d d d

Contract Law

Third Edition

Cavendish Publishing

Limited

CPLondon bull Sydney

Third edition first published 2001 by Cavendish Publishing LimitedThe Glass House Wharton Street London WC1X 9PX UnitedKingdom

Telephone +44 (0)20 7278 8000

Facsimile +44 (0)20 7278 8080

Email infocavendishpublishingcom

Website wwwcavendishpublishingcom

copy Cavendish Publishing Limited 2001

First edition 1997Second edition 1999Third edition 2001

All r ights reserved No part of this publication may bereproduced stored in a retrieval system or transmitted in anyform or by any means electronic mechanical photocopyingrecording scanning or otherwise except under the terms of theCopyright Designs and Patents Act 1988 or under the terms of alicence issued by the Copyright Licensing Agency 90 TottenhamCourt Road London W1P 9HE UK without the pr iorpermission in writing of the publisher

British Library Cataloguing in Publication Data

Contract law ndash 3rd ed ndash (Cavendish law cards)

1 Contracts ndash England 2 Contracts ndash Wales

3464202

ISBN 1 85941 514 8

Printed and bound in Great Britain

Contents

1 Agreement 1

2 Consideration and intention 19

3 Contents of a contract 37

4 Exemption (exclusion or

limitation) clauses 53

5 Vitiating elements which render

a contract voidable 73

6 Mistake 93

7 Illegality and capacity 111

8 Discharge 129

9 Remedies for breach of contract

and restitution 147

10 Privity of contract 171

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W1

1 Agreement

The traditional view that an agreement requires theidentification of a valid offer and a valid acceptance of thatoffer has been challenged in recent years by

bull Lord Denning in Gibson v Manchester City Council (1979)and Butler Machine Tool Co Ltd v Ex-Cell-O Corpn Ltd(1979) where he stated that providing the parties wereagreed on all material points then there was no need forthe traditional analysis

bull Lord Justice Steyn (obiter) in Trentham Ltd v Archital Luxfer(1993) where he stated that a strict analysis of offer andacceptance was not necessary in an executed contract ina commercial setting

The traditional view however was applied by the House ofLords in Gibson v Manchester City Council (1979)

Lord Diplock did recognise that there may be somelsquoexceptional contracts which do not fit easily into an analysisof offer and acceptancersquo for example a multi-partitecontract as in Clarke v Dunraven (1897) but he stressed thatin most contracts the lsquoconventionalrsquo approach of seeking anoffer and an acceptance of that offer must be adhered to

Offer Acceptance

In normal cases therefore a valid offer and a validacceptance of that offer must be identified

Unilateral and bilateral agreements

The distinction is important with regard to

bull advertisements

bull revocation of offers

bull communication of acceptance

Offer

A valid offer

bull must be communicated so that the offeree may accept orreject it

bull may be communicated in writing orally or by conduct

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2

A bilateral agreementconsists of an exchange of

promises for example

Offer ndash I will sell my carfor pound500

Acceptance ndash I will giveyou pound500 for your car

In a unilateral agreementthe offeror alone makes a

promise The offer is accepted by doing what is

set out in the offer forexample

Offer ndash I will pay pound500 toanyone who returns my

lost kitten

Acceptance ndash The lost kitten is returned

A definite promise to be bound provided that certain specified terms are accepted

(There is no general requirement that an agreement must bein writing Important exceptions include contracts relatingto interests in land (Law of Property (MiscellaneousProvisions) Act 1989 s 2(1)) and consumer credit(Consumer Credit Act 1974))

bull May be made to a particular person to a group ofpersons or to the whole world In Carlill v Carbolic SmokeBall Co Ltd (1893) the defendants issued anadvertisement in which they offered to pay pound100 to anyperson who used their smoke balls and then succumbedto influenza Mrs Carlill saw the advertisement and usedthe smoke ball but then immediately caught influenzaShe sued for the pound100 The defendants argued that it wasnot possible in English law to make an offer to the wholeworld Held ndash an offer can be made to the whole world

bull Must be definite in substance (see certainty of terms p 16below)

bull Must be distinguished from an invitation to treat

Invitations to treat

In Gibson v Manchester City Council (1979) the councilrsquos letterstated lsquowe may be prepared to sell you rsquo The House ofLords did not regard this as an lsquoofferrsquo

A response to an invitation to treat does not lead to anagreement The response may however be an offer CO

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W3

An indication that the invitor is willing to enter into negotiations but is not prepared to be

bound immediately

The distinction between an offer and an invitation to treatdepends on the reasonable expectations of the parties

The courts have established that there is no intention to bebound in the following cases

Display of goods for sale

bull In a shop In Pharmaceutical Society of GB v Boots CashChemists Ltd (1952) the Court of Appeal held that in aself-service shop the sale takes place when the assistantaccepts the customerrsquos offer to buy the goods Thedisplay of goods is a mere invitation to treat

bull In a shop window In Fisher v Bell (1961) it was held thatthe display of a lsquoflick knifersquo in a shop window with aprice attached was an invitation to treat

However it was suggested by Lord Denning in Thorntonv Shoe Lane Parking (1971) (see below) that vendingmachines and automatic ticket machines are makingoffers since once the money has been inserted thetransaction is irrevocable

bull In an advertisement In Partridge v Crittenden (1968) anadvertisement which said lsquoBramblefinch cocks and hensndash 25srsquo was held to be an invitation to treat The courtpointed out that if the advertisement was treated as anoffer this could lead to many actions for breach ofcontract against the advertiser as his stock of birds waslimited He could not have intended the advertisement tobe an offer

However if the advertisement is unilateral in nature andthere is no problem of limited stock then it may be an offerSee Carlill v Carbolic Smoke Ball Co Ltd (above) Advertising areward may also be a unilateral offer

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4

Auctions

bull An auctioneerrsquos request for bids in Payne v Cave (1789)was held to be an invitation to treat The offer was madeby the bidder (cf Sale of Goods Act 1979 s 57(2))

bull A notice of an auction In Harris v Nickerson (1873) it washeld that a notice that an auction would be held on acertain date was not an offer which then could beaccepted by turning up at the stated time It was astatement of intention

If the auction is stated to be lsquowithout reserversquo then there isstill no necessity to hold an auction but if the auction isheld lots must be sold to the highest bidder (Barry vHeathcote Ball (2001) confirming obiter dicta in Warlow vHarrison (1859)) The phrase lsquowithout reserversquo constitutes aunilateral offer which can be accepted by turning up andsubmitting the highest bid

Tenders

A request for tenders is normally an invitation to treat

bull However it was held in Harvela Ltd v Royal Trust ofCanada (1985) that if the request is made to specifiedparties and it is stated that the contract will be awardedto the lowest or the highest bidder then this will bebinding as an implied unilateral offer It was also held inthat case that a referential bid for example lsquothe highestother bid plus 10rsquo was not a valid bid

bull It was also held in Blackpool and Fylde Aero Club v BlackpoolBC (1990) that if the request is addressed to specifiedparties this amounts to a unilateral offer thatconsideration will be given to each tender which isproperly submitted C

ON

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5

Subject to contract

The words lsquosubject to contractrsquo may be placed on top of a letter in order to indicate that an offer is not to be legallybinding (Walford v Miles (1992))

Termination of the offer

Revocation (termination by the offeror)

An offeror may withdraw an offer at any time before it hasbeen accepted

bull The revocation must be communicated to the offereebefore acceptance In Byrne v van Tienhoven (1880) thewithdrawal of an offer sent by telegram was held to becommunicated only when the telegram was received

bull Communication need not be made by the offerorcommunication through a third party will suffice InDickinson v Dodds (1876) the plaintiff was told by aneighbour that a property which had been offered to himhad been sold to a third party Held ndash the offer had beenvalidly revoked

bull An offer to keep an offer open for a certain length of timecan be withdrawn like any other unless an option hasbeen purchased for example consideration has beengiven to keep the offer open (Routledge v Grant (1828))

Unilateral offersbull Communication of the revocation is difficult if the offer

was to the whole world It was suggested however inthe American case of Shuey v USA (1875) that

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6

Revocation Lapse Rejection

communication will be assumed if the offeror takesreasonable steps to inform the public for example placesan advertisement in the same newspaper

bull It now seems established that revocation cannot takeplace if the offeree has started to perform In Errington vErrington (1952) a father promised his daughter and son-in-law that if they paid off the mortgage on a house heowned he would give it to them The young couple dulypaid the instalments but the offer was withdrawnshortly before the whole debt was paid Held ndash there wasan implied term in the offer that it was irrevocable onceperformance had begun This is also supported by dictain Daulia v Four Millbank Nominees (1978)

Lapse (termination by operation of law)

An offer may lapse and thus be incapable of being acceptedbecause of

bull Passage of time

at the end of a stipulated time (if any) or

if no time is stipulated after a reasonable time InRamsgate Victoria Hotel Co v Montefiore (1866) anattempt to accept an offer to buy shares after fivemonths failed as the offer had clearly lapsed

bull Death

of the offeror if the offer was of a personal nature

of the offeree

bull Failure of a condition

an express condition or CO

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W7

an implied condition In Financings Ltd v Stimson(1962) it was held that an offer to buy a car lapsedwhen the car was badly damaged on the ground thatthe offer contained an implied term that the carwould remain in the same condition as when the offer was made

Rejection (termination by the offeree)

A rejection may be

bull express

bull implied

A counter offer is an implied rejectionbull Traditionally an acceptance must be a mirror image of

the offer If any alteration is made or anything addedthen this will be a counter offer and will terminate theoffer In Hyde v Wrench (1840) the defendant offered tosell a farm for pound1000 The plaintiff said he would givepound950 for it Held ndash this was a counter offer whichterminated the original offer which was therefore nolonger open for acceptance In Brogden v MetropolitanRailway (1877) the defendant sent to the plaintiff forsignature a written agreement which they hadnegotiated The plaintiff signed the agreement andentered in the name of an arbitrator on a space which hadbeen left empty for this purpose Held ndash the returneddocument was not an acceptance but a counter offer

bull This is particularly important for businesses whocontract by means of sales forms and purchase forms forexample if an order placed by the buyerrsquos purchase formis lsquoacceptedrsquo on the sellerrsquos sales form and the conditionson the back of the two forms are not identical (which theyare very unlikely to be) then the lsquoacceptancersquo is a counter

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8

offer and an implied rejection In Butler Machine Tool CoLtd v Ex-Cell-O Corpn Ltd (1979) the sellers offered to sella machine tool to the buyers for pound75535 on their ownconditions of sale which were stated to prevail over anyconditions in the buyersrsquo order form and whichcontained a price variation clause The buyers lsquoacceptedrsquothe offer on their own order form which stated that theprice was a fixed price and which contained a tear offslip which said lsquowe accept your order on the terms andconditions stated thereonrsquo This was in effect a lsquocounterofferrsquo The sellers signed and returned the slip togetherwith a letter which stated that they were carrying out theorder in accordance with their original offer When theydelivered the machine they claimed the price hadincreased by pound2892 The buyers refused to pay the extrasum Held ndash the contract was concluded on the buyersrsquoterms the signing and returning of the tear-off slip wasconclusive that the sellers had accepted the buyersrsquocounter offer The court analysed the transaction bylooking for matching offer and acceptance

Note ndash a request for further information is not a counteroffer In Stevenson v McLean (1880) the defendant offered tosell to the plaintiff iron at 40s a ton The plaintiff telegraphedto inquire whether he could pay by instalments Held ndash thiswas a mere inquiry for information not a counter offer andso the original offer was not rejected

A conditional acceptance

A conditional acceptance may be a counter offer capable ofacceptance for example I will pay pound500 for your car if youpaint it red If the owner agrees to this condition a contractwill be formed CO

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A valid acceptance must

bull be made while the offer is still in force (see termination ofoffer above)

bull be made by the offeree

bull exactly match the terms of the offer (see counter offersabove)

bull be written oral or implied from conduct In Brogden vMetropolitan Railway (1877) (above) the returneddocument was held to be a counter offer which thedefendants then accepted either by ordering coal fromBrogden or by accepting delivery of the coal (see alsolsquoThe Battle of the Formsrsquo)

However the offeror may require the acceptance to be madein a certain way If the requirement is mandatory it must befollowed

If the requirement is not mandatory then another equallyeffective method will suffice In Manchester Diocesan Councilfor Education v Commercial and General Investments Ltd (1969)an invitation to tender stated that the person whose bid was

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The fact of acceptance

An acceptance is a final and unqualified assent to all the terms of the offer

The fact of acceptance

Acceptance

Communication ofacceptance

accepted would be informed by a letter to the address givenin the tender The acceptance was eventually sent not to thisaddress but to the defendantrsquos surveyor Held ndash thestatement in the tender was not mandatory the tender hadtherefore been validly accepted

bull Where the offer is made in alternative terms theacceptance must make it clear to which set of terms itrelates

bull A person cannot accept an offer of which he has noknowledge (Clarke (1927) (Australia))

But a personrsquos motive in accepting the offer is irrelevantIn Williams v Carwardine (1833) (Australia) the plaintiffknew of the offer of a reward in exchange forinformation but her motive was to salve her conscienceHeld ndash she was entitled to the reward

bull lsquoCross-offersrsquo do not constitute an agreement (Tinn vHoffman amp Co (1873))

Communication of acceptance

Acceptance must be communicated by the offeree or hisagent In Powell v Lee (1908) an unauthorised communicationby one of the managers that the Board of Managers hadselected a particular candidate for a headship was held notto be a valid acceptance

Silence as communication

An offeror may not stipulate that silence of the offeree is toamount to acceptance In Felthouse v Bindley (1862) the

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Acceptance must be communicated

plaintiff wrote to his nephew offering to buy a horse andadding lsquoIf I hear no more I will take it that the horse isminersquo The nephew did not reply to this letter Held ndash nocontract Acceptance had not been communicated to theofferor

It has been suggested that this does not mean that silencecan never amount to acceptance for example if in Felthousev Bindley the offeree had relied on the offerorrsquos statementthat he need not communicate his acceptance and wished toclaim acceptance on that basis the court could decide thatthe need for acceptance had been waived by the offeror (seebelow)

Exceptions to the rule that acceptance must be

communicated

bull In a unilateral contract where communication isexpressly or impliedly waived (see Carlill v CarbolicSmoke Ball Co Ltd (above))

bull Possibly where failure of communication is the fault ofthe offeror This was suggested by Lord Denning inEntores Ltd v Miles Far East Corpn (1955)

bull Where the post is deemed to be the proper method ofcommunication In Adams v Lindsell (1818) thedefendants wrote to the plaintiffs offering to sell them aquantity of wool and requiring acceptance by post Theplaintiffs immediately posted an acceptance on 5December Held ndash the contract was completed on 5December

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The postal rule

bull Adams v Lindsell (1818) above

bull Acceptance is effective on posting even when the letter islost in the post In Household Fire Insurance Co Ltd v Grant(1879) the defendant offered to buy shares in theplaintiffrsquos company A letter of allotment was posted tothe defendant but it never reached him Held ndash thecontract was completed when the letter was posted

bull Note the difference between acceptance and revocationof an offer by post

Acceptance of an offer takes place when a letter isposted

Revocation of an offer takes place when the letter isreceived

bull Byrne v van Tienhoven (1880) above

Limitations to the postal rule

bull It only applies to acceptances and not to any other typeof communication (for example an offer or a revocation)

bull It only applies to letters and telegrams It does not applyto instantaneous methods of communication such astelex or probably fax or email

bull It must be reasonable to use the post as the means ofcommunication (for example an offer by telephone or byfax might indicate that a rapid method of response wasrequired)

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Acceptance takes place when a letter is postednot when it is received

bull Letters of acceptance must be properly addressed andstamped

bull The rule is easily displaced for example it may beexcluded by the offeror either expressly or impliedly InHolwell Securities Ltd v Hughes (1974) it was excluded bythe offeror requiring lsquonotice in writingrsquo It was alsosuggested by the court that the postal rule would not beused where it would lead to manifest inconvenience

There is no direct English authority on this point

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Arguments againstLogic ndash once a letter is posted the offer is accepted there isno provision in law for revoking an acceptance

bull The lsquologicalrsquo view is supported by the New Zealand caseof Wenckheim v Arndt (1878) and the South African case ofA to Z Bazaars (Pty) Ltd v Minister of Agriculture (1974)

Fairness ndash

bull Cheshire argues that it would be unfair to the offeror whowould be bound as soon as the letter was posted whereasthe offeree could keep his options open

Query ndash can a letter of acceptance be cancelled byactual communication before the letter is delivered

Communication by instantaneouselectronic means

bull The rules on telephones and telex were laid down inEntores v Miles (above) and confirmed in Brinkibon Ltd vStahag Stahl (1983) where it was suggested that duringnormal office hours acceptance takes place when themessage is printed out not when it is read The House ofLords however accepted that communication by telexmay not always be instantaneous for example whenreceived at night or when the office is closed

bull Lord Wilberforce stated

lsquoNo universal rule could cover all such cases theymust be resolved by reference to the intention of theparties by sound business practice and in some casesby a judgment of where the risk should liersquo

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Arguments forThere is some support for allowing recall in the Scottishcase of Countess of Dunmore v Alexander (1830)

bull It is argued that actual prior communication of rejectionwould not necessarily prejudice the offeror who bydefinition will be unaware of the lsquoacceptancersquo

bull It is also argued that it would be absurd to insist onenforcing a contract when both parties have acted on therecall This however could be interpreted as anagreement to discharge

Acceptance takes place when and where the message is received

bull It has been suggested that a message sent outsidebusiness hours should be lsquocommunicatedrsquo when it isexpected that it would be read for example at the nextopening of business It is generally accepted that thesame rules should apply to faxes and email as to telex

bull There is no direct authority on telephone answeringmachines It might well be argued that the presence of ananswering machine indicates that communication is notinstantaneous there is a delay between sending andreceiving messages It would then follow that the basicrule should apply that is that acceptance must becommunicated Acceptance therefore would take placewhen the message is actually heard by the offeror

Certainty of terms

The courts will not enforce

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Vague agreementsfor example

Scammell v Ouston (1941)

The courts refused toenforce a sale stated to bemade lsquoon hire purchase

termsrsquo neither the rate ofinterest nor the period of

repayment nor the numberof instalments were stated

Incomplete agreementsfor example

lsquoan agreement to make anagreementrsquo will be void

In Walford v Miles (1992) thecourt refused to enforce anlsquoagreement to negotiate in

good faithrsquo

See also May and Butcher v R (1934)

It is for the parties to make their intentions clear

But the uncertainty may be cured by

bull a trade custom where a word has a specific meaning

bull previous dealings between the parties whereby a word orphrase has acquired a specific meaning for exampletimber of lsquofair specificationrsquo in Hillas v Arcos (1932)

bull the contract itself which provides a method for resolvingan uncertainty In Foley v Classique Coaches (1934) therewas an executed contract where the vagueness of lsquoat aprice to be agreedrsquo was cured by a provision in thecontract referring disputes to arbitration Cf May andButcher v R an unexecuted contract where the courtrefused to allow a similar arbitration clause to cure theuncertainty

The courts will strive to find a contract valid where it hasbeen executed

bull The Sale of Goods Act 1979 provides that if no price ormechanism for fixing the price is provided then thebuyer must pay a lsquoreasonable pricersquo but this provisionwill not apply where the contract states that the price islsquoto be agreed between the partiesrsquo

bull Note a lsquolock-out agreementrsquo for example an agreementnot to negotiate with any one else is valid provided it isclearly stated and for a specific length of time This wasapplied by the Court of Appeal in Pitt v PHH AssetManagement (1993) where a promise not to negotiate withany third party for two weeks was enforced

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2 Consideration and intention

Consideration

Most legal systems will only enforce promises where thereis something to indicate that the promisor intended to bebound that is there is some

Consideration is the normal lsquobadge of enforceabilityrsquo inEnglish law

ReciprocityConsideration

RelianceLord Denning tried to

introduce reliance as basisfor enforcing promisesthrough the doctrine of

promissory estoppel

FormFor example writing English

law will enforce promiseswhich are contained in a

deed (A deed is a document which

is signed and attested andindicates on its face

that it is a deed)

lsquoBadge of

enforceabilityrsquo

Definitions of consideration

Shorter version

Limitation of the definition

bull It makes no mention of why the promisee incurs adetriment or confers a benefit or that the element of abargain is central to the classical notion of considerationFor example in Combe v Combe (1951) it was held thatthere was no consideration for the defendantrsquos promiseto pay his ex-wife pound100 per year even though in relianceon that promise she had not applied to the divorce courtfor maintenance and in that sense she had suffered adetriment The reason why the detriment did notconstitute consideration was that there was no request bythe husband express or implied that she should forbearfrom applying for maintenance There was nolsquoexchangersquo

bull Some writers have preferred to emphasise this elementof bargain and have defined consideration as

CA

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20

A valuable consideration in the eyes of the law mayconsist of (Currie v Misa (1875))

bull either some right interest profit or benefit to oneparty or

bull some forbearance detriment loss orresponsibility given suffered or undertaken bythe other

A benefit to one party or a detriment to the other

lsquothe element of exchange in a contractrsquoor

lsquothe price paid for a promisersquo

bull These definitions however are vague and despite itslimitation the benefitdetriment definition is mostcommonly used

Consideration and condition

Consideration must be distinguished from the fulfilment ofa condition If A says to B lsquoI will give you pound500 if you shouldbreak a legrsquo there is no contract but simply a gratuitouspromise subject to a condition In Carlill v Carbolic Smoke BallCo (1893) the plaintiff provided consideration for thedefendantrsquos promise by using the smoke ball Catchinginfluenza was only a condition of her entitlement to enforcethe promise

Kinds of consideration

bull In Roscorla v Thomas (1842) the defendant promised theplaintiff that a horse which had been bought by him wassound and free from vice It was held that since thispromise was made after the sale had been completedthere was no consideration for it and it could not beenforced In Re McArdle (1951) a promise made lsquoin

CO

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W21

Past consideration that is something already completed before the promise is made cannot

generally amount to consideration

Executed considerationAn act wholly

performed as part of a contract

Executory ConsiderationA promise to do something

in the future

consideration of your carrying out certain improvementsto the propertyrsquo was held by the Court of Appeal to beunenforceable as all the work had been done before thepromise was made

Exceptions to this rule

bull The modern requirements were laid down by LordScarman in Pao On v Lau Yiu Long (1980) Where a serviceis rendered

at the request of the promisor (as in Lampleigh vBraithwait (1615))

on the understanding that a payment will be made (asin Re Caseyrsquos Patents (1892)) and

if the payment would have been legally enforceableif it had been promised in advance

then a subsequent promise to pay a certain sum will beenforced

Note ndash the lsquoinferredrsquo intention to pay makes this a veryflexible exception

Consideration must move from the promisee

bull See Chapter 10 ndash Privity of contract

Consideration need not be adequate

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Only a person who has provided consideration for a promise can enforce that promise

The consideration provided by one party need not equal in value the

consideration provided by the other party

It is for the parties themselves to make their own bargainThe consideration need only have lsquosome value in the eyes ofthe lawrsquo (See lsquoConsideration must be sufficientrsquo p 24below)

bull The value may be slight In Chappell Co Ltd v Nestleacute Co Ltd(1960) three wrappers from the defendantrsquos chocolatebars were held to be part of the consideration InMountford v Scott (1975) pound1 was held to be goodconsideration for an option to buy a house

bull Withdrawal of threatened legal proceedings will amountto consideration even if the claim is found to have nolegal basis provided that the parties themselves believethat the claim is valid (Callisher v Bischoffstein (1870))

bull In Pitt v PHH Asset Management (1993) the defendantagreed to a lock-out agreement in return for Pittdropping his claim for an injunction against them Theclaim for an injunction had no merit but had a nuisancevalue and dropping it was therefore good consideration

bull In Alliance Bank v Broome (1964) the bankrsquos forbearance tosue was held to be consideration for the defendantrsquospromise to provide security for a loan

bull In Edmonds v Lawson (2000) it was held that the generalbenefits to chambers of operating a pupillage system wassufficient to provide consideration for contracts withindividual pupils

There is no consideration however where the promises arevague for example lsquoto stop being a nuisance to his fatherrsquo(White v Bluett (1853) but cf Ward v Byham (1956) below) orillusory for example to do something impossible or merelygood for example to show love or affection or gratitude CO

NT

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W23

It has been argued that because the latter are invalidconsideration must have some economic value Buteconomic value is extremely difficult to discern in the othercases cited above Since consideration is a lsquobadge ofenforceabilityrsquo it is argued that nominal consideration isadequate it is only designed to show that the promise isintended to be legally enforceable ndash whether it creates anyeconomic advantage is therefore irrelevant

Consideration must be sufficient

Traditionally the following have no value in the eyes of thelaw

Performing a duty imposed by law

bull For example promising not to commit a crime orpromising to appear in court after being subpoenaed InCollins v Godefroy (1831) a promise to pay a fee to awitness who has been properly subpoenaed to attend a

CA

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24

The consideration must have some value in the eyes of the law

Consideration therefore is found when a person receives whatever he requests

in return for a promise whether or not it has aneconomic value provided it is not too vague

Performing a duty imposed

by law

Performing an existingcontractual duty owed

to the other party

trial was held to have been made without considerationThe witness had a public duty to attend

bull But if a person does or promises to do more than he isrequired to do by law then he is providing considerationIn Glasbrook Bros v Glamorgan CC (1925) the council aspolice authority on the insistence of a colliery owner andin return for a promise of payment provided protectionover and above that required by law Held ndash they hadprovided consideration for the promise to pay

bull In Ward v Byham (1956) the father of an illegitimate childpromised to pay the mother an allowance of pound1 per weekif she proved that the child was lsquowell looked after andhappyrsquo Held ndash the mother was entitled to enforce thepromise because in undertaking to see that the child waslsquowell looked after and happyrsquo she was doing more thanher legal obligation Lord Denning however based hisdecision on the ground that the mother providedconsideration by performing her legal duty to maintainthe child

Treitel agreed with Denning that performance of a dutyimposed by the law can be consideration for a promise Heargues that it is public policy which accounts for the refusalof the law in certain circumstances to enforce promises toperform existing duties Where there are no grounds ofpublic policy involved then a promise given inconsideration of a public duty can be enforced

He cites

bull promises to pay rewards for information leading to thearrest of a felon See Sykes v DPP (1961)

bull Ward v Byham (above) CO

NT

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W25

In most cases it would make no difference whether the courtproceeded on the basis that the matter was one of publicpolicy or a lack of consideration But the former ground doesallow a greater degree of flexibility

Performing an existing contractual duty

Where the duty is owed to the other party this cannot beconsideration for

A request for extra payment

bull In Stilk v Myrick (1809) the captain promised the rest ofcrew extra wages if they would sail the ship back homeafter two sailors had deserted Held ndash the crew werealready bound by their contract to meet the normalemergencies of the voyage and were doing no more thantheir original contractual duty in working the ship home

bull Where the promisor however performs more than hehad originally promised then there can be considerationIn Hartley v Ponsonby (1857) nearly half the crewdeserted This discharged the contracts of the remainingsailors as it was dangerous to sail the ship home withonly half the crew The sailors were therefore free to makea new bargain so the captainrsquos promise to pay themadditional wages was enforceable

Exceptions to the rule in Stilk v Myrick

Factual advantages obtained by the promisorIn Williams v Roffey Bros (1991) the defendants (the maincontractors) were refurbishing a block of flats They sub-

CA

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26

A request for extra payment

A request to avoid part of a debt

contracted the carpentry work to the plaintiff The plaintiffran into financial difficulties whereupon the defendantsagreed to pay the plaintiff an additional sum if theycompleted the work on time Held ndash where a party to anexisting contract later agrees to pay an lsquoextra bonusrsquo in orderthat the other party performs his obligations under theoriginal contract then the new agreement is binding if theparty agreeing to pay the bonus has thereby obtained somenew practical advantage or avoided a disadvantage In thisparticular case the advantage was the avoidance of apenalty clause and the expense of finding new carpenters

bull Note ndash Stilk v Myrick (above) recognises as considerationonly those acts which the promisee was not under a legalobligation to perform Williams v Roffey Bros (above) addsto these factual advantages obtained by the promisor

bull This decision pushes to the fore the principles ofeconomic duress as a means of distinguishing enforceableand unenforceable modifications to a contract (seeChapter 5 on economic duress p 87)

Duties owed to third partyWhere a duty is owed to a third party its performance canalso be consideration for a promise by another It is clear thatthe third party is getting something more than he is entitledto

bull In Shadwell v Shadwell (1860) an uncle promised to pay anannual sum to his nephew on hearing of his intendedmarriage The fact of the marriage providedconsideration although the nephew was already legallycontracted to marry his fianceacutee

bull In Scotson v Pegg (1861) A agreed to deliver coal to Brsquosorder B ordered A to deliver coal to C who promised A to

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W27

unload it Held ndash A could enforce Crsquos promise as Arsquosdelivery of the coal was good considerationnotwithstanding that he was already bound to do so byhis contract with B

bull In New Zealand Shipping Co v Satterthwaite amp Co Ltd TheEurymedon (1975) it was held by the Privy Council thatwhere a stevedore at the request of the consignee ofcertain goods removed the goods from a ship this wasconsideration for the promise by the consignee to give thestevedore the benefit of an exclusion clause although thestevedore in removing the goods was only performingcontractual duties he owed to the carrier

A request to avoid part of a debt

If a creditor is owed pound100 and agrees to accept pound90 in fullsettlement he can later insist on the remaining pound10 beingpaid as there is no consideration for his promise to waive thepound10 (the rule in Pinnelrsquos Case (1602))

bull This rule was confirmed by the House of Lords in Foakesv Beer (1884) Dr Foakes was indebted to Mrs Beer on ajudgment sum of pound2090 It was agreed by Mrs Beer thatif Foakes paid her pound500 in cash and the balance of pound1590in instalments she would not take lsquoany proceedingswhatsoeverrsquo on the judgment Foakes paid the moneyexactly as requested but Mrs Beer then proceeded toclaim an additional pound360 as interest on the judgment debtFoakes refused and when sued pleaded that his duty topay interest had been discharged by the promise not tosue Their Lordships deferred as to whether on its trueconstruction the agreement merely gave Foakes time to

CA

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28

Basic rule payment of a smaller sum will not discharge the duty to pay a higher sum

pay or was intended to cover interest as well But theyheld even on the latter construction there was noconsideration for the promise and that Foakes was stillbound to pay the additional sum

There are situations however where payment of a smallersum will discharge the liability for the higher sum

bull where the promise to accept a smaller sum in fullsettlement is made by deed or in return forconsideration

bull where the original claim was not for a fixed sum or theamount is disputed in good faith

bull where the debtor does something different for examplewhere payment is made at the creditorrsquos request

at an earlier time

at a different place

by a different method (it was held in D amp C BuildersLtd v Rees (1966) that payment by cheque is notpayment by a different method)

bull where payment is accompanied by a benefit of somekind

bull in a composition agreement with creditors

bull where payment is made by a third party (see HirachandPunachand v Temple (1911))

It has been argued that to allow the creditor to sue for theremaining debt would be a fraud on the third parties in thelast two cases above

Note ndash the doctrine of promissory estoppel under certaincircumstances may allow payment of smaller sum todischarge liability for the larger sum

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W29

In Re Selectmove (1995) the Court of Appeal refused toextend the principle laid down in Williams v Roffey Bros topart payment of a debt The company had offered to pay itsarrears by instalments to the Inland Revenue who said thatthey would let them know if this was acceptable They heardnothing further but paid some instalments and thenreceived a threat of being wound up if the full arrears werenot paid immediately The court was not prepared to allowWilliams v Roffey Bros to overturn a rule laid down by theHouse of Lords in Foakes v Beer

Promissory estoppel

There are problems with regard to

Origins

bull It was introduced (obiter) by Lord Denning in the CentralLondon Property Trust Ltd v High Trees House Ltd (1947)where owners of a block of flats had promised to acceptreduced rents in 1939 There was no consideration fortheir promise but Lord Denning nevertheless stated thathe would estop them from recovering any arrears Hebased his statement on the decision in Hughes vMetropolitan Railway (1877)

CA

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30

If a promise intended to be binding andintended to be acted upon is acted upon then the court will not allow the promisor

to go back on his promise

the origins ofthe doctrine

the scope ofthe doctrine

the effect of the doctrine

bull It would however seem to conflict with the House ofLordsrsquo decision in Jorden v Money (1854) where it wasstated that estoppel applied only to statements of fact andnot to promises and also with the decision in Foakes vBeer (1884) where the House of Lords confirmed thatpayment of a smaller sum will not discharge the liabilityfor a larger sum

Scope

bull It only applies to the modification or discharge of anexisting contractual obligation It cannot create a newcontract See Combe v Combe (1951) above (However itwas used to create a new right of action in the Australiancase of Waltons v Maher (1988))

bull It can be used only as a lsquoshield and not a swordrsquo

bull The promise not to enforce rights must be clear andunequivocal In The Scaptrade (1983) the mere fact of nothaving enforced onersquos full rights in the past was notsufficient

bull It must be inequitable for the promisor to go back on hispromise In D amp C Builders v Rees (1966) Mrs Rees had forced the builders to accept her cheque by inequitable means and so could not rely on promissory estoppel

bull The promisee must have acted in reliance on the promisealthough not necessarily to his detriment (Alan amp Co Ltdv El-Nasr Export and Import Co (1972))

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W31

The exact scope of the doctrine is a matter ofdebate but certain requirements must be met

Effect of the doctrine

bull In Tool Metal Manufacturing Co v Tungsten Electric Co(1955) the owner of a patent promised to suspendperiodic payments during the war It was held by theCourt of Appeal that the promise was binding for theduration of the war but the owners could on givingreasonable notice at he end of the war revert to theiroriginal legal entitlements

bull In Ajayi v Briscoe (1964) the Privy Council stated that thepromisee could resile from his promise on givingreasonable notice which allowed the promisee areasonable opportunity of resuming his position but thatthe promise would become final if the promisee could notresume his former position

On one interpretation these cases show that as regardsexisting or past obligations it is extinctive but as regardsfuture obligations it is suspensory

On another interpretation the correct approach is to look atthe nature of the promise If it was intended to bepermanent then the promiseersquos liability will beextinguished

Lord Denning consistently asserted that promissoryestoppel can extinguish debts However this view iscontrary to Foakes v Beer

The view that promissory estoppel is suspensory onlywould reconcile it with the decisions in Jorden v Money

CA

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32

It is not clear whether the doctrine extinguishesrights or merely suspends them

Foakes v Beer and Pinnelrsquos Case but it would deprive it of mostof its usefulness

The question of whether the doctrine is suspensory orextinctive is particularly important with regard to singlepayments

Intention to be legally bound

This presumption may be rebutted but the onus of proof ison the party seeking to exclude legal relations In EssoPetroleum Co Ltd v Commissioners of Customs and Excise (1976)Esso promised to give one world cup coin with every fourgallons of petrol sold A majority of the House of Lordsbelieved that the presumption in favour of legal relationshad not been rebutted

Examples of rebuttals

bull lsquoThis arrangement is not entered into as a formal orlegal agreement and shall not be subject to legaljurisdiction in the law courtsrsquo (Rose and Frank v CromptonBros (1925))

bull Agreement to be binding lsquoin honour onlyrsquo (Jones v VernonPools (1939))

CO

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W33

Commercial andbusiness

agreements

Social anddomestic

agreements

In commercial and business agreements there is a presumption that the parties

intend to create legal relations

bull Letters of comfort for example statements to encouragelending to an associated company It was held inKleinwort Benson Ltd v Malaysia Mining Corpn (1989) thatthe defendantrsquos statement that lsquoit is our policy to ensurethat the business is at all times in a position to meet itsliabilities to yoursquo was a statement of present fact and nota promise for the future As such it was not intended tocreate legal relations

bull Collective agreements are declared not to be legallybinding by the Trade Unions and Labour Relations(Consolidation) Act 1992 unless expressly stated inwriting to be so

This can be rebutted by evidence to the contrary forexample

bull Agreements between husband and wife In Balfour vBalfour (1919) the court refused to enforce a promise bythe husband to give his wife pound50 per month whilst he wasworking abroad However the court will enforce a clearagreement where the parties are separating or separated(Merritt v Merritt (1970))

bull Agreements between members of a family In Jones vPadavatton (1969) Mrs Jones offered a monthly allowanceto her daughter if she would come to England to read forthe Bar Her daughter agreed but was not very successfulMrs Jones stopped paying the monthly allowance butallowed her daughter to live in her house and receive therents from other tenants Mrs Jones later sued forpossession The daughter counterclaimed for breach of

CA

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34

In social and domestic agreements there is a presumption against legal relations

the agreement to pay the monthly allowance andor for accommodation Held (a) the first agreement may havebeen made with the intention of creating legal relationsbut was for a reasonable time and would in any case havelapsed (b) the second agreement was a familyarrangement without an intention to create legalrelations It was very vague and uncertain

bull An intention to be legally bound may be inferred where

one party has acted to his detriment on theagreement (Parker v Clark (1960)) or

a business arrangement is involved (Snelling vSnelling (1973)) or

there is mutuality (Simpkins v Pays (1955))

But in all such cases the agreement must be clear

CO

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W35

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W37

3 Contents of a contract

Once a contract has been formed it is necessary to explorethe scope of the obligations which each party incurs

(Incorporation of terms is covered in Chapter 4)

The distinction between terms and mere

representations

Is a statement part of the contract Statements made duringnegotiations leading to a contract may be either

bull Terms

that is statements which form the express terms of thecontract As such they constitute promises as to thepresent truth of the statement or as to future action Ifsuch a promise is broken (for example because thestatement is untrue) this will involve a breach of contractor

Different weighting may be given to different terms

Distinction between termsand mere representations

Interpretation of expressterms

Identification of impliedterms

This involves

bull Mere representations

that is statements which do not form part of the contractbut which helped to induce the contract If these areuntrue they are lsquomisrepresentationsrsquo

Now that damages can be awarded for negligent misrepresentation the distinction has lost much of itsformer significance but there are still some importantconsequences

In trying to ascertain such intention the court may take intoaccount the following factors

The importance of the statement to the parties

bull In Bannerman v White (1861) the buyer stated lsquoif sulphurhas been used I do not want to know the pricersquo Held ndasha term Similarly in Couchman v Hill (1947) the buyerasked if the cow was in calf stating that if she was hewould not bid The auctioneerrsquos reply that she was not incalf was held to be a term overriding the printedconditions which stated that no warranty was given

The respective knowledge of the parties

bull In Oscar Chess Ltd v Williams (1957) it was held that astatement by a member of the public (a non expert) to agarage (an expert) with regard to the age of a car was amere representation not a term On the other hand astatement made by a garage (an expert) to a member ofthe public (a non-expert) concerning the mileage of a carwas held to be a term (Dick Bentley Productions Ltd vHarold Smith (Motors) Ltd (1965))

CA

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38

Whether a statement has become a term of thecontract depends on the intention of the parties

The manner of the statement

bull For example if it suggests verification (Ecay v Godfrey(1947)) it is unlikely to be a term If it discouragesverification lsquoIf there was anything wrong with the horseI would tell yoursquo (Schawel v Reade (1913)) it is more likelyto be a term

Where a contract has been reduced to writing

The terms will normally be the statements incorporated intothe written contract (Routledge v McKay (1954))

bull But a contract may be partly oral and partly written (seeCouchman v Hill (1947) above) In Evans amp Sons Ltd vAndrea Merzario Ltd (1976) an oral assurance thatmachinery would be stowed under not on the deck washeld to be a term of a contract although it was notincorporated into the written terms The court held thatthe contract was partly oral and partly written and insuch hybrid circumstances the court was entitled to lookat all the circumstances

bull Note ndash the discovery of a collateral contract mayovercome the difficulties of oral warranties in writtencontracts In City of Westminster Properties v Mudd (1959)a tenant signed a lease containing a covenant to use thepremises for business premises only He was induced tosign by a statement that this clause did not apply to himand that he could continue to sleep on the premises Thecourt found that his signing the contract was con-sideration for this promise thus creating a collateralcontract In Evans amp Son Ltd v Andrea Merzario Ltd (1976)Lord Denning considered the oral statement to be acollateral contract In Esso Petroleum Co v Mardon (1976)the court held that the statement by a representative of C

ON

TR

AC

TL

AW

39

Esso with regard to the throughput of a petrol station wascovered by an implied collateral warranty that thestatement had been made with due care and skill

bull The use of a collateral contract will not be possiblehowever if the main contract contains an appropriatelyworded lsquoentire agreementrsquo clause (The Inntrepreneur PubCo (GL) v East Crown Ltd (2000))

Identification of express terms

bull See incorporation of terms in Chapter 4 p 54

Interpretation of express terms of a contract

Oral contracts

The contents is a matter of evidence for the judge Theinterpretation will be undertaken by applying an objectivetest that is what would a reasonable person haveunderstood to have been meant by the words used (Thake vMaurice (1986))

Written contracts

If a contract is reduced to writing then under the lsquoparolevidencersquo rule oral or other evidence extrinsic to thedocument is not normally admissible to lsquoadd to vary orcontradictrsquo (Jacobs v Batavia and General Plantations Trust(1924)) the terms of the written agreement

Exceptions to the parol evidence rule

bull to show that the contract is not legally binding forexample because of mistake or misrepresentation

bull to show that the contract is subject to a lsquoconditionprecedentrsquo In Pym v Campbell (1856) oral evidence was

CA

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40

admitted to show that a contract was not to come intooperation unless a patent was approved by a third party

bull to establish a custom or trade usage (Hutton v Warren(1836) see below)

bull to establish that the written contract is not the wholecontract It is presumed that lsquoa document which lookslike a contract is the whole contractrsquo but this isrebuttable See Couchman v Hill (1947) and Evans v AndreaMerzario (above)

bull a contract may be contained in more than one document(Jacobs v Batavia Plantation Trust Ltd (1924))

bull to establish a collateral contract (City of WestminsterProperties Ltd v Mudd (1959) Evans amp Son Ltd v AndreaMerzario Ltd (1976))

The Law Commission recommended in 1976 that the lsquoparolevidencersquo rule be abolished However in view of the wideexceptions to the rule it recommended in 1986 that no actionneed be taken

Identification of implied terms

In addition to the terms which the parties have expresslyagreed a court may be prepared to hold that other termsmust be implied into the contract Such terms may beimplied by

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W41

Custom Statute The courts

Custom

A contract may be deemed to incorporate any relevantcustom of the market trade or locality in which the contractis made In Hutton v Warren (1836) a tenant established aright to fair allowance for improvements to the land througha local custom

Statute

Parliament as a matter of public policy has in variousinstances seen fit to imply terms into contracts for example

Terms implied into all sales

bull that the seller has the right to sell the goods

bull that goods sold by description correspond with thedescription

Terms implied only into sales by way of business

bull that the goods are of satisfactory quality

Goods are of a satisfactory quality if they meet thestandard that a reasonable person would regard assatisfactory taking account of any description of thegoods the price if relevant and all other relevantcircumstances In particular it will be necessary toconsider their

fitness for all purposes for which goods of that kindare commonly supplied

appearance and finish

CA

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42

The Sale of Goods Act 1979 which impliesthe following terms into contracts

for the sale of goods

freedom from minor defects

safety and

durability

This term does not apply to matters specifically drawn tothe buyerrsquos attention before the contract is made orwhere the buyer examines the goods defects which thatexamination should have revealed

bull that the goods are fit for any special purpose madeknown to the seller

bull that goods sold by sample correspond with the sample

bull In contracts of service there is an implied term that theservice will be carried out with reasonable care and skillwithin a reasonable time and for a reasonable price

In Wilson v Best (1993) it was held that the duty of a travelagent under this provision extended to checking that thelocal safety regulations had been complied with It did notrequire them to ensure that they complied with UKregulations

The courts

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W43

Terms implied in fact Terms implied in law

The Supply of Goods and Services Act 1982implies similar terms into contracts of hire contracts for work and materials and other

contracts not covered by the Sale of Goods Act

Terms implied in fact

When interpreting terms implied in fact the court seeks togive effect to the unexpressed intention of the parties Thereare two tests A term may be implied because

bull It is necessary to give business efficacy to the contract InThe Moorcock (1889) a term was implied that the riverbedwas in a condition that would not damage a shipunloading at the jetty

bull It satisfies the lsquoofficious bystanderrsquo test that is if abystander suggested a term the parties would respondwith a common lsquoof coursersquo In Spring v NASDS (1956) theunion tried to imply the lsquoBridlington Agreementrsquo Thecourt refused on the basis that if an lsquoofficious bystanderhad suggested this the plaintiff would have repliedldquoWhatrsquos thatrdquorsquo

The Moorcock doctrine is used in order to make the contractworkable or where it was so obvious that the parties musthave intended it to apply to the agreement It will not beused merely because it was reasonable or because it wouldimprove the contract

It was suggested in Shell UK Ltd v Lostock Garages Ltd (1977)that the courts will be reluctant to imply a term where theparties have entered into a detailed and carefully draftedwritten agreement

Terms implied in law

bull When terms are implied in law they are implied into allcontracts of a particular kind Here the court is not tryingto put into effect the parties intention but is imposing anobligation on one party often as a matter of public policyFor example the court implies into all contracts ofC

AV

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DIS

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AW

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RD

S44

employment a term that the employee will carry out hiswork with reasonable care and skill and will indemnifyhis employer against any loss caused by his negligence(Lister v Romford Ice Cold Storage Co (1957))

bull In these cases the implication is not based on thepresumed intention of the parties but on the courtrsquosperception of the nature of the relationship between theparties and whether such an implied term wasreasonable

bull In Liverpool CC v Irwin (1977) the tenants of a block ofcouncil flats failed to persuade the court to imply a termthat the council should be responsible for the commonparts of the building on the Moorcock or lsquoofficiousbystanderrsquo test but succeeded on the basis of the Listertest that is the term should be implied in law in that theagreement was incomplete it involved the relationshipof landlord and tenant and it would be reasonable toexpect the landlord to be responsible for the commonparts of the building

Classification of terms

There is a very important distinction between those terms ofa contract which entitle an innocent party to terminate(rescind or treat as discharged) a contract in the event of a

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W45

Conditions Warranties Innominate terms

breach and those which merely enable a person to claimdamages

Traditionally a distinction has been made in English lawbetween

Conditions

bull The Sale of Goods Act 1979 designates certain impliedterms for example re satisfactory quality as conditions ndashthe breach of which entitles the buyer to terminate (ortreat as discharged) the contract

bull In Poussard v Spiers and Pond (1876) a singer failed to takeup a role in an opera until a week after the season hadstarted Held ndash her promise to perform as from the firstperformance was a condition ndash and its breach entitled themanagement to treat the contract as discharged

Warranties

CA

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46

Contractual terms concerning the less importantor subsidiary statements of facts or promisesIf a warranty is broken this does not entitle

the other party to terminate (or treat asdischarged) the contract it merely entitles

him to sue for damages

Statements of fact or promises which form theessential terms of the contract If the statement is not true or the promise is not fulfilled the

injured party may terminate (or treat as discharged) the contract and claim damages

bull The Sale of Goods Act 1979 designates certain terms aswarranties breach of which do not allow the buyer totreat the contract as discharged but merely to sue fordamages for example the right to quiet enjoyment

bull In Bettini v Gye (1876) a singer was engaged to sing for awhole season and to arrive six days in advance to takepart in rehearsals He only arrived three days in advanceHeld ndash the rehearsal clause was subsidiary to the mainclause It was only a warranty The management wastherefore not entitled to treat the contract as dischargedThey should have kept to the original contract andsought damages for the three daysrsquo delay

Innominate or intermediate terms

bull In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha(1962) it was suggested by the Court of Appeal that itwas not enough to classify terms into conditions andwarranties Regard should also be had to the characterand nature of the breach which has occurred In HongKong Fir the defendants chartered the vessel Hong KongFir to the plaintiffs for 24 months the charter partyprovided that the ship was lsquofitted in every way forordinary cargo servicersquo The vessel spent less than nineweeks of the first seven months at sea because ofbreakdowns and the consequent repairs which werenecessary

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W47

On the facts this was not the case because the charter partystill had a substantial time to run

After the Hong Kong Fir case in 1962 there was someconfusion as to whether the breach based test which appliedto innominate terms had replaced the term based test whichrelied on the distinction between conditions and warrantiesor merely added to it an alternative in certain circumstances

bull In the Mihalis Angelos (1970) the Court of Appeal revertedto the term based test The owners of a vessel stated thatthe vessel was lsquoexpected ready to loadrsquo on or about 1 JulyIt was discovered that this was not so Held ndash the termwas a condition ndash the charterers could treat the contract as discharged

In 1976 two cases were decided on the breach based principle

bull In Cehave v Bremer Handelsgesellshaft MBH The Hansa Nord(1976) the seller had sold a cargo of citrus pellets with aterm in the contract that the shipment be made in goodcondition The buyer rejected the cargo on the basis thatthis term had been broken The defect however was notserious and the court held that although the Sale ofGoods Act had classified some terms as conditions andwarranties it did not follow that all the terms had to be soclassified Accordingly the court could consider the effect

CA

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48

Held ndash the term was neither a condition nor awarranty and in determining whether the

defendants could terminate the contract it wasnecessary to look at the consequences of the

breach to see if it deprived the innocent party ofsubstantially the whole benefit he should

have received under the contract

of the breach since this was not serious the buyer hadnot been entitled to reject

bull In Reardon Smith v Hansen Tangen (1976) an oil tanker wasdescribed as lsquoOsaka No 354rsquo where in fact it was lsquoOshimaNo 004rsquo but was otherwise exactly as specified Becausethe market for oil tankers had collapsed the chartererssought to argue that the number was a condition whichwould enable them to repudiate the contract The Houseof Lords rejected this argument Held ndash the statement wasan innominate term not a condition since the effect ofthe breach was trivial it did not justify termination of thecontract

bull Note ndash the time for determining whether a clause was acondition or an innominate term is at the time ofcontracting ndash not after the breach

Traditionally a term is a condition if it has been establishedas such

bull By statute ndash for example the Sale of Goods Act 1979

bull By precedent after a judicial decision In The MihalisAngelos (1970) the Court of Appeal held that thelsquoexpected readinessrsquo clause in a charter party is acondition

bull By the intention of the parties The court must ascertainthe intention of the parties If the wording clearly revealsthat the parties intended that breach of a particular termshould give rise to a right to rescind that term will beregarded as a condition In Lombard North Central vButterworth (1987) the Court of Appeal held thatcontracting parties can provide expressly in the contractthat lsquospecific breaches could terminate the contractrsquo Inthat case the contract included an express clause that the

CO

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W49

time for payment of instalments was lsquoof the essence of thecontractrsquo An accountant had contracted to hire acomputer for five years agreeing to make an initialpayment and 19 quarterly rental payments He was latein paying some instalments and the owners terminatedthe agreement recovered possession of the computerand claimed damages not only for the arrears but also forloss of future instalments The claim succeeded becausethe contract specifically stated that the time of paymentof each instalment was to be of the essence of the contract

Note the mere use of the word lsquoconditionrsquo is not conclusive

In Schuler v Wickman Tool Sales Ltd (1974) the House of Lordsheld that breach of a lsquoconditionrsquo that a distributor shouldvisit six customers every week could not have been intendedto allow rescission The word lsquoconditionrsquo had not been usedin this particular sense There was in the contract a separateclause which indicated when and how the contract could beterminated

bull By the court ndash deciding according to the subject matter ofthe contract (see Poussard v Spiers (1876) and Bettini v Gye(1876) above)

CA

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50

If a term is not a condition then the lsquowait and seersquotechnique can be used to decide if the gravity of

the breach is such that it deprivedthe innocent party of substantially the whole

benefit of the contract If so ndash then the innocentparty can terminate the contract

(innominate or intermediate term)

Certainty and flexibility

Certainty

bull The term based test is alleged to have the advantage ofpredictability and certainty It is important for the partiesto know their legal rights and liabilities as regards theavailability of termination The character of all terms isascertainable at the moment the contract is concludedNothing that happens after its formation can change thestatus of a term If the term is a condition then the partieswill know that its breach allows the other party toterminate But there can still be uncertainty where theparties have to await the courtrsquos decision on the nature ofthe term

bull The advantage of certainty is however balanced by thefact that it is possible to terminate a contract on atechnicality for sometimes a very minor breach

Flexibility

bull The breach based test is stated to bring flexibility to thelaw Instead of saying that the innocent party can in thecase of a condition always terminate or in the case of awarranty never terminate innominate terms allow thecourts to permit termination where the circumstancesjustify it and the consequences are sufficiently serious

bull It is however more difficult for the innocent party toknow when he has the right to terminate or for the partyin breach to realise in advance the consequence of hisaction

CO

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W51

Note the distinction between the different types of contract terms remains of

considerable importance

CO

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W53

4 Exemption (exclusion or limitation) clauses

A total exclusion is referred to as an exclusion clause apartial exclusion is known as a limitation clause

Exemption clauses are most commonly found in standardform contracts

To be valid an exemption clause must satisfy the tests set bythe

Common law requirements

A clause which purports to exclude wholly or inpart liability for a breach of contract or a tort

Common lawUnfair Contract

Terms Act (UCTA)1977

Regulations onUnfair Terms in ConsumerContracts 1999

The term must be incorporated into the

contract

The wording mustcover what actually

happened

Incorporation

bull This requirement applies to all terms but has beeninterpreted strictly in the case of exemption clauses

A term may be incorporated into a contract by being

Contained in a signed document

In LrsquoEacutestrange v Graucob Ltd (1934) the plaintiff had signed acontract of sale without reading it Held ndash she was bound bythe terms which contained an exemption clause

ExceptionsWhere the offeree has been induced to sign as a result ofmisrepresentation

bull In Curtis v Chemical Cleaning Co (1951) the plaintiffsigned a lsquoreceiptrsquo when she took a dress to be cleaned onbeing told that it was to protect the cleaners in case ofdamage to the sequins In fact the clause excludedliability for all damage Held ndash the cleaners were notprotected for damage to the dress the extent of theclause had been misrepresented and therefore thecleaners could not rely on it

bull lsquoNon est factumrsquo (see p 106 below)

Contained in an unsigned document (ticket cases)

bull This must be seen to be a contractual document

In Chapelton v Barry UDC (1940) on hiring a deckchair the plaintiff was given a ticket with only alarge black 3d on the face of the ticket and exclusionclauses on the back Held ndash the defendants could notrely on the exclusion clauses as it was not apparenton the face of it that the ticket was a contractualdocument rather than just a receipt

CA

VE

ND

ISH

LA

WC

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DS

54

bull Reasonable notice of the term must be given

In Parker v South Eastern Railway Co (1877) theplaintiff received a ticket which stated on the facelsquosee backrsquo Held ndash as long as the railway companyhad given reasonable notice of the exemptionclausersquos existence it did not matter that the plaintiffhad not read the clause

In Thompson v London Midland and Scottish Railway(1930) the ticket indicated that the conditions of thecontract could be seen at the station masterrsquos office oron the timetable The exemption clause was in clause552 of the timetable which cost sixpence ndash the ticketitself only cost two and sixpence In the circumstancesnevertheless reasonable notice had been given

The test is objective and it is irrelevant that the partyaffected by the exemption clause is blind or illiterateor otherwise unable to understand it (Thompson vLMS above)

But in Geir v Kujawa (1970) a notice in English wasstuck on the windscreen of a car stating thatpassengers travelled at their own risk A Germanpassenger who was known to speak no English washeld not to be bound by the clause as reasonable carehad not been taken to bring it to his attention

bull Attention must be drawn to any unusual clause

In Thornton v Shoe Lane Parking (1971) it was statedthat a person who drives his car into a car park mightexpect to find in his contract a clause excludingliability for loss or damage to the car but specialnotice should have been given of a clause purportingto exclude liability for personal injury

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W55

In Interfoto Picture Library v Stiletto Visual Programmes(1989) the Court of Appeal confirmed that onerousconditions required special measures to bring them tothe attention of the defendant The clause in that casewas not an exemption clause but a clause imposingcharges 10 times higher than normal The Court ofAppeal stated that the more unusual the clause thegreater the notice required

bull Notice of the term must be communicated to the otherparty before or at the time that the contract is enteredinto

In Thornton v Shoe Lane Parking Ltd (1971) the plaintiffmade his contract with the car company when heinserted a coin in the ticket machine The ticket wasissued afterwards and in any case referred toconditions displayed inside the car park which hecould see only after entry Notice therefore came toolate

bull The rules of offer and acceptance and the distinctionsbetween offers and invitations to treat must be consultedin order to ascertain when the contract was madeProblems with regard to incorporation can arise in atypical lsquoBattle of the Formsrsquo problem See Butler MachineTool Ltd v Ex-Cell-O Corpn (Chapter 1)

Notice by display

Notices exhibited in premises seeking to exclude liability forloss or damage are common for example lsquocar parked atownerrsquos riskrsquo and must be seen before or at the time of entryinto contract

bull In Olley v Marlborough Court Hotel (1949) Mr and MrsOlley saw a notice on the hotel bedroom wall which

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56

stated lsquothe proprietors will not hold themselvesresponsible for articles lost or stolen unless handed tothe manageress for safe keepingrsquo The contract had beenentered into on registration and the clause was thereforenot incorporated into the contract and could not protectthe proprietors

Notice by a lsquocourse of dealingrsquo

bull If there has been a course of dealing between the partiesthe usual terms may be incorporated into the contractalthough not specifically drawn to the attention of theparties each time a contract is made

In Spurling v Bradshaw (1956) Bradshaw deposited someorange juice in Spurlingrsquos warehouse The contractualdocument excluding liability for loss or damage was notsent to Spurling until several days after the contract Held ndashthe exclusion clauses were valid as the parties had alwaysdone business with each other on this basis

bull Note ndash the transactions must be sufficiently numerous toconstitute a course of dealings The established course ofdealings must be consistent The established course ofdealings must not have been deviated from on the occasion in question

In Hollier v Rambler Motors (1972) the Court of Appeal heldthat bringing a car to be serviced or repaired at a garage onthree or four occasions over a period of five years did notestablish a course of dealings

Notice through patent knowledge

bull In British Crane Hire Corpn v Ipswich Plant Hire (1975) theowner of a crane hired it out to a contractor who was alsoengaged in the same business It was held that the hirer

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W57

was bound by the ownerrsquos usual terms though they werenot actually communicated at the time of the contractThey were however based on a model supplied by atrade association to which both parties belonged It wasstated that they were reasonable and were well known inthe trade

Oral contracts

bull Whether a clause has been incorporated into an oralcontract is a matter of evidence for the court (McCutcheonv MacBrayne (1964))

On a proper construction the clause covers the loss

in question

bull An exclusion clause is interpreted contra proferentem thatis any ambiguity in the clause will be interpreted againstthe party seeking to rely on it

in Houghton v Trafalgar Insurance Co Ltd (1954) it washeld that the word lsquoloadrsquo could not refer to people

in Andrews Bros v Singer amp Co Ltd (1934) an exclusionreferring to implied terms was not allowed to cover aterm that the car was new as this was an express term

It was however suggested by the House of Lords inPhoto Production Ltd v Securicor Ltd (1980) that any needfor a strained and distorted interpretation of contracts inorder to control the effect of exemption clauses had beenreduced by the UCTA

bull Especially clear words must be used in order to excludeliability for negligence for example the use of the wordlsquonegligencersquo or the phrase lsquohowsoever causedrsquo (Smith vSouth Wales Switchgear Ltd (1978))

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58

But if these words are not used provided the wording iswide enough to cover negligence and there is no otherliability to which they can apply then it is assumed thatthey must have been intended to cover negligence(Canada Steamship Lines v The King (1952))

bull It was stated in Ailsa Craig Fishing Co v Malvern Fishing Co(1983) that limitation clauses may be interpreted lessrigidly than exclusion clauses

bull Only a party to a contract can rely on an exclusion clause(See Chapter 10)

bull Especially clear words are required when the breach is ofa fundamental nature In the past Lord Denning andothers argued that it was not possible to exclude breachesof contract which were deemed to be fundamental byany exclusion clause however widely and clearlydrafted

However the House of Lords confirmed in Photo ProductionLtd v Securicor Ltd (1980) that the doctrine of fundamentalbreach was a rule of construction not a rule of law that isliability for a fundamental breach could be excluded if thewords were sufficiently clear and precise

The House also stated that

bull the decision in Harbuttrsquos Plasticine Ltd v Wayne Tank andPump Co (1970) was not good law In that case the Courtof Appeal had held that as a fundamental breach broughta contract to an end there was no exclusion clause left toprotect the perpetrator of the breach

bull there is no difference between a lsquofundamental termrsquo anda lsquoconditionrsquo C

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59

bull a strained construction should not be put on words in anexclusion clause which are clearly and fairly susceptibleof only one meaning

bull where the parties are bargaining on equal terms theyshould be free to apportion risks as they wish

bull the courts should be wary of interfering with the settledpractices of business people as an exclusion clause oftenserves to identify who should insure against a particularloss

Unfair Contract Terms Act 1977

Note ndash the title is misleading

bull The Act does not cover all unfair contract terms onlyexemption clauses

bull The Act covers certain tortious liability as well ascontractual liability The following must be examined

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60

Clauses whichare void

Clauses which are valid only if reasonable

The meaning of lsquoreasonablersquo

Scope of the Act

Scope of the Act

bull s 1 ndash the Act applies to contracts made after 1 February1978 which arise in the course of business lsquoBusinessrsquoincludes a profession and the activities of anygovernment department andor public or localauthority

bull s 5 ndash contracts specifically excluded include contracts ofinsurance contracts for the transfer of land andinternational commercial contracts

bull s 13 ndash the Act limits the effectiveness of clauses thatexclude or restrict liability It also covers clauses whichmake it difficult to enforce a contract for example byimposing restrictive time limits or which excludeparticular remedies In Stewart Gill v Horatio Myer and Co(1992) it was held that a clause restricting a right of set-off or counterclaim was subject to the Act It was alsoheld in Smith v Bush (1990) that it covered lsquodisclaimerswhich restrictively defined a partyrsquos obligation under acontractrsquo In that case a valuation was stated to be givenlsquowithout any acceptance of liability for its accuracyrsquo

Negligence

bull The Act covers contractual tortious and statutory (that isunder the Occupiersrsquo Liability Act 1957) negligence

bull The difference between excluding liability for negligenceand transferring liability for negligence is seen in PhillipsProducts v Hyland Bros (1987) where the contracttransferred liability for the negligence of the driver of ahired excavator to the hirer The driver negligentlydamaged property belonging to the hirer Held ndash theclause was an exclusion clause and was subject to UCTA

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W61

bull In Thompson v Lohan (Plant Hire) (1987) on the otherhand an excavator and driver were hired under the sameconditions The driver negligently killed a third partyHeld ndash the clause transferring liability to the hirer was notan exclusion clause in this case as the third party was ableto sue the hirer It was merely a clause transferring liability

Misrepresentation

bull The difference between excluding liability formisrepresentation and defining the powers of an agent isseen in Cremdean Properties v Nash (1977) where a clausein the special conditions of sale stating that thelsquoparticulars were believed to be correct but theiraccuracy is not guaranteedrsquo was held to be an exclusionclause

bull In Collins v Howell Jones (1980) however the Court ofAppeal held a statement that the lsquovendor does not makeor give any representation or warranty and neither theestate agent or any person in their employment has anyauthority to make or give a representation or warrantywhatsoever in relation to the propertyrsquo had the effect ofdefining or limiting the scope of the agentrsquos authority

Effect of the Act

Clauses which are void

Exclusions of liability

bull for death or personal injury caused by negligence (s 2)

bull in a manufacturerrsquos guarantee for loss or damage causedby negligence (s 5)

bull for the statutory guarantee of title in contracts for the saleof goods or hire purchase (s 6)

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62

bull for the other statutory guarantees in consumer contractsfor the sale of goods or hire purchase (descriptionsatisfactory quality fitness for purpose) (s 6)

bull for similar statutory guarantees in other consumercontracts for the supply of goods for example contractsof hire (s 7)

Clauses which are valid only if reasonable

Clauses excluding liability

bull for loss or damage to property caused by negligence (s 2)

bull for breach of contract in a consumer or standard formcontract (s 3) This includes clauses in such contractsclaiming to render a substantially different performancefrom that reasonably expected or to render noperformance at all (s 3)

bull for statutory guarantees (other than those concerningtitle) in inter-business contracts for the sale of goods andhire purchase (description satisfactory quality andfitness for purpose) (s 6)

bull for statutory guarantees concerning title or possession inother contracts for the supply of goods (for examplehire) (s 7)

bull for other statutory guarantees (description satisfactoryquality fitness for purpose) in other inter-businesscontracts for the supply of goods (s 7)

bull for misrepresentation in all contracts

Note

lsquoConsumer transactionrsquo ndash a person is a lsquoconsumerrsquo where hedoes not make or hold himself out as making the contract in

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W63

the course of business and the other party does make thecontract in the course of business In contracts for the sale ofgoods the goods must also be of a type normally sold forprivate use

bull A controversial interpretation of a lsquoconsumerrsquo was madeby the Court of Appeal in R and B Customs v UnitedDominion Trust (1988) where a car was bought by aprivate company for the business and private use of itsdirectors It was held by the Court of Appeal that it wasnot bought lsquoin the course of a businessrsquo Buying cars wasincidental not central to the business of the company If itis incidental only then the purchase would only be lsquoin thecourse of a businessrsquo if it was one made with sufficientregularity

Note however that in Stevenson v Rogers (1999) the Courtof Appeal refused to apply the R and B Customs Brokersapproach to the question of whether a sale was in the courseof a business for the purpose of s 14(12) of the Sale of GoodsAct 1979

A lsquostandard form contractrsquo occurs when the parties deal onthe basis of a standard form provided by one of them

Reasonableness

In assessing reasonableness the following matters should beconsidered

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64

It is for the person relying on the clause to prove that the clause is reasonable

Section 11 of UCTA 1977

bull Contract terms are to be adjudged reasonable or notaccording to the circumstances which were or oughtreasonably to have been known to the parties when thecontract was made

bull Where a person seeks to restrict liability to a specifiedsum of money regard should be had to the resourceswhich he could expect to be available to him for thepurpose of meeting the liability and as to how far it wasopen to him to cover himself by insurance

bull In determining for the purpose of s 6 or s 7 whether acontract term satisfies the requirement of reasonablenessregard shall be had to

the strength of the bargaining position of the partiesrelative to each other

whether the customer received an inducement toagree to the term and had an opportunity of enteringinto a similar contract with other persons butwithout having to accept similar terms

whether the customer knew or ought reasonably tohave known of the existence and extent of the term

where the exclusion is conditional whether it wasreasonable to expect that compliance with thatcondition would be practicable

whether the goods were manufactured processed oradapted to the special order of the customer(Sched 2)

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W65

Decisions of the courts

In Smith v Bush (1990) and Harris v Wyre Forest DC (1989) theHouse of Lords dealt with two cases involving the validity ofan exclusion clause protecting surveyors who had carriedout valuations of a house The House of Lords decided thatthe clauses were exclusion clauses designed to protect thesurveyors against claims for negligence Lord Griffithsdeclared that there were four matters which should alwaysbe considered

bull were the parties of equal bargaining power

bull in the case of advice would it have been reasonable toobtain advice from another source

bull was the task being undertaken a difficult one for whichthe protection of an exclusion clause was necessary

bull what would be the practical consequences for the partiesof the decision on reasonableness For example wouldthe defendant normally be insured Would the plaintiffhave to bear the cost himself

In inter-business contracts the practices of business peopleare considered

bull In Photo Production v Securicor (1980) the House of Lordsstated that the courts should be reluctant to interfere withthe settled practices of businesses They pointed out thatthe function of an exclusion clause was often to indicatewho should insure against a particular risk

bull In Green v Cade Bros (1983) it was decided that a clauserequiring notice of rejection within three days of deliveryof seed potatoes was unreasonable as a defect could nothave been discovered by inspection within this time buta clause limiting damages to the contract price was

CA

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66

upheld ndash as it had been negotiated by organisationsrepresenting the buyers and sellers and lsquocertifiedrsquopotatoes had been available for a small extra charge (thatis Sched 2 was applied)

bull However in George Mitchell v Finney Lock Seeds Ltd (1983)the buyers suffered losses of pound61000 due to the supply ofthe wrong variety of cabbage seeds The contract limitedthe liability of the seller to a refund of the price paid(pound192) Held ndash the clause was not reasonable Matterstaken into consideration

the clause was inserted unilaterally ndash there was nonegotiation

loss was caused by the negligence of the seller

the seller could have insured against his liability

the sellers implied that they themselves consideredthe clause unreasonable by accepting liability inprevious cases

bull In Overland Shoes Ltd v Schenkers Ltd (1998) the Court ofAppeal upheld a judgersquos ruling that a clause preventingreliance on a lsquoset-offrsquo was not unreasonable on the basisthat it formed part of a set of standard trading conditionsused widely in the shipping industry They had arisenfrom careful negotiation and were generally recognisedin the industry as lsquofair and reasonablersquo

bull In Overseas Medical Supplies Ltd v Orient Transport ServicesLtd (1999) the Court of Appeal summarised the variousfactors which should be looked at in considering the testof reasonableness It confirmed that the lsquoGuidelinesrsquocontained in Sched 2 to UCTA although specificallyintended for consumer contracts for the sale of goods

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W67

should be regarded as relevant wherever the test ofreasonableness is applied

In many of the cases the appeal courts have emphasised thatthe decision on lsquoreasonablenessrsquo is best made by the trialjudge and that the appeal courts should be reluctant tointerfere with the conclusion arrived at at first instance

Unfair Terms in Consumer Contracts Regulations 1999

Based on EU Directive on Unfair Terms in ConsumerContracts The 1999 regulations replaced earlier regulationsmade in 1994

Coverage

The regulations apply to

This will be so even if some other parts of the contract havenot been drafted in advance

bull The regulations do not apply to contracts which relate toemployment family law or succession rights companiesor partnerships terms included in order to comply withlegislation or an international convention

CA

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68

Coverage Fairness Remedies

lsquoany term in a contract between a seller or supplier and a consumer where

the term has not been individually negotiatedrsquo thatis it has been drafted in advance

bull They do however cover insurance policies and contractsrelating to land

bull A lsquobusinessrsquo is defined to include a trade or professionand the activities of any government department or localor public authority

bull A lsquo consumerrsquo means a natural person who is acting for apurpose outside his business

Note ndash they are wider than UCTA in that they cover allterms not only exclusion clauses for example harsh termsconcerning unauthorised overdrafts The regulations arenarrower than UCTA in that they only cover clauses inconsumer contracts which have not been individuallynegotiated The definition of a consumer is also narrower cfR and B Customs v UDT (1988)

Unfairness

Regard must be had to the nature of the goods and servicesprovided the other terms of the contract and all thecircumstances relating to its conclusion

The definition of the main subject matter and the adequacyof the price or remuneration are not subject to the test offairness

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W69

The clause is unfair if contrary to the requirementsof good faith it creates a significant imbalance

in the partiesrsquo rights and obligations to thedetriment of the consumer

lsquoGood faithrsquo is not defined and unlike the earlier (1994)regulations the 1999 regulations do not spell out anyrelevant factors

In Director General of Fair Trading v First National Bank plc(2000) the Court of Appeal emphasised the need foropenness and information which will enable the consumerto make a properly informed choice about entering into thecontract In this case a clause imposing a lsquosurprisingrsquorequirement as to the payment of interest on a loan whichhad been the subject of a court order did not meet therequirement of good faith

The regulations contain a long indicative list of clauses likelyto be unfair These include not only exemption clauses butalso clauses which give the sellersupplier rights withoutcompensating rights for the consumer for example

bull enabling the sellersupplier to raise the price withoutgiving the buyer a chance to back out if the price rise istoo high

bull enabling the sellersupplier to cancel the agreementwithout penalty without also allowing the customer asimilar right

bull automatically extending the duration of the contractunless the customer indicates otherwise within an unreasonably brief period of time

Note also that all terms (including those defining thesubject matter or the price) should be expressed in plainEnglish and any ambiguity should be interpreted in theconsumerrsquos favour

CA

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70

Effect of an unfair term

bull The term itself shall not be binding on the consumer butthe rest of the contract may be enforced

bull The Director General of Fair Trading has a duty toconsider any complaint made to him that a term is unfairHe is empowered to bring proceedings for an injunctionagainst any business using an unfair term It was thispower that was used in the first reported case on theregulations Director General of Fair Trading v FirstNational Bank plc (2000) discussed above For the firsttime a similar power to apply for such an injunction isgiven to certain other lsquoqualifying bodiesrsquo including theData Protection Registrar various Directors General (ofgas supply electricity supply telecommunicationswater services) and the Consumersrsquo Association

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W71

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W73

5 Vitiating elements which render a contract voidable

Significance of a contract being voidable

Thus

bull The innocent party may if he wishes affirm the contract

bull Where the innocent party has not performed thecontract he may refuse to perform and rely on themisrepresentation as a defence

bull The misled party may rescind the contract by

informing the other party or

where a fraudulent party cannot be traced byinforming the police (Car and Universal Finance Co vCaldwell (1965)) or

bringing legal proceedings

The innocent party may set the contractaside if he so wishes

Misrepresentation Duress Undue influence

Certain mistakes (see Chapter 6)

bull It was stated in TSB v Camfield (1995) that the right torescind is that of the representee not the court All thecourt can do is decide whether the representee haslawfully exercised the right to rescind It is not thereforean exercise of equitable relief by the court

Rescission

bull But in Cheese v Thomas (1993) the court declared that thecourt must look at all the circumstances to do what waslsquofair and justrsquo In that case a house which had beenjointly bought had to be sold afterwards at aconsiderable loss The agreement between the twoparties for the purchase of the house was rescinded butthe court held that it was not necessary for the guiltyparty to bear the whole of the loss It was fair and justthat the proceeds should be divided according to thepartiesrsquo respective contributions

bull This contrasts with the normal situation where aproperty has diminished in value and the misled partywould get all his money returned (Erlanger v NewSombrero Phosphate Co (1878))

bull As part of this restoration equity may order a sum ofmoney to be paid to the misled person to indemnify himagainst any obligations necessarily created by the contract

In Whittington v Seale-Hayne (1900) the plaintiffsbreeders of prize poultry were induced to take a lease ofthe defendants premises by his innocent

CA

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74

Restoring the parties as far as is possible to the position they were in before they

entered into the contract

misrepresentation that the premises were in a sanitarycondition Under the lease the plaintiffs covenanted toexecute all works required by any local or publicauthority Owing to the insanitary conditions of thepremises the water supply was poisoned the plaintiffsrsquomanager and his family became very ill and the poultrybecame valueless for breeding purposes or died Inaddition the local authority required the drains to berenewed The plaintiffs sought an indemnity for all theirlosses The court rescinded the lease and held that theplaintiffs could recover an indemnity for what they hadspent on rates rent and repairs under the covenants inthe lease because these expenses arose necessarily out ofthe contract It refused to award compensation for otherlosses since to do so would be to award damages not anindemnity there being no obligation created by thecontract to carry on a poultry farm on the premises or toemploy a manager etc

bull Note ndash rescission even if enforced by the court is alwaysthe act of the defrauded party It is effective from the dateit is communicated to the representor or the police (seeabove) and not from the date of any judgment insubsequent litigation

Rescission is subject to certain barsC

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75

Affirmation of the contract

Lapse of time

Restitution mustbe possible

Third party rights

Affirmation of the contractThe representee may not rescind if he has affirmed thecontract after learning of the misrepresentation either bydeclaring his intention to proceed with the contract or byperforming some act from which such an intention can beinferred In Long v Lloyd (1958) the buyer of a lorryundertook a long journey after discovering serious defects inthe lorry Held ndash he had affirmed the contract

Lapse of timeThis can provide evidence of affirmation where themisrepresentee fails to rescind for a considerable time afterdiscovering the falsity

In cases of innocent misrepresentation lapse of time canoperate as a separate bar to rescission In Leaf v InternationalGalleries (1950) the plaintiff bought a picture which the sellerhad innocently misrepresented to be by Constable Fiveyears later the plaintiff discovered it was not by Constableand immediately sought to rescind the contract Held ndashbarred by lapse of time

Restitution must be possibleA person seeking to rescind the contract must be able andwilling to restore what he has received under it Howeverrescission is an equitable remedy and the court will notallow minor failures in the restoration to the originalposition to stand in the way In Erlanger v New SombreroPhosphate Co (1878) the purchaser had worked phosphatemines briefly Held ndash he could rescind by restoring propertyand accounting for any profit derived from it

CA

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76

Third party rightsThere can be no rescission if third parties have acquiredrights in the subject matter of the contract See Phillips vBrooks (1919) and Lewis v Averay (1972) ndash Chapter 6

Misrepresentation

Representations and terms of a contract

Material statements made during negotiations leading to acontact may be either

bull terms of the contract If these are untrue the untruthconstitutes a breach of contract

bull statements which helped to induce the contractthat is lsquomere representationsrsquo If untrue ndash they arelsquomisrepresentationsrsquo

(For distinctions between terms and lsquomere representationsrsquosee Chapter 3)

Requirements of misrepresentation

It must be

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W77

An untrue statement of fact made by one party tothe contract (representor) to the other (representee)which induces the other to enter into the contract

The requirements ofmisrepresentation

Remedies formisrepresentation

A statement of fact

bull Not a lsquomere puffrsquo that is a statement so vague as to bewithout effect for example describing a house as alsquodesirable residencersquo

bull Not a promise A promise to do something in the futureis only actionable if the promise amounts to a bindingcontract (Kleinwort Benson Ltd v Malaysian Mining CorpnBhd (1989))

bull Not a statement of opinion for example in Bisset vWilkinson (1927) the vendor of a farm which had neverbeen used as a sheep farm stated that in his judgment thefarm would support 2000 sheep Held ndash a statement ofopinion

But a statement expressed as an opinion may be treatedas a statement of fact if the person making the statementwas in a position to know the true facts In Smith v Landand House Prop Corpn (1884) the vendor of a hoteldescribed it as lsquolet to a most desirable tenantrsquo when thetenant had for a long time been in arrears with the rentThe Court of Appeal held there was a misrepresentationof fact

bull Not a statement of intention But if the representor didnot have that intention then it is a misstatement of fact asin Edgington v Fitzmaurice (1885) where the directorsissued a prospectus claiming that the money raised was tobe used to improve the companyrsquos buildings and toexpand its business Their real intention was to pay off thecompanyrsquos debts Held ndash fraudulent misrepresentation

bull Not a statement of law

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78

An active representation

bull The statement will normally be in words but other formsof communication which misrepresent the facts willsuffice as in Horsfall v Thomas (1862) (below)

bull Failure to make a statement however or the non-disclosure of facts will not generally qualify asmisrepresentation

Exceptionsbull Where facts have been selected to give a misleading

impression as in Dimmock v Hallett (1866) where avendor of land stated that farms were let but omitted tosay that the tenants had given notice to quit

bull Where circumstances have changed since arepresentation was made then the representor has a dutyto correct the statement In With v OrsquoFlanagan (1936) itwas stated correctly that a medical practice was worthpound2000 a year but by the time the practice changedhands it was practically worthless Held ndash there was aduty to disclose the changed circumstances

bull Contracts uberrimae fidei (lsquoof the utmost good faithrsquo) forexample

Contract of insurance Material facts must bedisclosed that is facts which would influence aninsurer in deciding whether to accept the proposalor to fix the amount of the premium for example apolicy of life insurance has been avoided because itwas not disclosed that the proposer had already beenturned down by other insurers

Family arrangements In Gordon v Gordon (1816ndash19)a division of property based on the proposition thatthe elder son was illegitimate was set aside upon

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W79

proof that the younger son had concealed hisknowledge of a private marriage ceremonysolemnised before the birth of this brother

Analogous contracts Where there is a duty todisclose not material but unusual facts for examplecontracts of suretyship

It must have been a material inducement

A statement likely to induce a person to contract willnormally be assumed to have done so Moreover if theclaimant can show that he was in fact induced it is nodefence to argue that a reasonable person would have beeninfluenced by the misrepresentation (Museprime PropertiesLtd v Adhill (1990)) There is no inducement however where

bull the misrepresentee or his agent actually knew the truth

bull the misrepresentee was ignorant of the misrepresentationwhen the contract was made In Horsfall v Thomas (1862)the vendor of a gun concealed a defect in the gun(misrepresentation by conduct) The buyer howeverbought the gun without examining it Held ndash theattempted misrepresentation had not induced thecontract

bull the misrepresentee did not allow the representation toaffect his judgment In Attwood v Small (1838) a buyerappointed an agent to check the statement made by theseller as to the reserves in a mine Held ndash not actionablemisrepresentation The buyer had relied on his ownagentrsquos statements not that of the vendor

Note however that

bull provided that the representation was one of theinducements it need not be the sole inducement

CA

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80

bull the fact that the representee did not take advantage of anopportunity to check the statement is no bar to an actionfor misrepresentation

In Redgrave v Hurd (1881) a solicitor was induced topurchase a house and practice by the innocentmisrepresentation of the seller Held ndash he was entitled torescission although he did not examine the documentswhich were available to him and which would haveindicated to him the true state of affairs

bull neither is it contributory negligence not to check astatement made by a vendor (Gran Gelato v Richcliff(1992))

Remedies for misrepresentation

Rescission

Misrepresentation renders a contract voidable ndash see aboveThe Misrepresentation Act 1967 provides that rescission isavailable in relation to

bull lsquoexecutedrsquo contracts for the sale of goods andconveyances of property

bull representations which have been incorporated as a termof the contract

Rescission was not available in these circumstances before1967

Damages

bull There are five ways in which damages may be claimedfor misrepresentation It seems likely that in future thenormal ground for damages will be the

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W81

Misrepresentation Act 1967 but there are still cases wheredamages can only be claimed at common law if at all

bull Note ndash rescission and damages are alternative remediesin many cases but if the victim of fraudulent ornegligent misrepresentation has suffered consequentialloss he may rescind and sue for damages

bull Damages can be claimed on different bases according tothe kind of misrepresentation that was committed

Damages in the tort of deceit for fraudulent misrepresentationIt is up to the misled party to prove that themisrepresentation was made fraudulently that isknowingly without belief in its truth or recklessly as towhether it be true or false (Derry v Peek (1889))

The burden of proof on the misled party is a heavy one

Damages in the tort of negligence Victims of negligent misrepresentation may be able to sueunder Hedley Byrne v Heller amp Partners (1963) Themisrepresentee must prove (1) that the misrepresentorowed him a duty to take reasonable care in making therepresentation that is there must be a lsquospecial relationshiprsquo(2) that the statement had been made negligently

Damages under s 2(1) of the Misrepresentation Act 1967Section 2(1) of the Misrepresentation Act 1967 provides thatwhere a person has entered into a contract after amisrepresentation has been made to him by another partythereto and as a result of it has suffered loss lsquothen if themisrepresentor would be liable for damages if it had beenmade fraudulently he will be so liable notwithstanding thatthe misrepresentation was not made fraudulently unless heproves that he had reasonable grounds to believe and did

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82

believe up to the time the contract was made that the factsrepresented were truersquo

Note that this is a more beneficial remedy for themisrepresentee as he only need prove that the statement isuntrue It is for the misrepresentor to prove that he had goodgrounds for making the statement and the burden of proofis a heavy one In Howard Marine and Dredging Co Ltd vOgden (1978) the owner of two barges told the hirer that thecapacity of the barges was 1600 tons He obtained thesefigures from the Lloydrsquos list but in this case the Lloydrsquos listwas incorrect The court held that he did not have goodgrounds for this statement he should have consulted themanufacturerrsquos specifications which should have been in hispossession

Assessment of damages

The Court of Appeal confirmed in Royscot Trust v Rogerson(1991) that damages under s 2(1) of the MisrepresentationAct should also be awarded on the reliance basis because ofthe lsquofiction of fraudrsquo in the wording of the Act

Remoteness of damage

The Court of Appeal also held in that case because of thelsquofiction of fraudrsquo that the rules of remoteness whichnormally apply only to the tort of deceit should be appliedunder s 2(1)

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W83

Damages in the tort of deceit and the tortof negligence are assessed on the tortious basis of reliance that is the claimant is entitled to be

put in the position he was in before the tort was committed

(In contract and in all torts other than deceit the losses mustbe lsquoreasonably foreseeablersquo)

bull In Royscot Trust v Rogerson (1991) a customer arranged toacquire a car on hire purchase from a car dealer Thefinance was to be provided by a finance company theRoyscot Trust which insisted on a deposit of 20 Thedealer falsified the figures in order to indicate a deposit of20 as required Some months later the customerwrongfully sold the car thus depriving the financecompany of its property The finance company sued thedealer under s 2(1) of the Misrepresentation Act It washeld by the Court of Appeal that the finance companycould recover damages from the car dealer to cover theloss of the car since the loss followed themisrepresentation The remoteness rules applicable to thetort of deceit would be applied and the loss did not needto be foreseeable

Controversy has followed this decision as the tort ofdeceit to which this rule only previously applied isdifficult to establish and involves moral culpability onthe part of the defendant It has now been extended to anaction which is relatively easy to establish (see HowardMarine and Dredging v Ogden) and may only involvecarelessness Some doubts as to whether this was thecorrect approach were expressed obiter by the House ofLords in Smith New Court Securities Ltd v ScrimgeourVickers (Asset Management) Ltd (1996) but for the timebeing Royscot v Rogerson remains good law

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84

That is damages would be awarded to coverall losses which flow directly from the

untrue statement whether or not those losses were foreseeable

bull Further problems are caused by the decision of the Courtof Appeal in East v Maurer (1991) a case in the tort ofdeceit where it was held that lsquoall damages flowingdirectly from the fraudrsquo would cover damages for somedegree of loss of profit ndash a heading previously consideredto be appropriate only to expectation damages incontract It is a matter for speculation whether the courtswill apply this decision to cases under theMisrepresentation Act and bring loss of profit under theheading of reliance loss on the basis that all losses whichflow directly from the misrepresentation should berecoverable

bull A generous interpretation of s 2(1) of the 1967 Act hadalso been applied by the court in Naughton v OrsquoCallaghan(1990) where reliance damages had been awarded tocover not only the difference between the value of the coltand the value it would have had if the statements madeabout it were correct (the quantification rule for breach ofcontract) but also the cost of its maintenance since thesale

It has been alleged that these three cases swell the amount ofdamages which can be awarded under the MisrepresentationAct to a greater extent than intended by Parliament and thatthe damages available for misrepresentation can nowexceed those available for breach of contract

Damages for wholly innocent misrepresentationDamages cannot be claimed for a misrepresentation whichis not fraudulent or negligent but

bull an indemnity may be awarded (see above)

bull damages in lieu of rescission may be awarded under s 2(2) of the Misrepresentation Act 1967 C

ON

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85

In William Sindall v Cambridgeshire CC (1994) the Court ofAppeal stated (obiter) that where the court is consideringwhether to award damages in lieu of rescission threematters should be taken into consideration

the nature of the misrepresentation

the loss which would be caused to the representee ifthe contract were upheld

the hardship caused to the misrepresentor if the con-tract were rescinded The Court of Appeal also statedthat the damages should resemble damages forbreach of warranty

bull lsquodamages in lieursquo can it seems be awarded even if one ofthe bars to recision apply (Thomas Witter Ltd v TBPIndustries (1996))

bull where the misrepresentation has become a term of thecontract the misrepresentee can sue for damages forbreach of contract as an alternative to damages formisrepresentation

Duress

A common law doctrine

Duress to the person

This requires actual or threatened violence to the personOriginally it was the only form of duress recognised by thelaw

CA

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86

Duress involves coercion

Duress to goods

bull Threat of damage to goods ndash traditionally this has notbeen recognised by the law but in view of thedevelopment of economic duress it is assumed thatduress to goods would today be a ground for relief

Economic duress

Requires

Economic duress led to rescission of a contract in UniverseTankships of Monrovia v ITWF (1983) where a union hadlsquoblackedrsquo a tanker and refused to let it leave port untilcertain moneys had been paid The House of Lordsconsidered that this amounted to economic duress andordered return of the money

It has been stated that economic duress requires

Compulsion or coercion of the will

In Pau On v Lau Yiu Long (1980) Lord Scarman listed thefollowing indications of compulsion or coercion of the will

bull did the party coerced have an alternative course open tohim

bull did the party coerced protest

bull did the party coerced have independent advice

bull did the party coerced take steps to avoid the contract

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W87

Compulsion of the will An illegitimate threat

Illegitimate pressure

There must be some element of illegitimacy in the pressureexerted for example a threatened breach of contract Theillegitimacy will normally arise from the fact that what isthreatened is unlawful In CTN Cash and Carry v Gallaher(1994) however the Court of Appeal accepted obiter that anoutrageous but technically lawful threat could amount toduress This possibility has not so far been developed in anylater cases

Economic duress is often pleaded together with lack ofconsideration in cases where a breach of contract isthreatened by the promisor unless he receives additionalpayment

bull In Atlas Express v Kafco (1989) Kafco a small companywhich imported and distributed basketware had acontract to supply Woolworths They contracted withAtlas for delivery of the basketware to Woolworths Thecontract commenced then Atlas discovered they hadunderpriced the contract and told Kafco that unless theypaid a minimum sum for each consignment they wouldcease to deliver Kafco were heavily dependent on theWoolworths contract and knew that a failure to deliverwould lead both to the loss of the contract and an actionfor damages At that time of the year they could not findan alternative carrier and agreed under protest to makethe extra payments Atlas sued for Kafkorsquos non-paymentHeld ndash the agreement was invalid for economic duressand also for lack of consideration

bull Cf Williams v Roffey Bros (1989) ndash Chapter 2

The following threats are probably not illegitimate (subjectto the possibility raised by CTN Cash and Carry v Gallaher(1994) discussed above)

CA

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88

bull a threat not to enter into a contract

bull a threat to institute civil proceedings

bull a threat to call the police

Note ndash not all threatened breaches of contract will amount toeconomic duress It will only do so when the threatenedparty has no reasonable alternative open to him The normalresponse to a breach of contract is to sue for damages

Remedies

bull In North Ocean Shipping Co v Hyundai Construction Co TheAtlantic Baron (1979) the court found economic duressbut refused rescission on the ground that the plaintiff hadaffirmed the contract

Undue influence

An equitable doctrine

bull Undue influence is based on the misuse of a relationshipof trust or confidence between the parties Where foundit renders a contract voidable The innocent party willneed to apply to the court for rescission of the contract(see above)

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W89

Pressure not amounting to duress at common lawwhereby a party is excluded from the exercise of

free and independent judgment

Duress renders a contract voidable Rescission willnormally be sought from the courts See above

Contracts where undue influence is presumed

For example

bull Contracts between certain relationships

parent and child

trustee and beneficiary

solicitor and client

doctor and patient

religious adviser and disciple

bull Where there has been a long relationship of confidenceand trust between the parties

For example between husband and wife or where oneparty had been accustomed to rely for guidance andadvice on the other In Lloyds Bank v Bundy (1975) MrBundy an elderly west country farmer on the advice ofthe local Lloyds Bank assistant manager granted a chargeto the bank over the family farm to guarantee his sonrsquos

CA

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90

Contracts where undue influence

is presumed

Contracts where actual undue

influence must be proved

Contracts induced by undue influence are of two kinds

The contract must be manifestly disadvantageous

to the weaker party

Contracts need not be manifestly disadvantageous

to the weaker party

indebtedness to the bank Mr Bundy had all his liferelied on Lloyds Bank for financial advice the court setaside the charge on the ground of undue influence on thepart of the bank

Note ndash a bank will not be presumed to exert undueinfluence in normal circumstances

In Credit Lyonnais Bank Nederland NV v Burch (1997) therelationship between an employer and a junior employee(who was persuaded to put up her own house as securityfor the businessrsquos overdraft) was held to be one of undueinfluence

The stronger party can disprove undue influence byshowing that

bull full disclosure of all material facts was made

bull the consideration was adequate

bull the weaker party was in receipt of independent legaladvice

Contracts where actual undue influence is proved

The burden of proof lies on the claimant to show that suchinfluence did exist and was exerted

Effect of undue influence on a third party

In Barclays Bank v OrsquoBrien (1993) Mrs OrsquoBrien had signed aguarantee which used the jointly owned matrimonial homeas security for a loan made to her husbandrsquos business Herhusband had told her it was for a maximum of pound60000 butin fact it was for pound130000 Mrs OrsquoBrien had not been advisedby the bank to consult an independent solicitor The Houseof Lords held that there was no undue influence in this casebut there was misrepresentation on the part of the husband

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W91

They further held that where there was undue influence ormisrepresentation or other legal wrong then the injuredpartyrsquos right to have the transaction set aside would beenforceable also against the third party provided the thirdparty had actual or constructive notice of the wrong Suchnotice would arise where

bull the parties were in an emotional relationship forexample co-habitees (heterosexual or homosexual) orchild and aged parents

bull one party was undertaking a financial liability on behalfof the other which was not to her or his advantage

The court also held that in the above situation the third partycould discharge his duty by making clear to the partyconcerned the full nature of the risk he or she is taking onfor example

bull by conducting a personal interview or

bull urging independent advice

Note ndash this doctrine of constructive notice applies to sureties(guarantors) but does not apply where a bank makes a jointloan to both parties as the facts in that situation do not meetthe requirements set out in Barclays Bank v OrsquoBrien See CIBCMortgages v Pitt (1993)

Note

bull A failure by a solicitor to give proper advice cannot beheld against a bank (even if the bank knows that thesolicitor is acting for both the borrower (for example thehusband) and the guarantorsurety (for example thewife)) ndash see Royal Bank of Scotland v Etridge (No 2) (1998)

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92

bull Once undue influence or misrepresentation has beenfound the whole contract is avoided it cannot be upheldin part ndash TSB Bank plc v Camfield (1995)

bull Damages are not available as a remedy for duress orundue influence

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CT

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W93

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W95

6 Mistake

There is much disagreement concerning the effect ofmistake on a contract There are many reasons for thisconfusion as to which terms to use a large number of caseswhich can be interpreted in different ways no recentdecisive House of Lords decisions on the subject theintervention of equity

Terminology

Different terms are used by Cheshire and Anson to describethe same kind of mistake and you should ascertain whichterms are used in your textbook

The terms used by Cheshire are used in this LawCard

CHESHIRE ANSON Effect

Same mistake Common Mutual May nullifymade by both mistake mistake agreementparties

Parties at Mutual Unilateral Negativescross-purposes mistake mistake agreement

Parties atcross-purposesbut one party Unilateral Unilateral Negativesknows that mistake mistake agreementthe other is mistaken

Effect of a mistake

If the contract is rendered void then the parties will bereturned to their original positions and this may defeat therights of innocent third parties who may have acquired aninterest in the contract

The reluctance of the courts to develop the common lawdoctrine of mistake is probably due to the unfortunateconsequences for third parties that can result from holdinga contract void Equity has however intervened to producemore flexibility as noted below

CA

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96

In common mistakes the parties are agreed but both are mistaken

In mutual and unilateral mistakes the parties may not have reached agreement and these mistakes are sometimes dealt with

under the heading of agreement

The general rule is that a mistake has no effect on a contract but certain mistakes of a fundamental nature sometimes called

operative mistakes may render a contract void at common law

Operative mistakes

Common mistakes

bull At common law this may render the contract void thatis the contract has no legal effect it is unenforcable byeither party and title to property cannot pass under it

bull In equity a more flexible approach has developedcontracts containing certain common mistakes have beentreated as voidable In setting aside such contracts thecourts have a much wider control over the terms it canimpose on the parties

In Bell v Lever Bros (1932) it was stated that to nullify theagreement the lsquomistake must go to the root of the contractrsquo

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W97

Commonmistakes

re a fundamentalmatter for

example resextincta res sua

the quality of the subject matter

Mutualmistakes

re identity ofsubject matter

of contract

Unilateralmistakes

re terms ofcontract re

identity of otherparty to contract

The parties are agreed but they are both under the same misapprehension If this

misapprehension is sufficiently fundamentalit may nullify the agreement

Lever Bros agreed to pay two directors of a subsidiarycompany substantial sums of money in compensation forloss of office while unaware of the fact that they hadengaged in irregular conduct which would have allowedthem to be dismissed without compensation Lever Brosasked the court to order the return the compensation paid onthe ground that it had been paid as a result of a commonmistake The House of Lords held that the common mistakeconcerning the need to pay compensation was notlsquosufficiently fundamentalrsquo to render the contract void

Common mistakes lsquosufficiently fundamentalrsquo to render a

contract void

A common mistake as to the existence of the subject matter(res extincta)bull In Galloway v Galloway (1914) the parties believing they

were married entered into a separation agreement Laterthey discovered that they were not validly married Held ndashthe separation agreement was void for a common mistake

bull In Strickland v Turner (1852) the court declared void onthe grounds of a common mistake a contract to purchasean annuity on the life of a person who had already died

bull In Couturier v Hastie (1856) a buyer bought a cargo ofcorn which both parties believed to be at sea the cargohad however already been disposed of Held ndash thecontract was void

bull Section 6 of the Sale of Goods Act 1979 declares thatlsquoWhere there is a contract for the sale of specific goodsand the goods without the knowledge of the seller haveperished when the contract is made the contract is voidrsquo

CA

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98

However in McRae v Commonwealth Disposals Commission(1951) the commission sold to McRae the right to salvagea tanker lying on a specified reef There was no such reefof that name nor was there any tanker The court foundthat there was a valid contract and that the commissionhad impliedly guaranteed the existence of the tanker Thecase could be distinguished from the Australianequivalent of s 6 on the ground that there never had beena tanker and it had therefore not perished

Whether a contract is void or valid depends on theconstruction of the contract that is even if the subjectmatter does not exist the contract will be valid

if performance was guaranteed or

if it was the purchase of a lsquochancersquo

Otherwise the contract would be void

Mistake as to title ndash res sua ndash that is the thing sold alreadybelongs to the buyerbull In Cooper v Phibbs (1867) Cooper not realising that a

fishery already belonged to him agreed to lease it fromPhibbs Held ndash the contract was void

Mistake as to the possibility of performing the contractbull In Sheik Bros Ltd v Ochsner (1957) a contract was held

void as the land was not capable of growing the cropcontracted for

bull In Griffith v Brymer (1903) a contract to hire a room toview the coronation of Edward VII which was madeafter the procession had been cancelled was held void(Commercial impossibility) C

ON

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99

Mistake as to the quality of the subject matterLords Atkin and Thankerton both insisted in Bell v Lever Brosthat to render a contract void the mistake must go to thelsquoroot of the contractrsquo

bull It has been argued that if the mistake in Bell was notsufficiently fundamental to render a contract void then itis highly unlikely that any mistake concerning qualitywould do so

bull Similarly in Leaf v International Galleries (1950) whereboth parties mistakenly believed that a painting was byConstable the Court of Appeal stated that the contractwas not void for common mistake

bull In Solle v Butcher (1950) the Court of Appeal declined todeclare void a lease which both parties believed was notsubject to the Rent Acts A similar decision was reachedin Grist v Bailey (1967) where the parties both believedthat a house was subject to a protected tenancy

However Lord Justice Steyn in Associated Japanese Bank vCredit du Nord (1988) stated that not enough attention hadbeen paid to speeches in Bell v Lever Bros which did indicatethat a narrow range of mistakes in quality could render acontract void for example Lord Atkinrsquos statement that lsquoacontract may be void if the mistake is as to the existence ofsome quality which makes the thing without that qualityessentially different from the thing it was believed to bersquo Hegave as an example ndash if a horse believed to be sound turnsout to be unsound then the contract remains valid but if ahorse believed to be a racehorse turns out to be a carthorsethen the contract is void

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100

Equity

The role of equity according to this view is supplementarydesigned to relieve the limitations of the common law

bull Rescission on terms was granted by the Court of Appealin Solle v Butcher (1950) (see above) The court rescindedthe lease but gave the tenant the option of staying thereon terms of his paying the extra rent which the landlordcould have charged in view of the improvements

bull Rescission on terms was also granted in Grist v Bailey(1967) where a house was sold in the mistaken belief thatit had a protected tenancy and in Laurence v LexcourtHoldings (1978) where there was a common mistake withregard to planning permission

bull Rescission without terms was granted in Magee v PennineInsurance Co (1969) where an agreement by an insurancecompany to meet a claim was rescinded because theparties were unaware that it was based on a policy whichwas voidable due to a misrepresentation by the assured

bull In William Sindall plc v Cambridgeshire CC (1994) Evans LJsuggested that whereas the common law only recognisedmistakes as to the subject matter of the contract equitywould recognise a lsquowider and perhaps unlimitedcategory of common mistakersquo In Clarion Ltd v NationalProvident Institution (2000) however Rimer J held that

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W101

Lord Justice Steyn in Associated Japanese Bank v Credit du Nord (1988) stated that a court will first examine whether a

contract is void at common law if it is not then itwill examine whether equity will grant rescission

equity would only intervene where the mistake was as tothe terms of the contract or its subject matter Equity didnot provide relief for a lsquobad bargainrsquo

Mutual and unilateral mistakes

The courts adopt an objective test in deciding whetheragreement has been reached It is not enough for one of theparties to allege that he was mistaken

Mistake can negate consent in the following cases

Mutual mistakes concerning the identity of the subject matter

bull In Raffles v Wichelhaus (1864) a consignment of cotton wasbought to arrive lsquoex Peerless from Bombayrsquo Two shipsboth called Peerless were due to leave Bombay at aroundthe same time Held ndash no agreement as the buyer wasthinking of one ship and the seller was referring to theother ship

bull Similarly there was no agreement in Scriven Bros vHindley amp Co Ltd (1913) where the seller sold lsquotowrsquo andthe buyer bought lsquohemprsquo Again there was an ambiguityas both lots were delivered under the same shippingmark and the catalogue was vague

CA

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102

In these cases the parties are at cross-purposesbut there must have been some ambiguity

in the situation before the courts willdeclare the contract void

These mistakes negate consentthat is they prevent the formation of an agreement

bull But in Smith v Hughes (1871) the court refused to declarevoid an agreement whereby the buyer had thought hewas buying old oats when in fact they were new oats asthe contract was for the sale of lsquooatsrsquo The mistake relatedto the quality not the identity of the subject matter

Unilateral mistake concerning the terms of the contract

bull In Hartog v Colin and Shields (1939) the sellers mistakenlyoffered to sell goods at a given price per pound whenthey intended to offer them per piece All the preliminarynegotiations had been on the basis of per piece Thebuyers must have realised that the sellers had made amistake The contract was declared void

bull In Smith v Hughes however the contract was for the saleof lsquooatsrsquo not lsquoold oatsrsquo it would only have been void iflsquoold oatsrsquo had been a term of the contract

Unilateral mistake as to the identity of other parties to the

contract

There are a number of contradictory cases and theoriesunder this heading

Traditionally a distinction is made between mistakes as toidentity and mistakes as to attributes (for example creditworthiness)

bull In Cundy v Lindsay (1878) a Mr Blenkarn ordered goodsfrom Lindsay signing the letter to give the impressionthat the order came from Blenkiron amp Co a firm knownto Lindsay amp Co Held ndash the contract was void Lindsay

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W103

Here one party has taken advantage of the other partyrsquos error

amp Co had only intended to do business with Blenkiron ampCo There was therefore a mistake concerning the identityof the other party to the contract

bull In Kingrsquos Norton Metal Co v Edridge Merrett amp Co Ltd(1872) on the other hand a Mr Wallis ordered goods onimpressive stationery which indicated that the order hadcome from Hallam amp Co an old established firm withbranches all over the country Held ndash the contractbetween Kingrsquos Norton Metal Co and Wallis was notvoid The sellers intended to do business with the writerof the letter they were merely mistaken as to hisattributes that is the size and credit worthiness of hisbusiness

bull In Boulton v Jones (1857) the defendant sent an order forsome goods to a Mr Brocklehurst unaware that he hadsold the business to his foreman the plaintiff Theplaintiff supplied the goods but the defendant refused topay for them as he had only intended to do business withBrocklehurst against whom he had a set off Held ndash therewas a mistake concerning the identity of the other partyand the contract was therefore void

However the cases all concerned contracts negotiated at adistance

CA

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104

From the above three cases it would seem that acontract is void if the mistaken party intended to do

business with another specific person and the identity of that other person was important to him

bull In Phillips v Brooks (1919) a jeweller sold a gold ring anddelivered it on credit to a customer who had come intohis shop and had falsely claimed to be Sir GeorgeBullough a well known and wealthy man Held ndash thecontract was valid The jeweller had intended to dobusiness with the person in his shop

bull In Lewis v Averay (1972) a rogue claimed to be RichardGreene the film actor and produced a pass to Pinewoodstudios to verify this He was allowed to drive away a carin return for a cheque and subsequently resold the car forcash to Averay The cheque bounced and the sellerclaimed the return of the car on the ground that he wasmistaken as to the identity of the buyer Held ndash thecontract was valid The seller must be presumed to haveintended to deal with the person physically in the roomwith him Averay kept the car

There are two cases however where the plaintiffs were ableto establish a mistake as to the identity of a person in theirpresence

bull In Ingram v Little (1961) two sisters sold a car and handedit over against a worthless cheque to a person whoclaimed to be a Mr Hutchinson of Stanstead HouseCaterham They only did so after one of them hadchecked that there was a man of that name who lived atthat address The Court of Appeal held the contract void C

ON

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105

Where the parties negotiate in person the samerules apply but there is a presumption that the inno-cent party intended to do business with the person

physically in his presence

They considered that the sisters had done enough toestablish that they only intended to deal with MrHutchinson

This case has been greatly criticised as it is difficult toreconcile with Phillips v Brooks and Lewis v Averay

bull In Sowler v Potter (1940) the lease of a cafeacute was granted toPotter who had previously been convicted of keeping adisorderly cafe under the name of Robinson The courtheld that the contract was void because of the lessorrsquosmistaken belief that Potter was not Robinson This casehas also been much criticised and doubted as it did notseem that Sowler had intended to do business with anyother identifiable person The contract could in any casehave been set aside for misrepresentation

The contract would in most cases be voidable in any case formisrepresentation where one party has misled the otherwith regard to his identity The advantage of having the contract declared void for mistake is to avoid the bars torescission

See Chapter 5 pp 75ndash76

Mistake as to the nature of the document signed

Defence of non est factum

bull The scope of this defence has been limited since thedecision in Saunders v Anglia Building Society (Gallie v Lee)(1971) where an old lady was persuaded by her nephewto sign a document conveying her house to her nephewrsquosfriend She had believed that she was signing a deed ofgift to her nephew She had not read the documentbecause her glasses were broken It was held that thedocument was valid It was stated that

CA

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106

It is also thought that it will only protect a person who isunder some disability The defence did succeed in LloydsBank v Waterhouse (1990) where the defendant who wasilliterate signed a guarantee of his sonrsquos debt to the bankThe father thought that the guarantee covered the purchaseprice of a farm but in fact it covered all his sonrsquosindebtedness to the bank It was held that the effect of thedocument was fundamentally different from what it wasbelieved to be There was no negligence and the contractwas therefore void

In UDT Ltd v Western (1976) it was held that these samerules applied to cases where a person had signed a formbefore all the details required by the form had been entered

Mistake in equity

The narrow approach taken by the common law towardsremedies for mistake (that is that it renders the contractvoid) is supplemented by the more flexible approach ofequity The following remedies may be available in equity

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W107

Rescission RectificationRefusal of

specificperformance

The signed document must be fundamentally different in effect from what it was thought to be

The signatory must prove that he had not been negligent in signing the document

Rescission

See common mistake (above)

Rectification

Where there has been a mistake not in the actual agreementbut in reducing it to writing equity will order rectification ofthe document so that it coincides with the true agreement ofthe parties

Necessary conditionsbull The document does not represent the intention of both

parties or

bull one party mistakenly believed a term was included in thedocument and the other party knew of this error InRoberts amp Co Ltd v Leicestershire CC (1961) the completiondate of a contract was rectified at the request of one partybecause it was clear that the other party was aware of theerror when the contract was signed

If the document fails to mention a term which one partybut not the other had intended to be a term of thecontract there is no case for rectification

bull There must have been a concluded agreement but notnecessarily a legally enforceable contract In Joscelyne vNissen (1970) a father and daughter agreed that thedaughter should take over the car hire business Inreturn the father would continue to live in the house andthe daughter would pay all the household expenses Thislast provision was not included in the written contractHeld ndash the contract should be rectified to include it

Note ndash a document which accurately records a prioragreement cannot be rectified because the agreement wasmade under some mistake (Rose v Pym above) Equityrectifies documents not agreements

CA

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108

Rectification is an equitable remedy and is available at thediscretion of the court Lapse of time or conflict with thirdparty rights may prevent rectification

Refusal of specific performance

bull In Webster v Cecil (1861) the defendant having previouslyrefused the plaintiffrsquos offer of pound2000 for his land wrote tothe plaintiff offering to sell it to him for pound1250 instead ofpound2250 as he had intended The plaintiff accepted theoffer Specific performance was refused as the plaintiffmust have been aware of the error (unilateral mistake)

bull Where there is no blame on the claimant the situation ismore difficult In Malins v Freeman (1837) the defendanthad mistakenly bought the wrong property at an auctionSpecific performance was refused In Tamplin v James(1879) however the court ordered specific performancewhere the defendant had bid for a property under anerror as to its true extent Presumably being forced to buya totally different property from the one he intendedwould have caused greater hardship than being forced tobuy a property whose dimensions differed from hisexpectations

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W109

Specific performance will be refused when the contract is void at common law Equity may also

refuse specific performance where a contract is validat law but only lsquowhere a hardship amounting toinjustice would have been inflicted upon him by

holding him to his bargainrsquo (Tamplin v James (1879))

7 Illegality and capacity

Illegal contracts are classified in different ways by differentauthorities In this chapter a distinction is drawn betweencontracts which involve the commission of a common lawor statutory offence and those which are void as beingcontrary to public policy

Illegality

The main issue with regard to illegal contracts is the effectof illegality on a contract The most often examined topicwith regard to contracts which are declared void ongrounds of public policy is contracts in restraint of trade

Illegal contracts

Contracts illegal by statute

bull Statute may declare a contract illegal for example theCompetition Act 1998

bull Statute may prohibit an act but declare that it shall noteffect validity of contract for example the ConsumerProtection Act 1987

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W111

Illegal contracts Contracts void

against public policy

Contracts prohibited by statute

Contracts illegal at common law

bull Statute may prohibit an act but not stipulate its effect onthe contract The status of the contract will in this casebe a matter of interpretation for the court In ReMahmoud and Ispahani (1921) the court decided that astatement that lsquoa person shall not buy or otherwise dealin linseed oil without a licencersquo was a prohibition and acontract entered into by a person without a licence wastherefore void

bull The courts are reluctant to imply a prohibition when thisis not clearly indicated in the statute In Hughes v AssetManagers (1995) the court held a contract valid despitethe fact that a document had not been signed by a personauthorised to do so as required by statute

Contracts illegal at common law

bull An agreement to commit a crime a tort or a fraud forexample defraud the rating authority (Allen v Roscous(1676)) to publish a libel (Clay v Yates)

bull An agreement to defraud the Inland Revenue (Napier vBusiness Associates (1951))

bull Contracts damaging to the countryrsquos safety or foreignrelations

bull Contracts interfering with the course of justice forexample contracts to give false evidence

bull Contracts leading to corruption in public life (Parkinson vRoyal College of Ambulance (1925))

bull Contracts tending to promote sexual immorality (Pearcev Brooks (1866))

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112

Effects of illegality

Contracts illegal as formed

In Pearce v Brooks (1866) the owner of a coach of unusualdesign was unable to recover the cost of hire from aprostitute who to his knowledge had hired it in order toattract clients

In Parkinson v Royal College of Ambulance (1925) Parkinsonwas unable to recover the money he had donated to thedefendants on the understanding that they would obtain aknighthood for him

Exceptionsbull Where the parties are not in pari delicto (that is not

equally at fault) for example where one party isunaware of the illegal nature of the contract or has beeninduced to enter into it by fraudulent misrepresentationor is the party the law was attempting to protect forexample a tenant who has paid an illegal premium(Kiriri Cotton Co v Dewani (1960))

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W113

Contracts illegal as formed

Contracts illegal in their performance

Such contracts are void ab initio there can be no action for breach of contract

Money paid or property transferred under the contract cannot be recovered

bull Where the transferor genuinely repents and repudiatesthe contract before performance In Tribe v Tribe (1995)money was transferred to a son in order to avoid thefatherrsquos creditors At the end of the day the creditorswere all paid in full and the father was allowed to cite theoriginal reason for the transfer in order to rebut thepresumption of advancement (which would have meantthat his son could keep the shares) He had withdrawnfrom the illegal purpose before performance

In Bigos v Boustead (1951) however the court was notconvinced that the plaintiff had genuinely repented

bull Where the transferor can frame his claim without relyingon the contract In Bowmakers v Barnet Instruments (1945)the plaintiffs were able to rely on an action in the tort ofconversion to recover goods delivered under an illegalhire purchase contract

Similarly in Tinsley v Milligan (1993) both parties hadcontributed money towards the purchase of a house putin the name of Tinsley alone in order to allow Milligan tomake various social security claims When Milligan suedfor the return of the money it was argued that theagreement had been entered into for an illegal purposeand that the public conscience lsquowould be affronted byrecognising rights created by illegal transactionsrsquo TheHouse of Lords held however that a resulting trust hadbeen created in favour of Milligan by the contribution tothe purchase price Milligan therefore could rely on theresulting trust and had no need to rely on the illegalagreement

This case shows (a) that the rule applies to equity as wellas to common law (b) the test of lsquoaffront to the publicconsciencersquo previously used by the Court of Appeal is nolonger good law

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114

bull Where part of the contract is lawful the court will notsever the good from the bad In Napier v National BusinessAgency (1951) certain payments were described aslsquoexpensesrsquo in order to defraud the Inland Revenue Thecourt refused to enforce payment of the accompanyingsalary as the whole contract was tainted with the illegality

Note ndash property can pass under an illegal contract as in Singv Ali (1960)

Contracts illegal in their performance

A claim by the innocent party to enforce the contract in thesecases is strong

bull In Marles v Philip Trant (1954) the defendant sold winterwheat described as spring wheat without anaccompanying invoice as required by statute Held ndash theplaintiff could sue for damages for breach of contractThe contract was illegal in its performance but not in itsinception

bull In Strongman v Sincock (1955) Sincock failed to getlicences which were needed to modernise some houseswhich belonged to him and refused to pay for the workon the basis that the contracts were illegal Held ndashStrongman could not sue on the illegal contracts butcould sue Sincock on his collateral promise to obtain thelicences

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W115

The illegality may only arise during the performance of a contract for example

a carrier may break the law by exceeding the speed limit whilst delivering goods

belonging to a client He will be punished but the contract will not necessarily be void

bull In Archbolds v Spanglett (1961) Spanglett contracted tocarry Archbolds whisky in a van which was not licensedto carry any goods other than his own Archbold wasunaware of this and could therefore recover damages forbreach of contract

But in Ashmore Benson Pease amp Co v Dawson Ltd (1973)the other party knew of the overloading of the lorry andcould not therefore recover damages He hadparticipated in the illegality

bull Even the guilty party may enforce the contract if theillegality is incidental

In Shaw v Groom (1970) a landlord failed to give histenant a rent book as required by law Held ndash he could suefor the rent The purpose of the statute was to punish thelandlordrsquos failure to provide a rent book not to render thecontract void

In St John Shipping v Rank (1957) a ship owner who hadoverloaded his ship in contravention of a statute was ableto recover freight

Contracts void at common law on grounds of publicpolicy

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116

Contracts damaging to theinstitution of marriage

For example contracts inrestraint of marriage

marriage brokerage contractscontracts for future separation

(pre-nuptial agreements)

Contracts made after orimmediately beforeseparation are valid

Contracts to oust thejurisdiction of the courts

However arbitrationagreements are valid

In Esso Petroleum v Harpers Garage (1968) it was stated thatthe court will consider

bull whether the contract is in restraint of trade A contract isin restraint of trade if it restricts a personrsquos liberty tocarry on his trade or profession Certain restraints havebecome acceptable over the years for example lsquotiedhousesrsquo restrictive covenants in leases sole agency orsole distributorship agreements

bull whether it should nevertheless be enforced because itprotects a legitimate interest and is reasonable Theonus of proving reasonability is on the promisee Arestraint to be permissible must be no wider than isnecessary to protect the relevant interest of thepromisee

Categories of contracts in restraint of trade

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W117

Restraints onemployees

Restraints on thevendors of a business

Exclusive dealingagreements

A contract in restraint of trade is prima facie void but thecourts will now uphold the restriction if it is shown that

bull the restraint protects a legitimate interest

bull the restraint is reasonable between the parties

bull the restraint is reasonable as regards the interest of thepublic

Contracts in restraint of trade

Restraints on employeesThe restraint is void unless the employer can show

bull That it is necessary to protect a proprietary interest forexample the trade secrets of a works manager in Foster vSuggett (1918) the trade connections of a solicitorrsquosmanaging clerk in Fitch v Dewes (1921)

A restraint merely to prevent competition will not beenforced

In Eastham v Newcastle United FC (1964) the courtaccepted that the proper organisation of football was avalid matter for clubs to protect but found the lsquoretainand transfer systemrsquo unreasonable

bull That the restraint is no greater than is necessary toprotect the employerrsquos interest in terms of time andarea

In Scorer v Seymore-Jones (1966) the court upheld arestriction of 10 miles within branch A at which theemployee had worked but held that a similar restraintcovering branch B at which the employee had notworked was unreasonable and void

bull Problems with area can be overcome by using lsquonon-solicitationrsquo clauses instead

In Home Counties Dairies v Skilton (1970) a milkmanagreed that for one year after leaving his present job hewould not sell milk to his employerrsquos customers Held ndashrestraint valid It was necessary to protect the employeragainst loss of customers

bull The validity of the duration of the restraint depends onthe nature of the business to be protected and on thestatus of the employee

CA

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118

In Briggs v Oates (1991) a restriction of five miles for fiveyears on an assistant solicitor was upheld as reasonable

bull A restraint imposed by indirect means for example byloss of pension rights (Bull v Pitney Bowes (1966)) orwhere two companies agreed not to take on the otherrsquosemployees (Kores v Kolok (1959)) will be judged by thesame criteria

Restraints on the vendor of a business

bull In Vancouver Malt and Sake Brewing Co v VancouverBreweries Ltd (1934) a company which was licensed tobrew beer but which had not at any time brewed beerwas sold and agreed not to brew any beer for 15 yearsHeld ndash the restraint was void since there was no goodwillof a beer brewing business to be transferred

bull In British Concrete v Schelff (1921) S sold his localisedbusiness to B who had branches all over the UK andagreed not to open any business within 10 miles of any ofBrsquos branches Held ndash the restriction was void B wasentitled only to protect the business he had bought notthe business which he already owned

bull In Nordenfelt v Maxim Nordenfelt (1894) N a worldwidesupplier of guns sold his worldwide business to M andagreed not to manufacture guns anywhere in the worldfor 25 years Held ndash the restriction was valid C

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AW

119

Such a restraint is valid if it is intended to protectthe purchaserrsquos interest in the goodwill of the

business bought and is reasonable

Exclusive dealing agreements

bull In Esso Petroleum v Harpers Garage (1968) a solusagreement for four years was held reasonable but asolus agreement for 21 years was held unreasonable andtherefore void

bull Solus agreements were distinguished from restrictivecovenants in a lease When an oil company leases afilling station to X inserting a clause that X should buyall its requirements from the company this is not subjectto restraint of trade rules because the tenant is notgiving up a previously held freedom

bull But in Amoco v Rocca Bros (1975) the court held thatrestraint of trade rules did apply to lease and lease backagreements

bull In Alec Lobb (Garages) v Total Oil (1985) in a similar leaseback arrangement a solus agreement for between sevenand 21 years was held reasonable on the ground that thearrangement was a rescue operation benefiting theplaintiffs and there were lsquobreakrsquo clauses in theunderlease

bull In Schroeder Music Publishing Co v Macaulay (1974) itwas held that a contract by which an unknown songwriter undertook to give his exclusive services to apublisher who made no promise to publish his work

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120

Solus agreements whereby A agrees to buy all his re-quirements of a particular commodity from B

Most exclusive services contracts are found in professional sport or entertainment

was subject to the restraint of trade doctrine as it waslsquocapable of enforcement in an oppressive mannerrsquo

bull In Greig v Insole (1978) the MCC banned any cricketerwho played for a cricketing lsquocircusrsquo from playing forEngland The court held that the ban was void as beingin restraint of trade

It has been suggested that the courts will hold exclusivedealing and service contracts to be within the restraint oftrade doctrine if they contain unusual or novel features orif there is disparity in the bargaining power and theagreement is likely to cause hardship to the weaker party

Cartel agreementsThese are now covered by statute for example the FairTrading Act 1973 and the Competition Act 1998 This mayalso fall within Article 81 of the Treaty of the EuropeanCommunities

Effect of a restraint

Two tests must be satisfied

bull The lsquoblue pencilrsquo test It must be possible to sever theillegal part simply by deleting words in the contract Thecourt will not add words substitute one word foranother rearrange words or in any way redraft the

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W121

A void restraint is severable Severance can be operated intwo ways

bull severance of the whole of the objectionable promiseleaving the rest of the contract to be enforced

bull severance of the objectionable part of the promise

contract In Mason v Provident Clothing Co Ltd (1913) theHouse of Lords refused to redraft a promise not to workwithin 25 miles of London But in Goldsoll v Goldman(1915) a dealer in imitation jewellery promised not todeal in real or imitation jewellery either in the UK orabroad Dealing in real jewellery and dealing abroadwere severed

bull Severance of the objectionable part of the contract mustnot alter the nature (as distinct from the extent) of theoriginal contract The illegal restraint will not be severedif it is the the main purpose of the restraint or if to severit would alter entirely the scope and intention of theagreement In Attwood v Lamont (1920) the court refusedto sever restrictions on a tailor from competing with anydepartment of the department store which had employedhim The court stated that this was a covenant lsquowhichmust stand or fall in its unaltered formrsquo

Capacity

Minors

The law pursues two conflicting policies in the case ofminors On the one hand it tries to protect minors from theirown inexperience on the other it tries to ensure that personsdealing with minors are not dealt with in a harsh manner

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122

Minorspersons under 18

Persons of unsound mindand drunken persons

Contracts with minors can be divided into three categories

Valid contracts ndash contracts which can be enforced

against a minor

Necessaries

bull In Nash v Inman (1908) a student purchased 11 silkwaistcoats while still a minor The court held that silkwaistcoats were suitable to the conditions of life of aCambridge undergraduate at that time but they were notsuitable to his actual needs as he already had a sufficientsupply of waistcoats

It is important to distinguish between luxurious goods ofutility and goods of pure luxury The status of the minor canmake the former into necessaries but the latter can never beclassified as necessaries

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W123

Contracts fornecessaries

Beneficial contracts of service

Valid contracts Voidable contracts Other contracts

Necessary goods are defined in the Sale of GoodsAct 1979 as lsquogoods suitable to his conditionin life and to his actual requirements at the

time of sale and deliveryrsquo

The burden of proving that the goods are necessaries is onthe seller

They must satisfy the same tests as necessary goods

Professor Treitel considers that both executed andunexecuted contracts for necessaries can be enforced Hecites Roberts v Gray (1913) Roberts agreed to take Gray aminor on a billiard tour to instruct him in the profession ofbilliard player Gray repudiated the contract The court heldthat Roberts could recover damages despite the fact that thecontract was executory

Cheshire Fifoot and Furmston agree that executorycontracts for necessary services are enforceable as in Robertsv Gray but deny that executory contracts for necessary goodscan be enforced

They cite

bull the actual wording of the Sale of Goods Act which refersto time of lsquosale and deliveryrsquo

bull the minor has to pay a reasonable price for the goods notthe contractual price

These indicate it is argued that liability is based onacceptance of the goods not on agreement

Beneficial contracts of service

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124 These must be for the benefit of the minor

Necessary services include education medical and legal services

bull In De Francesco v Barnum (1890) a contract whose termswere burdensome and harsh on the minor was held void

bull But in White City Stadium v Doyle (1935) where a minorhad forfeited his payment for a fight because ofdisqualification the contract was neverthelessenforceable against him Where a contract is on the wholefor the benefit of a minor it will not be invalidatedbecause one term has operated in a way which is not tohis advantage

bull In Chaplin v Leslie Frewin (Publishers) Ltd (1966) the courtenforced a contract by a minor to publish his memoirs asthis would train him in becoming an author and enablehim to earn a living

bull But trading contracts (involving the minorrsquos capital) willnot be enforced even if it does help the minor earn aliving In Mercantile Union Guarantee Co Ltd v Ball (1937)the court refused to enforce a hire purchase contract for alorry which would enable a minor to trade as a haulagecontractor

Voidable contracts

These comprise contracts of continuing obligation such ascontracts to acquire an interest in land or partly paid sharesor partnership agreements

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W125

They must be contracts of service or similar to a contract of service

Contracts which can be avoided by the minor beforemajority or within a short time afterwards

The minor can free himself from obligations for the futurefor example an obligation to pay rent under a lease but willhave to pay for benefits already received He cannot recovermoney already paid under the contract unless there has beena total failure of consideration (Steinberg v Scala (Leeds) Ltd(1923))

Other contracts

But

bull The minor himself may enforce such contracts

bull Property can pass under such contracts

bull Where the contract has been carried out by the minor hecannot recover any property unless there has been atotal failure of consideration or some other failingwhich would equally apply to an adult

bull The Minors Contracts Act 1987 provides that

a minor may ratify such a contract on majority and itcan thereafter be enforced against him

a guarantee of a minorrsquos debt will not be voidbecause a minorrsquos debt is unenforceable against him

a court may if it considers it is just and equitable to doso order a minor to return property he has receivedunder a void contract or any property representing itIt is not clear whether property transferred under thecontract covers money for example in money lendingcontracts It is argued that as lsquoproperty representing itrsquo

CA

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126

These cannot be enforced against a minor

must cover money it would therefore be illogical toexclude money acquired directly but there is as yet nodecision on this point Property cannot presumably berecovered under this section where the minor hasgiven away the contract property

bull Equity will order restitution of property acquired byfraud But there can be no restitution of money (Leslie vSheill (1914)) and no restitution if the minor has resold theproperty

bull An action may be brought in tort if it does not in any wayrely on the contract But although a minor is fully liablefor all his torts he may not be sued in tort if this is just anindirect way of enforcing a contract In Leslie v Sheill(1914) a minor obtained a loan by fraudulentlymisrepresenting his age Held ndash he could not be sued inthe tort of deceit as this would be an indirect way ofenforcing a contract which was void

Persons of unsound mind and drunken persons

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W127

A person who has been declared a lsquopatientrsquo under the MentalHealth Act 1983 by the Court of Protection is incapable ofentering into a valid contract

Other mentally disordered persons and drunken personswill be bound by their contracts unless

bull they were so disordered or drunk that they did notunderstand the nature of what they were doing and

bull the other party was aware of this

Such contracts may be affirmed during a sober or lucidmoment The Sale of Goods Act requires that wherelsquonecessaries are sold and delivered to a person who byreason of mental incapacity or drunkenness is incompetentto contract he must pay a reasonable price for themrsquo

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128

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W129

8 Discharge

A contract may be discharged by

Performance

Precision of performance

bull In Cutter v Powell (1795) a shiprsquos engineer undertook tosail a ship from Jamaica to Liverpool but died before thevoyage was complete Held ndash nothing could berecovered in respect of his service he had not fulfilled hisobligation

bull In Bolton v Mahadeva (1972) a central heating systemgave out less heat than it should and there were fumesin one room Held the contractor could not claimpayment although the boiler and pipes had beeninstalled they did not fulfill the primary purpose ofheating the house

A contract is lsquodischargedrsquo when there are noobligations outstanding under it

Performance Agreement Breach Frustration

Precision ofperformance

Time ofperformance

Tender ofperformance

To discharge his obligations under a contract aparty must perform exactly what he promised

These are examples of lsquoentirersquo contracts which consist ofone unseverable obligation

bull Where the contract is divisible payment can berecovered for the completed part for example goodsdelivered by instalments

bull Where the promisee accepts partial performance InSumpter v Hedges (1898) however payment for partialperformance was refused as Hedges had been left with ahalf-built house and had been put in a position where hehad no choice but to accept partial performance

bull Where the promisee prevents complete performance forexample in Plancheacute v Colburn (1831) a writer wasallowed payment for the work he had already donewhen the publisher abandoned the series

bull Where the promisor has performed a substantial part ofthe contract In Hoenig v Isaacs (1952) the plaintiffdecorated the defendantrsquos flat but because of faultyworkmanship the defendant had to pay pound50 to anotherfirm to finish the job Held ndash the plaintiff was entitled topound150 (the contract price) minus the pound50 paid to the otherfirm cf Bolton v Mahadeva (1972) where the courtdeclined to find substantial performance

This has become known as the doctrine of substantialperformance In order for the claimant to rely on thisdoctrine the failure to perform must amount only to a

CA

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130

Despite the rule that performance must be exact the law will allow payment to be made on a

quantum meruit basis for incomplete performance in the following circumstances

breach of warranty or a non-fundamental breach of aninnominate term It will not apply to a fundamentalbreach or to a breach of condition

Time of performance

bull It is stipulated in the contract see Lombard North Centralv Butterworth (1987)

bull One party has given reasonable notice during thecurrency of the contract that performance must takeplace within a certain time In Rickards v Oppenheim(1950) a car body which had been ordered from theplaintiffs was late The defendants gave final notice to theplaintiff that unless it was delivered within three monthsthey would cancel the order Held ndash time had been madeof the essence the defendants could cancel the order

bull The nature of the contract makes it imperative thatstipulations as to time should be observed for examplecontracts for the sale of perishable goods

The Law of Property Act 1925 stipulated that terms as tothe time of performance should be interpreted in thesame way at common law as in equity In Rainieri v Miles(1981) the House of Lords held that that meant that lateperformance would not give rise to a right to terminatebut would give rise to damages

Tender of performance

If one party tenders performance which is refused he maysue for breach of contract

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W131

Equity considers that time is not lsquoof the essence of a contractrsquo that is a condition

except in the following circumstances

If payment is tendered and rejected the obligation to tenderpayment is discharged but the obligation to pay remains

Agreement

bull If the contract is wholly executory there is no problemwith consideration as both parties surrender their rightsunder the contract

bull If the contract is partly executed one party hascompleted his performance under the contract ndash to makethe agreement binding there must either be a deed (alsquoreleasersquo) or new consideration (lsquoaccord and satisfactionrsquo)or the doctrine of equitable estoppel or waiver mustapply See Chapter 2

CA

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132

A term in the originalcontract for example acondition subsequent

or method for terminating the contract

A new agreement

A contract may be discharged by

As contracts are created by agreement so they may be discharged by agreement Consideration is

necessary to make the agreement binding

Breach

See classification of terms p 45 above

There are special problems where a party repudiates acontract under a wrong assumption that he has a right to doso

bull In Federal Commerce and Navigation v Molena Alpha (1979)the owners of a ship gave instructions not to issue bills oflading without which the charterers could not operatethe ship They wrongly believed that they had the rightto do so Held ndash their conduct constituted a wrongfulrepudiation of the contract which allowed the other partyto treat the contract as discharged

bull In Woodar Investment Development v Wimpey Construction(1980) the purchaser wrongly repudiated a contract forthe sale of land wrongly believing that he had a right todo so Held ndash a wrongful repudiation made in good faithwould not necessarily allow the other party to treat thecontract as discharged

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W133

A breach of condition

A fundamentalbreach of an

innominate term

A breach does not of itself discharge a contract It may allowthe other other party an option to treat the contract as discharged that is to terminate the contract if the breach is sufficiently serious that is if it is

A repudiatory breach

It is difficult to distinguish these decisions The general viewis that the approach in Molena Alpha is to be preferred so thateven a good faith lsquorepudiatoryrsquo response to a non-repudiatory breach will amount to a breach of contract

Effect of treating the contract as discharged

The obligation of both parties to perform (that is theprimary obligation) is discharged from the date of thetermination

However the party in breach may have to pay damages forany losses past and future caused to the innocent party as aresult of the breach (Lombard North Central v Butterworth ndashChapter 3)

The discharge does not operate retrospectively In PhotoProduction v Securicor (1980) Securicor was able to rely on anexclusion clause in the contract despite the fact that thecontract had been discharged

Note ndash it was held by the House of Lords in Vitol v Norelf(1996) that the defendantrsquos failure to perform his ownobligation could constitute acceptance of the plaintiffrsquos repudiation

The decision to terminate cannot be retracted

Anticipatory breach of contract

CA

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134

Explicit

Hochter v La Tour (1853) atravel courier announced

in advance that he would not be fulfilling

his contract

Implicit

Frost v Knight (1872) aparty disabled himself

from carrying out apromise to marry by

marrying another person

Effect of anticipatory breach

bull The other party may sue for damages immediately Hedoes not have to await the date of performance (Hochsterv De La Tour (1853))

bull The innocent party may refuse to accept the repudiationHe may affirm the contract and continue to perform hisobligations under the contract In White and Carter Ltd vMcGregor (1962) the defendants cancelled a contractshortly after it had been signed The plaintiffs refused toaccept the cancellation carried on with the contract andthen sued for the full contract price Held ndash the plaintiffswere entitled to succeed a repudiation does notautomatically bring a contract to an end the innocentparty has an option either to affirm the contract or toterminate the contract unless

the innocent party needs the co-operation of the other party In Hounslow BC v Twickenham GardenDevelopments Ltd (1971) Hounslow council cancelled acontract to lay out a park It was held that thedefendants could not rely on White and Carter vMcGregor because the work was to be performed oncouncil property

the innocent party had no legitimate interestfinancial or otherwise in performing the contractrather than in claiming damages In The AlaskanTrader (1984) a ship chartered to the defendantsrequired extensive repairs at the end of the first yearwhereupon the defendants repudiated the contractThe plaintiffs however refused to accept therepudiation repaired the ship and kept it fullycrewed ready for the defendantrsquos use Held ndash theplaintiffs had no special interest in keeping the

CO

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W135

contract alive They should have accepted therepudiation and sued for damages

Where a party has affirmed the contract

bull He will have to pay damages for any subsequent breachwhich he commits he cannot argue that the other partyrsquosanticipatory breach excuses him (Fercometal SARL vMediterranean Shipping Co (1988))

bull There is a danger that a supervening event may frustratethe contract and deprive the innocent party of his right todamages as in Avery v Bowden (1855) (below)

Frustration

The doctrine has been kept to narrow limits

The basis of the doctrine and the tests

bull Until the 19th century the courts adhered to a theory oflsquoabsolute contractsrsquo as in Paradine v Jane (1647) It wassaid that if the parties wished to evade liability because of

CA

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136

By the courts whohave insisted that the

supervening event mustdestroy a fundamental

assumption

By business persons who have lsquodrafted outrsquo

the doctrine byforce majeure clauses

Frustration occurs where it is established that due to a subsequent change in circumstances the

contract has become impossible to perform or it hasbeen deprived of its commercial purpose

some supervening event then they should provide forthis in the contract However in Taylor v Caldwell (1863)the courts relented and held that if the contract becameimpossible to perform due to some extraneous cause forwhich neither party was responsible then the contactwould be discharged

bull The modern test was enunciated by Lord Simon inNational Carriers v Panalpina (1981) frustration ariseswhere lsquothere supervenes an event (without default ofeither party and for which the contract makes nosufficient provision) which so significantly changes thenature (not merely the expense or onerousness) of theoutstanding contractual rights andor obligations fromwhat the parties could reasonably have contemplated atthe time of its execution that it would be unjust to holdthem to the literal sense of its stipulations in the newcircumstancesrsquo

bull In Davis Contractors v Fareham UDC (1956) Lord Radcliffstated that frustration occurs where to requireperformance would be to render the obligationsomething lsquoradically differentrsquo from what wasundertaken by the contract

Circumstances in which frustration may occur

bull The subject matter of the contract has been destroyed oris otherwise unavailable

In Taylor v Caldwell (1863) a contract to hire a music hallwas held to be frustrated by the destruction of the musichall by fire (see also s 7 of the Sale of Goods Act 1979)

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W137

Note ndash it is not the circumstances but the nature ofthe obligation which must have changed

bull But the unavailable or destroyed object must have beenintended by both parties to be the subject of the contract

In Blackburn Bobbin Co v Allen (1918) the contract was forthe sale of lsquobirch timberrsquo which the seller intended toobtain from Finland Held ndash the contract was not frustratedwhen it became impossible to obtain timber from FinlandThe subject matter of the contract was birch timber notFinnish birch timber

bull Death or incapacity of a party to a contract of personalservice or a contract where the personality of one partyis important

In Condor v The Baron Knights (1966) a contract between apop group and its drummer was held frustrated whenthe drummer became ill and was unable to fulfill theterms of the contract A claim for unfair dismissal can alsosometimes be defeated by the defence of frustrationwhere an employee has become permanentlyincapacitated or imprisoned for a long period

bull The contract has become illegal to perform eitherbecause of a change in the law or the outbreak of war

In Avery v Bowden (1855) a contract to supply goods toRussia was frustrated when the Crimean War broke out Ithad become an illegal contract ndash trading with the enemy

Note the outbreak of war between two foreign States willnot render a contract illegal but may make it impossibleto perform In Finelvet v Vinava Shipping Co (1983) acontract to deliver goods to Basra did not become illegalon the outbreak of the Iraq-Iran war but was frustratedwhen it became too dangerous to sail to Basra

bull The commercial purpose of the contract has failedCA

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138

Establishing whether a contract is impossible or illegal toperform is relatively straightforward but it is more difficultto decide whether the commercial purpose of the contracthas failed

It may happen in the following circumstances

bull Failure of an event upon which the contract was based

In Krell v Henry (1903) the court held that a contract tohire a room overlooking the proposed route of thecoronation procession was frustrated when thecoronation was postponed The purpose of the contractwas to view the coronation not merely to hire a room Ithas been argued that the fact that the hire of the roomwas a lsquoone offrsquo transaction was important The judge inthe case contrasted it with the hire of a taxi to take theclient to Epsom on Derby day This would be a normalcontractual transaction for the taxi driver thecancellation of the Derby would not therefore frustratethe contract

In the case of Herne Bay Steamboat Co v Hutton (1903) thecourt refused to hold that a contract to hire a boat to seethe king review the fleet was frustrated when the reviewwas cancelled the fleet was still there and could beviewed ndash there was therefore no overall failure of thepurpose of the contract

bull Government interference or delay

In Metropolitan Water Board v Dick Kerr (1918) a contracthad been formed in 1913 to build a reservoir within sixyears In 1915 the government ordered the work to bestopped and the plant sold Held ndash the contract wasfrustrated C

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139

In Jackson v Union Marine Insurance Co (1874) a ship waschartered in November to proceed with all dispatch toNewport The ship did not reach Newport until thefollowing August Held ndash the contract was frustratedsince the ship was not available for the voyage for whichshe had been chartered

In The Nema (1982) a charter party was frustrated when along strike closed the port at which the ship was due toload so that of the six or seven voyages contracted to bemade between April and December only two could bemade

Similar difficult problems arise in the case of contracts ofemployment (illness or imprisonment) and leases

It has been suggested that where the contract is of a fixedduration and the unavailability of the subject matter isonly temporary the court should consider the ratio of thelikely interruption to the duration of the contract

LeasesIt had long been thought that the doctrine of frustration didnot apply to leases (see Paradine v Jane (1647) and CricklewoodInvestments v Leightonrsquos Investments (1945))

bull However in National Carriers v Panalpina (1981) theHouse of Lords declared that in principle a lease couldbe frustrated In that case a street which gave the onlyaccess to a warehouse was closed for 18 months Thelease for the warehouse was for 10 years Held ndash the leasewas not frustrated

bull The House of Lords did state however that where therewas only one purpose for the property leased and thispurpose became impossible then the lease would be

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140

frustrated for example a short term holiday lease It isstill true that it will be very rare for a lease to befrustrated

Limits to the doctrine of frustration

It will not be applied

bull In Davis Contractors LTD v Fareham UDC (1956) thecontractors had agreed to build a council estate at a fixedprice Due to strikes bad weather and shortages oflabour and materials there were considerable delays andthe houses could only be built at a substantial loss Heldndash the contract was not frustrated

bull See also the Suez cases where the courts refused to holdshipping contracts frustrated as a result of the closing ofthe Suez Canal unless the contracts specified a routethrough the canal

But a force majeure clause will be interpreted narrowly asin Metropolitan Water Board v Dick Kerr amp Co (1918) wherea reference to lsquodelaysrsquo was held to refer only to ordinarydelays and not to a delay caused by government decree

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W141

lsquoDoctrine must be kept within narrow limitsrsquo

on the grounds of inconvenience increase in expense loss of profit

Where there is an express provision in thecontract covering the intervening event

(that is a force majeure clause)

A force majeure clause will not in any case be applied to covertrading with an enemy

A contract will not be frustrated if the event makingperformance impossible was the voluntary action of oneof the parties If the party concerned had a choice open tohim and chose to act in such a way as to makeperformance impossible then the frustration will be self-induced and the court will refuse to treat the contract asdischarged

bull In The Superservant Two (1990) one of two barges ownedby the defendants and used to transport oil rigs wassunk They were therefore unable to fulfill their contractto transport an oil rig belonging to the plaintiff as theirother barge (Superservant One) was already allocated toother contracts The court held that the contract was notfrustrated The plaintiffs had another barge available butchose not to allocate it to the contract with the plaintiffs

This case illustrates both the courts reluctance to applythe doctrine of frustration and the advantage of using aforce majeure clause

If by reason of special knowledge the event wasforeseeable by one party then he cannot claimfrustration

bull In Amalgamated Investment and Property Co v John Walker ampSons Ltd (1976) the possibility that a building could belisted was foreseen by the plaintiff who had inquiredabout the matter beforehand A failure to obtain planning

CA

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142

Where the frustration is self-induced

Where the event was foreseeable

permission was also foreseeable and was a normal riskfor property developers The contract was therefore notfrustrated

The effect of frustration

This rule could be very unfair in its operation as in Chandlerv Webster (1904) where the hirer had to pay all the sum duefor the hire of a room to view the coronation despite thecourt holding the contract frustrated by the cancellation ofthe coronation

This rule however would only apply in the event of a totalfailure of consideration and could itself in any case causehardship if the other party had expended a considerableamount of money in connection with the contract

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W143

At common law the loss lay where it fell that isthe date of the frustrating event was all important

Anything paid or payable before that datewould have to be paid Anything payable

after that date need not be paid

In the Fibrosa case (1943) the House of Lordsdid move away from this rule and held that

where there was a total failure of considerationthen any money paid or payable in advance

would have to be returned

Note these two sections are to be applied independently Theexpenses in s 1(2) can only be recovered from lsquosums paid orpayable before the frustrating eventrsquo

Section 1(3) was applied in BP Exploration v Hunt (1982)where it was held that the court must

bull identify and value the lsquobenefit obtainedrsquo

bull assess the lsquojust sumrsquo which it is proper to award

The court also stated that

bull the section was designed to prevent unjust enrichmentnot to apportion the loss or to place the parties in theposition they would be in had the contract beenperformed or to restore them to their pre-contractposition

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144

The Law Reform (Frustrated Contracts) Act 1943was therefore passed to remedy these deficiencies

It provided

s 1(2) ndash all sums paid or payable before the frustratingevent shall be recoverable or cease to be payable but

the court has a discretionary power to allow the payeeto set off against the sum so paid expenses he has

incurred before the frustrating event

s 1(3) ndash where one party has obtained a valuablebenefit before the time of discharge the other

party may recover from him such sums asthe court considers just

bull in assessing the valuable benefit the section requiredreference to the end benefit received by a party not thecost of performance In assessing the end benefit theeffect of the frustrating event had to be taken intoaccount

bull the cost of performance can be taken into account inassessing the just sum

In BP v Hunt (1982) BP were to do the exploration andprovide the necessary finance on an oil concession ownedby Mr Hunt in Libya They were also to provide certainlsquofarm-inrsquo payments in cash and oil In return they were toget a half-share in the concession and 5 of theirexpenditure in reimbursement oil A large field wasdiscovered the oil began to flow then in 1971 the LibyanGovernment nationalised the field

The court held

bull the valuable benefit to Hunt was the net amount of oilreceived plus the compensation payable by the LibyanGovernment which amounted to pound85000000

bull the just sum would cover the work done by BP less thevalue of the reimbursement oil already received Thiswas assessed at pound34000000 As the valuable benefitexceeded the just sum BP recovered their expenses infull The position would have been very differenthowever if the field had been nationalised at an earlierstage and no compensation had been paid

CO

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W145

The Law Reform (Frustrated Contracts) Act 1943 does notapply to

CA

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146

Charter parties Contracts of insurance

Contracts for the sale of specificgoods which have perished

CO

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W147

9 Remedies for breach of contract and restitution

not

If no loss has been suffered then nominal damages onlywill be awarded

bull In Surrey CC v Bredero Homes (1993) the court refused toaward damages against a defendant who had notcomplied with planning permission as there was no lossto the council

Unliquidated damages (that is damages assessed by

the court)

The purpose of unliquidated damages is to compensate the claimant for the loss he has

suffered as a result of a breach

Unliquidateddamages

Equitableremedies

Liquidateddamages

Restitutionor

quasi-contract

to punish the defendantPunitive damages are

not awarded for breachof contract

generally to recoup again made by the

defendant (but cf AG vBlake (2000) below)

bull However in Chaplin v Hicks (1911) damages wereawarded for the loss of a chance to win a competitionalthough there was no certainty that the plaintiff wouldhave been one of the winners

Reliance damages rather than expectation damages may beappropriate where the benefits which would have beenobtained by successful performance are difficult to assess asin

bull McRae v Commonwealth Disposals Commission (1951)where the plaintiff recovered the expenses incurred insearching for a wreck which did not exist

bull Anglia Television v Reed (1972) where the leading actor ina film project withdrew at the last moment The plaintiffswere able to recover all their wasted expenditure on theprogramme including even those incurred before thecontract had been signed

CA

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148

Methods of compensating the claimant

Expectation that is loss ofbargain is the traditional

basis for assessing damagesin contract It aims to putthe claimant in the sameposition as far as money

can do it as if the contracthad been performed

Reliance that is out of pocketor wasted expenditure This

is the normal way ofassessing damages in tort

but can be used in contractas illustrated below

bull But cf Regalian Properties v London Dockland Development(1995) where expenses incurred while negotiations wereexpressly lsquosubject to contractrsquo were not recoverable

It has been held that a claimant may freely choose betweenexpectation and reliance damages unless the difficulty inidentifying profits is because he has made a lsquobad bargainrsquo

bull In C and P Haulage v Middleton (1983) the plaintiff hired agarage for six months on the basis that anyimprovements would become the property of thelandlord He was ejected in breach of contract and suedfor the cost of the improvements Held ndash expenditurewould have been wasted even if the contract had beenperformed

bull It is for the defendant to prove that the claimant hadmade a bad bargain as in CCC Films v Impact QuadrantFilms (1985) where the defendant failed to prove that theplaintiff would not have made a profit from distributingthe films had they been delivered in accordance with thecontract

bull In normal circumstances the claimant will ask fordamages on an expectation basis as this is moreprofitable for him

Restitutionary measure

In Attorney General v Blake (2000) the House of Lords for thefirst time recognised that in some circumstances alsquorestitutionaryrsquo measure of damages requiring thedefendant to pay over the profit made as a result of thebreach of contract may be appropriate The case was anunusual one involving a book published by a member ofthe security services who had spied for Russia The House ofLords regarded the defendant as having been under

CO

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W149

something lsquoakin to a fiduciary obligationrsquo and it is not yetclear how far the principle adopted in this case is likely to beapplied in other situations

Contributory negligence

This is only relevant where the liability in contract isidentical with the liability on tort that is the breach is of acontractual duty to take care (Barclays Bank v FaircloughBuilding (1994))

Quantification of damage

Where lsquoloss of bargainrsquo damages are claimed there are twopossible methods of quantification

The court will normally adopt the most appropriate (RuxleyElectronics and Construction v Forsyth (1995))

Prima facie rules

CA

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150

Sale of goods ndash difference in value

Failure to repair (lease) ndash difference in value

Building contracts ndash cost of cure

Difference in value Cost of cure

Failure to deliver goods

bull In Williams Bros v Agius (1914) the profit which wouldhave been earned on a resale was ignored damagesrepresented the difference between the contract price andthe market price (which was higher than the resale price)

Failure to accept delivery and pay

bull If the seller is a dealer in mass produced goods then thedamage to him will be the loss of profit on onetransaction The claimant had sold one item less than heotherwise would have during the year (Thomson vRobinson (1955))

bull However if the mass produced item is in short supplyand the number of sales is governed by supply not bydemand then there is no loss of profit and damageswould not be awarded (Charter v Sullivan (1957))

bull The damages revert to the difference between thecontract price and market price in the case of secondhand goods even if the seller is a dealer (Lazenby Garagesv Wright (1976))

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W151

The Sale of Goods Act 1979 states thatdamages will represent the difference between

the contract price and the market price

The Sale of Goods Act 1979 states that damages willagain represent the difference between the contract

price and the market price

Limitations on principle of expectation

Although the stated aim of the expectation basis of assessingdamages is to put the claimant in the position he would havebeen in had the contract been performed there are a numberof rules which militate against this result

Remoteness of damage

bull In Hadley v Baxendale (1854) a mill was closed because ofthe delay of a carrier in returning a mill shaft The courtheld that the carrier was not liable for damages for theclosure of the mill as he was not aware that the absenceof a mill shaft would lead to this conclusion

The following damages were said to be recoverable

those arising naturally out of the breach

those which because of special knowledge wouldhave been within the contemplation of the parties

bull In Victoria Laundry v Newman Industries (1949) the rulewas restated and based on knowledge The laundry wasable to recover damages for normal loss of profitC

AV

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DIS

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S152

Damages cannot be recovered for losses that are tooremote The losses must be lsquowithin the reasonable

contemplationrsquo of the parties

Kind ofloss

CausationDuty of

mitigationRemotenessof damage

following a delay in the delivery of a boiler but not forspecially lucrative dyeing contracts they were offeredduring this time

Damages were said to be recoverable for losses whichwere within the reasonable contemplation of the partiesat the time of the contract either from

imputed knowledge or

actual knowledge

bull In The Heron II (1969) the House of Lords confirmed thata higher degree of foreseeability is required in contractthan in tort Damages were awarded to cover lossesarising from the late delivery of sugar to Basra Theparties must have been aware that the price of sugar inBasra might fluctuate For a loss not to be too remotethere must be

lsquoa real dangerrsquo

lsquoa serious possibilityrsquo

or the loss must be

lsquonot unlikelyrsquo

lsquoliable to resultrsquo

The difference between the tests of remoteness in contractand tort has been criticised but justified on the ground thata contracting party can protect himself against unusual risksby drawing them to the attention of the other party to thecontract

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W153

Application of remoteness rules

bull Imputed knowledge

Hadley v Baxendale (1854) Victoria Laundry v Newman Industries (1949)The Heron II (1967)

bull Actual knowledge

Defendantrsquos knowledge of special circumstances must beprecise This encourages contracting parties to discloseclearly any likely exceptional losses in advance

In Simpson v L amp NWR (1876) the defendant was liable forloss caused to the plaintiff by delivering goods toNewcastle Show Ground the day after the show had finished

In Horne v Midland Railway (1873) defendants were heldnot liable for exceptionally high profit lost by plaintiffthrough late delivery They knew that shoes would haveto be taken back if not delivered on 3 February but notthat the plaintiff would lose an exceptionally high profit

bull In Wroth v Tyler (1974) the defendant was liable for thefull difference between the contract price and the marketprice although the rise in the market price wasexceptional and could not have been foreseen

bull In Parsons (Livestock) Ltd v Uttley Ingham Co Ltd (1978) thedefendants who had supplied inadequately ventilatedhoppers for pig food were held liable for the loss of theplaintiffrsquos pigs even though the disease from which they

CA

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154

Note the test of remoteness determinesentitlement not quantum

died was not foreseeable It was enough that they couldhave contemplated any illness of the pigs (But cf VictoriaLaundry v Newman Industries (1849))

Lord Denning in this case argued that so far as physicaldamage was concerned (not loss of profit) all directlosses should be recoverable as in tort

Lord Scarman has also stated that it would be ridiculousif the amount of damages depended on whether anaction was framed in contract or tort A House of Lordsrsquodecision on these issues is awaited

It is sometimes disputed that the decisions since Hadley vBaxendale have not in any way clarified the rule

Types of loss recognised

This is the normal ground for the award of damages forbreach of contract

However damages for non-pecuniary loss will be awardedin specific cases for example

bull Pain and suffering consequent on physical injury

bull Physical inconvenience

In Watts v Morrow (1991) damages were awarded tocover the inconvenience of living in a house whilst it wasbeing repaired C

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155

Pecuniary loss

Non-pecuniary loss

bull Damage to commercial reputation

In Gibbons v Westminster Bank (1939) damages wereawarded to cover the losses caused by the wrongfulreferring of a cheque

Cf Malik v BCCI (1997) where the House of Lords heldthat compensation was payable for the stigma of havingworked for an organisation which had been run corruptly

bull Distress to claimant

Traditionally damages for injured feelings were notawarded for breach of contract Addis v Gramaphone Co(1909) This general principle has recently been confirmedby the House of Lords in Johnson v Unisys Ltd (2001)

However some limited exceptions to this rule have beenrecognised

Damages for disappointment were awarded againsta holiday company in Jarvis v Swan Tours (1973)where the holiday was not as described

In Hayes v Dodd (1990) the Court of Appealconfirmed that damages for distress are notrecoverable in normal commercial contracts butcould be recovered in contracts

CA

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156

to provide pleasure See Jarvis v Swan Tours Ltd

(1973)

to prevent distress Heywood v Wellers (1976) ndashsolicitorrsquos failure to obtain

an injunction

It has been suggested that damages for distress areparticularly appropriate in lsquoconsumer contractsrsquo

The duty of mitigation

In Payzu v Saunders (1919) the plaintiff had refused the offerof goods at below market price In Brace v Calder (1895) anemployee dismissed by a partnership turned down an offerof similar employment by one of the partners In both casesthe plaintiff was penalised for his failure to mitigate

bull He need not however take lsquounreasonablersquo steps inmitigation

In Pilkington v Wood (1953) it was stated that the plaintiffdid not need to embark on hazardous legal action inmitigation of his loss He should not take unreasonablesteps which would increase losses

bull The claimant cannot recover damages for losses he hasavoided

In British Westinghouse v Underground Electric Railways Co(1912) the plaintiff replaced a defective turbine with anew turbine which was so much more efficient that thesavings exceeded the losses on the defective turbineHeld ndash no loss ndash no damages

bull Note ndash the duty to mitigate does not arise until there hasbeen an actual breach of contract or an anticipatorybreach has been accepted by the other party (see Whiteand Carter v McGregor (above))

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W157

The claimant has a duty to take reasonablesteps to mitigate his loss

Causation (losses which the defendant did not cause)

bull The action of a third party may break the chain ofcausation if it is not foreseeable

In Lambert v Lewis (1981) a farmer continued to use acoupling even though he knew it was broken Held ndash thefarmer was responsible for losses caused by the failure ofthe coupling the manufacturer could not have foreseenthat he would continue to use it knowing it was faulty

bull However where the action is foreseeable the chain ofcausation will not be broken

In Stansbie v Troman (1948) a painter who in breach ofcontract had left a door unlocked was held liable forgoods taken by thieves since this was the kind of loss hehad undertaken to guard against by locking the doors

CA

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158

The breach must have caused the loss as well ashaving preceded the loss

Liquidated damages

Damages set by the parties themselves

The following guidelines for distinguishing between thetwo were suggested in Dunlop Pneumatic Tyre Ltd v NewGarage and Motor Co (1915)

bull a penalty ndash if the sum is extravagant and unconscionable

bull a penalty ndash if a larger sum is payable on the failure to paya smaller sum

bull a penalty ndash if the same sum is payable on major andminor breaches

bull it is no obstacle to the sum being liquidated damages thata precise pre-estimate is almost impossible

CO

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W159

Penalty clauses will not be enforced by the courtInstead the court will award unliquidated damages

The parties may stipulate that a certain sum mustbe paid on a breach of contract

If the sum represents a genuine pre-estimatethen it will be enforced by the court

as liquidated damages

If the sum is not genuine but is an attemptto frighten the other party into performing

then it is a penalty A penalty will not beenforced by the court

The rule against penalties does not apply to

bull Acceleration clauses

Here the whole of a debt becomes payable immediatelyif certain conditions are not observed

bull Deposits

Money paid otherwise than on a breach of contract

Alder v Moore (1961)

Bridge v Campbell Discount Co Ltd (1962)

bull clauses declaring a term to be a condition

Lombard North Central v Butterworth (1987)

Equitable remedies

Specific performance

Traditionally specific performance will only be awardedwhere damages are not an adequate remedy that is

CA

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160

An order of the court directing the defendant to fulfill his obligations under the contract

Specific performance Injunctions

All equitable remedies are discretionary

The following will be taken into account

bull Mutuality Negative ndash a minor cannot get it because it isnot available against a minor Positive ndash a vendor of landmay obtain it although damages would be an adequateremedy because it is also available to a purchaser of land

bull Supervision The need for constant supervisionprevented the appointment of a resident porter beingordered in Ryan v Mutual Tontine Association (1893) but inPosner v Scott Lewis (1986) a similar order was madebecause the terms of the contract were sufficientlyprecise

bull Impossibility ndash Watts v Spence (1976) ndash land belonged to athird party C

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161

Where damages are difficult to assessfor example annuities

Where there is no alternative remedy available(Beswick v Beswick (1968)) see above

Where the claimant cannot get a satisfactory substitute for example

contracts for the sale of land or contracts for the sale of goods which cannot be

obtained elsewhere for example antiquesvaluable paintings ndash unless bought as an

investment as in Cohen v Roche (1927)

bull Hardship ndash Patel v Ali (1984) ndash defendant would lose thehelp of supportive neighbours

bull Conduct of the claimant ndash Shell (UK) Ltd v Lostock Garages(1977) ndash Shellrsquos behaviour was unreasonable

bull Vagueness ndash Tito v Waddell (1977) ndash see above

bull Mistake ndash Webster v Cecil (1861) ndash see above

Special problems

bull Contracts of personal service

These are considered to involve personal relationshipsand are therefore not thought suitable for an order of specific performance

However such orders were exceptionally made in Hill vCA Parsons Ltd (1972) and Irani v Southampton AHA(1985) on the ground that in the very unusualcircumstances of those cases the mutual trust betweenthe employer and employee had not been destroyed

bull Building contracts

The courts are reluctant to enforce building contracts onthe grounds that damages are generally an adequateremedy the terms are often vague there are difficultieswith supervision

But it was held in Wolverhampton Corpn v Emmons (1901)that provided the terms were clear the problem ofsupervision would not be an absolute barrier

Injunctions

CA

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162

These are orders directing the defendant not to do a certain act

Types of injunction

Injunctions are also discretionary remedies and are subject to the similar constraints to orders of specific performance However an injunction will be granted toenforce a negative stipulation in a contract of employmentas long as this is not an indirect way of enforcing thecontract

bull Warner Bros v Nelson (1937)

bull cf Page One Records v Britton (1968)

CO

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W163

Interim injunction

This is designed to regulatethe position of the parties

pending trial

Prohibitory injunction

This is an ordercommanding the

defendant not to dosomething

Mandatory injunction

This orders thedefendant to undosomething he had

agreed not to

A comparison of the remedies for misrepresentation

and for breach of contract

Setting aside contracts

CA

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164

DamagesDamages available as of right Normally assessedon expectation basis Losses must be within thecontemplation of the parties See above

Damages available in tort of deceit negligentstatements and under s 2(1) of the 1967 ActDamages assessed on reliance basis All lossesflowing directly from misrepresentation will becovered whether or not foreseeable in actions indeceit and under s 2(1) of the 1967 Act (Royscot vRogerson (1991)) Losses must be foreseeable inthe tort of negligence No right to damages forinnocent misrepresentation but may be awardedin lieu of rescission at the discretion of the court

Breach

Misrep

Termination or rescission for breach

Available only for breaches of conditionsfundamental breaches of innominate terms and repudiations

Contract discharged from time of breachdischarge not retrospective Innocent party canalso sue for damages (see Chapter 8)

Rescission

Available for all misrepresentations but atdiscretion of court and subject to certain barsContract cancelled prospectively and retrospectivelyparties returned to the position they were in beforethe contract was entered into (see Chapter 6)

Breach

Misrep

Exclusion clauses

See ss 3 6 7 of UCTA

All clauses must be reasonable

Restitution or quasi-contract (based on unjust

enrichment)

It covers

Money may be recovered

bull Where there is a total failure of consideration (see Fibrosacase (frustration))

In Rowland v Divall (1923) the plaintiff had bought a carwhich turned out to be stolen property and which wasrecovered by the owner Despite the fact that the plaintiffhad had the use of the car for a considerable time and ithad fallen in value during this time the plaintiff was ableto recover the full purchase price of the car from thedefendant There had been a total failure of consideration

CO

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W165

Breach

Misrep

recovery of money payment for work done

Restitution may be available where parties arenot in a contractual relationship

It is based on the principle of unjust enrichment it allows the injured party to

recover money paid or the value of benefitsconferred where it would be unjust to allow the

other party to retain the benefit

bull Money paid under a mistake of fact is recoverableprovided the mistake is as to a fact which if true wouldhave legally or morally obliged the claimant to pay themoney or is sufficiently serious to require payment forexample

In Kleinwort Benson Ltd v Lincoln City Council (1998) theHouse of Lords held that in certain circumstances moneypaid under a mistake of law could also be recovered if itwould be unjust to allow the recipient to retain the money(See also Nurdin and Peacock plc v DB Ramsden amp Co Ltd(1999))

bull Money paid under a void contract

For example contracts void

bull In Westdeutche Landesbank v Islington LBC (1994) thecouncil had entered into a rate swapping arrangementwith the bank under which the bank had paid pound2500000to the council in advance The council had paidapproximately pound1200000 to the bank by instalment andargued that since there was not a total failure ofconsideration it should not have to pay the bank theremaining pound1300000 The Court of Appeal held that theprinciple upon which money must be repaid under a

CA

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166

because ultra vires

as against public policy

for a commonmistake

Mistaken payments underinsurance policies

Mistaken payments intoa bank account

void contract is different from that on a total failure ofconsideration Recovery of money under a void contractis allowed if there is no legal basis for such a payment

bull Note ndash money paid under contract which is void forillegality cannot be recovered unless the action can beframed without relying on the contract

Parkinson v Royal College of Ambulance (1925)Bowmakers v Barnet Instruments (1945) Tinsley v Milligan (1993)

bull Note ndash recovery under these heads will not be possible if

In Lipkin Gorman v Karpnale Ltd (1992) a partner in a firmof solicitors was a compulsive gambler who regularlygambled at a casino run by the defendants In order tofinance his gambling he had drawn cheques on clientaccounts where he was the sole signatory He had spentat least pound154000 of this money at the defendantrsquos casinoand the plaintiff sued for the return of the money as ithad been received under a contract which was void(declared void by statute) Held ndash where the true ownerof stolen money sought to recover it from an innocentthird party the recipient was under an obligation toreturn it where he had given no consideration for itunless he could show that he had altered his position ingood faith In this case the plaintiff was able to recoverthe pound154000 less the winnings paid to the partner The

CO

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W167

the payer hadintended the

payee tobenefit in any

event

there is goodconsiderationfor exampledischarge of

a debt

the payee haschanged

position as aresult of the

payment

casino had altered their position on each gamble in thatthey had become vulnerable to a loss

However in South Tyneside Metropolitan Borough Council vSvenska International (1994) the House of Lords allowedthe council to recover approximately pound200000 it had paidto a bank under a rate swap agreement which had beendeclared ultra vires and void The court rejected thebankrsquos claim that it had changed its position in that it hadentered into financial arrangements with otherorganisations in order to hedge its losses

bull Money paid to a third party for the benefit of thedefendant provided the claimant was not acting as avolunteer (for example a mother paying off a sonrsquos debt)but was acting under some constraint

In Macclesfield Corpn v Great Central Railway (1911) theplaintiffs carried out repairs to a bridge which thedefendants were legally obliged (but had refused) tomaintain They were regarded as purely volunteers andcould not therefore recover the money However in Exallv Partridge (1799) the plaintiff paid off arrears of rentowed by the defendant in order to avoid seizure of theplaintiffrsquos carriage which was kept on the defendantrsquospremises The plaintiff was acting under a constraint andcould therefore recover the money

Payment for work done

bull Where the claimant has prevented performance of thecontract (see Plancheacute v Colburn (1831))

CA

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168

Here the claimant is seeking compensationon a quantum meruit basis (cf s 1(3) of the

Law Reform (Frustrated Contracts) Act 1943)

bull Where work has been carried out under a void contractIn Craven Ellis v Canons Ltd (1936) the plaintiff hadcarried out a great deal of work on behalf of a companyon the understanding that he had been appointedmanaging director It was later discovered that he hadnot properly been appointed managing director Thecourt held that he should be paid on a quantum meruitbasis for the work he had done

bull Where agreement has not been reached and

the work was requested by the defendants InWilliam Lacey v Davis (1957) the plaintiffs hadsubmitted the lowest tender for a building contractand had been led to believe that they would beawarded it At the defendantsrsquo request they thenprepared various plans and estimates Thedefendants then decided not to proceed The courtordered the defendants to pay a reasonable sum on aquantum meruit basis for the work that had beendone on analogy with Craven Ellis v Cannons or

the work had been freely accepted In British SteelCorpn v Cleveland Bridge Engineering Co (1984) a letterof intent was issued by the defendants indicating thatthey intended to enter into a contract with theplaintiffs for the construction and delivery of cast-steel lsquonodesrsquo However it proved impossible to reachagreement on a number of major items Despite this anumber of lsquonodesrsquo were eventually constructed andaccepted by the defendants It was held by the courtthat the defendants should pay for the nodes they hadaccepted

CO

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W169

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10 Privity of contract

Introduction

The traditional approach to the doctrine of privity is that

Privity of contract is closely associated with the rule thatconsideration must move from the promisee See Dunlop vSelfridge (above)

Only a party to a contractcan sue on a contract

Only a party to a contractcan be sued on a contract

In Tweddle v Atkinson(1861) the plaintiff had

married Mr Guyrsquosdaughter The plaintiffrsquosfather and Mr Guy had

agreed together that theywould each pay a sum ofmoney to the plaintiff Mr

Guy died before themoney was paid and the

plaintiff sued hisexecutors The action wasdismissed ndash the plaintiffwas not a party to thecontract which wasmade between the

two fathersSee also

Beswick v Beswick (1968)

In Dunlop v Selfridge(1915) Dew amp Co at the

instigation of Dunlophad placed a minimum

resale price in theircontract with Selfridge

Held ndash Dunlop could notsue Selfridge for breach of contract they were

not parties to the contract nor had they

given consideration to Selfridge

Matters relevant to the doctrine of privity

One part of the traditional approach that is that relating toconferring benefits has recently been significantly changedby legislation which is discussed below In addition thereare a number of situations which fall outside the scope ofthe doctrine

Matters outside the doctrine

It has been argued that it is only because English law hasdeclared many transactions not to be subject to the doctrineof privity that the doctrine itself has survived so long

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172

AssignmentRights can be assignedprovided that certain

formalities are followed

AgencyA principal can sue and

be sued on contractsmade by an agent

on his behalf

TrustsWhere a trust has beencreated the beneficiaryunder the trust can suethe trustees even if hewas not a party to the

original agreement

Multi-partite agreementsIn Clarke v Dunraven(1897) entrants in a

yacht race were allowedto sue each other TheCompanies Act 1985allows shareholders

to sue each other

Land law recognises a number of exceptions

Statutory exceptions

bull Price maintenance agreements

bull Various insurance contracts

bull For example Married Womanrsquos Property Act

bull Law of Property Act 1925 s 56

bull Negotiable instruments

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W173

Collateral contractsIn limited cases the court will find a separate

(collateral) contract between the promisor and the third party

(Shanklin Pier v Detel Products (1951))

LeasesThe benefits and

obligations under a lease can be transferred

to third parties

Law of Property Act 1925 s 56

See below

Restrictive covenantsThese can bind a third party under the rule in

Tulk v Moxhay (1848)

Conferring benefits on a third party

Statutory intervention

The common law rule preventing a third party fromenforcing a contract was much criticised and has now beenreformed by legislation that is the Contracts (Rights ofThird Parties) Act 1999 based on recommendations from theLaw Commission

Main effectA third party will be able to enforce a contractual provisionpurporting to confer a benefit on him or her if both of twoconditions are satisfied (s 1)

Right to vary the contract

Unless they have provided otherwise the contractingparties will lose the right to vary or cancel the provisionbenefiting the third party if (s 2)

bull the third party has communicated his assent or

bull the third party has relied on the term and the promisor isaware of this or

bull the third party has relied on the term and the promisorcould be reasonably expected to have foreseen this

on its proper constructionthe contract is intended to

give the third party a legallyenforceable right

the contract expresslyprovides that the third party

may benefit

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174

DefencesThe promisor can raise against the third party any defencesthat could have been raised against the promisee (forexample misrepresentation duress) (s 3)

The promisor can also rely on defences set-offs orcounterclaims arising from prior dealings with the thirdparty

ExceptionsThere cannot be double liability that is as against thepromisee and the third party (s 5)

Some contracts are excluded from the Act (s 6)

bull contracts on a bill of exchange or promissory note

bull terms of a contract of employment as against anemployee

bull contracts for the carriage of goods by sea or if subject toan international transport convention by road rail or air

The exception for carriage of goods by sea does not apply toreliance on an exclusion clause (as in The Eurymedon (1975)for example)

Note also that the main contracting parties are in control ndashthey can decide that the provisions of the new Act shouldnot apply and there will be nothing that the third party cando about it

The Act does not affect the other part of the privity doctrinendash relating to the imposition of obligations on third parties ndashwhich remains governed by the common law

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W175

The common law approach

The common law developed a number of devices to allow athird party to receive the benefit of contract by

These devices will be of much less importance now that theContracts (Rights of Third Parties) Act 1999 is in force Theymay still be used however particularly in situations wherefor one reason or another the 1999 Act does not apply

Attempts to allow the third party to sue

bull Attempts to extend the use of lsquotrustsrsquo

In Walfordrsquos case (1919) under a charterparty theship owner promised the charterer to pay a broker acommission Held ndash the charterer was trustee of thispromise for the broker who could thus enforce itagainst the ship owner

However in Re Schebsman (1944) a contract betweenSchebsman and X Ltd that in certain circumstanceshis wife and daughter should be paid a lump sumwas held not to create a trust

The trust as a device to outflank privity was limited bythe courts presumably because of concern that theirrevocable nature of the trust may prevent thecontracting parties from changing their minds Thecourts no longer go out of their way to find that theparties intended to create a trust

CA

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176

Allowing the thirdparty to sue

Allowing the promiseeto sue on behalf of the

third party

bull Lord Denning launched a campaign against privity andargued that s 56 of the Law of Property Act 1925 intendedto destroy doctrine altogether This was finally rejected bythe House of Lords in Beswick v Beswick (1968) theyacknowledged that the wording was wide enough tosupport Lord Denningrsquos view but insisted neverthelessthat it must be restricted to contracts concerning land asthe purpose of the Act was to consolidate the law relatingto real property

bull Agency

Agency has been used to allow a third party to takeadvantage of an exclusion clause in a contract to whichhe was not a party

The House of Lords refused to allow stevedores torely on an exclusion clause in a contract between thecarriers and the cargo owner in Scruttons v MidlandSilicones (1962) on the basis that only a party to thecontract could claim the benefit of the contract that isthe exclusion clause

However in The Eurymedon (1975) the Privy Councilon similar facts held that the carriers had negotiateda second contract (a collateral contract) as agents ofthe stevedores and the stevedores could claim thebenefit of the exclusion clause in this contract

But in Southern Water Authority v Carey (1985) sub-contractors sought to rely on a limitation of liabilityclause in a main contract Held ndash they must havespecific authority to negotiate on behalf of a thirdparty before this device could work

CO

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W177

In Norwich City Council v Harvey (1989) instead ofusing an exclusion clause the contract placed the riskof loss or damage by fire on the owner and thisprotected both main contractor and sub-contractor

Attempts to allow the promisee to enforce the contract onbehalf of the third party

bull Specific performance

In Beswick v Beswick (1968) Peter Beswick had transferredhis business to his nephew in return for his nephewrsquospromise to pay his uncle a pension and after his deathan annuity to his widow The nephew paid his uncle thepension but only one payment of the annuity was madeThe widow as administratrix of her husbandrsquos estatesuccessfully sued her nephew for specific performance ofthe contract to pay the annuity although the House ofLords implied that she would not have succeeded if shehad been suing in her own right

bull Injunction

Similarly an injunction may be awarded to restrain abreach of a negative promise on a suit brought by thepromisee for example A promised B not to compete withC or by a stay of proceedings

In Snelling v Snelling Ltd (1973) three brothers lent moneyto a family company and agreed not to reclaim themoney for a certain period A stay of proceedings wasgranted to one of the brothers to stop another brotherfrom breaking his promise and suing the company for thereturn of his money

CA

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178

bull Damages

Damages to cover the disappointment of a third partywas sanctioned by Lord Denning in Jackson v HorizonHolidays Ltd (1975) where the plaintiff entered into acontract with a holiday firm for a holiday for his familyand himself in Ceylon The holiday was a disaster Theplaintiff recovered damages for pound500 for lsquomental stressrsquoOn appeal the court confirmed the amount on theground that witnessing the distress of his family hadincreased the plaintiffrsquos own distress Lord Denninghowever stated that the sum was excessive for theplaintiffrsquos own distress but upheld the award on theground that the plaintiff had made the contract on behalfof himself and of his wife and children and that he couldrecover in respect of their loss as well as their own

This statement by Lord Denning was disapproved by theHouse of Lords in Woodar Investment Development Ltd vWimpey Construction (UK) Ltd (1980) They stated thatdamages should not generally be recovered on behalf ofa third party

Lord Wilberforce however did suggest that there was aspecial category of contracts which called for specialtreatment That is where one party contracted for abenefit to be shared equally between a group forexample family holidays ordering meals in restaurantsfor a party hiring taxis for a group The decision inJackson could therefore be supported on this ground Afurther exception was identified by the House of Lords inLinden Gardens Trust v Lenesta Sludge Disposals Ltd (1993)where in a construction contract the original propertyowner may be able to sue the contractor for damagesresulting from defects in the work even though theproperty has been transferred to a third party The

CO

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W179

damages would be held in trust for the third party Thisexception was again confirmed by the House of Lords inAlfred McAlpine Construction Ltd v Panatown Ltd (2000) inorder to avoid the situation where otherwise no onewould be able to sue the contractor although on the factsthe exception did not apply (because a separatearrangement had been made under which the contractorwas directly liable to the third party)

Attempts to impose obligations on third parties

bull Restrictive covenants inserted into a contract for the saleof land may bind subsequent purchasers provided

they are negative in nature the subsequent purchaser has notice of the covenants

the person claiming the benefit has land capable ofbenefiting from its enforcement (Tulk v Moxhay (1848))

bull The courts extended the rule in Tulk v Moxhay to personalproperty for example a ship in The Strathcona (1926)where the plaintiffs had chartered The Strathcona forcertain months each year The ship was sold to thedefendant who refused to allow the plaintiffs to use theship The plaintiffs sought an injunction on the groundthat the doctrine in Tulk v Moxhay should be extendedfrom land to ships The court granted an injunction

This decision was criticised in Port Line Ltd v Ben Line Ltd(1958) where a ship chartered to the plaintiffs was sold tothe defendants The ship was requisitioned during theSuez war and compensation was paid to the defendantsThis compensation was claimed by the plaintiffs Held ndasheven if The Strathcona case was rightly decided it couldC

AV

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S180

not be applied in this case as (a) the defendants were notin breach of any duty and (b) the plaintiffs had notsought an injunction but financial compensation whichwas outside Tulk v Moxhay

The decision in The Strathcona has been widely criticisedbecause

a contract of hire creates personal not proprietaryrights in the hired object

the retention of land which can benefit from thecovenant is a necessary condition of the doctrine inTulk v Moxhay

bull However in Swiss Bank Corpn v Lloyds Bank (1979)Browne-Wilkinson J considered that the decision in TheStrathcona was correct He suggested however that thetort of inducing a breach of contract or knowinglyinterfering with a contract would be a more suitable basisfor the decision than Tulk v Moxhay He stated that in hisjudgment a person proposing to deal with property insuch a way as to cause a breach of a contract affecting thatproperty will be restrained by injunction from doing so ifwhen he acquired that property he had actualknowledge of the contract

CO

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W181

• Book Cover
• Title
• Copyright
• Contents
• 1 Agreement
• 2 Consideration and intention
• 3 Contents of a contract
• 4 Exemption (exclusion or
• 5 Vitiating elements which render
• 6 Mistake
• 7 Illegality and capacity
• 8 Discharge
• 9 Remedies for breach of contract
• 10 Privity of contract

Contract Law

Third Edition

Cavendish Publishing

Limited

CPLondon bull Sydney

Third edition first published 2001 by Cavendish Publishing LimitedThe Glass House Wharton Street London WC1X 9PX UnitedKingdom

Telephone +44 (0)20 7278 8000

Facsimile +44 (0)20 7278 8080

Email infocavendishpublishingcom

Website wwwcavendishpublishingcom

copy Cavendish Publishing Limited 2001

First edition 1997Second edition 1999Third edition 2001

All r ights reserved No part of this publication may bereproduced stored in a retrieval system or transmitted in anyform or by any means electronic mechanical photocopyingrecording scanning or otherwise except under the terms of theCopyright Designs and Patents Act 1988 or under the terms of alicence issued by the Copyright Licensing Agency 90 TottenhamCourt Road London W1P 9HE UK without the pr iorpermission in writing of the publisher

British Library Cataloguing in Publication Data

Contract law ndash 3rd ed ndash (Cavendish law cards)

1 Contracts ndash England 2 Contracts ndash Wales

3464202

ISBN 1 85941 514 8

Printed and bound in Great Britain

Contents

1 Agreement 1

2 Consideration and intention 19

3 Contents of a contract 37

4 Exemption (exclusion or

limitation) clauses 53

5 Vitiating elements which render

a contract voidable 73

6 Mistake 93

7 Illegality and capacity 111

8 Discharge 129

9 Remedies for breach of contract

and restitution 147

10 Privity of contract 171

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W1

1 Agreement

The traditional view that an agreement requires theidentification of a valid offer and a valid acceptance of thatoffer has been challenged in recent years by

bull Lord Denning in Gibson v Manchester City Council (1979)and Butler Machine Tool Co Ltd v Ex-Cell-O Corpn Ltd(1979) where he stated that providing the parties wereagreed on all material points then there was no need forthe traditional analysis

bull Lord Justice Steyn (obiter) in Trentham Ltd v Archital Luxfer(1993) where he stated that a strict analysis of offer andacceptance was not necessary in an executed contract ina commercial setting

The traditional view however was applied by the House ofLords in Gibson v Manchester City Council (1979)

Lord Diplock did recognise that there may be somelsquoexceptional contracts which do not fit easily into an analysisof offer and acceptancersquo for example a multi-partitecontract as in Clarke v Dunraven (1897) but he stressed thatin most contracts the lsquoconventionalrsquo approach of seeking anoffer and an acceptance of that offer must be adhered to

Offer Acceptance

In normal cases therefore a valid offer and a validacceptance of that offer must be identified

Unilateral and bilateral agreements

The distinction is important with regard to

bull advertisements

bull revocation of offers

bull communication of acceptance

Offer

A valid offer

bull must be communicated so that the offeree may accept orreject it

bull may be communicated in writing orally or by conduct

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2

A bilateral agreementconsists of an exchange of

promises for example

Offer ndash I will sell my carfor pound500

Acceptance ndash I will giveyou pound500 for your car

In a unilateral agreementthe offeror alone makes a

promise The offer is accepted by doing what is

set out in the offer forexample

Offer ndash I will pay pound500 toanyone who returns my

lost kitten

Acceptance ndash The lost kitten is returned

A definite promise to be bound provided that certain specified terms are accepted

(There is no general requirement that an agreement must bein writing Important exceptions include contracts relatingto interests in land (Law of Property (MiscellaneousProvisions) Act 1989 s 2(1)) and consumer credit(Consumer Credit Act 1974))

bull May be made to a particular person to a group ofpersons or to the whole world In Carlill v Carbolic SmokeBall Co Ltd (1893) the defendants issued anadvertisement in which they offered to pay pound100 to anyperson who used their smoke balls and then succumbedto influenza Mrs Carlill saw the advertisement and usedthe smoke ball but then immediately caught influenzaShe sued for the pound100 The defendants argued that it wasnot possible in English law to make an offer to the wholeworld Held ndash an offer can be made to the whole world

bull Must be definite in substance (see certainty of terms p 16below)

bull Must be distinguished from an invitation to treat

Invitations to treat

In Gibson v Manchester City Council (1979) the councilrsquos letterstated lsquowe may be prepared to sell you rsquo The House ofLords did not regard this as an lsquoofferrsquo

A response to an invitation to treat does not lead to anagreement The response may however be an offer CO

NT

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W3

An indication that the invitor is willing to enter into negotiations but is not prepared to be

bound immediately

The distinction between an offer and an invitation to treatdepends on the reasonable expectations of the parties

The courts have established that there is no intention to bebound in the following cases

Display of goods for sale

bull In a shop In Pharmaceutical Society of GB v Boots CashChemists Ltd (1952) the Court of Appeal held that in aself-service shop the sale takes place when the assistantaccepts the customerrsquos offer to buy the goods Thedisplay of goods is a mere invitation to treat

bull In a shop window In Fisher v Bell (1961) it was held thatthe display of a lsquoflick knifersquo in a shop window with aprice attached was an invitation to treat

However it was suggested by Lord Denning in Thorntonv Shoe Lane Parking (1971) (see below) that vendingmachines and automatic ticket machines are makingoffers since once the money has been inserted thetransaction is irrevocable

bull In an advertisement In Partridge v Crittenden (1968) anadvertisement which said lsquoBramblefinch cocks and hensndash 25srsquo was held to be an invitation to treat The courtpointed out that if the advertisement was treated as anoffer this could lead to many actions for breach ofcontract against the advertiser as his stock of birds waslimited He could not have intended the advertisement tobe an offer

However if the advertisement is unilateral in nature andthere is no problem of limited stock then it may be an offerSee Carlill v Carbolic Smoke Ball Co Ltd (above) Advertising areward may also be a unilateral offer

CA

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4

Auctions

bull An auctioneerrsquos request for bids in Payne v Cave (1789)was held to be an invitation to treat The offer was madeby the bidder (cf Sale of Goods Act 1979 s 57(2))

bull A notice of an auction In Harris v Nickerson (1873) it washeld that a notice that an auction would be held on acertain date was not an offer which then could beaccepted by turning up at the stated time It was astatement of intention

If the auction is stated to be lsquowithout reserversquo then there isstill no necessity to hold an auction but if the auction isheld lots must be sold to the highest bidder (Barry vHeathcote Ball (2001) confirming obiter dicta in Warlow vHarrison (1859)) The phrase lsquowithout reserversquo constitutes aunilateral offer which can be accepted by turning up andsubmitting the highest bid

Tenders

A request for tenders is normally an invitation to treat

bull However it was held in Harvela Ltd v Royal Trust ofCanada (1985) that if the request is made to specifiedparties and it is stated that the contract will be awardedto the lowest or the highest bidder then this will bebinding as an implied unilateral offer It was also held inthat case that a referential bid for example lsquothe highestother bid plus 10rsquo was not a valid bid

bull It was also held in Blackpool and Fylde Aero Club v BlackpoolBC (1990) that if the request is addressed to specifiedparties this amounts to a unilateral offer thatconsideration will be given to each tender which isproperly submitted C

ON

TR

AC

TL

AW

5

Subject to contract

The words lsquosubject to contractrsquo may be placed on top of a letter in order to indicate that an offer is not to be legallybinding (Walford v Miles (1992))

Termination of the offer

Revocation (termination by the offeror)

An offeror may withdraw an offer at any time before it hasbeen accepted

bull The revocation must be communicated to the offereebefore acceptance In Byrne v van Tienhoven (1880) thewithdrawal of an offer sent by telegram was held to becommunicated only when the telegram was received

bull Communication need not be made by the offerorcommunication through a third party will suffice InDickinson v Dodds (1876) the plaintiff was told by aneighbour that a property which had been offered to himhad been sold to a third party Held ndash the offer had beenvalidly revoked

bull An offer to keep an offer open for a certain length of timecan be withdrawn like any other unless an option hasbeen purchased for example consideration has beengiven to keep the offer open (Routledge v Grant (1828))

Unilateral offersbull Communication of the revocation is difficult if the offer

was to the whole world It was suggested however inthe American case of Shuey v USA (1875) that

CA

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6

Revocation Lapse Rejection

communication will be assumed if the offeror takesreasonable steps to inform the public for example placesan advertisement in the same newspaper

bull It now seems established that revocation cannot takeplace if the offeree has started to perform In Errington vErrington (1952) a father promised his daughter and son-in-law that if they paid off the mortgage on a house heowned he would give it to them The young couple dulypaid the instalments but the offer was withdrawnshortly before the whole debt was paid Held ndash there wasan implied term in the offer that it was irrevocable onceperformance had begun This is also supported by dictain Daulia v Four Millbank Nominees (1978)

Lapse (termination by operation of law)

An offer may lapse and thus be incapable of being acceptedbecause of

bull Passage of time

at the end of a stipulated time (if any) or

if no time is stipulated after a reasonable time InRamsgate Victoria Hotel Co v Montefiore (1866) anattempt to accept an offer to buy shares after fivemonths failed as the offer had clearly lapsed

bull Death

of the offeror if the offer was of a personal nature

of the offeree

bull Failure of a condition

an express condition or CO

NT

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LA

W7

an implied condition In Financings Ltd v Stimson(1962) it was held that an offer to buy a car lapsedwhen the car was badly damaged on the ground thatthe offer contained an implied term that the carwould remain in the same condition as when the offer was made

Rejection (termination by the offeree)

A rejection may be

bull express

bull implied

A counter offer is an implied rejectionbull Traditionally an acceptance must be a mirror image of

the offer If any alteration is made or anything addedthen this will be a counter offer and will terminate theoffer In Hyde v Wrench (1840) the defendant offered tosell a farm for pound1000 The plaintiff said he would givepound950 for it Held ndash this was a counter offer whichterminated the original offer which was therefore nolonger open for acceptance In Brogden v MetropolitanRailway (1877) the defendant sent to the plaintiff forsignature a written agreement which they hadnegotiated The plaintiff signed the agreement andentered in the name of an arbitrator on a space which hadbeen left empty for this purpose Held ndash the returneddocument was not an acceptance but a counter offer

bull This is particularly important for businesses whocontract by means of sales forms and purchase forms forexample if an order placed by the buyerrsquos purchase formis lsquoacceptedrsquo on the sellerrsquos sales form and the conditionson the back of the two forms are not identical (which theyare very unlikely to be) then the lsquoacceptancersquo is a counter

CA

VE

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8

offer and an implied rejection In Butler Machine Tool CoLtd v Ex-Cell-O Corpn Ltd (1979) the sellers offered to sella machine tool to the buyers for pound75535 on their ownconditions of sale which were stated to prevail over anyconditions in the buyersrsquo order form and whichcontained a price variation clause The buyers lsquoacceptedrsquothe offer on their own order form which stated that theprice was a fixed price and which contained a tear offslip which said lsquowe accept your order on the terms andconditions stated thereonrsquo This was in effect a lsquocounterofferrsquo The sellers signed and returned the slip togetherwith a letter which stated that they were carrying out theorder in accordance with their original offer When theydelivered the machine they claimed the price hadincreased by pound2892 The buyers refused to pay the extrasum Held ndash the contract was concluded on the buyersrsquoterms the signing and returning of the tear-off slip wasconclusive that the sellers had accepted the buyersrsquocounter offer The court analysed the transaction bylooking for matching offer and acceptance

Note ndash a request for further information is not a counteroffer In Stevenson v McLean (1880) the defendant offered tosell to the plaintiff iron at 40s a ton The plaintiff telegraphedto inquire whether he could pay by instalments Held ndash thiswas a mere inquiry for information not a counter offer andso the original offer was not rejected

A conditional acceptance

A conditional acceptance may be a counter offer capable ofacceptance for example I will pay pound500 for your car if youpaint it red If the owner agrees to this condition a contractwill be formed CO

NT

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W9

A valid acceptance must

bull be made while the offer is still in force (see termination ofoffer above)

bull be made by the offeree

bull exactly match the terms of the offer (see counter offersabove)

bull be written oral or implied from conduct In Brogden vMetropolitan Railway (1877) (above) the returneddocument was held to be a counter offer which thedefendants then accepted either by ordering coal fromBrogden or by accepting delivery of the coal (see alsolsquoThe Battle of the Formsrsquo)

However the offeror may require the acceptance to be madein a certain way If the requirement is mandatory it must befollowed

If the requirement is not mandatory then another equallyeffective method will suffice In Manchester Diocesan Councilfor Education v Commercial and General Investments Ltd (1969)an invitation to tender stated that the person whose bid was

CA

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10

The fact of acceptance

An acceptance is a final and unqualified assent to all the terms of the offer

The fact of acceptance

Acceptance

Communication ofacceptance

accepted would be informed by a letter to the address givenin the tender The acceptance was eventually sent not to thisaddress but to the defendantrsquos surveyor Held ndash thestatement in the tender was not mandatory the tender hadtherefore been validly accepted

bull Where the offer is made in alternative terms theacceptance must make it clear to which set of terms itrelates

bull A person cannot accept an offer of which he has noknowledge (Clarke (1927) (Australia))

But a personrsquos motive in accepting the offer is irrelevantIn Williams v Carwardine (1833) (Australia) the plaintiffknew of the offer of a reward in exchange forinformation but her motive was to salve her conscienceHeld ndash she was entitled to the reward

bull lsquoCross-offersrsquo do not constitute an agreement (Tinn vHoffman amp Co (1873))

Communication of acceptance

Acceptance must be communicated by the offeree or hisagent In Powell v Lee (1908) an unauthorised communicationby one of the managers that the Board of Managers hadselected a particular candidate for a headship was held notto be a valid acceptance

Silence as communication

An offeror may not stipulate that silence of the offeree is toamount to acceptance In Felthouse v Bindley (1862) the

CO

NT

RA

CT

LA

W11

Acceptance must be communicated

plaintiff wrote to his nephew offering to buy a horse andadding lsquoIf I hear no more I will take it that the horse isminersquo The nephew did not reply to this letter Held ndash nocontract Acceptance had not been communicated to theofferor

It has been suggested that this does not mean that silencecan never amount to acceptance for example if in Felthousev Bindley the offeree had relied on the offerorrsquos statementthat he need not communicate his acceptance and wished toclaim acceptance on that basis the court could decide thatthe need for acceptance had been waived by the offeror (seebelow)

Exceptions to the rule that acceptance must be

communicated

bull In a unilateral contract where communication isexpressly or impliedly waived (see Carlill v CarbolicSmoke Ball Co Ltd (above))

bull Possibly where failure of communication is the fault ofthe offeror This was suggested by Lord Denning inEntores Ltd v Miles Far East Corpn (1955)

bull Where the post is deemed to be the proper method ofcommunication In Adams v Lindsell (1818) thedefendants wrote to the plaintiffs offering to sell them aquantity of wool and requiring acceptance by post Theplaintiffs immediately posted an acceptance on 5December Held ndash the contract was completed on 5December

CA

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12

The postal rule

bull Adams v Lindsell (1818) above

bull Acceptance is effective on posting even when the letter islost in the post In Household Fire Insurance Co Ltd v Grant(1879) the defendant offered to buy shares in theplaintiffrsquos company A letter of allotment was posted tothe defendant but it never reached him Held ndash thecontract was completed when the letter was posted

bull Note the difference between acceptance and revocationof an offer by post

Acceptance of an offer takes place when a letter isposted

Revocation of an offer takes place when the letter isreceived

bull Byrne v van Tienhoven (1880) above

Limitations to the postal rule

bull It only applies to acceptances and not to any other typeof communication (for example an offer or a revocation)

bull It only applies to letters and telegrams It does not applyto instantaneous methods of communication such astelex or probably fax or email

bull It must be reasonable to use the post as the means ofcommunication (for example an offer by telephone or byfax might indicate that a rapid method of response wasrequired)

CO

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W13

Acceptance takes place when a letter is postednot when it is received

bull Letters of acceptance must be properly addressed andstamped

bull The rule is easily displaced for example it may beexcluded by the offeror either expressly or impliedly InHolwell Securities Ltd v Hughes (1974) it was excluded bythe offeror requiring lsquonotice in writingrsquo It was alsosuggested by the court that the postal rule would not beused where it would lead to manifest inconvenience

There is no direct English authority on this point

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14

Arguments againstLogic ndash once a letter is posted the offer is accepted there isno provision in law for revoking an acceptance

bull The lsquologicalrsquo view is supported by the New Zealand caseof Wenckheim v Arndt (1878) and the South African case ofA to Z Bazaars (Pty) Ltd v Minister of Agriculture (1974)

Fairness ndash

bull Cheshire argues that it would be unfair to the offeror whowould be bound as soon as the letter was posted whereasthe offeree could keep his options open

Query ndash can a letter of acceptance be cancelled byactual communication before the letter is delivered

Communication by instantaneouselectronic means

bull The rules on telephones and telex were laid down inEntores v Miles (above) and confirmed in Brinkibon Ltd vStahag Stahl (1983) where it was suggested that duringnormal office hours acceptance takes place when themessage is printed out not when it is read The House ofLords however accepted that communication by telexmay not always be instantaneous for example whenreceived at night or when the office is closed

bull Lord Wilberforce stated

lsquoNo universal rule could cover all such cases theymust be resolved by reference to the intention of theparties by sound business practice and in some casesby a judgment of where the risk should liersquo

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W15

Arguments forThere is some support for allowing recall in the Scottishcase of Countess of Dunmore v Alexander (1830)

bull It is argued that actual prior communication of rejectionwould not necessarily prejudice the offeror who bydefinition will be unaware of the lsquoacceptancersquo

bull It is also argued that it would be absurd to insist onenforcing a contract when both parties have acted on therecall This however could be interpreted as anagreement to discharge

Acceptance takes place when and where the message is received

bull It has been suggested that a message sent outsidebusiness hours should be lsquocommunicatedrsquo when it isexpected that it would be read for example at the nextopening of business It is generally accepted that thesame rules should apply to faxes and email as to telex

bull There is no direct authority on telephone answeringmachines It might well be argued that the presence of ananswering machine indicates that communication is notinstantaneous there is a delay between sending andreceiving messages It would then follow that the basicrule should apply that is that acceptance must becommunicated Acceptance therefore would take placewhen the message is actually heard by the offeror

Certainty of terms

The courts will not enforce

CA

VE

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16

Vague agreementsfor example

Scammell v Ouston (1941)

The courts refused toenforce a sale stated to bemade lsquoon hire purchase

termsrsquo neither the rate ofinterest nor the period of

repayment nor the numberof instalments were stated

Incomplete agreementsfor example

lsquoan agreement to make anagreementrsquo will be void

In Walford v Miles (1992) thecourt refused to enforce anlsquoagreement to negotiate in

good faithrsquo

See also May and Butcher v R (1934)

It is for the parties to make their intentions clear

But the uncertainty may be cured by

bull a trade custom where a word has a specific meaning

bull previous dealings between the parties whereby a word orphrase has acquired a specific meaning for exampletimber of lsquofair specificationrsquo in Hillas v Arcos (1932)

bull the contract itself which provides a method for resolvingan uncertainty In Foley v Classique Coaches (1934) therewas an executed contract where the vagueness of lsquoat aprice to be agreedrsquo was cured by a provision in thecontract referring disputes to arbitration Cf May andButcher v R an unexecuted contract where the courtrefused to allow a similar arbitration clause to cure theuncertainty

The courts will strive to find a contract valid where it hasbeen executed

bull The Sale of Goods Act 1979 provides that if no price ormechanism for fixing the price is provided then thebuyer must pay a lsquoreasonable pricersquo but this provisionwill not apply where the contract states that the price islsquoto be agreed between the partiesrsquo

bull Note a lsquolock-out agreementrsquo for example an agreementnot to negotiate with any one else is valid provided it isclearly stated and for a specific length of time This wasapplied by the Court of Appeal in Pitt v PHH AssetManagement (1993) where a promise not to negotiate withany third party for two weeks was enforced

CO

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W17

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W19

2 Consideration and intention

Consideration

Most legal systems will only enforce promises where thereis something to indicate that the promisor intended to bebound that is there is some

Consideration is the normal lsquobadge of enforceabilityrsquo inEnglish law

ReciprocityConsideration

RelianceLord Denning tried to

introduce reliance as basisfor enforcing promisesthrough the doctrine of

promissory estoppel

FormFor example writing English

law will enforce promiseswhich are contained in a

deed (A deed is a document which

is signed and attested andindicates on its face

that it is a deed)

lsquoBadge of

enforceabilityrsquo

Definitions of consideration

Shorter version

Limitation of the definition

bull It makes no mention of why the promisee incurs adetriment or confers a benefit or that the element of abargain is central to the classical notion of considerationFor example in Combe v Combe (1951) it was held thatthere was no consideration for the defendantrsquos promiseto pay his ex-wife pound100 per year even though in relianceon that promise she had not applied to the divorce courtfor maintenance and in that sense she had suffered adetriment The reason why the detriment did notconstitute consideration was that there was no request bythe husband express or implied that she should forbearfrom applying for maintenance There was nolsquoexchangersquo

bull Some writers have preferred to emphasise this elementof bargain and have defined consideration as

CA

VE

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20

A valuable consideration in the eyes of the law mayconsist of (Currie v Misa (1875))

bull either some right interest profit or benefit to oneparty or

bull some forbearance detriment loss orresponsibility given suffered or undertaken bythe other

A benefit to one party or a detriment to the other

lsquothe element of exchange in a contractrsquoor

lsquothe price paid for a promisersquo

bull These definitions however are vague and despite itslimitation the benefitdetriment definition is mostcommonly used

Consideration and condition

Consideration must be distinguished from the fulfilment ofa condition If A says to B lsquoI will give you pound500 if you shouldbreak a legrsquo there is no contract but simply a gratuitouspromise subject to a condition In Carlill v Carbolic Smoke BallCo (1893) the plaintiff provided consideration for thedefendantrsquos promise by using the smoke ball Catchinginfluenza was only a condition of her entitlement to enforcethe promise

Kinds of consideration

bull In Roscorla v Thomas (1842) the defendant promised theplaintiff that a horse which had been bought by him wassound and free from vice It was held that since thispromise was made after the sale had been completedthere was no consideration for it and it could not beenforced In Re McArdle (1951) a promise made lsquoin

CO

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W21

Past consideration that is something already completed before the promise is made cannot

generally amount to consideration

Executed considerationAn act wholly

performed as part of a contract

Executory ConsiderationA promise to do something

in the future

consideration of your carrying out certain improvementsto the propertyrsquo was held by the Court of Appeal to beunenforceable as all the work had been done before thepromise was made

Exceptions to this rule

bull The modern requirements were laid down by LordScarman in Pao On v Lau Yiu Long (1980) Where a serviceis rendered

at the request of the promisor (as in Lampleigh vBraithwait (1615))

on the understanding that a payment will be made (asin Re Caseyrsquos Patents (1892)) and

if the payment would have been legally enforceableif it had been promised in advance

then a subsequent promise to pay a certain sum will beenforced

Note ndash the lsquoinferredrsquo intention to pay makes this a veryflexible exception

Consideration must move from the promisee

bull See Chapter 10 ndash Privity of contract

Consideration need not be adequate

CA

VE

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22

Only a person who has provided consideration for a promise can enforce that promise

The consideration provided by one party need not equal in value the

consideration provided by the other party

It is for the parties themselves to make their own bargainThe consideration need only have lsquosome value in the eyes ofthe lawrsquo (See lsquoConsideration must be sufficientrsquo p 24below)

bull The value may be slight In Chappell Co Ltd v Nestleacute Co Ltd(1960) three wrappers from the defendantrsquos chocolatebars were held to be part of the consideration InMountford v Scott (1975) pound1 was held to be goodconsideration for an option to buy a house

bull Withdrawal of threatened legal proceedings will amountto consideration even if the claim is found to have nolegal basis provided that the parties themselves believethat the claim is valid (Callisher v Bischoffstein (1870))

bull In Pitt v PHH Asset Management (1993) the defendantagreed to a lock-out agreement in return for Pittdropping his claim for an injunction against them Theclaim for an injunction had no merit but had a nuisancevalue and dropping it was therefore good consideration

bull In Alliance Bank v Broome (1964) the bankrsquos forbearance tosue was held to be consideration for the defendantrsquospromise to provide security for a loan

bull In Edmonds v Lawson (2000) it was held that the generalbenefits to chambers of operating a pupillage system wassufficient to provide consideration for contracts withindividual pupils

There is no consideration however where the promises arevague for example lsquoto stop being a nuisance to his fatherrsquo(White v Bluett (1853) but cf Ward v Byham (1956) below) orillusory for example to do something impossible or merelygood for example to show love or affection or gratitude CO

NT

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W23

It has been argued that because the latter are invalidconsideration must have some economic value Buteconomic value is extremely difficult to discern in the othercases cited above Since consideration is a lsquobadge ofenforceabilityrsquo it is argued that nominal consideration isadequate it is only designed to show that the promise isintended to be legally enforceable ndash whether it creates anyeconomic advantage is therefore irrelevant

Consideration must be sufficient

Traditionally the following have no value in the eyes of thelaw

Performing a duty imposed by law

bull For example promising not to commit a crime orpromising to appear in court after being subpoenaed InCollins v Godefroy (1831) a promise to pay a fee to awitness who has been properly subpoenaed to attend a

CA

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24

The consideration must have some value in the eyes of the law

Consideration therefore is found when a person receives whatever he requests

in return for a promise whether or not it has aneconomic value provided it is not too vague

Performing a duty imposed

by law

Performing an existingcontractual duty owed

to the other party

trial was held to have been made without considerationThe witness had a public duty to attend

bull But if a person does or promises to do more than he isrequired to do by law then he is providing considerationIn Glasbrook Bros v Glamorgan CC (1925) the council aspolice authority on the insistence of a colliery owner andin return for a promise of payment provided protectionover and above that required by law Held ndash they hadprovided consideration for the promise to pay

bull In Ward v Byham (1956) the father of an illegitimate childpromised to pay the mother an allowance of pound1 per weekif she proved that the child was lsquowell looked after andhappyrsquo Held ndash the mother was entitled to enforce thepromise because in undertaking to see that the child waslsquowell looked after and happyrsquo she was doing more thanher legal obligation Lord Denning however based hisdecision on the ground that the mother providedconsideration by performing her legal duty to maintainthe child

Treitel agreed with Denning that performance of a dutyimposed by the law can be consideration for a promise Heargues that it is public policy which accounts for the refusalof the law in certain circumstances to enforce promises toperform existing duties Where there are no grounds ofpublic policy involved then a promise given inconsideration of a public duty can be enforced

He cites

bull promises to pay rewards for information leading to thearrest of a felon See Sykes v DPP (1961)

bull Ward v Byham (above) CO

NT

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W25

In most cases it would make no difference whether the courtproceeded on the basis that the matter was one of publicpolicy or a lack of consideration But the former ground doesallow a greater degree of flexibility

Performing an existing contractual duty

Where the duty is owed to the other party this cannot beconsideration for

A request for extra payment

bull In Stilk v Myrick (1809) the captain promised the rest ofcrew extra wages if they would sail the ship back homeafter two sailors had deserted Held ndash the crew werealready bound by their contract to meet the normalemergencies of the voyage and were doing no more thantheir original contractual duty in working the ship home

bull Where the promisor however performs more than hehad originally promised then there can be considerationIn Hartley v Ponsonby (1857) nearly half the crewdeserted This discharged the contracts of the remainingsailors as it was dangerous to sail the ship home withonly half the crew The sailors were therefore free to makea new bargain so the captainrsquos promise to pay themadditional wages was enforceable

Exceptions to the rule in Stilk v Myrick

Factual advantages obtained by the promisorIn Williams v Roffey Bros (1991) the defendants (the maincontractors) were refurbishing a block of flats They sub-

CA

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26

A request for extra payment

A request to avoid part of a debt

contracted the carpentry work to the plaintiff The plaintiffran into financial difficulties whereupon the defendantsagreed to pay the plaintiff an additional sum if theycompleted the work on time Held ndash where a party to anexisting contract later agrees to pay an lsquoextra bonusrsquo in orderthat the other party performs his obligations under theoriginal contract then the new agreement is binding if theparty agreeing to pay the bonus has thereby obtained somenew practical advantage or avoided a disadvantage In thisparticular case the advantage was the avoidance of apenalty clause and the expense of finding new carpenters

bull Note ndash Stilk v Myrick (above) recognises as considerationonly those acts which the promisee was not under a legalobligation to perform Williams v Roffey Bros (above) addsto these factual advantages obtained by the promisor

bull This decision pushes to the fore the principles ofeconomic duress as a means of distinguishing enforceableand unenforceable modifications to a contract (seeChapter 5 on economic duress p 87)

Duties owed to third partyWhere a duty is owed to a third party its performance canalso be consideration for a promise by another It is clear thatthe third party is getting something more than he is entitledto

bull In Shadwell v Shadwell (1860) an uncle promised to pay anannual sum to his nephew on hearing of his intendedmarriage The fact of the marriage providedconsideration although the nephew was already legallycontracted to marry his fianceacutee

bull In Scotson v Pegg (1861) A agreed to deliver coal to Brsquosorder B ordered A to deliver coal to C who promised A to

CO

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W27

unload it Held ndash A could enforce Crsquos promise as Arsquosdelivery of the coal was good considerationnotwithstanding that he was already bound to do so byhis contract with B

bull In New Zealand Shipping Co v Satterthwaite amp Co Ltd TheEurymedon (1975) it was held by the Privy Council thatwhere a stevedore at the request of the consignee ofcertain goods removed the goods from a ship this wasconsideration for the promise by the consignee to give thestevedore the benefit of an exclusion clause although thestevedore in removing the goods was only performingcontractual duties he owed to the carrier

A request to avoid part of a debt

If a creditor is owed pound100 and agrees to accept pound90 in fullsettlement he can later insist on the remaining pound10 beingpaid as there is no consideration for his promise to waive thepound10 (the rule in Pinnelrsquos Case (1602))

bull This rule was confirmed by the House of Lords in Foakesv Beer (1884) Dr Foakes was indebted to Mrs Beer on ajudgment sum of pound2090 It was agreed by Mrs Beer thatif Foakes paid her pound500 in cash and the balance of pound1590in instalments she would not take lsquoany proceedingswhatsoeverrsquo on the judgment Foakes paid the moneyexactly as requested but Mrs Beer then proceeded toclaim an additional pound360 as interest on the judgment debtFoakes refused and when sued pleaded that his duty topay interest had been discharged by the promise not tosue Their Lordships deferred as to whether on its trueconstruction the agreement merely gave Foakes time to

CA

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28

Basic rule payment of a smaller sum will not discharge the duty to pay a higher sum

pay or was intended to cover interest as well But theyheld even on the latter construction there was noconsideration for the promise and that Foakes was stillbound to pay the additional sum

There are situations however where payment of a smallersum will discharge the liability for the higher sum

bull where the promise to accept a smaller sum in fullsettlement is made by deed or in return forconsideration

bull where the original claim was not for a fixed sum or theamount is disputed in good faith

bull where the debtor does something different for examplewhere payment is made at the creditorrsquos request

at an earlier time

at a different place

by a different method (it was held in D amp C BuildersLtd v Rees (1966) that payment by cheque is notpayment by a different method)

bull where payment is accompanied by a benefit of somekind

bull in a composition agreement with creditors

bull where payment is made by a third party (see HirachandPunachand v Temple (1911))

It has been argued that to allow the creditor to sue for theremaining debt would be a fraud on the third parties in thelast two cases above

Note ndash the doctrine of promissory estoppel under certaincircumstances may allow payment of smaller sum todischarge liability for the larger sum

CO

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W29

In Re Selectmove (1995) the Court of Appeal refused toextend the principle laid down in Williams v Roffey Bros topart payment of a debt The company had offered to pay itsarrears by instalments to the Inland Revenue who said thatthey would let them know if this was acceptable They heardnothing further but paid some instalments and thenreceived a threat of being wound up if the full arrears werenot paid immediately The court was not prepared to allowWilliams v Roffey Bros to overturn a rule laid down by theHouse of Lords in Foakes v Beer

Promissory estoppel

There are problems with regard to

Origins

bull It was introduced (obiter) by Lord Denning in the CentralLondon Property Trust Ltd v High Trees House Ltd (1947)where owners of a block of flats had promised to acceptreduced rents in 1939 There was no consideration fortheir promise but Lord Denning nevertheless stated thathe would estop them from recovering any arrears Hebased his statement on the decision in Hughes vMetropolitan Railway (1877)

CA

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30

If a promise intended to be binding andintended to be acted upon is acted upon then the court will not allow the promisor

to go back on his promise

the origins ofthe doctrine

the scope ofthe doctrine

the effect of the doctrine

bull It would however seem to conflict with the House ofLordsrsquo decision in Jorden v Money (1854) where it wasstated that estoppel applied only to statements of fact andnot to promises and also with the decision in Foakes vBeer (1884) where the House of Lords confirmed thatpayment of a smaller sum will not discharge the liabilityfor a larger sum

Scope

bull It only applies to the modification or discharge of anexisting contractual obligation It cannot create a newcontract See Combe v Combe (1951) above (However itwas used to create a new right of action in the Australiancase of Waltons v Maher (1988))

bull It can be used only as a lsquoshield and not a swordrsquo

bull The promise not to enforce rights must be clear andunequivocal In The Scaptrade (1983) the mere fact of nothaving enforced onersquos full rights in the past was notsufficient

bull It must be inequitable for the promisor to go back on hispromise In D amp C Builders v Rees (1966) Mrs Rees had forced the builders to accept her cheque by inequitable means and so could not rely on promissory estoppel

bull The promisee must have acted in reliance on the promisealthough not necessarily to his detriment (Alan amp Co Ltdv El-Nasr Export and Import Co (1972))

CO

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W31

The exact scope of the doctrine is a matter ofdebate but certain requirements must be met

Effect of the doctrine

bull In Tool Metal Manufacturing Co v Tungsten Electric Co(1955) the owner of a patent promised to suspendperiodic payments during the war It was held by theCourt of Appeal that the promise was binding for theduration of the war but the owners could on givingreasonable notice at he end of the war revert to theiroriginal legal entitlements

bull In Ajayi v Briscoe (1964) the Privy Council stated that thepromisee could resile from his promise on givingreasonable notice which allowed the promisee areasonable opportunity of resuming his position but thatthe promise would become final if the promisee could notresume his former position

On one interpretation these cases show that as regardsexisting or past obligations it is extinctive but as regardsfuture obligations it is suspensory

On another interpretation the correct approach is to look atthe nature of the promise If it was intended to bepermanent then the promiseersquos liability will beextinguished

Lord Denning consistently asserted that promissoryestoppel can extinguish debts However this view iscontrary to Foakes v Beer

The view that promissory estoppel is suspensory onlywould reconcile it with the decisions in Jorden v Money

CA

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32

It is not clear whether the doctrine extinguishesrights or merely suspends them

Foakes v Beer and Pinnelrsquos Case but it would deprive it of mostof its usefulness

The question of whether the doctrine is suspensory orextinctive is particularly important with regard to singlepayments

Intention to be legally bound

This presumption may be rebutted but the onus of proof ison the party seeking to exclude legal relations In EssoPetroleum Co Ltd v Commissioners of Customs and Excise (1976)Esso promised to give one world cup coin with every fourgallons of petrol sold A majority of the House of Lordsbelieved that the presumption in favour of legal relationshad not been rebutted

Examples of rebuttals

bull lsquoThis arrangement is not entered into as a formal orlegal agreement and shall not be subject to legaljurisdiction in the law courtsrsquo (Rose and Frank v CromptonBros (1925))

bull Agreement to be binding lsquoin honour onlyrsquo (Jones v VernonPools (1939))

CO

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W33

Commercial andbusiness

agreements

Social anddomestic

agreements

In commercial and business agreements there is a presumption that the parties

intend to create legal relations

bull Letters of comfort for example statements to encouragelending to an associated company It was held inKleinwort Benson Ltd v Malaysia Mining Corpn (1989) thatthe defendantrsquos statement that lsquoit is our policy to ensurethat the business is at all times in a position to meet itsliabilities to yoursquo was a statement of present fact and nota promise for the future As such it was not intended tocreate legal relations

bull Collective agreements are declared not to be legallybinding by the Trade Unions and Labour Relations(Consolidation) Act 1992 unless expressly stated inwriting to be so

This can be rebutted by evidence to the contrary forexample

bull Agreements between husband and wife In Balfour vBalfour (1919) the court refused to enforce a promise bythe husband to give his wife pound50 per month whilst he wasworking abroad However the court will enforce a clearagreement where the parties are separating or separated(Merritt v Merritt (1970))

bull Agreements between members of a family In Jones vPadavatton (1969) Mrs Jones offered a monthly allowanceto her daughter if she would come to England to read forthe Bar Her daughter agreed but was not very successfulMrs Jones stopped paying the monthly allowance butallowed her daughter to live in her house and receive therents from other tenants Mrs Jones later sued forpossession The daughter counterclaimed for breach of

CA

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34

In social and domestic agreements there is a presumption against legal relations

the agreement to pay the monthly allowance andor for accommodation Held (a) the first agreement may havebeen made with the intention of creating legal relationsbut was for a reasonable time and would in any case havelapsed (b) the second agreement was a familyarrangement without an intention to create legalrelations It was very vague and uncertain

bull An intention to be legally bound may be inferred where

one party has acted to his detriment on theagreement (Parker v Clark (1960)) or

a business arrangement is involved (Snelling vSnelling (1973)) or

there is mutuality (Simpkins v Pays (1955))

But in all such cases the agreement must be clear

CO

NT

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W35

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W37

3 Contents of a contract

Once a contract has been formed it is necessary to explorethe scope of the obligations which each party incurs

(Incorporation of terms is covered in Chapter 4)

The distinction between terms and mere

representations

Is a statement part of the contract Statements made duringnegotiations leading to a contract may be either

bull Terms

that is statements which form the express terms of thecontract As such they constitute promises as to thepresent truth of the statement or as to future action Ifsuch a promise is broken (for example because thestatement is untrue) this will involve a breach of contractor

Different weighting may be given to different terms

Distinction between termsand mere representations

Interpretation of expressterms

Identification of impliedterms

This involves

bull Mere representations

that is statements which do not form part of the contractbut which helped to induce the contract If these areuntrue they are lsquomisrepresentationsrsquo

Now that damages can be awarded for negligent misrepresentation the distinction has lost much of itsformer significance but there are still some importantconsequences

In trying to ascertain such intention the court may take intoaccount the following factors

The importance of the statement to the parties

bull In Bannerman v White (1861) the buyer stated lsquoif sulphurhas been used I do not want to know the pricersquo Held ndasha term Similarly in Couchman v Hill (1947) the buyerasked if the cow was in calf stating that if she was hewould not bid The auctioneerrsquos reply that she was not incalf was held to be a term overriding the printedconditions which stated that no warranty was given

The respective knowledge of the parties

bull In Oscar Chess Ltd v Williams (1957) it was held that astatement by a member of the public (a non expert) to agarage (an expert) with regard to the age of a car was amere representation not a term On the other hand astatement made by a garage (an expert) to a member ofthe public (a non-expert) concerning the mileage of a carwas held to be a term (Dick Bentley Productions Ltd vHarold Smith (Motors) Ltd (1965))

CA

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38

Whether a statement has become a term of thecontract depends on the intention of the parties

The manner of the statement

bull For example if it suggests verification (Ecay v Godfrey(1947)) it is unlikely to be a term If it discouragesverification lsquoIf there was anything wrong with the horseI would tell yoursquo (Schawel v Reade (1913)) it is more likelyto be a term

Where a contract has been reduced to writing

The terms will normally be the statements incorporated intothe written contract (Routledge v McKay (1954))

bull But a contract may be partly oral and partly written (seeCouchman v Hill (1947) above) In Evans amp Sons Ltd vAndrea Merzario Ltd (1976) an oral assurance thatmachinery would be stowed under not on the deck washeld to be a term of a contract although it was notincorporated into the written terms The court held thatthe contract was partly oral and partly written and insuch hybrid circumstances the court was entitled to lookat all the circumstances

bull Note ndash the discovery of a collateral contract mayovercome the difficulties of oral warranties in writtencontracts In City of Westminster Properties v Mudd (1959)a tenant signed a lease containing a covenant to use thepremises for business premises only He was induced tosign by a statement that this clause did not apply to himand that he could continue to sleep on the premises Thecourt found that his signing the contract was con-sideration for this promise thus creating a collateralcontract In Evans amp Son Ltd v Andrea Merzario Ltd (1976)Lord Denning considered the oral statement to be acollateral contract In Esso Petroleum Co v Mardon (1976)the court held that the statement by a representative of C

ON

TR

AC

TL

AW

39

Esso with regard to the throughput of a petrol station wascovered by an implied collateral warranty that thestatement had been made with due care and skill

bull The use of a collateral contract will not be possiblehowever if the main contract contains an appropriatelyworded lsquoentire agreementrsquo clause (The Inntrepreneur PubCo (GL) v East Crown Ltd (2000))

Identification of express terms

bull See incorporation of terms in Chapter 4 p 54

Interpretation of express terms of a contract

Oral contracts

The contents is a matter of evidence for the judge Theinterpretation will be undertaken by applying an objectivetest that is what would a reasonable person haveunderstood to have been meant by the words used (Thake vMaurice (1986))

Written contracts

If a contract is reduced to writing then under the lsquoparolevidencersquo rule oral or other evidence extrinsic to thedocument is not normally admissible to lsquoadd to vary orcontradictrsquo (Jacobs v Batavia and General Plantations Trust(1924)) the terms of the written agreement

Exceptions to the parol evidence rule

bull to show that the contract is not legally binding forexample because of mistake or misrepresentation

bull to show that the contract is subject to a lsquoconditionprecedentrsquo In Pym v Campbell (1856) oral evidence was

CA

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40

admitted to show that a contract was not to come intooperation unless a patent was approved by a third party

bull to establish a custom or trade usage (Hutton v Warren(1836) see below)

bull to establish that the written contract is not the wholecontract It is presumed that lsquoa document which lookslike a contract is the whole contractrsquo but this isrebuttable See Couchman v Hill (1947) and Evans v AndreaMerzario (above)

bull a contract may be contained in more than one document(Jacobs v Batavia Plantation Trust Ltd (1924))

bull to establish a collateral contract (City of WestminsterProperties Ltd v Mudd (1959) Evans amp Son Ltd v AndreaMerzario Ltd (1976))

The Law Commission recommended in 1976 that the lsquoparolevidencersquo rule be abolished However in view of the wideexceptions to the rule it recommended in 1986 that no actionneed be taken

Identification of implied terms

In addition to the terms which the parties have expresslyagreed a court may be prepared to hold that other termsmust be implied into the contract Such terms may beimplied by

CO

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W41

Custom Statute The courts

Custom

A contract may be deemed to incorporate any relevantcustom of the market trade or locality in which the contractis made In Hutton v Warren (1836) a tenant established aright to fair allowance for improvements to the land througha local custom

Statute

Parliament as a matter of public policy has in variousinstances seen fit to imply terms into contracts for example

Terms implied into all sales

bull that the seller has the right to sell the goods

bull that goods sold by description correspond with thedescription

Terms implied only into sales by way of business

bull that the goods are of satisfactory quality

Goods are of a satisfactory quality if they meet thestandard that a reasonable person would regard assatisfactory taking account of any description of thegoods the price if relevant and all other relevantcircumstances In particular it will be necessary toconsider their

fitness for all purposes for which goods of that kindare commonly supplied

appearance and finish

CA

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ND

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42

The Sale of Goods Act 1979 which impliesthe following terms into contracts

for the sale of goods

freedom from minor defects

safety and

durability

This term does not apply to matters specifically drawn tothe buyerrsquos attention before the contract is made orwhere the buyer examines the goods defects which thatexamination should have revealed

bull that the goods are fit for any special purpose madeknown to the seller

bull that goods sold by sample correspond with the sample

bull In contracts of service there is an implied term that theservice will be carried out with reasonable care and skillwithin a reasonable time and for a reasonable price

In Wilson v Best (1993) it was held that the duty of a travelagent under this provision extended to checking that thelocal safety regulations had been complied with It did notrequire them to ensure that they complied with UKregulations

The courts

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W43

Terms implied in fact Terms implied in law

The Supply of Goods and Services Act 1982implies similar terms into contracts of hire contracts for work and materials and other

contracts not covered by the Sale of Goods Act

Terms implied in fact

When interpreting terms implied in fact the court seeks togive effect to the unexpressed intention of the parties Thereare two tests A term may be implied because

bull It is necessary to give business efficacy to the contract InThe Moorcock (1889) a term was implied that the riverbedwas in a condition that would not damage a shipunloading at the jetty

bull It satisfies the lsquoofficious bystanderrsquo test that is if abystander suggested a term the parties would respondwith a common lsquoof coursersquo In Spring v NASDS (1956) theunion tried to imply the lsquoBridlington Agreementrsquo Thecourt refused on the basis that if an lsquoofficious bystanderhad suggested this the plaintiff would have repliedldquoWhatrsquos thatrdquorsquo

The Moorcock doctrine is used in order to make the contractworkable or where it was so obvious that the parties musthave intended it to apply to the agreement It will not beused merely because it was reasonable or because it wouldimprove the contract

It was suggested in Shell UK Ltd v Lostock Garages Ltd (1977)that the courts will be reluctant to imply a term where theparties have entered into a detailed and carefully draftedwritten agreement

Terms implied in law

bull When terms are implied in law they are implied into allcontracts of a particular kind Here the court is not tryingto put into effect the parties intention but is imposing anobligation on one party often as a matter of public policyFor example the court implies into all contracts ofC

AV

EN

DIS

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RD

S44

employment a term that the employee will carry out hiswork with reasonable care and skill and will indemnifyhis employer against any loss caused by his negligence(Lister v Romford Ice Cold Storage Co (1957))

bull In these cases the implication is not based on thepresumed intention of the parties but on the courtrsquosperception of the nature of the relationship between theparties and whether such an implied term wasreasonable

bull In Liverpool CC v Irwin (1977) the tenants of a block ofcouncil flats failed to persuade the court to imply a termthat the council should be responsible for the commonparts of the building on the Moorcock or lsquoofficiousbystanderrsquo test but succeeded on the basis of the Listertest that is the term should be implied in law in that theagreement was incomplete it involved the relationshipof landlord and tenant and it would be reasonable toexpect the landlord to be responsible for the commonparts of the building

Classification of terms

There is a very important distinction between those terms ofa contract which entitle an innocent party to terminate(rescind or treat as discharged) a contract in the event of a

CO

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W45

Conditions Warranties Innominate terms

breach and those which merely enable a person to claimdamages

Traditionally a distinction has been made in English lawbetween

Conditions

bull The Sale of Goods Act 1979 designates certain impliedterms for example re satisfactory quality as conditions ndashthe breach of which entitles the buyer to terminate (ortreat as discharged) the contract

bull In Poussard v Spiers and Pond (1876) a singer failed to takeup a role in an opera until a week after the season hadstarted Held ndash her promise to perform as from the firstperformance was a condition ndash and its breach entitled themanagement to treat the contract as discharged

Warranties

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46

Contractual terms concerning the less importantor subsidiary statements of facts or promisesIf a warranty is broken this does not entitle

the other party to terminate (or treat asdischarged) the contract it merely entitles

him to sue for damages

Statements of fact or promises which form theessential terms of the contract If the statement is not true or the promise is not fulfilled the

injured party may terminate (or treat as discharged) the contract and claim damages

bull The Sale of Goods Act 1979 designates certain terms aswarranties breach of which do not allow the buyer totreat the contract as discharged but merely to sue fordamages for example the right to quiet enjoyment

bull In Bettini v Gye (1876) a singer was engaged to sing for awhole season and to arrive six days in advance to takepart in rehearsals He only arrived three days in advanceHeld ndash the rehearsal clause was subsidiary to the mainclause It was only a warranty The management wastherefore not entitled to treat the contract as dischargedThey should have kept to the original contract andsought damages for the three daysrsquo delay

Innominate or intermediate terms

bull In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha(1962) it was suggested by the Court of Appeal that itwas not enough to classify terms into conditions andwarranties Regard should also be had to the characterand nature of the breach which has occurred In HongKong Fir the defendants chartered the vessel Hong KongFir to the plaintiffs for 24 months the charter partyprovided that the ship was lsquofitted in every way forordinary cargo servicersquo The vessel spent less than nineweeks of the first seven months at sea because ofbreakdowns and the consequent repairs which werenecessary

CO

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W47

On the facts this was not the case because the charter partystill had a substantial time to run

After the Hong Kong Fir case in 1962 there was someconfusion as to whether the breach based test which appliedto innominate terms had replaced the term based test whichrelied on the distinction between conditions and warrantiesor merely added to it an alternative in certain circumstances

bull In the Mihalis Angelos (1970) the Court of Appeal revertedto the term based test The owners of a vessel stated thatthe vessel was lsquoexpected ready to loadrsquo on or about 1 JulyIt was discovered that this was not so Held ndash the termwas a condition ndash the charterers could treat the contract as discharged

In 1976 two cases were decided on the breach based principle

bull In Cehave v Bremer Handelsgesellshaft MBH The Hansa Nord(1976) the seller had sold a cargo of citrus pellets with aterm in the contract that the shipment be made in goodcondition The buyer rejected the cargo on the basis thatthis term had been broken The defect however was notserious and the court held that although the Sale ofGoods Act had classified some terms as conditions andwarranties it did not follow that all the terms had to be soclassified Accordingly the court could consider the effect

CA

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ND

ISH

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48

Held ndash the term was neither a condition nor awarranty and in determining whether the

defendants could terminate the contract it wasnecessary to look at the consequences of the

breach to see if it deprived the innocent party ofsubstantially the whole benefit he should

have received under the contract

of the breach since this was not serious the buyer hadnot been entitled to reject

bull In Reardon Smith v Hansen Tangen (1976) an oil tanker wasdescribed as lsquoOsaka No 354rsquo where in fact it was lsquoOshimaNo 004rsquo but was otherwise exactly as specified Becausethe market for oil tankers had collapsed the chartererssought to argue that the number was a condition whichwould enable them to repudiate the contract The Houseof Lords rejected this argument Held ndash the statement wasan innominate term not a condition since the effect ofthe breach was trivial it did not justify termination of thecontract

bull Note ndash the time for determining whether a clause was acondition or an innominate term is at the time ofcontracting ndash not after the breach

Traditionally a term is a condition if it has been establishedas such

bull By statute ndash for example the Sale of Goods Act 1979

bull By precedent after a judicial decision In The MihalisAngelos (1970) the Court of Appeal held that thelsquoexpected readinessrsquo clause in a charter party is acondition

bull By the intention of the parties The court must ascertainthe intention of the parties If the wording clearly revealsthat the parties intended that breach of a particular termshould give rise to a right to rescind that term will beregarded as a condition In Lombard North Central vButterworth (1987) the Court of Appeal held thatcontracting parties can provide expressly in the contractthat lsquospecific breaches could terminate the contractrsquo Inthat case the contract included an express clause that the

CO

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W49

time for payment of instalments was lsquoof the essence of thecontractrsquo An accountant had contracted to hire acomputer for five years agreeing to make an initialpayment and 19 quarterly rental payments He was latein paying some instalments and the owners terminatedthe agreement recovered possession of the computerand claimed damages not only for the arrears but also forloss of future instalments The claim succeeded becausethe contract specifically stated that the time of paymentof each instalment was to be of the essence of the contract

Note the mere use of the word lsquoconditionrsquo is not conclusive

In Schuler v Wickman Tool Sales Ltd (1974) the House of Lordsheld that breach of a lsquoconditionrsquo that a distributor shouldvisit six customers every week could not have been intendedto allow rescission The word lsquoconditionrsquo had not been usedin this particular sense There was in the contract a separateclause which indicated when and how the contract could beterminated

bull By the court ndash deciding according to the subject matter ofthe contract (see Poussard v Spiers (1876) and Bettini v Gye(1876) above)

CA

VE

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50

If a term is not a condition then the lsquowait and seersquotechnique can be used to decide if the gravity of

the breach is such that it deprivedthe innocent party of substantially the whole

benefit of the contract If so ndash then the innocentparty can terminate the contract

(innominate or intermediate term)

Certainty and flexibility

Certainty

bull The term based test is alleged to have the advantage ofpredictability and certainty It is important for the partiesto know their legal rights and liabilities as regards theavailability of termination The character of all terms isascertainable at the moment the contract is concludedNothing that happens after its formation can change thestatus of a term If the term is a condition then the partieswill know that its breach allows the other party toterminate But there can still be uncertainty where theparties have to await the courtrsquos decision on the nature ofthe term

bull The advantage of certainty is however balanced by thefact that it is possible to terminate a contract on atechnicality for sometimes a very minor breach

Flexibility

bull The breach based test is stated to bring flexibility to thelaw Instead of saying that the innocent party can in thecase of a condition always terminate or in the case of awarranty never terminate innominate terms allow thecourts to permit termination where the circumstancesjustify it and the consequences are sufficiently serious

bull It is however more difficult for the innocent party toknow when he has the right to terminate or for the partyin breach to realise in advance the consequence of hisaction

CO

NT

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CT

LA

W51

Note the distinction between the different types of contract terms remains of

considerable importance

CO

NT

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W53

4 Exemption (exclusion or limitation) clauses

A total exclusion is referred to as an exclusion clause apartial exclusion is known as a limitation clause

Exemption clauses are most commonly found in standardform contracts

To be valid an exemption clause must satisfy the tests set bythe

Common law requirements

A clause which purports to exclude wholly or inpart liability for a breach of contract or a tort

Common lawUnfair Contract

Terms Act (UCTA)1977

Regulations onUnfair Terms in ConsumerContracts 1999

The term must be incorporated into the

contract

The wording mustcover what actually

happened

Incorporation

bull This requirement applies to all terms but has beeninterpreted strictly in the case of exemption clauses

A term may be incorporated into a contract by being

Contained in a signed document

In LrsquoEacutestrange v Graucob Ltd (1934) the plaintiff had signed acontract of sale without reading it Held ndash she was bound bythe terms which contained an exemption clause

ExceptionsWhere the offeree has been induced to sign as a result ofmisrepresentation

bull In Curtis v Chemical Cleaning Co (1951) the plaintiffsigned a lsquoreceiptrsquo when she took a dress to be cleaned onbeing told that it was to protect the cleaners in case ofdamage to the sequins In fact the clause excludedliability for all damage Held ndash the cleaners were notprotected for damage to the dress the extent of theclause had been misrepresented and therefore thecleaners could not rely on it

bull lsquoNon est factumrsquo (see p 106 below)

Contained in an unsigned document (ticket cases)

bull This must be seen to be a contractual document

In Chapelton v Barry UDC (1940) on hiring a deckchair the plaintiff was given a ticket with only alarge black 3d on the face of the ticket and exclusionclauses on the back Held ndash the defendants could notrely on the exclusion clauses as it was not apparenton the face of it that the ticket was a contractualdocument rather than just a receipt

CA

VE

ND

ISH

LA

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DS

54

bull Reasonable notice of the term must be given

In Parker v South Eastern Railway Co (1877) theplaintiff received a ticket which stated on the facelsquosee backrsquo Held ndash as long as the railway companyhad given reasonable notice of the exemptionclausersquos existence it did not matter that the plaintiffhad not read the clause

In Thompson v London Midland and Scottish Railway(1930) the ticket indicated that the conditions of thecontract could be seen at the station masterrsquos office oron the timetable The exemption clause was in clause552 of the timetable which cost sixpence ndash the ticketitself only cost two and sixpence In the circumstancesnevertheless reasonable notice had been given

The test is objective and it is irrelevant that the partyaffected by the exemption clause is blind or illiterateor otherwise unable to understand it (Thompson vLMS above)

But in Geir v Kujawa (1970) a notice in English wasstuck on the windscreen of a car stating thatpassengers travelled at their own risk A Germanpassenger who was known to speak no English washeld not to be bound by the clause as reasonable carehad not been taken to bring it to his attention

bull Attention must be drawn to any unusual clause

In Thornton v Shoe Lane Parking (1971) it was statedthat a person who drives his car into a car park mightexpect to find in his contract a clause excludingliability for loss or damage to the car but specialnotice should have been given of a clause purportingto exclude liability for personal injury

CO

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W55

In Interfoto Picture Library v Stiletto Visual Programmes(1989) the Court of Appeal confirmed that onerousconditions required special measures to bring them tothe attention of the defendant The clause in that casewas not an exemption clause but a clause imposingcharges 10 times higher than normal The Court ofAppeal stated that the more unusual the clause thegreater the notice required

bull Notice of the term must be communicated to the otherparty before or at the time that the contract is enteredinto

In Thornton v Shoe Lane Parking Ltd (1971) the plaintiffmade his contract with the car company when heinserted a coin in the ticket machine The ticket wasissued afterwards and in any case referred toconditions displayed inside the car park which hecould see only after entry Notice therefore came toolate

bull The rules of offer and acceptance and the distinctionsbetween offers and invitations to treat must be consultedin order to ascertain when the contract was madeProblems with regard to incorporation can arise in atypical lsquoBattle of the Formsrsquo problem See Butler MachineTool Ltd v Ex-Cell-O Corpn (Chapter 1)

Notice by display

Notices exhibited in premises seeking to exclude liability forloss or damage are common for example lsquocar parked atownerrsquos riskrsquo and must be seen before or at the time of entryinto contract

bull In Olley v Marlborough Court Hotel (1949) Mr and MrsOlley saw a notice on the hotel bedroom wall which

CA

VE

ND

ISH

LA

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DS

56

stated lsquothe proprietors will not hold themselvesresponsible for articles lost or stolen unless handed tothe manageress for safe keepingrsquo The contract had beenentered into on registration and the clause was thereforenot incorporated into the contract and could not protectthe proprietors

Notice by a lsquocourse of dealingrsquo

bull If there has been a course of dealing between the partiesthe usual terms may be incorporated into the contractalthough not specifically drawn to the attention of theparties each time a contract is made

In Spurling v Bradshaw (1956) Bradshaw deposited someorange juice in Spurlingrsquos warehouse The contractualdocument excluding liability for loss or damage was notsent to Spurling until several days after the contract Held ndashthe exclusion clauses were valid as the parties had alwaysdone business with each other on this basis

bull Note ndash the transactions must be sufficiently numerous toconstitute a course of dealings The established course ofdealings must be consistent The established course ofdealings must not have been deviated from on the occasion in question

In Hollier v Rambler Motors (1972) the Court of Appeal heldthat bringing a car to be serviced or repaired at a garage onthree or four occasions over a period of five years did notestablish a course of dealings

Notice through patent knowledge

bull In British Crane Hire Corpn v Ipswich Plant Hire (1975) theowner of a crane hired it out to a contractor who was alsoengaged in the same business It was held that the hirer

CO

NT

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W57

was bound by the ownerrsquos usual terms though they werenot actually communicated at the time of the contractThey were however based on a model supplied by atrade association to which both parties belonged It wasstated that they were reasonable and were well known inthe trade

Oral contracts

bull Whether a clause has been incorporated into an oralcontract is a matter of evidence for the court (McCutcheonv MacBrayne (1964))

On a proper construction the clause covers the loss

in question

bull An exclusion clause is interpreted contra proferentem thatis any ambiguity in the clause will be interpreted againstthe party seeking to rely on it

in Houghton v Trafalgar Insurance Co Ltd (1954) it washeld that the word lsquoloadrsquo could not refer to people

in Andrews Bros v Singer amp Co Ltd (1934) an exclusionreferring to implied terms was not allowed to cover aterm that the car was new as this was an express term

It was however suggested by the House of Lords inPhoto Production Ltd v Securicor Ltd (1980) that any needfor a strained and distorted interpretation of contracts inorder to control the effect of exemption clauses had beenreduced by the UCTA

bull Especially clear words must be used in order to excludeliability for negligence for example the use of the wordlsquonegligencersquo or the phrase lsquohowsoever causedrsquo (Smith vSouth Wales Switchgear Ltd (1978))

CA

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58

But if these words are not used provided the wording iswide enough to cover negligence and there is no otherliability to which they can apply then it is assumed thatthey must have been intended to cover negligence(Canada Steamship Lines v The King (1952))

bull It was stated in Ailsa Craig Fishing Co v Malvern Fishing Co(1983) that limitation clauses may be interpreted lessrigidly than exclusion clauses

bull Only a party to a contract can rely on an exclusion clause(See Chapter 10)

bull Especially clear words are required when the breach is ofa fundamental nature In the past Lord Denning andothers argued that it was not possible to exclude breachesof contract which were deemed to be fundamental byany exclusion clause however widely and clearlydrafted

However the House of Lords confirmed in Photo ProductionLtd v Securicor Ltd (1980) that the doctrine of fundamentalbreach was a rule of construction not a rule of law that isliability for a fundamental breach could be excluded if thewords were sufficiently clear and precise

The House also stated that

bull the decision in Harbuttrsquos Plasticine Ltd v Wayne Tank andPump Co (1970) was not good law In that case the Courtof Appeal had held that as a fundamental breach broughta contract to an end there was no exclusion clause left toprotect the perpetrator of the breach

bull there is no difference between a lsquofundamental termrsquo anda lsquoconditionrsquo C

ON

TR

AC

TL

AW

59

bull a strained construction should not be put on words in anexclusion clause which are clearly and fairly susceptibleof only one meaning

bull where the parties are bargaining on equal terms theyshould be free to apportion risks as they wish

bull the courts should be wary of interfering with the settledpractices of business people as an exclusion clause oftenserves to identify who should insure against a particularloss

Unfair Contract Terms Act 1977

Note ndash the title is misleading

bull The Act does not cover all unfair contract terms onlyexemption clauses

bull The Act covers certain tortious liability as well ascontractual liability The following must be examined

CA

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60

Clauses whichare void

Clauses which are valid only if reasonable

The meaning of lsquoreasonablersquo

Scope of the Act

Scope of the Act

bull s 1 ndash the Act applies to contracts made after 1 February1978 which arise in the course of business lsquoBusinessrsquoincludes a profession and the activities of anygovernment department andor public or localauthority

bull s 5 ndash contracts specifically excluded include contracts ofinsurance contracts for the transfer of land andinternational commercial contracts

bull s 13 ndash the Act limits the effectiveness of clauses thatexclude or restrict liability It also covers clauses whichmake it difficult to enforce a contract for example byimposing restrictive time limits or which excludeparticular remedies In Stewart Gill v Horatio Myer and Co(1992) it was held that a clause restricting a right of set-off or counterclaim was subject to the Act It was alsoheld in Smith v Bush (1990) that it covered lsquodisclaimerswhich restrictively defined a partyrsquos obligation under acontractrsquo In that case a valuation was stated to be givenlsquowithout any acceptance of liability for its accuracyrsquo

Negligence

bull The Act covers contractual tortious and statutory (that isunder the Occupiersrsquo Liability Act 1957) negligence

bull The difference between excluding liability for negligenceand transferring liability for negligence is seen in PhillipsProducts v Hyland Bros (1987) where the contracttransferred liability for the negligence of the driver of ahired excavator to the hirer The driver negligentlydamaged property belonging to the hirer Held ndash theclause was an exclusion clause and was subject to UCTA

CO

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W61

bull In Thompson v Lohan (Plant Hire) (1987) on the otherhand an excavator and driver were hired under the sameconditions The driver negligently killed a third partyHeld ndash the clause transferring liability to the hirer was notan exclusion clause in this case as the third party was ableto sue the hirer It was merely a clause transferring liability

Misrepresentation

bull The difference between excluding liability formisrepresentation and defining the powers of an agent isseen in Cremdean Properties v Nash (1977) where a clausein the special conditions of sale stating that thelsquoparticulars were believed to be correct but theiraccuracy is not guaranteedrsquo was held to be an exclusionclause

bull In Collins v Howell Jones (1980) however the Court ofAppeal held a statement that the lsquovendor does not makeor give any representation or warranty and neither theestate agent or any person in their employment has anyauthority to make or give a representation or warrantywhatsoever in relation to the propertyrsquo had the effect ofdefining or limiting the scope of the agentrsquos authority

Effect of the Act

Clauses which are void

Exclusions of liability

bull for death or personal injury caused by negligence (s 2)

bull in a manufacturerrsquos guarantee for loss or damage causedby negligence (s 5)

bull for the statutory guarantee of title in contracts for the saleof goods or hire purchase (s 6)

CA

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62

bull for the other statutory guarantees in consumer contractsfor the sale of goods or hire purchase (descriptionsatisfactory quality fitness for purpose) (s 6)

bull for similar statutory guarantees in other consumercontracts for the supply of goods for example contractsof hire (s 7)

Clauses which are valid only if reasonable

Clauses excluding liability

bull for loss or damage to property caused by negligence (s 2)

bull for breach of contract in a consumer or standard formcontract (s 3) This includes clauses in such contractsclaiming to render a substantially different performancefrom that reasonably expected or to render noperformance at all (s 3)

bull for statutory guarantees (other than those concerningtitle) in inter-business contracts for the sale of goods andhire purchase (description satisfactory quality andfitness for purpose) (s 6)

bull for statutory guarantees concerning title or possession inother contracts for the supply of goods (for examplehire) (s 7)

bull for other statutory guarantees (description satisfactoryquality fitness for purpose) in other inter-businesscontracts for the supply of goods (s 7)

bull for misrepresentation in all contracts

Note

lsquoConsumer transactionrsquo ndash a person is a lsquoconsumerrsquo where hedoes not make or hold himself out as making the contract in

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W63

the course of business and the other party does make thecontract in the course of business In contracts for the sale ofgoods the goods must also be of a type normally sold forprivate use

bull A controversial interpretation of a lsquoconsumerrsquo was madeby the Court of Appeal in R and B Customs v UnitedDominion Trust (1988) where a car was bought by aprivate company for the business and private use of itsdirectors It was held by the Court of Appeal that it wasnot bought lsquoin the course of a businessrsquo Buying cars wasincidental not central to the business of the company If itis incidental only then the purchase would only be lsquoin thecourse of a businessrsquo if it was one made with sufficientregularity

Note however that in Stevenson v Rogers (1999) the Courtof Appeal refused to apply the R and B Customs Brokersapproach to the question of whether a sale was in the courseof a business for the purpose of s 14(12) of the Sale of GoodsAct 1979

A lsquostandard form contractrsquo occurs when the parties deal onthe basis of a standard form provided by one of them

Reasonableness

In assessing reasonableness the following matters should beconsidered

CA

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64

It is for the person relying on the clause to prove that the clause is reasonable

Section 11 of UCTA 1977

bull Contract terms are to be adjudged reasonable or notaccording to the circumstances which were or oughtreasonably to have been known to the parties when thecontract was made

bull Where a person seeks to restrict liability to a specifiedsum of money regard should be had to the resourceswhich he could expect to be available to him for thepurpose of meeting the liability and as to how far it wasopen to him to cover himself by insurance

bull In determining for the purpose of s 6 or s 7 whether acontract term satisfies the requirement of reasonablenessregard shall be had to

the strength of the bargaining position of the partiesrelative to each other

whether the customer received an inducement toagree to the term and had an opportunity of enteringinto a similar contract with other persons butwithout having to accept similar terms

whether the customer knew or ought reasonably tohave known of the existence and extent of the term

where the exclusion is conditional whether it wasreasonable to expect that compliance with thatcondition would be practicable

whether the goods were manufactured processed oradapted to the special order of the customer(Sched 2)

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W65

Decisions of the courts

In Smith v Bush (1990) and Harris v Wyre Forest DC (1989) theHouse of Lords dealt with two cases involving the validity ofan exclusion clause protecting surveyors who had carriedout valuations of a house The House of Lords decided thatthe clauses were exclusion clauses designed to protect thesurveyors against claims for negligence Lord Griffithsdeclared that there were four matters which should alwaysbe considered

bull were the parties of equal bargaining power

bull in the case of advice would it have been reasonable toobtain advice from another source

bull was the task being undertaken a difficult one for whichthe protection of an exclusion clause was necessary

bull what would be the practical consequences for the partiesof the decision on reasonableness For example wouldthe defendant normally be insured Would the plaintiffhave to bear the cost himself

In inter-business contracts the practices of business peopleare considered

bull In Photo Production v Securicor (1980) the House of Lordsstated that the courts should be reluctant to interfere withthe settled practices of businesses They pointed out thatthe function of an exclusion clause was often to indicatewho should insure against a particular risk

bull In Green v Cade Bros (1983) it was decided that a clauserequiring notice of rejection within three days of deliveryof seed potatoes was unreasonable as a defect could nothave been discovered by inspection within this time buta clause limiting damages to the contract price was

CA

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66

upheld ndash as it had been negotiated by organisationsrepresenting the buyers and sellers and lsquocertifiedrsquopotatoes had been available for a small extra charge (thatis Sched 2 was applied)

bull However in George Mitchell v Finney Lock Seeds Ltd (1983)the buyers suffered losses of pound61000 due to the supply ofthe wrong variety of cabbage seeds The contract limitedthe liability of the seller to a refund of the price paid(pound192) Held ndash the clause was not reasonable Matterstaken into consideration

the clause was inserted unilaterally ndash there was nonegotiation

loss was caused by the negligence of the seller

the seller could have insured against his liability

the sellers implied that they themselves consideredthe clause unreasonable by accepting liability inprevious cases

bull In Overland Shoes Ltd v Schenkers Ltd (1998) the Court ofAppeal upheld a judgersquos ruling that a clause preventingreliance on a lsquoset-offrsquo was not unreasonable on the basisthat it formed part of a set of standard trading conditionsused widely in the shipping industry They had arisenfrom careful negotiation and were generally recognisedin the industry as lsquofair and reasonablersquo

bull In Overseas Medical Supplies Ltd v Orient Transport ServicesLtd (1999) the Court of Appeal summarised the variousfactors which should be looked at in considering the testof reasonableness It confirmed that the lsquoGuidelinesrsquocontained in Sched 2 to UCTA although specificallyintended for consumer contracts for the sale of goods

CO

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CT

LA

W67

should be regarded as relevant wherever the test ofreasonableness is applied

In many of the cases the appeal courts have emphasised thatthe decision on lsquoreasonablenessrsquo is best made by the trialjudge and that the appeal courts should be reluctant tointerfere with the conclusion arrived at at first instance

Unfair Terms in Consumer Contracts Regulations 1999

Based on EU Directive on Unfair Terms in ConsumerContracts The 1999 regulations replaced earlier regulationsmade in 1994

Coverage

The regulations apply to

This will be so even if some other parts of the contract havenot been drafted in advance

bull The regulations do not apply to contracts which relate toemployment family law or succession rights companiesor partnerships terms included in order to comply withlegislation or an international convention

CA

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68

Coverage Fairness Remedies

lsquoany term in a contract between a seller or supplier and a consumer where

the term has not been individually negotiatedrsquo thatis it has been drafted in advance

bull They do however cover insurance policies and contractsrelating to land

bull A lsquobusinessrsquo is defined to include a trade or professionand the activities of any government department or localor public authority

bull A lsquo consumerrsquo means a natural person who is acting for apurpose outside his business

Note ndash they are wider than UCTA in that they cover allterms not only exclusion clauses for example harsh termsconcerning unauthorised overdrafts The regulations arenarrower than UCTA in that they only cover clauses inconsumer contracts which have not been individuallynegotiated The definition of a consumer is also narrower cfR and B Customs v UDT (1988)

Unfairness

Regard must be had to the nature of the goods and servicesprovided the other terms of the contract and all thecircumstances relating to its conclusion

The definition of the main subject matter and the adequacyof the price or remuneration are not subject to the test offairness

CO

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W69

The clause is unfair if contrary to the requirementsof good faith it creates a significant imbalance

in the partiesrsquo rights and obligations to thedetriment of the consumer

lsquoGood faithrsquo is not defined and unlike the earlier (1994)regulations the 1999 regulations do not spell out anyrelevant factors

In Director General of Fair Trading v First National Bank plc(2000) the Court of Appeal emphasised the need foropenness and information which will enable the consumerto make a properly informed choice about entering into thecontract In this case a clause imposing a lsquosurprisingrsquorequirement as to the payment of interest on a loan whichhad been the subject of a court order did not meet therequirement of good faith

The regulations contain a long indicative list of clauses likelyto be unfair These include not only exemption clauses butalso clauses which give the sellersupplier rights withoutcompensating rights for the consumer for example

bull enabling the sellersupplier to raise the price withoutgiving the buyer a chance to back out if the price rise istoo high

bull enabling the sellersupplier to cancel the agreementwithout penalty without also allowing the customer asimilar right

bull automatically extending the duration of the contractunless the customer indicates otherwise within an unreasonably brief period of time

Note also that all terms (including those defining thesubject matter or the price) should be expressed in plainEnglish and any ambiguity should be interpreted in theconsumerrsquos favour

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70

Effect of an unfair term

bull The term itself shall not be binding on the consumer butthe rest of the contract may be enforced

bull The Director General of Fair Trading has a duty toconsider any complaint made to him that a term is unfairHe is empowered to bring proceedings for an injunctionagainst any business using an unfair term It was thispower that was used in the first reported case on theregulations Director General of Fair Trading v FirstNational Bank plc (2000) discussed above For the firsttime a similar power to apply for such an injunction isgiven to certain other lsquoqualifying bodiesrsquo including theData Protection Registrar various Directors General (ofgas supply electricity supply telecommunicationswater services) and the Consumersrsquo Association

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W71

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W73

5 Vitiating elements which render a contract voidable

Significance of a contract being voidable

Thus

bull The innocent party may if he wishes affirm the contract

bull Where the innocent party has not performed thecontract he may refuse to perform and rely on themisrepresentation as a defence

bull The misled party may rescind the contract by

informing the other party or

where a fraudulent party cannot be traced byinforming the police (Car and Universal Finance Co vCaldwell (1965)) or

bringing legal proceedings

The innocent party may set the contractaside if he so wishes

Misrepresentation Duress Undue influence

Certain mistakes (see Chapter 6)

bull It was stated in TSB v Camfield (1995) that the right torescind is that of the representee not the court All thecourt can do is decide whether the representee haslawfully exercised the right to rescind It is not thereforean exercise of equitable relief by the court

Rescission

bull But in Cheese v Thomas (1993) the court declared that thecourt must look at all the circumstances to do what waslsquofair and justrsquo In that case a house which had beenjointly bought had to be sold afterwards at aconsiderable loss The agreement between the twoparties for the purchase of the house was rescinded butthe court held that it was not necessary for the guiltyparty to bear the whole of the loss It was fair and justthat the proceeds should be divided according to thepartiesrsquo respective contributions

bull This contrasts with the normal situation where aproperty has diminished in value and the misled partywould get all his money returned (Erlanger v NewSombrero Phosphate Co (1878))

bull As part of this restoration equity may order a sum ofmoney to be paid to the misled person to indemnify himagainst any obligations necessarily created by the contract

In Whittington v Seale-Hayne (1900) the plaintiffsbreeders of prize poultry were induced to take a lease ofthe defendants premises by his innocent

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74

Restoring the parties as far as is possible to the position they were in before they

entered into the contract

misrepresentation that the premises were in a sanitarycondition Under the lease the plaintiffs covenanted toexecute all works required by any local or publicauthority Owing to the insanitary conditions of thepremises the water supply was poisoned the plaintiffsrsquomanager and his family became very ill and the poultrybecame valueless for breeding purposes or died Inaddition the local authority required the drains to berenewed The plaintiffs sought an indemnity for all theirlosses The court rescinded the lease and held that theplaintiffs could recover an indemnity for what they hadspent on rates rent and repairs under the covenants inthe lease because these expenses arose necessarily out ofthe contract It refused to award compensation for otherlosses since to do so would be to award damages not anindemnity there being no obligation created by thecontract to carry on a poultry farm on the premises or toemploy a manager etc

bull Note ndash rescission even if enforced by the court is alwaysthe act of the defrauded party It is effective from the dateit is communicated to the representor or the police (seeabove) and not from the date of any judgment insubsequent litigation

Rescission is subject to certain barsC

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75

Affirmation of the contract

Lapse of time

Restitution mustbe possible

Third party rights

Affirmation of the contractThe representee may not rescind if he has affirmed thecontract after learning of the misrepresentation either bydeclaring his intention to proceed with the contract or byperforming some act from which such an intention can beinferred In Long v Lloyd (1958) the buyer of a lorryundertook a long journey after discovering serious defects inthe lorry Held ndash he had affirmed the contract

Lapse of timeThis can provide evidence of affirmation where themisrepresentee fails to rescind for a considerable time afterdiscovering the falsity

In cases of innocent misrepresentation lapse of time canoperate as a separate bar to rescission In Leaf v InternationalGalleries (1950) the plaintiff bought a picture which the sellerhad innocently misrepresented to be by Constable Fiveyears later the plaintiff discovered it was not by Constableand immediately sought to rescind the contract Held ndashbarred by lapse of time

Restitution must be possibleA person seeking to rescind the contract must be able andwilling to restore what he has received under it Howeverrescission is an equitable remedy and the court will notallow minor failures in the restoration to the originalposition to stand in the way In Erlanger v New SombreroPhosphate Co (1878) the purchaser had worked phosphatemines briefly Held ndash he could rescind by restoring propertyand accounting for any profit derived from it

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76

Third party rightsThere can be no rescission if third parties have acquiredrights in the subject matter of the contract See Phillips vBrooks (1919) and Lewis v Averay (1972) ndash Chapter 6

Misrepresentation

Representations and terms of a contract

Material statements made during negotiations leading to acontact may be either

bull terms of the contract If these are untrue the untruthconstitutes a breach of contract

bull statements which helped to induce the contractthat is lsquomere representationsrsquo If untrue ndash they arelsquomisrepresentationsrsquo

(For distinctions between terms and lsquomere representationsrsquosee Chapter 3)

Requirements of misrepresentation

It must be

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W77

An untrue statement of fact made by one party tothe contract (representor) to the other (representee)which induces the other to enter into the contract

The requirements ofmisrepresentation

Remedies formisrepresentation

A statement of fact

bull Not a lsquomere puffrsquo that is a statement so vague as to bewithout effect for example describing a house as alsquodesirable residencersquo

bull Not a promise A promise to do something in the futureis only actionable if the promise amounts to a bindingcontract (Kleinwort Benson Ltd v Malaysian Mining CorpnBhd (1989))

bull Not a statement of opinion for example in Bisset vWilkinson (1927) the vendor of a farm which had neverbeen used as a sheep farm stated that in his judgment thefarm would support 2000 sheep Held ndash a statement ofopinion

But a statement expressed as an opinion may be treatedas a statement of fact if the person making the statementwas in a position to know the true facts In Smith v Landand House Prop Corpn (1884) the vendor of a hoteldescribed it as lsquolet to a most desirable tenantrsquo when thetenant had for a long time been in arrears with the rentThe Court of Appeal held there was a misrepresentationof fact

bull Not a statement of intention But if the representor didnot have that intention then it is a misstatement of fact asin Edgington v Fitzmaurice (1885) where the directorsissued a prospectus claiming that the money raised was tobe used to improve the companyrsquos buildings and toexpand its business Their real intention was to pay off thecompanyrsquos debts Held ndash fraudulent misrepresentation

bull Not a statement of law

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78

An active representation

bull The statement will normally be in words but other formsof communication which misrepresent the facts willsuffice as in Horsfall v Thomas (1862) (below)

bull Failure to make a statement however or the non-disclosure of facts will not generally qualify asmisrepresentation

Exceptionsbull Where facts have been selected to give a misleading

impression as in Dimmock v Hallett (1866) where avendor of land stated that farms were let but omitted tosay that the tenants had given notice to quit

bull Where circumstances have changed since arepresentation was made then the representor has a dutyto correct the statement In With v OrsquoFlanagan (1936) itwas stated correctly that a medical practice was worthpound2000 a year but by the time the practice changedhands it was practically worthless Held ndash there was aduty to disclose the changed circumstances

bull Contracts uberrimae fidei (lsquoof the utmost good faithrsquo) forexample

Contract of insurance Material facts must bedisclosed that is facts which would influence aninsurer in deciding whether to accept the proposalor to fix the amount of the premium for example apolicy of life insurance has been avoided because itwas not disclosed that the proposer had already beenturned down by other insurers

Family arrangements In Gordon v Gordon (1816ndash19)a division of property based on the proposition thatthe elder son was illegitimate was set aside upon

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W79

proof that the younger son had concealed hisknowledge of a private marriage ceremonysolemnised before the birth of this brother

Analogous contracts Where there is a duty todisclose not material but unusual facts for examplecontracts of suretyship

It must have been a material inducement

A statement likely to induce a person to contract willnormally be assumed to have done so Moreover if theclaimant can show that he was in fact induced it is nodefence to argue that a reasonable person would have beeninfluenced by the misrepresentation (Museprime PropertiesLtd v Adhill (1990)) There is no inducement however where

bull the misrepresentee or his agent actually knew the truth

bull the misrepresentee was ignorant of the misrepresentationwhen the contract was made In Horsfall v Thomas (1862)the vendor of a gun concealed a defect in the gun(misrepresentation by conduct) The buyer howeverbought the gun without examining it Held ndash theattempted misrepresentation had not induced thecontract

bull the misrepresentee did not allow the representation toaffect his judgment In Attwood v Small (1838) a buyerappointed an agent to check the statement made by theseller as to the reserves in a mine Held ndash not actionablemisrepresentation The buyer had relied on his ownagentrsquos statements not that of the vendor

Note however that

bull provided that the representation was one of theinducements it need not be the sole inducement

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80

bull the fact that the representee did not take advantage of anopportunity to check the statement is no bar to an actionfor misrepresentation

In Redgrave v Hurd (1881) a solicitor was induced topurchase a house and practice by the innocentmisrepresentation of the seller Held ndash he was entitled torescission although he did not examine the documentswhich were available to him and which would haveindicated to him the true state of affairs

bull neither is it contributory negligence not to check astatement made by a vendor (Gran Gelato v Richcliff(1992))

Remedies for misrepresentation

Rescission

Misrepresentation renders a contract voidable ndash see aboveThe Misrepresentation Act 1967 provides that rescission isavailable in relation to

bull lsquoexecutedrsquo contracts for the sale of goods andconveyances of property

bull representations which have been incorporated as a termof the contract

Rescission was not available in these circumstances before1967

Damages

bull There are five ways in which damages may be claimedfor misrepresentation It seems likely that in future thenormal ground for damages will be the

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W81

Misrepresentation Act 1967 but there are still cases wheredamages can only be claimed at common law if at all

bull Note ndash rescission and damages are alternative remediesin many cases but if the victim of fraudulent ornegligent misrepresentation has suffered consequentialloss he may rescind and sue for damages

bull Damages can be claimed on different bases according tothe kind of misrepresentation that was committed

Damages in the tort of deceit for fraudulent misrepresentationIt is up to the misled party to prove that themisrepresentation was made fraudulently that isknowingly without belief in its truth or recklessly as towhether it be true or false (Derry v Peek (1889))

The burden of proof on the misled party is a heavy one

Damages in the tort of negligence Victims of negligent misrepresentation may be able to sueunder Hedley Byrne v Heller amp Partners (1963) Themisrepresentee must prove (1) that the misrepresentorowed him a duty to take reasonable care in making therepresentation that is there must be a lsquospecial relationshiprsquo(2) that the statement had been made negligently

Damages under s 2(1) of the Misrepresentation Act 1967Section 2(1) of the Misrepresentation Act 1967 provides thatwhere a person has entered into a contract after amisrepresentation has been made to him by another partythereto and as a result of it has suffered loss lsquothen if themisrepresentor would be liable for damages if it had beenmade fraudulently he will be so liable notwithstanding thatthe misrepresentation was not made fraudulently unless heproves that he had reasonable grounds to believe and did

CA

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82

believe up to the time the contract was made that the factsrepresented were truersquo

Note that this is a more beneficial remedy for themisrepresentee as he only need prove that the statement isuntrue It is for the misrepresentor to prove that he had goodgrounds for making the statement and the burden of proofis a heavy one In Howard Marine and Dredging Co Ltd vOgden (1978) the owner of two barges told the hirer that thecapacity of the barges was 1600 tons He obtained thesefigures from the Lloydrsquos list but in this case the Lloydrsquos listwas incorrect The court held that he did not have goodgrounds for this statement he should have consulted themanufacturerrsquos specifications which should have been in hispossession

Assessment of damages

The Court of Appeal confirmed in Royscot Trust v Rogerson(1991) that damages under s 2(1) of the MisrepresentationAct should also be awarded on the reliance basis because ofthe lsquofiction of fraudrsquo in the wording of the Act

Remoteness of damage

The Court of Appeal also held in that case because of thelsquofiction of fraudrsquo that the rules of remoteness whichnormally apply only to the tort of deceit should be appliedunder s 2(1)

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W83

Damages in the tort of deceit and the tortof negligence are assessed on the tortious basis of reliance that is the claimant is entitled to be

put in the position he was in before the tort was committed

(In contract and in all torts other than deceit the losses mustbe lsquoreasonably foreseeablersquo)

bull In Royscot Trust v Rogerson (1991) a customer arranged toacquire a car on hire purchase from a car dealer Thefinance was to be provided by a finance company theRoyscot Trust which insisted on a deposit of 20 Thedealer falsified the figures in order to indicate a deposit of20 as required Some months later the customerwrongfully sold the car thus depriving the financecompany of its property The finance company sued thedealer under s 2(1) of the Misrepresentation Act It washeld by the Court of Appeal that the finance companycould recover damages from the car dealer to cover theloss of the car since the loss followed themisrepresentation The remoteness rules applicable to thetort of deceit would be applied and the loss did not needto be foreseeable

Controversy has followed this decision as the tort ofdeceit to which this rule only previously applied isdifficult to establish and involves moral culpability onthe part of the defendant It has now been extended to anaction which is relatively easy to establish (see HowardMarine and Dredging v Ogden) and may only involvecarelessness Some doubts as to whether this was thecorrect approach were expressed obiter by the House ofLords in Smith New Court Securities Ltd v ScrimgeourVickers (Asset Management) Ltd (1996) but for the timebeing Royscot v Rogerson remains good law

CA

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84

That is damages would be awarded to coverall losses which flow directly from the

untrue statement whether or not those losses were foreseeable

bull Further problems are caused by the decision of the Courtof Appeal in East v Maurer (1991) a case in the tort ofdeceit where it was held that lsquoall damages flowingdirectly from the fraudrsquo would cover damages for somedegree of loss of profit ndash a heading previously consideredto be appropriate only to expectation damages incontract It is a matter for speculation whether the courtswill apply this decision to cases under theMisrepresentation Act and bring loss of profit under theheading of reliance loss on the basis that all losses whichflow directly from the misrepresentation should berecoverable

bull A generous interpretation of s 2(1) of the 1967 Act hadalso been applied by the court in Naughton v OrsquoCallaghan(1990) where reliance damages had been awarded tocover not only the difference between the value of the coltand the value it would have had if the statements madeabout it were correct (the quantification rule for breach ofcontract) but also the cost of its maintenance since thesale

It has been alleged that these three cases swell the amount ofdamages which can be awarded under the MisrepresentationAct to a greater extent than intended by Parliament and thatthe damages available for misrepresentation can nowexceed those available for breach of contract

Damages for wholly innocent misrepresentationDamages cannot be claimed for a misrepresentation whichis not fraudulent or negligent but

bull an indemnity may be awarded (see above)

bull damages in lieu of rescission may be awarded under s 2(2) of the Misrepresentation Act 1967 C

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85

In William Sindall v Cambridgeshire CC (1994) the Court ofAppeal stated (obiter) that where the court is consideringwhether to award damages in lieu of rescission threematters should be taken into consideration

the nature of the misrepresentation

the loss which would be caused to the representee ifthe contract were upheld

the hardship caused to the misrepresentor if the con-tract were rescinded The Court of Appeal also statedthat the damages should resemble damages forbreach of warranty

bull lsquodamages in lieursquo can it seems be awarded even if one ofthe bars to recision apply (Thomas Witter Ltd v TBPIndustries (1996))

bull where the misrepresentation has become a term of thecontract the misrepresentee can sue for damages forbreach of contract as an alternative to damages formisrepresentation

Duress

A common law doctrine

Duress to the person

This requires actual or threatened violence to the personOriginally it was the only form of duress recognised by thelaw

CA

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86

Duress involves coercion

Duress to goods

bull Threat of damage to goods ndash traditionally this has notbeen recognised by the law but in view of thedevelopment of economic duress it is assumed thatduress to goods would today be a ground for relief

Economic duress

Requires

Economic duress led to rescission of a contract in UniverseTankships of Monrovia v ITWF (1983) where a union hadlsquoblackedrsquo a tanker and refused to let it leave port untilcertain moneys had been paid The House of Lordsconsidered that this amounted to economic duress andordered return of the money

It has been stated that economic duress requires

Compulsion or coercion of the will

In Pau On v Lau Yiu Long (1980) Lord Scarman listed thefollowing indications of compulsion or coercion of the will

bull did the party coerced have an alternative course open tohim

bull did the party coerced protest

bull did the party coerced have independent advice

bull did the party coerced take steps to avoid the contract

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W87

Compulsion of the will An illegitimate threat

Illegitimate pressure

There must be some element of illegitimacy in the pressureexerted for example a threatened breach of contract Theillegitimacy will normally arise from the fact that what isthreatened is unlawful In CTN Cash and Carry v Gallaher(1994) however the Court of Appeal accepted obiter that anoutrageous but technically lawful threat could amount toduress This possibility has not so far been developed in anylater cases

Economic duress is often pleaded together with lack ofconsideration in cases where a breach of contract isthreatened by the promisor unless he receives additionalpayment

bull In Atlas Express v Kafco (1989) Kafco a small companywhich imported and distributed basketware had acontract to supply Woolworths They contracted withAtlas for delivery of the basketware to Woolworths Thecontract commenced then Atlas discovered they hadunderpriced the contract and told Kafco that unless theypaid a minimum sum for each consignment they wouldcease to deliver Kafco were heavily dependent on theWoolworths contract and knew that a failure to deliverwould lead both to the loss of the contract and an actionfor damages At that time of the year they could not findan alternative carrier and agreed under protest to makethe extra payments Atlas sued for Kafkorsquos non-paymentHeld ndash the agreement was invalid for economic duressand also for lack of consideration

bull Cf Williams v Roffey Bros (1989) ndash Chapter 2

The following threats are probably not illegitimate (subjectto the possibility raised by CTN Cash and Carry v Gallaher(1994) discussed above)

CA

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88

bull a threat not to enter into a contract

bull a threat to institute civil proceedings

bull a threat to call the police

Note ndash not all threatened breaches of contract will amount toeconomic duress It will only do so when the threatenedparty has no reasonable alternative open to him The normalresponse to a breach of contract is to sue for damages

Remedies

bull In North Ocean Shipping Co v Hyundai Construction Co TheAtlantic Baron (1979) the court found economic duressbut refused rescission on the ground that the plaintiff hadaffirmed the contract

Undue influence

An equitable doctrine

bull Undue influence is based on the misuse of a relationshipof trust or confidence between the parties Where foundit renders a contract voidable The innocent party willneed to apply to the court for rescission of the contract(see above)

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Pressure not amounting to duress at common lawwhereby a party is excluded from the exercise of

free and independent judgment

Duress renders a contract voidable Rescission willnormally be sought from the courts See above

Contracts where undue influence is presumed

For example

bull Contracts between certain relationships

parent and child

trustee and beneficiary

solicitor and client

doctor and patient

religious adviser and disciple

bull Where there has been a long relationship of confidenceand trust between the parties

For example between husband and wife or where oneparty had been accustomed to rely for guidance andadvice on the other In Lloyds Bank v Bundy (1975) MrBundy an elderly west country farmer on the advice ofthe local Lloyds Bank assistant manager granted a chargeto the bank over the family farm to guarantee his sonrsquos

CA

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90

Contracts where undue influence

is presumed

Contracts where actual undue

influence must be proved

Contracts induced by undue influence are of two kinds

The contract must be manifestly disadvantageous

to the weaker party

Contracts need not be manifestly disadvantageous

to the weaker party

indebtedness to the bank Mr Bundy had all his liferelied on Lloyds Bank for financial advice the court setaside the charge on the ground of undue influence on thepart of the bank

Note ndash a bank will not be presumed to exert undueinfluence in normal circumstances

In Credit Lyonnais Bank Nederland NV v Burch (1997) therelationship between an employer and a junior employee(who was persuaded to put up her own house as securityfor the businessrsquos overdraft) was held to be one of undueinfluence

The stronger party can disprove undue influence byshowing that

bull full disclosure of all material facts was made

bull the consideration was adequate

bull the weaker party was in receipt of independent legaladvice

Contracts where actual undue influence is proved

The burden of proof lies on the claimant to show that suchinfluence did exist and was exerted

Effect of undue influence on a third party

In Barclays Bank v OrsquoBrien (1993) Mrs OrsquoBrien had signed aguarantee which used the jointly owned matrimonial homeas security for a loan made to her husbandrsquos business Herhusband had told her it was for a maximum of pound60000 butin fact it was for pound130000 Mrs OrsquoBrien had not been advisedby the bank to consult an independent solicitor The Houseof Lords held that there was no undue influence in this casebut there was misrepresentation on the part of the husband

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W91

They further held that where there was undue influence ormisrepresentation or other legal wrong then the injuredpartyrsquos right to have the transaction set aside would beenforceable also against the third party provided the thirdparty had actual or constructive notice of the wrong Suchnotice would arise where

bull the parties were in an emotional relationship forexample co-habitees (heterosexual or homosexual) orchild and aged parents

bull one party was undertaking a financial liability on behalfof the other which was not to her or his advantage

The court also held that in the above situation the third partycould discharge his duty by making clear to the partyconcerned the full nature of the risk he or she is taking onfor example

bull by conducting a personal interview or

bull urging independent advice

Note ndash this doctrine of constructive notice applies to sureties(guarantors) but does not apply where a bank makes a jointloan to both parties as the facts in that situation do not meetthe requirements set out in Barclays Bank v OrsquoBrien See CIBCMortgages v Pitt (1993)

Note

bull A failure by a solicitor to give proper advice cannot beheld against a bank (even if the bank knows that thesolicitor is acting for both the borrower (for example thehusband) and the guarantorsurety (for example thewife)) ndash see Royal Bank of Scotland v Etridge (No 2) (1998)

CA

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92

bull Once undue influence or misrepresentation has beenfound the whole contract is avoided it cannot be upheldin part ndash TSB Bank plc v Camfield (1995)

bull Damages are not available as a remedy for duress orundue influence

CO

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W93

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6 Mistake

There is much disagreement concerning the effect ofmistake on a contract There are many reasons for thisconfusion as to which terms to use a large number of caseswhich can be interpreted in different ways no recentdecisive House of Lords decisions on the subject theintervention of equity

Terminology

Different terms are used by Cheshire and Anson to describethe same kind of mistake and you should ascertain whichterms are used in your textbook

The terms used by Cheshire are used in this LawCard

CHESHIRE ANSON Effect

Same mistake Common Mutual May nullifymade by both mistake mistake agreementparties

Parties at Mutual Unilateral Negativescross-purposes mistake mistake agreement

Parties atcross-purposesbut one party Unilateral Unilateral Negativesknows that mistake mistake agreementthe other is mistaken

Effect of a mistake

If the contract is rendered void then the parties will bereturned to their original positions and this may defeat therights of innocent third parties who may have acquired aninterest in the contract

The reluctance of the courts to develop the common lawdoctrine of mistake is probably due to the unfortunateconsequences for third parties that can result from holdinga contract void Equity has however intervened to producemore flexibility as noted below

CA

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96

In common mistakes the parties are agreed but both are mistaken

In mutual and unilateral mistakes the parties may not have reached agreement and these mistakes are sometimes dealt with

under the heading of agreement

The general rule is that a mistake has no effect on a contract but certain mistakes of a fundamental nature sometimes called

operative mistakes may render a contract void at common law

Operative mistakes

Common mistakes

bull At common law this may render the contract void thatis the contract has no legal effect it is unenforcable byeither party and title to property cannot pass under it

bull In equity a more flexible approach has developedcontracts containing certain common mistakes have beentreated as voidable In setting aside such contracts thecourts have a much wider control over the terms it canimpose on the parties

In Bell v Lever Bros (1932) it was stated that to nullify theagreement the lsquomistake must go to the root of the contractrsquo

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W97

Commonmistakes

re a fundamentalmatter for

example resextincta res sua

the quality of the subject matter

Mutualmistakes

re identity ofsubject matter

of contract

Unilateralmistakes

re terms ofcontract re

identity of otherparty to contract

The parties are agreed but they are both under the same misapprehension If this

misapprehension is sufficiently fundamentalit may nullify the agreement

Lever Bros agreed to pay two directors of a subsidiarycompany substantial sums of money in compensation forloss of office while unaware of the fact that they hadengaged in irregular conduct which would have allowedthem to be dismissed without compensation Lever Brosasked the court to order the return the compensation paid onthe ground that it had been paid as a result of a commonmistake The House of Lords held that the common mistakeconcerning the need to pay compensation was notlsquosufficiently fundamentalrsquo to render the contract void

Common mistakes lsquosufficiently fundamentalrsquo to render a

contract void

A common mistake as to the existence of the subject matter(res extincta)bull In Galloway v Galloway (1914) the parties believing they

were married entered into a separation agreement Laterthey discovered that they were not validly married Held ndashthe separation agreement was void for a common mistake

bull In Strickland v Turner (1852) the court declared void onthe grounds of a common mistake a contract to purchasean annuity on the life of a person who had already died

bull In Couturier v Hastie (1856) a buyer bought a cargo ofcorn which both parties believed to be at sea the cargohad however already been disposed of Held ndash thecontract was void

bull Section 6 of the Sale of Goods Act 1979 declares thatlsquoWhere there is a contract for the sale of specific goodsand the goods without the knowledge of the seller haveperished when the contract is made the contract is voidrsquo

CA

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98

However in McRae v Commonwealth Disposals Commission(1951) the commission sold to McRae the right to salvagea tanker lying on a specified reef There was no such reefof that name nor was there any tanker The court foundthat there was a valid contract and that the commissionhad impliedly guaranteed the existence of the tanker Thecase could be distinguished from the Australianequivalent of s 6 on the ground that there never had beena tanker and it had therefore not perished

Whether a contract is void or valid depends on theconstruction of the contract that is even if the subjectmatter does not exist the contract will be valid

if performance was guaranteed or

if it was the purchase of a lsquochancersquo

Otherwise the contract would be void

Mistake as to title ndash res sua ndash that is the thing sold alreadybelongs to the buyerbull In Cooper v Phibbs (1867) Cooper not realising that a

fishery already belonged to him agreed to lease it fromPhibbs Held ndash the contract was void

Mistake as to the possibility of performing the contractbull In Sheik Bros Ltd v Ochsner (1957) a contract was held

void as the land was not capable of growing the cropcontracted for

bull In Griffith v Brymer (1903) a contract to hire a room toview the coronation of Edward VII which was madeafter the procession had been cancelled was held void(Commercial impossibility) C

ON

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99

Mistake as to the quality of the subject matterLords Atkin and Thankerton both insisted in Bell v Lever Brosthat to render a contract void the mistake must go to thelsquoroot of the contractrsquo

bull It has been argued that if the mistake in Bell was notsufficiently fundamental to render a contract void then itis highly unlikely that any mistake concerning qualitywould do so

bull Similarly in Leaf v International Galleries (1950) whereboth parties mistakenly believed that a painting was byConstable the Court of Appeal stated that the contractwas not void for common mistake

bull In Solle v Butcher (1950) the Court of Appeal declined todeclare void a lease which both parties believed was notsubject to the Rent Acts A similar decision was reachedin Grist v Bailey (1967) where the parties both believedthat a house was subject to a protected tenancy

However Lord Justice Steyn in Associated Japanese Bank vCredit du Nord (1988) stated that not enough attention hadbeen paid to speeches in Bell v Lever Bros which did indicatethat a narrow range of mistakes in quality could render acontract void for example Lord Atkinrsquos statement that lsquoacontract may be void if the mistake is as to the existence ofsome quality which makes the thing without that qualityessentially different from the thing it was believed to bersquo Hegave as an example ndash if a horse believed to be sound turnsout to be unsound then the contract remains valid but if ahorse believed to be a racehorse turns out to be a carthorsethen the contract is void

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100

Equity

The role of equity according to this view is supplementarydesigned to relieve the limitations of the common law

bull Rescission on terms was granted by the Court of Appealin Solle v Butcher (1950) (see above) The court rescindedthe lease but gave the tenant the option of staying thereon terms of his paying the extra rent which the landlordcould have charged in view of the improvements

bull Rescission on terms was also granted in Grist v Bailey(1967) where a house was sold in the mistaken belief thatit had a protected tenancy and in Laurence v LexcourtHoldings (1978) where there was a common mistake withregard to planning permission

bull Rescission without terms was granted in Magee v PennineInsurance Co (1969) where an agreement by an insurancecompany to meet a claim was rescinded because theparties were unaware that it was based on a policy whichwas voidable due to a misrepresentation by the assured

bull In William Sindall plc v Cambridgeshire CC (1994) Evans LJsuggested that whereas the common law only recognisedmistakes as to the subject matter of the contract equitywould recognise a lsquowider and perhaps unlimitedcategory of common mistakersquo In Clarion Ltd v NationalProvident Institution (2000) however Rimer J held that

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W101

Lord Justice Steyn in Associated Japanese Bank v Credit du Nord (1988) stated that a court will first examine whether a

contract is void at common law if it is not then itwill examine whether equity will grant rescission

equity would only intervene where the mistake was as tothe terms of the contract or its subject matter Equity didnot provide relief for a lsquobad bargainrsquo

Mutual and unilateral mistakes

The courts adopt an objective test in deciding whetheragreement has been reached It is not enough for one of theparties to allege that he was mistaken

Mistake can negate consent in the following cases

Mutual mistakes concerning the identity of the subject matter

bull In Raffles v Wichelhaus (1864) a consignment of cotton wasbought to arrive lsquoex Peerless from Bombayrsquo Two shipsboth called Peerless were due to leave Bombay at aroundthe same time Held ndash no agreement as the buyer wasthinking of one ship and the seller was referring to theother ship

bull Similarly there was no agreement in Scriven Bros vHindley amp Co Ltd (1913) where the seller sold lsquotowrsquo andthe buyer bought lsquohemprsquo Again there was an ambiguityas both lots were delivered under the same shippingmark and the catalogue was vague

CA

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102

In these cases the parties are at cross-purposesbut there must have been some ambiguity

in the situation before the courts willdeclare the contract void

These mistakes negate consentthat is they prevent the formation of an agreement

bull But in Smith v Hughes (1871) the court refused to declarevoid an agreement whereby the buyer had thought hewas buying old oats when in fact they were new oats asthe contract was for the sale of lsquooatsrsquo The mistake relatedto the quality not the identity of the subject matter

Unilateral mistake concerning the terms of the contract

bull In Hartog v Colin and Shields (1939) the sellers mistakenlyoffered to sell goods at a given price per pound whenthey intended to offer them per piece All the preliminarynegotiations had been on the basis of per piece Thebuyers must have realised that the sellers had made amistake The contract was declared void

bull In Smith v Hughes however the contract was for the saleof lsquooatsrsquo not lsquoold oatsrsquo it would only have been void iflsquoold oatsrsquo had been a term of the contract

Unilateral mistake as to the identity of other parties to the

contract

There are a number of contradictory cases and theoriesunder this heading

Traditionally a distinction is made between mistakes as toidentity and mistakes as to attributes (for example creditworthiness)

bull In Cundy v Lindsay (1878) a Mr Blenkarn ordered goodsfrom Lindsay signing the letter to give the impressionthat the order came from Blenkiron amp Co a firm knownto Lindsay amp Co Held ndash the contract was void Lindsay

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W103

Here one party has taken advantage of the other partyrsquos error

amp Co had only intended to do business with Blenkiron ampCo There was therefore a mistake concerning the identityof the other party to the contract

bull In Kingrsquos Norton Metal Co v Edridge Merrett amp Co Ltd(1872) on the other hand a Mr Wallis ordered goods onimpressive stationery which indicated that the order hadcome from Hallam amp Co an old established firm withbranches all over the country Held ndash the contractbetween Kingrsquos Norton Metal Co and Wallis was notvoid The sellers intended to do business with the writerof the letter they were merely mistaken as to hisattributes that is the size and credit worthiness of hisbusiness

bull In Boulton v Jones (1857) the defendant sent an order forsome goods to a Mr Brocklehurst unaware that he hadsold the business to his foreman the plaintiff Theplaintiff supplied the goods but the defendant refused topay for them as he had only intended to do business withBrocklehurst against whom he had a set off Held ndash therewas a mistake concerning the identity of the other partyand the contract was therefore void

However the cases all concerned contracts negotiated at adistance

CA

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104

From the above three cases it would seem that acontract is void if the mistaken party intended to do

business with another specific person and the identity of that other person was important to him

bull In Phillips v Brooks (1919) a jeweller sold a gold ring anddelivered it on credit to a customer who had come intohis shop and had falsely claimed to be Sir GeorgeBullough a well known and wealthy man Held ndash thecontract was valid The jeweller had intended to dobusiness with the person in his shop

bull In Lewis v Averay (1972) a rogue claimed to be RichardGreene the film actor and produced a pass to Pinewoodstudios to verify this He was allowed to drive away a carin return for a cheque and subsequently resold the car forcash to Averay The cheque bounced and the sellerclaimed the return of the car on the ground that he wasmistaken as to the identity of the buyer Held ndash thecontract was valid The seller must be presumed to haveintended to deal with the person physically in the roomwith him Averay kept the car

There are two cases however where the plaintiffs were ableto establish a mistake as to the identity of a person in theirpresence

bull In Ingram v Little (1961) two sisters sold a car and handedit over against a worthless cheque to a person whoclaimed to be a Mr Hutchinson of Stanstead HouseCaterham They only did so after one of them hadchecked that there was a man of that name who lived atthat address The Court of Appeal held the contract void C

ON

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105

Where the parties negotiate in person the samerules apply but there is a presumption that the inno-cent party intended to do business with the person

physically in his presence

They considered that the sisters had done enough toestablish that they only intended to deal with MrHutchinson

This case has been greatly criticised as it is difficult toreconcile with Phillips v Brooks and Lewis v Averay

bull In Sowler v Potter (1940) the lease of a cafeacute was granted toPotter who had previously been convicted of keeping adisorderly cafe under the name of Robinson The courtheld that the contract was void because of the lessorrsquosmistaken belief that Potter was not Robinson This casehas also been much criticised and doubted as it did notseem that Sowler had intended to do business with anyother identifiable person The contract could in any casehave been set aside for misrepresentation

The contract would in most cases be voidable in any case formisrepresentation where one party has misled the otherwith regard to his identity The advantage of having the contract declared void for mistake is to avoid the bars torescission

See Chapter 5 pp 75ndash76

Mistake as to the nature of the document signed

Defence of non est factum

bull The scope of this defence has been limited since thedecision in Saunders v Anglia Building Society (Gallie v Lee)(1971) where an old lady was persuaded by her nephewto sign a document conveying her house to her nephewrsquosfriend She had believed that she was signing a deed ofgift to her nephew She had not read the documentbecause her glasses were broken It was held that thedocument was valid It was stated that

CA

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106

It is also thought that it will only protect a person who isunder some disability The defence did succeed in LloydsBank v Waterhouse (1990) where the defendant who wasilliterate signed a guarantee of his sonrsquos debt to the bankThe father thought that the guarantee covered the purchaseprice of a farm but in fact it covered all his sonrsquosindebtedness to the bank It was held that the effect of thedocument was fundamentally different from what it wasbelieved to be There was no negligence and the contractwas therefore void

In UDT Ltd v Western (1976) it was held that these samerules applied to cases where a person had signed a formbefore all the details required by the form had been entered

Mistake in equity

The narrow approach taken by the common law towardsremedies for mistake (that is that it renders the contractvoid) is supplemented by the more flexible approach ofequity The following remedies may be available in equity

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W107

Rescission RectificationRefusal of

specificperformance

The signed document must be fundamentally different in effect from what it was thought to be

The signatory must prove that he had not been negligent in signing the document

Rescission

See common mistake (above)

Rectification

Where there has been a mistake not in the actual agreementbut in reducing it to writing equity will order rectification ofthe document so that it coincides with the true agreement ofthe parties

Necessary conditionsbull The document does not represent the intention of both

parties or

bull one party mistakenly believed a term was included in thedocument and the other party knew of this error InRoberts amp Co Ltd v Leicestershire CC (1961) the completiondate of a contract was rectified at the request of one partybecause it was clear that the other party was aware of theerror when the contract was signed

If the document fails to mention a term which one partybut not the other had intended to be a term of thecontract there is no case for rectification

bull There must have been a concluded agreement but notnecessarily a legally enforceable contract In Joscelyne vNissen (1970) a father and daughter agreed that thedaughter should take over the car hire business Inreturn the father would continue to live in the house andthe daughter would pay all the household expenses Thislast provision was not included in the written contractHeld ndash the contract should be rectified to include it

Note ndash a document which accurately records a prioragreement cannot be rectified because the agreement wasmade under some mistake (Rose v Pym above) Equityrectifies documents not agreements

CA

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108

Rectification is an equitable remedy and is available at thediscretion of the court Lapse of time or conflict with thirdparty rights may prevent rectification

Refusal of specific performance

bull In Webster v Cecil (1861) the defendant having previouslyrefused the plaintiffrsquos offer of pound2000 for his land wrote tothe plaintiff offering to sell it to him for pound1250 instead ofpound2250 as he had intended The plaintiff accepted theoffer Specific performance was refused as the plaintiffmust have been aware of the error (unilateral mistake)

bull Where there is no blame on the claimant the situation ismore difficult In Malins v Freeman (1837) the defendanthad mistakenly bought the wrong property at an auctionSpecific performance was refused In Tamplin v James(1879) however the court ordered specific performancewhere the defendant had bid for a property under anerror as to its true extent Presumably being forced to buya totally different property from the one he intendedwould have caused greater hardship than being forced tobuy a property whose dimensions differed from hisexpectations

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W109

Specific performance will be refused when the contract is void at common law Equity may also

refuse specific performance where a contract is validat law but only lsquowhere a hardship amounting toinjustice would have been inflicted upon him by

holding him to his bargainrsquo (Tamplin v James (1879))

7 Illegality and capacity

Illegal contracts are classified in different ways by differentauthorities In this chapter a distinction is drawn betweencontracts which involve the commission of a common lawor statutory offence and those which are void as beingcontrary to public policy

Illegality

The main issue with regard to illegal contracts is the effectof illegality on a contract The most often examined topicwith regard to contracts which are declared void ongrounds of public policy is contracts in restraint of trade

Illegal contracts

Contracts illegal by statute

bull Statute may declare a contract illegal for example theCompetition Act 1998

bull Statute may prohibit an act but declare that it shall noteffect validity of contract for example the ConsumerProtection Act 1987

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W111

Illegal contracts Contracts void

against public policy

Contracts prohibited by statute

Contracts illegal at common law

bull Statute may prohibit an act but not stipulate its effect onthe contract The status of the contract will in this casebe a matter of interpretation for the court In ReMahmoud and Ispahani (1921) the court decided that astatement that lsquoa person shall not buy or otherwise dealin linseed oil without a licencersquo was a prohibition and acontract entered into by a person without a licence wastherefore void

bull The courts are reluctant to imply a prohibition when thisis not clearly indicated in the statute In Hughes v AssetManagers (1995) the court held a contract valid despitethe fact that a document had not been signed by a personauthorised to do so as required by statute

Contracts illegal at common law

bull An agreement to commit a crime a tort or a fraud forexample defraud the rating authority (Allen v Roscous(1676)) to publish a libel (Clay v Yates)

bull An agreement to defraud the Inland Revenue (Napier vBusiness Associates (1951))

bull Contracts damaging to the countryrsquos safety or foreignrelations

bull Contracts interfering with the course of justice forexample contracts to give false evidence

bull Contracts leading to corruption in public life (Parkinson vRoyal College of Ambulance (1925))

bull Contracts tending to promote sexual immorality (Pearcev Brooks (1866))

CA

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112

Effects of illegality

Contracts illegal as formed

In Pearce v Brooks (1866) the owner of a coach of unusualdesign was unable to recover the cost of hire from aprostitute who to his knowledge had hired it in order toattract clients

In Parkinson v Royal College of Ambulance (1925) Parkinsonwas unable to recover the money he had donated to thedefendants on the understanding that they would obtain aknighthood for him

Exceptionsbull Where the parties are not in pari delicto (that is not

equally at fault) for example where one party isunaware of the illegal nature of the contract or has beeninduced to enter into it by fraudulent misrepresentationor is the party the law was attempting to protect forexample a tenant who has paid an illegal premium(Kiriri Cotton Co v Dewani (1960))

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W113

Contracts illegal as formed

Contracts illegal in their performance

Such contracts are void ab initio there can be no action for breach of contract

Money paid or property transferred under the contract cannot be recovered

bull Where the transferor genuinely repents and repudiatesthe contract before performance In Tribe v Tribe (1995)money was transferred to a son in order to avoid thefatherrsquos creditors At the end of the day the creditorswere all paid in full and the father was allowed to cite theoriginal reason for the transfer in order to rebut thepresumption of advancement (which would have meantthat his son could keep the shares) He had withdrawnfrom the illegal purpose before performance

In Bigos v Boustead (1951) however the court was notconvinced that the plaintiff had genuinely repented

bull Where the transferor can frame his claim without relyingon the contract In Bowmakers v Barnet Instruments (1945)the plaintiffs were able to rely on an action in the tort ofconversion to recover goods delivered under an illegalhire purchase contract

Similarly in Tinsley v Milligan (1993) both parties hadcontributed money towards the purchase of a house putin the name of Tinsley alone in order to allow Milligan tomake various social security claims When Milligan suedfor the return of the money it was argued that theagreement had been entered into for an illegal purposeand that the public conscience lsquowould be affronted byrecognising rights created by illegal transactionsrsquo TheHouse of Lords held however that a resulting trust hadbeen created in favour of Milligan by the contribution tothe purchase price Milligan therefore could rely on theresulting trust and had no need to rely on the illegalagreement

This case shows (a) that the rule applies to equity as wellas to common law (b) the test of lsquoaffront to the publicconsciencersquo previously used by the Court of Appeal is nolonger good law

CA

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114

bull Where part of the contract is lawful the court will notsever the good from the bad In Napier v National BusinessAgency (1951) certain payments were described aslsquoexpensesrsquo in order to defraud the Inland Revenue Thecourt refused to enforce payment of the accompanyingsalary as the whole contract was tainted with the illegality

Note ndash property can pass under an illegal contract as in Singv Ali (1960)

Contracts illegal in their performance

A claim by the innocent party to enforce the contract in thesecases is strong

bull In Marles v Philip Trant (1954) the defendant sold winterwheat described as spring wheat without anaccompanying invoice as required by statute Held ndash theplaintiff could sue for damages for breach of contractThe contract was illegal in its performance but not in itsinception

bull In Strongman v Sincock (1955) Sincock failed to getlicences which were needed to modernise some houseswhich belonged to him and refused to pay for the workon the basis that the contracts were illegal Held ndashStrongman could not sue on the illegal contracts butcould sue Sincock on his collateral promise to obtain thelicences

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W115

The illegality may only arise during the performance of a contract for example

a carrier may break the law by exceeding the speed limit whilst delivering goods

belonging to a client He will be punished but the contract will not necessarily be void

bull In Archbolds v Spanglett (1961) Spanglett contracted tocarry Archbolds whisky in a van which was not licensedto carry any goods other than his own Archbold wasunaware of this and could therefore recover damages forbreach of contract

But in Ashmore Benson Pease amp Co v Dawson Ltd (1973)the other party knew of the overloading of the lorry andcould not therefore recover damages He hadparticipated in the illegality

bull Even the guilty party may enforce the contract if theillegality is incidental

In Shaw v Groom (1970) a landlord failed to give histenant a rent book as required by law Held ndash he could suefor the rent The purpose of the statute was to punish thelandlordrsquos failure to provide a rent book not to render thecontract void

In St John Shipping v Rank (1957) a ship owner who hadoverloaded his ship in contravention of a statute was ableto recover freight

Contracts void at common law on grounds of publicpolicy

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116

Contracts damaging to theinstitution of marriage

For example contracts inrestraint of marriage

marriage brokerage contractscontracts for future separation

(pre-nuptial agreements)

Contracts made after orimmediately beforeseparation are valid

Contracts to oust thejurisdiction of the courts

However arbitrationagreements are valid

In Esso Petroleum v Harpers Garage (1968) it was stated thatthe court will consider

bull whether the contract is in restraint of trade A contract isin restraint of trade if it restricts a personrsquos liberty tocarry on his trade or profession Certain restraints havebecome acceptable over the years for example lsquotiedhousesrsquo restrictive covenants in leases sole agency orsole distributorship agreements

bull whether it should nevertheless be enforced because itprotects a legitimate interest and is reasonable Theonus of proving reasonability is on the promisee Arestraint to be permissible must be no wider than isnecessary to protect the relevant interest of thepromisee

Categories of contracts in restraint of trade

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W117

Restraints onemployees

Restraints on thevendors of a business

Exclusive dealingagreements

A contract in restraint of trade is prima facie void but thecourts will now uphold the restriction if it is shown that

bull the restraint protects a legitimate interest

bull the restraint is reasonable between the parties

bull the restraint is reasonable as regards the interest of thepublic

Contracts in restraint of trade

Restraints on employeesThe restraint is void unless the employer can show

bull That it is necessary to protect a proprietary interest forexample the trade secrets of a works manager in Foster vSuggett (1918) the trade connections of a solicitorrsquosmanaging clerk in Fitch v Dewes (1921)

A restraint merely to prevent competition will not beenforced

In Eastham v Newcastle United FC (1964) the courtaccepted that the proper organisation of football was avalid matter for clubs to protect but found the lsquoretainand transfer systemrsquo unreasonable

bull That the restraint is no greater than is necessary toprotect the employerrsquos interest in terms of time andarea

In Scorer v Seymore-Jones (1966) the court upheld arestriction of 10 miles within branch A at which theemployee had worked but held that a similar restraintcovering branch B at which the employee had notworked was unreasonable and void

bull Problems with area can be overcome by using lsquonon-solicitationrsquo clauses instead

In Home Counties Dairies v Skilton (1970) a milkmanagreed that for one year after leaving his present job hewould not sell milk to his employerrsquos customers Held ndashrestraint valid It was necessary to protect the employeragainst loss of customers

bull The validity of the duration of the restraint depends onthe nature of the business to be protected and on thestatus of the employee

CA

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118

In Briggs v Oates (1991) a restriction of five miles for fiveyears on an assistant solicitor was upheld as reasonable

bull A restraint imposed by indirect means for example byloss of pension rights (Bull v Pitney Bowes (1966)) orwhere two companies agreed not to take on the otherrsquosemployees (Kores v Kolok (1959)) will be judged by thesame criteria

Restraints on the vendor of a business

bull In Vancouver Malt and Sake Brewing Co v VancouverBreweries Ltd (1934) a company which was licensed tobrew beer but which had not at any time brewed beerwas sold and agreed not to brew any beer for 15 yearsHeld ndash the restraint was void since there was no goodwillof a beer brewing business to be transferred

bull In British Concrete v Schelff (1921) S sold his localisedbusiness to B who had branches all over the UK andagreed not to open any business within 10 miles of any ofBrsquos branches Held ndash the restriction was void B wasentitled only to protect the business he had bought notthe business which he already owned

bull In Nordenfelt v Maxim Nordenfelt (1894) N a worldwidesupplier of guns sold his worldwide business to M andagreed not to manufacture guns anywhere in the worldfor 25 years Held ndash the restriction was valid C

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119

Such a restraint is valid if it is intended to protectthe purchaserrsquos interest in the goodwill of the

business bought and is reasonable

Exclusive dealing agreements

bull In Esso Petroleum v Harpers Garage (1968) a solusagreement for four years was held reasonable but asolus agreement for 21 years was held unreasonable andtherefore void

bull Solus agreements were distinguished from restrictivecovenants in a lease When an oil company leases afilling station to X inserting a clause that X should buyall its requirements from the company this is not subjectto restraint of trade rules because the tenant is notgiving up a previously held freedom

bull But in Amoco v Rocca Bros (1975) the court held thatrestraint of trade rules did apply to lease and lease backagreements

bull In Alec Lobb (Garages) v Total Oil (1985) in a similar leaseback arrangement a solus agreement for between sevenand 21 years was held reasonable on the ground that thearrangement was a rescue operation benefiting theplaintiffs and there were lsquobreakrsquo clauses in theunderlease

bull In Schroeder Music Publishing Co v Macaulay (1974) itwas held that a contract by which an unknown songwriter undertook to give his exclusive services to apublisher who made no promise to publish his work

CA

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120

Solus agreements whereby A agrees to buy all his re-quirements of a particular commodity from B

Most exclusive services contracts are found in professional sport or entertainment

was subject to the restraint of trade doctrine as it waslsquocapable of enforcement in an oppressive mannerrsquo

bull In Greig v Insole (1978) the MCC banned any cricketerwho played for a cricketing lsquocircusrsquo from playing forEngland The court held that the ban was void as beingin restraint of trade

It has been suggested that the courts will hold exclusivedealing and service contracts to be within the restraint oftrade doctrine if they contain unusual or novel features orif there is disparity in the bargaining power and theagreement is likely to cause hardship to the weaker party

Cartel agreementsThese are now covered by statute for example the FairTrading Act 1973 and the Competition Act 1998 This mayalso fall within Article 81 of the Treaty of the EuropeanCommunities

Effect of a restraint

Two tests must be satisfied

bull The lsquoblue pencilrsquo test It must be possible to sever theillegal part simply by deleting words in the contract Thecourt will not add words substitute one word foranother rearrange words or in any way redraft the

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W121

A void restraint is severable Severance can be operated intwo ways

bull severance of the whole of the objectionable promiseleaving the rest of the contract to be enforced

bull severance of the objectionable part of the promise

contract In Mason v Provident Clothing Co Ltd (1913) theHouse of Lords refused to redraft a promise not to workwithin 25 miles of London But in Goldsoll v Goldman(1915) a dealer in imitation jewellery promised not todeal in real or imitation jewellery either in the UK orabroad Dealing in real jewellery and dealing abroadwere severed

bull Severance of the objectionable part of the contract mustnot alter the nature (as distinct from the extent) of theoriginal contract The illegal restraint will not be severedif it is the the main purpose of the restraint or if to severit would alter entirely the scope and intention of theagreement In Attwood v Lamont (1920) the court refusedto sever restrictions on a tailor from competing with anydepartment of the department store which had employedhim The court stated that this was a covenant lsquowhichmust stand or fall in its unaltered formrsquo

Capacity

Minors

The law pursues two conflicting policies in the case ofminors On the one hand it tries to protect minors from theirown inexperience on the other it tries to ensure that personsdealing with minors are not dealt with in a harsh manner

CA

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122

Minorspersons under 18

Persons of unsound mindand drunken persons

Contracts with minors can be divided into three categories

Valid contracts ndash contracts which can be enforced

against a minor

Necessaries

bull In Nash v Inman (1908) a student purchased 11 silkwaistcoats while still a minor The court held that silkwaistcoats were suitable to the conditions of life of aCambridge undergraduate at that time but they were notsuitable to his actual needs as he already had a sufficientsupply of waistcoats

It is important to distinguish between luxurious goods ofutility and goods of pure luxury The status of the minor canmake the former into necessaries but the latter can never beclassified as necessaries

CO

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W123

Contracts fornecessaries

Beneficial contracts of service

Valid contracts Voidable contracts Other contracts

Necessary goods are defined in the Sale of GoodsAct 1979 as lsquogoods suitable to his conditionin life and to his actual requirements at the

time of sale and deliveryrsquo

The burden of proving that the goods are necessaries is onthe seller

They must satisfy the same tests as necessary goods

Professor Treitel considers that both executed andunexecuted contracts for necessaries can be enforced Hecites Roberts v Gray (1913) Roberts agreed to take Gray aminor on a billiard tour to instruct him in the profession ofbilliard player Gray repudiated the contract The court heldthat Roberts could recover damages despite the fact that thecontract was executory

Cheshire Fifoot and Furmston agree that executorycontracts for necessary services are enforceable as in Robertsv Gray but deny that executory contracts for necessary goodscan be enforced

They cite

bull the actual wording of the Sale of Goods Act which refersto time of lsquosale and deliveryrsquo

bull the minor has to pay a reasonable price for the goods notthe contractual price

These indicate it is argued that liability is based onacceptance of the goods not on agreement

Beneficial contracts of service

CA

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124 These must be for the benefit of the minor

Necessary services include education medical and legal services

bull In De Francesco v Barnum (1890) a contract whose termswere burdensome and harsh on the minor was held void

bull But in White City Stadium v Doyle (1935) where a minorhad forfeited his payment for a fight because ofdisqualification the contract was neverthelessenforceable against him Where a contract is on the wholefor the benefit of a minor it will not be invalidatedbecause one term has operated in a way which is not tohis advantage

bull In Chaplin v Leslie Frewin (Publishers) Ltd (1966) the courtenforced a contract by a minor to publish his memoirs asthis would train him in becoming an author and enablehim to earn a living

bull But trading contracts (involving the minorrsquos capital) willnot be enforced even if it does help the minor earn aliving In Mercantile Union Guarantee Co Ltd v Ball (1937)the court refused to enforce a hire purchase contract for alorry which would enable a minor to trade as a haulagecontractor

Voidable contracts

These comprise contracts of continuing obligation such ascontracts to acquire an interest in land or partly paid sharesor partnership agreements

CO

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W125

They must be contracts of service or similar to a contract of service

Contracts which can be avoided by the minor beforemajority or within a short time afterwards

The minor can free himself from obligations for the futurefor example an obligation to pay rent under a lease but willhave to pay for benefits already received He cannot recovermoney already paid under the contract unless there has beena total failure of consideration (Steinberg v Scala (Leeds) Ltd(1923))

Other contracts

But

bull The minor himself may enforce such contracts

bull Property can pass under such contracts

bull Where the contract has been carried out by the minor hecannot recover any property unless there has been atotal failure of consideration or some other failingwhich would equally apply to an adult

bull The Minors Contracts Act 1987 provides that

a minor may ratify such a contract on majority and itcan thereafter be enforced against him

a guarantee of a minorrsquos debt will not be voidbecause a minorrsquos debt is unenforceable against him

a court may if it considers it is just and equitable to doso order a minor to return property he has receivedunder a void contract or any property representing itIt is not clear whether property transferred under thecontract covers money for example in money lendingcontracts It is argued that as lsquoproperty representing itrsquo

CA

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126

These cannot be enforced against a minor

must cover money it would therefore be illogical toexclude money acquired directly but there is as yet nodecision on this point Property cannot presumably berecovered under this section where the minor hasgiven away the contract property

bull Equity will order restitution of property acquired byfraud But there can be no restitution of money (Leslie vSheill (1914)) and no restitution if the minor has resold theproperty

bull An action may be brought in tort if it does not in any wayrely on the contract But although a minor is fully liablefor all his torts he may not be sued in tort if this is just anindirect way of enforcing a contract In Leslie v Sheill(1914) a minor obtained a loan by fraudulentlymisrepresenting his age Held ndash he could not be sued inthe tort of deceit as this would be an indirect way ofenforcing a contract which was void

Persons of unsound mind and drunken persons

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W127

A person who has been declared a lsquopatientrsquo under the MentalHealth Act 1983 by the Court of Protection is incapable ofentering into a valid contract

Other mentally disordered persons and drunken personswill be bound by their contracts unless

bull they were so disordered or drunk that they did notunderstand the nature of what they were doing and

bull the other party was aware of this

Such contracts may be affirmed during a sober or lucidmoment The Sale of Goods Act requires that wherelsquonecessaries are sold and delivered to a person who byreason of mental incapacity or drunkenness is incompetentto contract he must pay a reasonable price for themrsquo

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128

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W129

8 Discharge

A contract may be discharged by

Performance

Precision of performance

bull In Cutter v Powell (1795) a shiprsquos engineer undertook tosail a ship from Jamaica to Liverpool but died before thevoyage was complete Held ndash nothing could berecovered in respect of his service he had not fulfilled hisobligation

bull In Bolton v Mahadeva (1972) a central heating systemgave out less heat than it should and there were fumesin one room Held the contractor could not claimpayment although the boiler and pipes had beeninstalled they did not fulfill the primary purpose ofheating the house

A contract is lsquodischargedrsquo when there are noobligations outstanding under it

Performance Agreement Breach Frustration

Precision ofperformance

Time ofperformance

Tender ofperformance

To discharge his obligations under a contract aparty must perform exactly what he promised

These are examples of lsquoentirersquo contracts which consist ofone unseverable obligation

bull Where the contract is divisible payment can berecovered for the completed part for example goodsdelivered by instalments

bull Where the promisee accepts partial performance InSumpter v Hedges (1898) however payment for partialperformance was refused as Hedges had been left with ahalf-built house and had been put in a position where hehad no choice but to accept partial performance

bull Where the promisee prevents complete performance forexample in Plancheacute v Colburn (1831) a writer wasallowed payment for the work he had already donewhen the publisher abandoned the series

bull Where the promisor has performed a substantial part ofthe contract In Hoenig v Isaacs (1952) the plaintiffdecorated the defendantrsquos flat but because of faultyworkmanship the defendant had to pay pound50 to anotherfirm to finish the job Held ndash the plaintiff was entitled topound150 (the contract price) minus the pound50 paid to the otherfirm cf Bolton v Mahadeva (1972) where the courtdeclined to find substantial performance

This has become known as the doctrine of substantialperformance In order for the claimant to rely on thisdoctrine the failure to perform must amount only to a

CA

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130

Despite the rule that performance must be exact the law will allow payment to be made on a

quantum meruit basis for incomplete performance in the following circumstances

breach of warranty or a non-fundamental breach of aninnominate term It will not apply to a fundamentalbreach or to a breach of condition

Time of performance

bull It is stipulated in the contract see Lombard North Centralv Butterworth (1987)

bull One party has given reasonable notice during thecurrency of the contract that performance must takeplace within a certain time In Rickards v Oppenheim(1950) a car body which had been ordered from theplaintiffs was late The defendants gave final notice to theplaintiff that unless it was delivered within three monthsthey would cancel the order Held ndash time had been madeof the essence the defendants could cancel the order

bull The nature of the contract makes it imperative thatstipulations as to time should be observed for examplecontracts for the sale of perishable goods

The Law of Property Act 1925 stipulated that terms as tothe time of performance should be interpreted in thesame way at common law as in equity In Rainieri v Miles(1981) the House of Lords held that that meant that lateperformance would not give rise to a right to terminatebut would give rise to damages

Tender of performance

If one party tenders performance which is refused he maysue for breach of contract

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W131

Equity considers that time is not lsquoof the essence of a contractrsquo that is a condition

except in the following circumstances

If payment is tendered and rejected the obligation to tenderpayment is discharged but the obligation to pay remains

Agreement

bull If the contract is wholly executory there is no problemwith consideration as both parties surrender their rightsunder the contract

bull If the contract is partly executed one party hascompleted his performance under the contract ndash to makethe agreement binding there must either be a deed (alsquoreleasersquo) or new consideration (lsquoaccord and satisfactionrsquo)or the doctrine of equitable estoppel or waiver mustapply See Chapter 2

CA

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132

A term in the originalcontract for example acondition subsequent

or method for terminating the contract

A new agreement

A contract may be discharged by

As contracts are created by agreement so they may be discharged by agreement Consideration is

necessary to make the agreement binding

Breach

See classification of terms p 45 above

There are special problems where a party repudiates acontract under a wrong assumption that he has a right to doso

bull In Federal Commerce and Navigation v Molena Alpha (1979)the owners of a ship gave instructions not to issue bills oflading without which the charterers could not operatethe ship They wrongly believed that they had the rightto do so Held ndash their conduct constituted a wrongfulrepudiation of the contract which allowed the other partyto treat the contract as discharged

bull In Woodar Investment Development v Wimpey Construction(1980) the purchaser wrongly repudiated a contract forthe sale of land wrongly believing that he had a right todo so Held ndash a wrongful repudiation made in good faithwould not necessarily allow the other party to treat thecontract as discharged

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W133

A breach of condition

A fundamentalbreach of an

innominate term

A breach does not of itself discharge a contract It may allowthe other other party an option to treat the contract as discharged that is to terminate the contract if the breach is sufficiently serious that is if it is

A repudiatory breach

It is difficult to distinguish these decisions The general viewis that the approach in Molena Alpha is to be preferred so thateven a good faith lsquorepudiatoryrsquo response to a non-repudiatory breach will amount to a breach of contract

Effect of treating the contract as discharged

The obligation of both parties to perform (that is theprimary obligation) is discharged from the date of thetermination

However the party in breach may have to pay damages forany losses past and future caused to the innocent party as aresult of the breach (Lombard North Central v Butterworth ndashChapter 3)

The discharge does not operate retrospectively In PhotoProduction v Securicor (1980) Securicor was able to rely on anexclusion clause in the contract despite the fact that thecontract had been discharged

Note ndash it was held by the House of Lords in Vitol v Norelf(1996) that the defendantrsquos failure to perform his ownobligation could constitute acceptance of the plaintiffrsquos repudiation

The decision to terminate cannot be retracted

Anticipatory breach of contract

CA

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134

Explicit

Hochter v La Tour (1853) atravel courier announced

in advance that he would not be fulfilling

his contract

Implicit

Frost v Knight (1872) aparty disabled himself

from carrying out apromise to marry by

marrying another person

Effect of anticipatory breach

bull The other party may sue for damages immediately Hedoes not have to await the date of performance (Hochsterv De La Tour (1853))

bull The innocent party may refuse to accept the repudiationHe may affirm the contract and continue to perform hisobligations under the contract In White and Carter Ltd vMcGregor (1962) the defendants cancelled a contractshortly after it had been signed The plaintiffs refused toaccept the cancellation carried on with the contract andthen sued for the full contract price Held ndash the plaintiffswere entitled to succeed a repudiation does notautomatically bring a contract to an end the innocentparty has an option either to affirm the contract or toterminate the contract unless

the innocent party needs the co-operation of the other party In Hounslow BC v Twickenham GardenDevelopments Ltd (1971) Hounslow council cancelled acontract to lay out a park It was held that thedefendants could not rely on White and Carter vMcGregor because the work was to be performed oncouncil property

the innocent party had no legitimate interestfinancial or otherwise in performing the contractrather than in claiming damages In The AlaskanTrader (1984) a ship chartered to the defendantsrequired extensive repairs at the end of the first yearwhereupon the defendants repudiated the contractThe plaintiffs however refused to accept therepudiation repaired the ship and kept it fullycrewed ready for the defendantrsquos use Held ndash theplaintiffs had no special interest in keeping the

CO

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W135

contract alive They should have accepted therepudiation and sued for damages

Where a party has affirmed the contract

bull He will have to pay damages for any subsequent breachwhich he commits he cannot argue that the other partyrsquosanticipatory breach excuses him (Fercometal SARL vMediterranean Shipping Co (1988))

bull There is a danger that a supervening event may frustratethe contract and deprive the innocent party of his right todamages as in Avery v Bowden (1855) (below)

Frustration

The doctrine has been kept to narrow limits

The basis of the doctrine and the tests

bull Until the 19th century the courts adhered to a theory oflsquoabsolute contractsrsquo as in Paradine v Jane (1647) It wassaid that if the parties wished to evade liability because of

CA

VE

ND

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136

By the courts whohave insisted that the

supervening event mustdestroy a fundamental

assumption

By business persons who have lsquodrafted outrsquo

the doctrine byforce majeure clauses

Frustration occurs where it is established that due to a subsequent change in circumstances the

contract has become impossible to perform or it hasbeen deprived of its commercial purpose

some supervening event then they should provide forthis in the contract However in Taylor v Caldwell (1863)the courts relented and held that if the contract becameimpossible to perform due to some extraneous cause forwhich neither party was responsible then the contactwould be discharged

bull The modern test was enunciated by Lord Simon inNational Carriers v Panalpina (1981) frustration ariseswhere lsquothere supervenes an event (without default ofeither party and for which the contract makes nosufficient provision) which so significantly changes thenature (not merely the expense or onerousness) of theoutstanding contractual rights andor obligations fromwhat the parties could reasonably have contemplated atthe time of its execution that it would be unjust to holdthem to the literal sense of its stipulations in the newcircumstancesrsquo

bull In Davis Contractors v Fareham UDC (1956) Lord Radcliffstated that frustration occurs where to requireperformance would be to render the obligationsomething lsquoradically differentrsquo from what wasundertaken by the contract

Circumstances in which frustration may occur

bull The subject matter of the contract has been destroyed oris otherwise unavailable

In Taylor v Caldwell (1863) a contract to hire a music hallwas held to be frustrated by the destruction of the musichall by fire (see also s 7 of the Sale of Goods Act 1979)

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W137

Note ndash it is not the circumstances but the nature ofthe obligation which must have changed

bull But the unavailable or destroyed object must have beenintended by both parties to be the subject of the contract

In Blackburn Bobbin Co v Allen (1918) the contract was forthe sale of lsquobirch timberrsquo which the seller intended toobtain from Finland Held ndash the contract was not frustratedwhen it became impossible to obtain timber from FinlandThe subject matter of the contract was birch timber notFinnish birch timber

bull Death or incapacity of a party to a contract of personalservice or a contract where the personality of one partyis important

In Condor v The Baron Knights (1966) a contract between apop group and its drummer was held frustrated whenthe drummer became ill and was unable to fulfill theterms of the contract A claim for unfair dismissal can alsosometimes be defeated by the defence of frustrationwhere an employee has become permanentlyincapacitated or imprisoned for a long period

bull The contract has become illegal to perform eitherbecause of a change in the law or the outbreak of war

In Avery v Bowden (1855) a contract to supply goods toRussia was frustrated when the Crimean War broke out Ithad become an illegal contract ndash trading with the enemy

Note the outbreak of war between two foreign States willnot render a contract illegal but may make it impossibleto perform In Finelvet v Vinava Shipping Co (1983) acontract to deliver goods to Basra did not become illegalon the outbreak of the Iraq-Iran war but was frustratedwhen it became too dangerous to sail to Basra

bull The commercial purpose of the contract has failedCA

VE

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138

Establishing whether a contract is impossible or illegal toperform is relatively straightforward but it is more difficultto decide whether the commercial purpose of the contracthas failed

It may happen in the following circumstances

bull Failure of an event upon which the contract was based

In Krell v Henry (1903) the court held that a contract tohire a room overlooking the proposed route of thecoronation procession was frustrated when thecoronation was postponed The purpose of the contractwas to view the coronation not merely to hire a room Ithas been argued that the fact that the hire of the roomwas a lsquoone offrsquo transaction was important The judge inthe case contrasted it with the hire of a taxi to take theclient to Epsom on Derby day This would be a normalcontractual transaction for the taxi driver thecancellation of the Derby would not therefore frustratethe contract

In the case of Herne Bay Steamboat Co v Hutton (1903) thecourt refused to hold that a contract to hire a boat to seethe king review the fleet was frustrated when the reviewwas cancelled the fleet was still there and could beviewed ndash there was therefore no overall failure of thepurpose of the contract

bull Government interference or delay

In Metropolitan Water Board v Dick Kerr (1918) a contracthad been formed in 1913 to build a reservoir within sixyears In 1915 the government ordered the work to bestopped and the plant sold Held ndash the contract wasfrustrated C

ON

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139

In Jackson v Union Marine Insurance Co (1874) a ship waschartered in November to proceed with all dispatch toNewport The ship did not reach Newport until thefollowing August Held ndash the contract was frustratedsince the ship was not available for the voyage for whichshe had been chartered

In The Nema (1982) a charter party was frustrated when along strike closed the port at which the ship was due toload so that of the six or seven voyages contracted to bemade between April and December only two could bemade

Similar difficult problems arise in the case of contracts ofemployment (illness or imprisonment) and leases

It has been suggested that where the contract is of a fixedduration and the unavailability of the subject matter isonly temporary the court should consider the ratio of thelikely interruption to the duration of the contract

LeasesIt had long been thought that the doctrine of frustration didnot apply to leases (see Paradine v Jane (1647) and CricklewoodInvestments v Leightonrsquos Investments (1945))

bull However in National Carriers v Panalpina (1981) theHouse of Lords declared that in principle a lease couldbe frustrated In that case a street which gave the onlyaccess to a warehouse was closed for 18 months Thelease for the warehouse was for 10 years Held ndash the leasewas not frustrated

bull The House of Lords did state however that where therewas only one purpose for the property leased and thispurpose became impossible then the lease would be

CA

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140

frustrated for example a short term holiday lease It isstill true that it will be very rare for a lease to befrustrated

Limits to the doctrine of frustration

It will not be applied

bull In Davis Contractors LTD v Fareham UDC (1956) thecontractors had agreed to build a council estate at a fixedprice Due to strikes bad weather and shortages oflabour and materials there were considerable delays andthe houses could only be built at a substantial loss Heldndash the contract was not frustrated

bull See also the Suez cases where the courts refused to holdshipping contracts frustrated as a result of the closing ofthe Suez Canal unless the contracts specified a routethrough the canal

But a force majeure clause will be interpreted narrowly asin Metropolitan Water Board v Dick Kerr amp Co (1918) wherea reference to lsquodelaysrsquo was held to refer only to ordinarydelays and not to a delay caused by government decree

CO

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W141

lsquoDoctrine must be kept within narrow limitsrsquo

on the grounds of inconvenience increase in expense loss of profit

Where there is an express provision in thecontract covering the intervening event

(that is a force majeure clause)

A force majeure clause will not in any case be applied to covertrading with an enemy

A contract will not be frustrated if the event makingperformance impossible was the voluntary action of oneof the parties If the party concerned had a choice open tohim and chose to act in such a way as to makeperformance impossible then the frustration will be self-induced and the court will refuse to treat the contract asdischarged

bull In The Superservant Two (1990) one of two barges ownedby the defendants and used to transport oil rigs wassunk They were therefore unable to fulfill their contractto transport an oil rig belonging to the plaintiff as theirother barge (Superservant One) was already allocated toother contracts The court held that the contract was notfrustrated The plaintiffs had another barge available butchose not to allocate it to the contract with the plaintiffs

This case illustrates both the courts reluctance to applythe doctrine of frustration and the advantage of using aforce majeure clause

If by reason of special knowledge the event wasforeseeable by one party then he cannot claimfrustration

bull In Amalgamated Investment and Property Co v John Walker ampSons Ltd (1976) the possibility that a building could belisted was foreseen by the plaintiff who had inquiredabout the matter beforehand A failure to obtain planning

CA

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142

Where the frustration is self-induced

Where the event was foreseeable

permission was also foreseeable and was a normal riskfor property developers The contract was therefore notfrustrated

The effect of frustration

This rule could be very unfair in its operation as in Chandlerv Webster (1904) where the hirer had to pay all the sum duefor the hire of a room to view the coronation despite thecourt holding the contract frustrated by the cancellation ofthe coronation

This rule however would only apply in the event of a totalfailure of consideration and could itself in any case causehardship if the other party had expended a considerableamount of money in connection with the contract

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W143

At common law the loss lay where it fell that isthe date of the frustrating event was all important

Anything paid or payable before that datewould have to be paid Anything payable

after that date need not be paid

In the Fibrosa case (1943) the House of Lordsdid move away from this rule and held that

where there was a total failure of considerationthen any money paid or payable in advance

would have to be returned

Note these two sections are to be applied independently Theexpenses in s 1(2) can only be recovered from lsquosums paid orpayable before the frustrating eventrsquo

Section 1(3) was applied in BP Exploration v Hunt (1982)where it was held that the court must

bull identify and value the lsquobenefit obtainedrsquo

bull assess the lsquojust sumrsquo which it is proper to award

The court also stated that

bull the section was designed to prevent unjust enrichmentnot to apportion the loss or to place the parties in theposition they would be in had the contract beenperformed or to restore them to their pre-contractposition

CA

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144

The Law Reform (Frustrated Contracts) Act 1943was therefore passed to remedy these deficiencies

It provided

s 1(2) ndash all sums paid or payable before the frustratingevent shall be recoverable or cease to be payable but

the court has a discretionary power to allow the payeeto set off against the sum so paid expenses he has

incurred before the frustrating event

s 1(3) ndash where one party has obtained a valuablebenefit before the time of discharge the other

party may recover from him such sums asthe court considers just

bull in assessing the valuable benefit the section requiredreference to the end benefit received by a party not thecost of performance In assessing the end benefit theeffect of the frustrating event had to be taken intoaccount

bull the cost of performance can be taken into account inassessing the just sum

In BP v Hunt (1982) BP were to do the exploration andprovide the necessary finance on an oil concession ownedby Mr Hunt in Libya They were also to provide certainlsquofarm-inrsquo payments in cash and oil In return they were toget a half-share in the concession and 5 of theirexpenditure in reimbursement oil A large field wasdiscovered the oil began to flow then in 1971 the LibyanGovernment nationalised the field

The court held

bull the valuable benefit to Hunt was the net amount of oilreceived plus the compensation payable by the LibyanGovernment which amounted to pound85000000

bull the just sum would cover the work done by BP less thevalue of the reimbursement oil already received Thiswas assessed at pound34000000 As the valuable benefitexceeded the just sum BP recovered their expenses infull The position would have been very differenthowever if the field had been nationalised at an earlierstage and no compensation had been paid

CO

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W145

The Law Reform (Frustrated Contracts) Act 1943 does notapply to

CA

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146

Charter parties Contracts of insurance

Contracts for the sale of specificgoods which have perished

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W147

9 Remedies for breach of contract and restitution

not

If no loss has been suffered then nominal damages onlywill be awarded

bull In Surrey CC v Bredero Homes (1993) the court refused toaward damages against a defendant who had notcomplied with planning permission as there was no lossto the council

Unliquidated damages (that is damages assessed by

the court)

The purpose of unliquidated damages is to compensate the claimant for the loss he has

suffered as a result of a breach

Unliquidateddamages

Equitableremedies

Liquidateddamages

Restitutionor

quasi-contract

to punish the defendantPunitive damages are

not awarded for breachof contract

generally to recoup again made by the

defendant (but cf AG vBlake (2000) below)

bull However in Chaplin v Hicks (1911) damages wereawarded for the loss of a chance to win a competitionalthough there was no certainty that the plaintiff wouldhave been one of the winners

Reliance damages rather than expectation damages may beappropriate where the benefits which would have beenobtained by successful performance are difficult to assess asin

bull McRae v Commonwealth Disposals Commission (1951)where the plaintiff recovered the expenses incurred insearching for a wreck which did not exist

bull Anglia Television v Reed (1972) where the leading actor ina film project withdrew at the last moment The plaintiffswere able to recover all their wasted expenditure on theprogramme including even those incurred before thecontract had been signed

CA

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148

Methods of compensating the claimant

Expectation that is loss ofbargain is the traditional

basis for assessing damagesin contract It aims to putthe claimant in the sameposition as far as money

can do it as if the contracthad been performed

Reliance that is out of pocketor wasted expenditure This

is the normal way ofassessing damages in tort

but can be used in contractas illustrated below

bull But cf Regalian Properties v London Dockland Development(1995) where expenses incurred while negotiations wereexpressly lsquosubject to contractrsquo were not recoverable

It has been held that a claimant may freely choose betweenexpectation and reliance damages unless the difficulty inidentifying profits is because he has made a lsquobad bargainrsquo

bull In C and P Haulage v Middleton (1983) the plaintiff hired agarage for six months on the basis that anyimprovements would become the property of thelandlord He was ejected in breach of contract and suedfor the cost of the improvements Held ndash expenditurewould have been wasted even if the contract had beenperformed

bull It is for the defendant to prove that the claimant hadmade a bad bargain as in CCC Films v Impact QuadrantFilms (1985) where the defendant failed to prove that theplaintiff would not have made a profit from distributingthe films had they been delivered in accordance with thecontract

bull In normal circumstances the claimant will ask fordamages on an expectation basis as this is moreprofitable for him

Restitutionary measure

In Attorney General v Blake (2000) the House of Lords for thefirst time recognised that in some circumstances alsquorestitutionaryrsquo measure of damages requiring thedefendant to pay over the profit made as a result of thebreach of contract may be appropriate The case was anunusual one involving a book published by a member ofthe security services who had spied for Russia The House ofLords regarded the defendant as having been under

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W149

something lsquoakin to a fiduciary obligationrsquo and it is not yetclear how far the principle adopted in this case is likely to beapplied in other situations

Contributory negligence

This is only relevant where the liability in contract isidentical with the liability on tort that is the breach is of acontractual duty to take care (Barclays Bank v FaircloughBuilding (1994))

Quantification of damage

Where lsquoloss of bargainrsquo damages are claimed there are twopossible methods of quantification

The court will normally adopt the most appropriate (RuxleyElectronics and Construction v Forsyth (1995))

Prima facie rules

CA

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150

Sale of goods ndash difference in value

Failure to repair (lease) ndash difference in value

Building contracts ndash cost of cure

Difference in value Cost of cure

Failure to deliver goods

bull In Williams Bros v Agius (1914) the profit which wouldhave been earned on a resale was ignored damagesrepresented the difference between the contract price andthe market price (which was higher than the resale price)

Failure to accept delivery and pay

bull If the seller is a dealer in mass produced goods then thedamage to him will be the loss of profit on onetransaction The claimant had sold one item less than heotherwise would have during the year (Thomson vRobinson (1955))

bull However if the mass produced item is in short supplyand the number of sales is governed by supply not bydemand then there is no loss of profit and damageswould not be awarded (Charter v Sullivan (1957))

bull The damages revert to the difference between thecontract price and market price in the case of secondhand goods even if the seller is a dealer (Lazenby Garagesv Wright (1976))

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W151

The Sale of Goods Act 1979 states thatdamages will represent the difference between

the contract price and the market price

The Sale of Goods Act 1979 states that damages willagain represent the difference between the contract

price and the market price

Limitations on principle of expectation

Although the stated aim of the expectation basis of assessingdamages is to put the claimant in the position he would havebeen in had the contract been performed there are a numberof rules which militate against this result

Remoteness of damage

bull In Hadley v Baxendale (1854) a mill was closed because ofthe delay of a carrier in returning a mill shaft The courtheld that the carrier was not liable for damages for theclosure of the mill as he was not aware that the absenceof a mill shaft would lead to this conclusion

The following damages were said to be recoverable

those arising naturally out of the breach

those which because of special knowledge wouldhave been within the contemplation of the parties

bull In Victoria Laundry v Newman Industries (1949) the rulewas restated and based on knowledge The laundry wasable to recover damages for normal loss of profitC

AV

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S152

Damages cannot be recovered for losses that are tooremote The losses must be lsquowithin the reasonable

contemplationrsquo of the parties

Kind ofloss

CausationDuty of

mitigationRemotenessof damage

following a delay in the delivery of a boiler but not forspecially lucrative dyeing contracts they were offeredduring this time

Damages were said to be recoverable for losses whichwere within the reasonable contemplation of the partiesat the time of the contract either from

imputed knowledge or

actual knowledge

bull In The Heron II (1969) the House of Lords confirmed thata higher degree of foreseeability is required in contractthan in tort Damages were awarded to cover lossesarising from the late delivery of sugar to Basra Theparties must have been aware that the price of sugar inBasra might fluctuate For a loss not to be too remotethere must be

lsquoa real dangerrsquo

lsquoa serious possibilityrsquo

or the loss must be

lsquonot unlikelyrsquo

lsquoliable to resultrsquo

The difference between the tests of remoteness in contractand tort has been criticised but justified on the ground thata contracting party can protect himself against unusual risksby drawing them to the attention of the other party to thecontract

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W153

Application of remoteness rules

bull Imputed knowledge

Hadley v Baxendale (1854) Victoria Laundry v Newman Industries (1949)The Heron II (1967)

bull Actual knowledge

Defendantrsquos knowledge of special circumstances must beprecise This encourages contracting parties to discloseclearly any likely exceptional losses in advance

In Simpson v L amp NWR (1876) the defendant was liable forloss caused to the plaintiff by delivering goods toNewcastle Show Ground the day after the show had finished

In Horne v Midland Railway (1873) defendants were heldnot liable for exceptionally high profit lost by plaintiffthrough late delivery They knew that shoes would haveto be taken back if not delivered on 3 February but notthat the plaintiff would lose an exceptionally high profit

bull In Wroth v Tyler (1974) the defendant was liable for thefull difference between the contract price and the marketprice although the rise in the market price wasexceptional and could not have been foreseen

bull In Parsons (Livestock) Ltd v Uttley Ingham Co Ltd (1978) thedefendants who had supplied inadequately ventilatedhoppers for pig food were held liable for the loss of theplaintiffrsquos pigs even though the disease from which they

CA

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154

Note the test of remoteness determinesentitlement not quantum

died was not foreseeable It was enough that they couldhave contemplated any illness of the pigs (But cf VictoriaLaundry v Newman Industries (1849))

Lord Denning in this case argued that so far as physicaldamage was concerned (not loss of profit) all directlosses should be recoverable as in tort

Lord Scarman has also stated that it would be ridiculousif the amount of damages depended on whether anaction was framed in contract or tort A House of Lordsrsquodecision on these issues is awaited

It is sometimes disputed that the decisions since Hadley vBaxendale have not in any way clarified the rule

Types of loss recognised

This is the normal ground for the award of damages forbreach of contract

However damages for non-pecuniary loss will be awardedin specific cases for example

bull Pain and suffering consequent on physical injury

bull Physical inconvenience

In Watts v Morrow (1991) damages were awarded tocover the inconvenience of living in a house whilst it wasbeing repaired C

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155

Pecuniary loss

Non-pecuniary loss

bull Damage to commercial reputation

In Gibbons v Westminster Bank (1939) damages wereawarded to cover the losses caused by the wrongfulreferring of a cheque

Cf Malik v BCCI (1997) where the House of Lords heldthat compensation was payable for the stigma of havingworked for an organisation which had been run corruptly

bull Distress to claimant

Traditionally damages for injured feelings were notawarded for breach of contract Addis v Gramaphone Co(1909) This general principle has recently been confirmedby the House of Lords in Johnson v Unisys Ltd (2001)

However some limited exceptions to this rule have beenrecognised

Damages for disappointment were awarded againsta holiday company in Jarvis v Swan Tours (1973)where the holiday was not as described

In Hayes v Dodd (1990) the Court of Appealconfirmed that damages for distress are notrecoverable in normal commercial contracts butcould be recovered in contracts

CA

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156

to provide pleasure See Jarvis v Swan Tours Ltd

(1973)

to prevent distress Heywood v Wellers (1976) ndashsolicitorrsquos failure to obtain

an injunction

It has been suggested that damages for distress areparticularly appropriate in lsquoconsumer contractsrsquo

The duty of mitigation

In Payzu v Saunders (1919) the plaintiff had refused the offerof goods at below market price In Brace v Calder (1895) anemployee dismissed by a partnership turned down an offerof similar employment by one of the partners In both casesthe plaintiff was penalised for his failure to mitigate

bull He need not however take lsquounreasonablersquo steps inmitigation

In Pilkington v Wood (1953) it was stated that the plaintiffdid not need to embark on hazardous legal action inmitigation of his loss He should not take unreasonablesteps which would increase losses

bull The claimant cannot recover damages for losses he hasavoided

In British Westinghouse v Underground Electric Railways Co(1912) the plaintiff replaced a defective turbine with anew turbine which was so much more efficient that thesavings exceeded the losses on the defective turbineHeld ndash no loss ndash no damages

bull Note ndash the duty to mitigate does not arise until there hasbeen an actual breach of contract or an anticipatorybreach has been accepted by the other party (see Whiteand Carter v McGregor (above))

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The claimant has a duty to take reasonablesteps to mitigate his loss

Causation (losses which the defendant did not cause)

bull The action of a third party may break the chain ofcausation if it is not foreseeable

In Lambert v Lewis (1981) a farmer continued to use acoupling even though he knew it was broken Held ndash thefarmer was responsible for losses caused by the failure ofthe coupling the manufacturer could not have foreseenthat he would continue to use it knowing it was faulty

bull However where the action is foreseeable the chain ofcausation will not be broken

In Stansbie v Troman (1948) a painter who in breach ofcontract had left a door unlocked was held liable forgoods taken by thieves since this was the kind of loss hehad undertaken to guard against by locking the doors

CA

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158

The breach must have caused the loss as well ashaving preceded the loss

Liquidated damages

Damages set by the parties themselves

The following guidelines for distinguishing between thetwo were suggested in Dunlop Pneumatic Tyre Ltd v NewGarage and Motor Co (1915)

bull a penalty ndash if the sum is extravagant and unconscionable

bull a penalty ndash if a larger sum is payable on the failure to paya smaller sum

bull a penalty ndash if the same sum is payable on major andminor breaches

bull it is no obstacle to the sum being liquidated damages thata precise pre-estimate is almost impossible

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W159

Penalty clauses will not be enforced by the courtInstead the court will award unliquidated damages

The parties may stipulate that a certain sum mustbe paid on a breach of contract

If the sum represents a genuine pre-estimatethen it will be enforced by the court

as liquidated damages

If the sum is not genuine but is an attemptto frighten the other party into performing

then it is a penalty A penalty will not beenforced by the court

The rule against penalties does not apply to

bull Acceleration clauses

Here the whole of a debt becomes payable immediatelyif certain conditions are not observed

bull Deposits

Money paid otherwise than on a breach of contract

Alder v Moore (1961)

Bridge v Campbell Discount Co Ltd (1962)

bull clauses declaring a term to be a condition

Lombard North Central v Butterworth (1987)

Equitable remedies

Specific performance

Traditionally specific performance will only be awardedwhere damages are not an adequate remedy that is

CA

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160

An order of the court directing the defendant to fulfill his obligations under the contract

Specific performance Injunctions

All equitable remedies are discretionary

The following will be taken into account

bull Mutuality Negative ndash a minor cannot get it because it isnot available against a minor Positive ndash a vendor of landmay obtain it although damages would be an adequateremedy because it is also available to a purchaser of land

bull Supervision The need for constant supervisionprevented the appointment of a resident porter beingordered in Ryan v Mutual Tontine Association (1893) but inPosner v Scott Lewis (1986) a similar order was madebecause the terms of the contract were sufficientlyprecise

bull Impossibility ndash Watts v Spence (1976) ndash land belonged to athird party C

ON

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161

Where damages are difficult to assessfor example annuities

Where there is no alternative remedy available(Beswick v Beswick (1968)) see above

Where the claimant cannot get a satisfactory substitute for example

contracts for the sale of land or contracts for the sale of goods which cannot be

obtained elsewhere for example antiquesvaluable paintings ndash unless bought as an

investment as in Cohen v Roche (1927)

bull Hardship ndash Patel v Ali (1984) ndash defendant would lose thehelp of supportive neighbours

bull Conduct of the claimant ndash Shell (UK) Ltd v Lostock Garages(1977) ndash Shellrsquos behaviour was unreasonable

bull Vagueness ndash Tito v Waddell (1977) ndash see above

bull Mistake ndash Webster v Cecil (1861) ndash see above

Special problems

bull Contracts of personal service

These are considered to involve personal relationshipsand are therefore not thought suitable for an order of specific performance

However such orders were exceptionally made in Hill vCA Parsons Ltd (1972) and Irani v Southampton AHA(1985) on the ground that in the very unusualcircumstances of those cases the mutual trust betweenthe employer and employee had not been destroyed

bull Building contracts

The courts are reluctant to enforce building contracts onthe grounds that damages are generally an adequateremedy the terms are often vague there are difficultieswith supervision

But it was held in Wolverhampton Corpn v Emmons (1901)that provided the terms were clear the problem ofsupervision would not be an absolute barrier

Injunctions

CA

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162

These are orders directing the defendant not to do a certain act

Types of injunction

Injunctions are also discretionary remedies and are subject to the similar constraints to orders of specific performance However an injunction will be granted toenforce a negative stipulation in a contract of employmentas long as this is not an indirect way of enforcing thecontract

bull Warner Bros v Nelson (1937)

bull cf Page One Records v Britton (1968)

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W163

Interim injunction

This is designed to regulatethe position of the parties

pending trial

Prohibitory injunction

This is an ordercommanding the

defendant not to dosomething

Mandatory injunction

This orders thedefendant to undosomething he had

agreed not to

A comparison of the remedies for misrepresentation

and for breach of contract

Setting aside contracts

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164

DamagesDamages available as of right Normally assessedon expectation basis Losses must be within thecontemplation of the parties See above

Damages available in tort of deceit negligentstatements and under s 2(1) of the 1967 ActDamages assessed on reliance basis All lossesflowing directly from misrepresentation will becovered whether or not foreseeable in actions indeceit and under s 2(1) of the 1967 Act (Royscot vRogerson (1991)) Losses must be foreseeable inthe tort of negligence No right to damages forinnocent misrepresentation but may be awardedin lieu of rescission at the discretion of the court

Breach

Misrep

Termination or rescission for breach

Available only for breaches of conditionsfundamental breaches of innominate terms and repudiations

Contract discharged from time of breachdischarge not retrospective Innocent party canalso sue for damages (see Chapter 8)

Rescission

Available for all misrepresentations but atdiscretion of court and subject to certain barsContract cancelled prospectively and retrospectivelyparties returned to the position they were in beforethe contract was entered into (see Chapter 6)

Breach

Misrep

Exclusion clauses

See ss 3 6 7 of UCTA

All clauses must be reasonable

Restitution or quasi-contract (based on unjust

enrichment)

It covers

Money may be recovered

bull Where there is a total failure of consideration (see Fibrosacase (frustration))

In Rowland v Divall (1923) the plaintiff had bought a carwhich turned out to be stolen property and which wasrecovered by the owner Despite the fact that the plaintiffhad had the use of the car for a considerable time and ithad fallen in value during this time the plaintiff was ableto recover the full purchase price of the car from thedefendant There had been a total failure of consideration

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W165

Breach

Misrep

recovery of money payment for work done

Restitution may be available where parties arenot in a contractual relationship

It is based on the principle of unjust enrichment it allows the injured party to

recover money paid or the value of benefitsconferred where it would be unjust to allow the

other party to retain the benefit

bull Money paid under a mistake of fact is recoverableprovided the mistake is as to a fact which if true wouldhave legally or morally obliged the claimant to pay themoney or is sufficiently serious to require payment forexample

In Kleinwort Benson Ltd v Lincoln City Council (1998) theHouse of Lords held that in certain circumstances moneypaid under a mistake of law could also be recovered if itwould be unjust to allow the recipient to retain the money(See also Nurdin and Peacock plc v DB Ramsden amp Co Ltd(1999))

bull Money paid under a void contract

For example contracts void

bull In Westdeutche Landesbank v Islington LBC (1994) thecouncil had entered into a rate swapping arrangementwith the bank under which the bank had paid pound2500000to the council in advance The council had paidapproximately pound1200000 to the bank by instalment andargued that since there was not a total failure ofconsideration it should not have to pay the bank theremaining pound1300000 The Court of Appeal held that theprinciple upon which money must be repaid under a

CA

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166

because ultra vires

as against public policy

for a commonmistake

Mistaken payments underinsurance policies

Mistaken payments intoa bank account

void contract is different from that on a total failure ofconsideration Recovery of money under a void contractis allowed if there is no legal basis for such a payment

bull Note ndash money paid under contract which is void forillegality cannot be recovered unless the action can beframed without relying on the contract

Parkinson v Royal College of Ambulance (1925)Bowmakers v Barnet Instruments (1945) Tinsley v Milligan (1993)

bull Note ndash recovery under these heads will not be possible if

In Lipkin Gorman v Karpnale Ltd (1992) a partner in a firmof solicitors was a compulsive gambler who regularlygambled at a casino run by the defendants In order tofinance his gambling he had drawn cheques on clientaccounts where he was the sole signatory He had spentat least pound154000 of this money at the defendantrsquos casinoand the plaintiff sued for the return of the money as ithad been received under a contract which was void(declared void by statute) Held ndash where the true ownerof stolen money sought to recover it from an innocentthird party the recipient was under an obligation toreturn it where he had given no consideration for itunless he could show that he had altered his position ingood faith In this case the plaintiff was able to recoverthe pound154000 less the winnings paid to the partner The

CO

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W167

the payer hadintended the

payee tobenefit in any

event

there is goodconsiderationfor exampledischarge of

a debt

the payee haschanged

position as aresult of the

payment

casino had altered their position on each gamble in thatthey had become vulnerable to a loss

However in South Tyneside Metropolitan Borough Council vSvenska International (1994) the House of Lords allowedthe council to recover approximately pound200000 it had paidto a bank under a rate swap agreement which had beendeclared ultra vires and void The court rejected thebankrsquos claim that it had changed its position in that it hadentered into financial arrangements with otherorganisations in order to hedge its losses

bull Money paid to a third party for the benefit of thedefendant provided the claimant was not acting as avolunteer (for example a mother paying off a sonrsquos debt)but was acting under some constraint

In Macclesfield Corpn v Great Central Railway (1911) theplaintiffs carried out repairs to a bridge which thedefendants were legally obliged (but had refused) tomaintain They were regarded as purely volunteers andcould not therefore recover the money However in Exallv Partridge (1799) the plaintiff paid off arrears of rentowed by the defendant in order to avoid seizure of theplaintiffrsquos carriage which was kept on the defendantrsquospremises The plaintiff was acting under a constraint andcould therefore recover the money

Payment for work done

bull Where the claimant has prevented performance of thecontract (see Plancheacute v Colburn (1831))

CA

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168

Here the claimant is seeking compensationon a quantum meruit basis (cf s 1(3) of the

Law Reform (Frustrated Contracts) Act 1943)

bull Where work has been carried out under a void contractIn Craven Ellis v Canons Ltd (1936) the plaintiff hadcarried out a great deal of work on behalf of a companyon the understanding that he had been appointedmanaging director It was later discovered that he hadnot properly been appointed managing director Thecourt held that he should be paid on a quantum meruitbasis for the work he had done

bull Where agreement has not been reached and

the work was requested by the defendants InWilliam Lacey v Davis (1957) the plaintiffs hadsubmitted the lowest tender for a building contractand had been led to believe that they would beawarded it At the defendantsrsquo request they thenprepared various plans and estimates Thedefendants then decided not to proceed The courtordered the defendants to pay a reasonable sum on aquantum meruit basis for the work that had beendone on analogy with Craven Ellis v Cannons or

the work had been freely accepted In British SteelCorpn v Cleveland Bridge Engineering Co (1984) a letterof intent was issued by the defendants indicating thatthey intended to enter into a contract with theplaintiffs for the construction and delivery of cast-steel lsquonodesrsquo However it proved impossible to reachagreement on a number of major items Despite this anumber of lsquonodesrsquo were eventually constructed andaccepted by the defendants It was held by the courtthat the defendants should pay for the nodes they hadaccepted

CO

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W169

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W171

10 Privity of contract

Introduction

The traditional approach to the doctrine of privity is that

Privity of contract is closely associated with the rule thatconsideration must move from the promisee See Dunlop vSelfridge (above)

Only a party to a contractcan sue on a contract

Only a party to a contractcan be sued on a contract

In Tweddle v Atkinson(1861) the plaintiff had

married Mr Guyrsquosdaughter The plaintiffrsquosfather and Mr Guy had

agreed together that theywould each pay a sum ofmoney to the plaintiff Mr

Guy died before themoney was paid and the

plaintiff sued hisexecutors The action wasdismissed ndash the plaintiffwas not a party to thecontract which wasmade between the

two fathersSee also

Beswick v Beswick (1968)

In Dunlop v Selfridge(1915) Dew amp Co at the

instigation of Dunlophad placed a minimum

resale price in theircontract with Selfridge

Held ndash Dunlop could notsue Selfridge for breach of contract they were

not parties to the contract nor had they

given consideration to Selfridge

Matters relevant to the doctrine of privity

One part of the traditional approach that is that relating toconferring benefits has recently been significantly changedby legislation which is discussed below In addition thereare a number of situations which fall outside the scope ofthe doctrine

Matters outside the doctrine

It has been argued that it is only because English law hasdeclared many transactions not to be subject to the doctrineof privity that the doctrine itself has survived so long

CA

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172

AssignmentRights can be assignedprovided that certain

formalities are followed

AgencyA principal can sue and

be sued on contractsmade by an agent

on his behalf

TrustsWhere a trust has beencreated the beneficiaryunder the trust can suethe trustees even if hewas not a party to the

original agreement

Multi-partite agreementsIn Clarke v Dunraven(1897) entrants in a

yacht race were allowedto sue each other TheCompanies Act 1985allows shareholders

to sue each other

Land law recognises a number of exceptions

Statutory exceptions

bull Price maintenance agreements

bull Various insurance contracts

bull For example Married Womanrsquos Property Act

bull Law of Property Act 1925 s 56

bull Negotiable instruments

CO

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W173

Collateral contractsIn limited cases the court will find a separate

(collateral) contract between the promisor and the third party

(Shanklin Pier v Detel Products (1951))

LeasesThe benefits and

obligations under a lease can be transferred

to third parties

Law of Property Act 1925 s 56

See below

Restrictive covenantsThese can bind a third party under the rule in

Tulk v Moxhay (1848)

Conferring benefits on a third party

Statutory intervention

The common law rule preventing a third party fromenforcing a contract was much criticised and has now beenreformed by legislation that is the Contracts (Rights ofThird Parties) Act 1999 based on recommendations from theLaw Commission

Main effectA third party will be able to enforce a contractual provisionpurporting to confer a benefit on him or her if both of twoconditions are satisfied (s 1)

Right to vary the contract

Unless they have provided otherwise the contractingparties will lose the right to vary or cancel the provisionbenefiting the third party if (s 2)

bull the third party has communicated his assent or

bull the third party has relied on the term and the promisor isaware of this or

bull the third party has relied on the term and the promisorcould be reasonably expected to have foreseen this

on its proper constructionthe contract is intended to

give the third party a legallyenforceable right

the contract expresslyprovides that the third party

may benefit

CA

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174

DefencesThe promisor can raise against the third party any defencesthat could have been raised against the promisee (forexample misrepresentation duress) (s 3)

The promisor can also rely on defences set-offs orcounterclaims arising from prior dealings with the thirdparty

ExceptionsThere cannot be double liability that is as against thepromisee and the third party (s 5)

Some contracts are excluded from the Act (s 6)

bull contracts on a bill of exchange or promissory note

bull terms of a contract of employment as against anemployee

bull contracts for the carriage of goods by sea or if subject toan international transport convention by road rail or air

The exception for carriage of goods by sea does not apply toreliance on an exclusion clause (as in The Eurymedon (1975)for example)

Note also that the main contracting parties are in control ndashthey can decide that the provisions of the new Act shouldnot apply and there will be nothing that the third party cando about it

The Act does not affect the other part of the privity doctrinendash relating to the imposition of obligations on third parties ndashwhich remains governed by the common law

CO

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W175

The common law approach

The common law developed a number of devices to allow athird party to receive the benefit of contract by

These devices will be of much less importance now that theContracts (Rights of Third Parties) Act 1999 is in force Theymay still be used however particularly in situations wherefor one reason or another the 1999 Act does not apply

Attempts to allow the third party to sue

bull Attempts to extend the use of lsquotrustsrsquo

In Walfordrsquos case (1919) under a charterparty theship owner promised the charterer to pay a broker acommission Held ndash the charterer was trustee of thispromise for the broker who could thus enforce itagainst the ship owner

However in Re Schebsman (1944) a contract betweenSchebsman and X Ltd that in certain circumstanceshis wife and daughter should be paid a lump sumwas held not to create a trust

The trust as a device to outflank privity was limited bythe courts presumably because of concern that theirrevocable nature of the trust may prevent thecontracting parties from changing their minds Thecourts no longer go out of their way to find that theparties intended to create a trust

CA

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176

Allowing the thirdparty to sue

Allowing the promiseeto sue on behalf of the

third party

bull Lord Denning launched a campaign against privity andargued that s 56 of the Law of Property Act 1925 intendedto destroy doctrine altogether This was finally rejected bythe House of Lords in Beswick v Beswick (1968) theyacknowledged that the wording was wide enough tosupport Lord Denningrsquos view but insisted neverthelessthat it must be restricted to contracts concerning land asthe purpose of the Act was to consolidate the law relatingto real property

bull Agency

Agency has been used to allow a third party to takeadvantage of an exclusion clause in a contract to whichhe was not a party

The House of Lords refused to allow stevedores torely on an exclusion clause in a contract between thecarriers and the cargo owner in Scruttons v MidlandSilicones (1962) on the basis that only a party to thecontract could claim the benefit of the contract that isthe exclusion clause

However in The Eurymedon (1975) the Privy Councilon similar facts held that the carriers had negotiateda second contract (a collateral contract) as agents ofthe stevedores and the stevedores could claim thebenefit of the exclusion clause in this contract

But in Southern Water Authority v Carey (1985) sub-contractors sought to rely on a limitation of liabilityclause in a main contract Held ndash they must havespecific authority to negotiate on behalf of a thirdparty before this device could work

CO

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W177

In Norwich City Council v Harvey (1989) instead ofusing an exclusion clause the contract placed the riskof loss or damage by fire on the owner and thisprotected both main contractor and sub-contractor

Attempts to allow the promisee to enforce the contract onbehalf of the third party

bull Specific performance

In Beswick v Beswick (1968) Peter Beswick had transferredhis business to his nephew in return for his nephewrsquospromise to pay his uncle a pension and after his deathan annuity to his widow The nephew paid his uncle thepension but only one payment of the annuity was madeThe widow as administratrix of her husbandrsquos estatesuccessfully sued her nephew for specific performance ofthe contract to pay the annuity although the House ofLords implied that she would not have succeeded if shehad been suing in her own right

bull Injunction

Similarly an injunction may be awarded to restrain abreach of a negative promise on a suit brought by thepromisee for example A promised B not to compete withC or by a stay of proceedings

In Snelling v Snelling Ltd (1973) three brothers lent moneyto a family company and agreed not to reclaim themoney for a certain period A stay of proceedings wasgranted to one of the brothers to stop another brotherfrom breaking his promise and suing the company for thereturn of his money

CA

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178

bull Damages

Damages to cover the disappointment of a third partywas sanctioned by Lord Denning in Jackson v HorizonHolidays Ltd (1975) where the plaintiff entered into acontract with a holiday firm for a holiday for his familyand himself in Ceylon The holiday was a disaster Theplaintiff recovered damages for pound500 for lsquomental stressrsquoOn appeal the court confirmed the amount on theground that witnessing the distress of his family hadincreased the plaintiffrsquos own distress Lord Denninghowever stated that the sum was excessive for theplaintiffrsquos own distress but upheld the award on theground that the plaintiff had made the contract on behalfof himself and of his wife and children and that he couldrecover in respect of their loss as well as their own

This statement by Lord Denning was disapproved by theHouse of Lords in Woodar Investment Development Ltd vWimpey Construction (UK) Ltd (1980) They stated thatdamages should not generally be recovered on behalf ofa third party

Lord Wilberforce however did suggest that there was aspecial category of contracts which called for specialtreatment That is where one party contracted for abenefit to be shared equally between a group forexample family holidays ordering meals in restaurantsfor a party hiring taxis for a group The decision inJackson could therefore be supported on this ground Afurther exception was identified by the House of Lords inLinden Gardens Trust v Lenesta Sludge Disposals Ltd (1993)where in a construction contract the original propertyowner may be able to sue the contractor for damagesresulting from defects in the work even though theproperty has been transferred to a third party The

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W179

damages would be held in trust for the third party Thisexception was again confirmed by the House of Lords inAlfred McAlpine Construction Ltd v Panatown Ltd (2000) inorder to avoid the situation where otherwise no onewould be able to sue the contractor although on the factsthe exception did not apply (because a separatearrangement had been made under which the contractorwas directly liable to the third party)

Attempts to impose obligations on third parties

bull Restrictive covenants inserted into a contract for the saleof land may bind subsequent purchasers provided

they are negative in nature the subsequent purchaser has notice of the covenants

the person claiming the benefit has land capable ofbenefiting from its enforcement (Tulk v Moxhay (1848))

bull The courts extended the rule in Tulk v Moxhay to personalproperty for example a ship in The Strathcona (1926)where the plaintiffs had chartered The Strathcona forcertain months each year The ship was sold to thedefendant who refused to allow the plaintiffs to use theship The plaintiffs sought an injunction on the groundthat the doctrine in Tulk v Moxhay should be extendedfrom land to ships The court granted an injunction

This decision was criticised in Port Line Ltd v Ben Line Ltd(1958) where a ship chartered to the plaintiffs was sold tothe defendants The ship was requisitioned during theSuez war and compensation was paid to the defendantsThis compensation was claimed by the plaintiffs Held ndasheven if The Strathcona case was rightly decided it couldC

AV

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DIS

HL

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CA

RD

S180

not be applied in this case as (a) the defendants were notin breach of any duty and (b) the plaintiffs had notsought an injunction but financial compensation whichwas outside Tulk v Moxhay

The decision in The Strathcona has been widely criticisedbecause

a contract of hire creates personal not proprietaryrights in the hired object

the retention of land which can benefit from thecovenant is a necessary condition of the doctrine inTulk v Moxhay

bull However in Swiss Bank Corpn v Lloyds Bank (1979)Browne-Wilkinson J considered that the decision in TheStrathcona was correct He suggested however that thetort of inducing a breach of contract or knowinglyinterfering with a contract would be a more suitable basisfor the decision than Tulk v Moxhay He stated that in hisjudgment a person proposing to deal with property insuch a way as to cause a breach of a contract affecting thatproperty will be restrained by injunction from doing so ifwhen he acquired that property he had actualknowledge of the contract

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• Book Cover
• Title
• Copyright
• Contents
• 1 Agreement
• 2 Consideration and intention
• 3 Contents of a contract
• 4 Exemption (exclusion or
• 5 Vitiating elements which render
• 6 Mistake
• 7 Illegality and capacity
• 8 Discharge
• 9 Remedies for breach of contract
• 10 Privity of contract

Third edition first published 2001 by Cavendish Publishing LimitedThe Glass House Wharton Street London WC1X 9PX UnitedKingdom

Telephone +44 (0)20 7278 8000

Facsimile +44 (0)20 7278 8080

Email infocavendishpublishingcom

Website wwwcavendishpublishingcom

copy Cavendish Publishing Limited 2001

First edition 1997Second edition 1999Third edition 2001

All r ights reserved No part of this publication may bereproduced stored in a retrieval system or transmitted in anyform or by any means electronic mechanical photocopyingrecording scanning or otherwise except under the terms of theCopyright Designs and Patents Act 1988 or under the terms of alicence issued by the Copyright Licensing Agency 90 TottenhamCourt Road London W1P 9HE UK without the pr iorpermission in writing of the publisher

British Library Cataloguing in Publication Data

Contract law ndash 3rd ed ndash (Cavendish law cards)

1 Contracts ndash England 2 Contracts ndash Wales

3464202

ISBN 1 85941 514 8

Printed and bound in Great Britain

Contents

1 Agreement 1

2 Consideration and intention 19

3 Contents of a contract 37

4 Exemption (exclusion or

limitation) clauses 53

5 Vitiating elements which render

a contract voidable 73

6 Mistake 93

7 Illegality and capacity 111

8 Discharge 129

9 Remedies for breach of contract

and restitution 147

10 Privity of contract 171

CO

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W1

1 Agreement

The traditional view that an agreement requires theidentification of a valid offer and a valid acceptance of thatoffer has been challenged in recent years by

bull Lord Denning in Gibson v Manchester City Council (1979)and Butler Machine Tool Co Ltd v Ex-Cell-O Corpn Ltd(1979) where he stated that providing the parties wereagreed on all material points then there was no need forthe traditional analysis

bull Lord Justice Steyn (obiter) in Trentham Ltd v Archital Luxfer(1993) where he stated that a strict analysis of offer andacceptance was not necessary in an executed contract ina commercial setting

The traditional view however was applied by the House ofLords in Gibson v Manchester City Council (1979)

Lord Diplock did recognise that there may be somelsquoexceptional contracts which do not fit easily into an analysisof offer and acceptancersquo for example a multi-partitecontract as in Clarke v Dunraven (1897) but he stressed thatin most contracts the lsquoconventionalrsquo approach of seeking anoffer and an acceptance of that offer must be adhered to

Offer Acceptance

In normal cases therefore a valid offer and a validacceptance of that offer must be identified

Unilateral and bilateral agreements

The distinction is important with regard to

bull advertisements

bull revocation of offers

bull communication of acceptance

Offer

A valid offer

bull must be communicated so that the offeree may accept orreject it

bull may be communicated in writing orally or by conduct

CA

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2

A bilateral agreementconsists of an exchange of

promises for example

Offer ndash I will sell my carfor pound500

Acceptance ndash I will giveyou pound500 for your car

In a unilateral agreementthe offeror alone makes a

promise The offer is accepted by doing what is

set out in the offer forexample

Offer ndash I will pay pound500 toanyone who returns my

lost kitten

Acceptance ndash The lost kitten is returned

A definite promise to be bound provided that certain specified terms are accepted

(There is no general requirement that an agreement must bein writing Important exceptions include contracts relatingto interests in land (Law of Property (MiscellaneousProvisions) Act 1989 s 2(1)) and consumer credit(Consumer Credit Act 1974))

bull May be made to a particular person to a group ofpersons or to the whole world In Carlill v Carbolic SmokeBall Co Ltd (1893) the defendants issued anadvertisement in which they offered to pay pound100 to anyperson who used their smoke balls and then succumbedto influenza Mrs Carlill saw the advertisement and usedthe smoke ball but then immediately caught influenzaShe sued for the pound100 The defendants argued that it wasnot possible in English law to make an offer to the wholeworld Held ndash an offer can be made to the whole world

bull Must be definite in substance (see certainty of terms p 16below)

bull Must be distinguished from an invitation to treat

Invitations to treat

In Gibson v Manchester City Council (1979) the councilrsquos letterstated lsquowe may be prepared to sell you rsquo The House ofLords did not regard this as an lsquoofferrsquo

A response to an invitation to treat does not lead to anagreement The response may however be an offer CO

NT

RA

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LA

W3

An indication that the invitor is willing to enter into negotiations but is not prepared to be

bound immediately

The distinction between an offer and an invitation to treatdepends on the reasonable expectations of the parties

The courts have established that there is no intention to bebound in the following cases

Display of goods for sale

bull In a shop In Pharmaceutical Society of GB v Boots CashChemists Ltd (1952) the Court of Appeal held that in aself-service shop the sale takes place when the assistantaccepts the customerrsquos offer to buy the goods Thedisplay of goods is a mere invitation to treat

bull In a shop window In Fisher v Bell (1961) it was held thatthe display of a lsquoflick knifersquo in a shop window with aprice attached was an invitation to treat

However it was suggested by Lord Denning in Thorntonv Shoe Lane Parking (1971) (see below) that vendingmachines and automatic ticket machines are makingoffers since once the money has been inserted thetransaction is irrevocable

bull In an advertisement In Partridge v Crittenden (1968) anadvertisement which said lsquoBramblefinch cocks and hensndash 25srsquo was held to be an invitation to treat The courtpointed out that if the advertisement was treated as anoffer this could lead to many actions for breach ofcontract against the advertiser as his stock of birds waslimited He could not have intended the advertisement tobe an offer

However if the advertisement is unilateral in nature andthere is no problem of limited stock then it may be an offerSee Carlill v Carbolic Smoke Ball Co Ltd (above) Advertising areward may also be a unilateral offer

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4

Auctions

bull An auctioneerrsquos request for bids in Payne v Cave (1789)was held to be an invitation to treat The offer was madeby the bidder (cf Sale of Goods Act 1979 s 57(2))

bull A notice of an auction In Harris v Nickerson (1873) it washeld that a notice that an auction would be held on acertain date was not an offer which then could beaccepted by turning up at the stated time It was astatement of intention

If the auction is stated to be lsquowithout reserversquo then there isstill no necessity to hold an auction but if the auction isheld lots must be sold to the highest bidder (Barry vHeathcote Ball (2001) confirming obiter dicta in Warlow vHarrison (1859)) The phrase lsquowithout reserversquo constitutes aunilateral offer which can be accepted by turning up andsubmitting the highest bid

Tenders

A request for tenders is normally an invitation to treat

bull However it was held in Harvela Ltd v Royal Trust ofCanada (1985) that if the request is made to specifiedparties and it is stated that the contract will be awardedto the lowest or the highest bidder then this will bebinding as an implied unilateral offer It was also held inthat case that a referential bid for example lsquothe highestother bid plus 10rsquo was not a valid bid

bull It was also held in Blackpool and Fylde Aero Club v BlackpoolBC (1990) that if the request is addressed to specifiedparties this amounts to a unilateral offer thatconsideration will be given to each tender which isproperly submitted C

ON

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AC

TL

AW

5

Subject to contract

The words lsquosubject to contractrsquo may be placed on top of a letter in order to indicate that an offer is not to be legallybinding (Walford v Miles (1992))

Termination of the offer

Revocation (termination by the offeror)

An offeror may withdraw an offer at any time before it hasbeen accepted

bull The revocation must be communicated to the offereebefore acceptance In Byrne v van Tienhoven (1880) thewithdrawal of an offer sent by telegram was held to becommunicated only when the telegram was received

bull Communication need not be made by the offerorcommunication through a third party will suffice InDickinson v Dodds (1876) the plaintiff was told by aneighbour that a property which had been offered to himhad been sold to a third party Held ndash the offer had beenvalidly revoked

bull An offer to keep an offer open for a certain length of timecan be withdrawn like any other unless an option hasbeen purchased for example consideration has beengiven to keep the offer open (Routledge v Grant (1828))

Unilateral offersbull Communication of the revocation is difficult if the offer

was to the whole world It was suggested however inthe American case of Shuey v USA (1875) that

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6

Revocation Lapse Rejection

communication will be assumed if the offeror takesreasonable steps to inform the public for example placesan advertisement in the same newspaper

bull It now seems established that revocation cannot takeplace if the offeree has started to perform In Errington vErrington (1952) a father promised his daughter and son-in-law that if they paid off the mortgage on a house heowned he would give it to them The young couple dulypaid the instalments but the offer was withdrawnshortly before the whole debt was paid Held ndash there wasan implied term in the offer that it was irrevocable onceperformance had begun This is also supported by dictain Daulia v Four Millbank Nominees (1978)

Lapse (termination by operation of law)

An offer may lapse and thus be incapable of being acceptedbecause of

bull Passage of time

at the end of a stipulated time (if any) or

if no time is stipulated after a reasonable time InRamsgate Victoria Hotel Co v Montefiore (1866) anattempt to accept an offer to buy shares after fivemonths failed as the offer had clearly lapsed

bull Death

of the offeror if the offer was of a personal nature

of the offeree

bull Failure of a condition

an express condition or CO

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W7

an implied condition In Financings Ltd v Stimson(1962) it was held that an offer to buy a car lapsedwhen the car was badly damaged on the ground thatthe offer contained an implied term that the carwould remain in the same condition as when the offer was made

Rejection (termination by the offeree)

A rejection may be

bull express

bull implied

A counter offer is an implied rejectionbull Traditionally an acceptance must be a mirror image of

the offer If any alteration is made or anything addedthen this will be a counter offer and will terminate theoffer In Hyde v Wrench (1840) the defendant offered tosell a farm for pound1000 The plaintiff said he would givepound950 for it Held ndash this was a counter offer whichterminated the original offer which was therefore nolonger open for acceptance In Brogden v MetropolitanRailway (1877) the defendant sent to the plaintiff forsignature a written agreement which they hadnegotiated The plaintiff signed the agreement andentered in the name of an arbitrator on a space which hadbeen left empty for this purpose Held ndash the returneddocument was not an acceptance but a counter offer

bull This is particularly important for businesses whocontract by means of sales forms and purchase forms forexample if an order placed by the buyerrsquos purchase formis lsquoacceptedrsquo on the sellerrsquos sales form and the conditionson the back of the two forms are not identical (which theyare very unlikely to be) then the lsquoacceptancersquo is a counter

CA

VE

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8

offer and an implied rejection In Butler Machine Tool CoLtd v Ex-Cell-O Corpn Ltd (1979) the sellers offered to sella machine tool to the buyers for pound75535 on their ownconditions of sale which were stated to prevail over anyconditions in the buyersrsquo order form and whichcontained a price variation clause The buyers lsquoacceptedrsquothe offer on their own order form which stated that theprice was a fixed price and which contained a tear offslip which said lsquowe accept your order on the terms andconditions stated thereonrsquo This was in effect a lsquocounterofferrsquo The sellers signed and returned the slip togetherwith a letter which stated that they were carrying out theorder in accordance with their original offer When theydelivered the machine they claimed the price hadincreased by pound2892 The buyers refused to pay the extrasum Held ndash the contract was concluded on the buyersrsquoterms the signing and returning of the tear-off slip wasconclusive that the sellers had accepted the buyersrsquocounter offer The court analysed the transaction bylooking for matching offer and acceptance

Note ndash a request for further information is not a counteroffer In Stevenson v McLean (1880) the defendant offered tosell to the plaintiff iron at 40s a ton The plaintiff telegraphedto inquire whether he could pay by instalments Held ndash thiswas a mere inquiry for information not a counter offer andso the original offer was not rejected

A conditional acceptance

A conditional acceptance may be a counter offer capable ofacceptance for example I will pay pound500 for your car if youpaint it red If the owner agrees to this condition a contractwill be formed CO

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W9

A valid acceptance must

bull be made while the offer is still in force (see termination ofoffer above)

bull be made by the offeree

bull exactly match the terms of the offer (see counter offersabove)

bull be written oral or implied from conduct In Brogden vMetropolitan Railway (1877) (above) the returneddocument was held to be a counter offer which thedefendants then accepted either by ordering coal fromBrogden or by accepting delivery of the coal (see alsolsquoThe Battle of the Formsrsquo)

However the offeror may require the acceptance to be madein a certain way If the requirement is mandatory it must befollowed

If the requirement is not mandatory then another equallyeffective method will suffice In Manchester Diocesan Councilfor Education v Commercial and General Investments Ltd (1969)an invitation to tender stated that the person whose bid was

CA

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10

The fact of acceptance

An acceptance is a final and unqualified assent to all the terms of the offer

The fact of acceptance

Acceptance

Communication ofacceptance

accepted would be informed by a letter to the address givenin the tender The acceptance was eventually sent not to thisaddress but to the defendantrsquos surveyor Held ndash thestatement in the tender was not mandatory the tender hadtherefore been validly accepted

bull Where the offer is made in alternative terms theacceptance must make it clear to which set of terms itrelates

bull A person cannot accept an offer of which he has noknowledge (Clarke (1927) (Australia))

But a personrsquos motive in accepting the offer is irrelevantIn Williams v Carwardine (1833) (Australia) the plaintiffknew of the offer of a reward in exchange forinformation but her motive was to salve her conscienceHeld ndash she was entitled to the reward

bull lsquoCross-offersrsquo do not constitute an agreement (Tinn vHoffman amp Co (1873))

Communication of acceptance

Acceptance must be communicated by the offeree or hisagent In Powell v Lee (1908) an unauthorised communicationby one of the managers that the Board of Managers hadselected a particular candidate for a headship was held notto be a valid acceptance

Silence as communication

An offeror may not stipulate that silence of the offeree is toamount to acceptance In Felthouse v Bindley (1862) the

CO

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W11

Acceptance must be communicated

plaintiff wrote to his nephew offering to buy a horse andadding lsquoIf I hear no more I will take it that the horse isminersquo The nephew did not reply to this letter Held ndash nocontract Acceptance had not been communicated to theofferor

It has been suggested that this does not mean that silencecan never amount to acceptance for example if in Felthousev Bindley the offeree had relied on the offerorrsquos statementthat he need not communicate his acceptance and wished toclaim acceptance on that basis the court could decide thatthe need for acceptance had been waived by the offeror (seebelow)

Exceptions to the rule that acceptance must be

communicated

bull In a unilateral contract where communication isexpressly or impliedly waived (see Carlill v CarbolicSmoke Ball Co Ltd (above))

bull Possibly where failure of communication is the fault ofthe offeror This was suggested by Lord Denning inEntores Ltd v Miles Far East Corpn (1955)

bull Where the post is deemed to be the proper method ofcommunication In Adams v Lindsell (1818) thedefendants wrote to the plaintiffs offering to sell them aquantity of wool and requiring acceptance by post Theplaintiffs immediately posted an acceptance on 5December Held ndash the contract was completed on 5December

CA

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12

The postal rule

bull Adams v Lindsell (1818) above

bull Acceptance is effective on posting even when the letter islost in the post In Household Fire Insurance Co Ltd v Grant(1879) the defendant offered to buy shares in theplaintiffrsquos company A letter of allotment was posted tothe defendant but it never reached him Held ndash thecontract was completed when the letter was posted

bull Note the difference between acceptance and revocationof an offer by post

Acceptance of an offer takes place when a letter isposted

Revocation of an offer takes place when the letter isreceived

bull Byrne v van Tienhoven (1880) above

Limitations to the postal rule

bull It only applies to acceptances and not to any other typeof communication (for example an offer or a revocation)

bull It only applies to letters and telegrams It does not applyto instantaneous methods of communication such astelex or probably fax or email

bull It must be reasonable to use the post as the means ofcommunication (for example an offer by telephone or byfax might indicate that a rapid method of response wasrequired)

CO

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W13

Acceptance takes place when a letter is postednot when it is received

bull Letters of acceptance must be properly addressed andstamped

bull The rule is easily displaced for example it may beexcluded by the offeror either expressly or impliedly InHolwell Securities Ltd v Hughes (1974) it was excluded bythe offeror requiring lsquonotice in writingrsquo It was alsosuggested by the court that the postal rule would not beused where it would lead to manifest inconvenience

There is no direct English authority on this point

CA

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14

Arguments againstLogic ndash once a letter is posted the offer is accepted there isno provision in law for revoking an acceptance

bull The lsquologicalrsquo view is supported by the New Zealand caseof Wenckheim v Arndt (1878) and the South African case ofA to Z Bazaars (Pty) Ltd v Minister of Agriculture (1974)

Fairness ndash

bull Cheshire argues that it would be unfair to the offeror whowould be bound as soon as the letter was posted whereasthe offeree could keep his options open

Query ndash can a letter of acceptance be cancelled byactual communication before the letter is delivered

Communication by instantaneouselectronic means

bull The rules on telephones and telex were laid down inEntores v Miles (above) and confirmed in Brinkibon Ltd vStahag Stahl (1983) where it was suggested that duringnormal office hours acceptance takes place when themessage is printed out not when it is read The House ofLords however accepted that communication by telexmay not always be instantaneous for example whenreceived at night or when the office is closed

bull Lord Wilberforce stated

lsquoNo universal rule could cover all such cases theymust be resolved by reference to the intention of theparties by sound business practice and in some casesby a judgment of where the risk should liersquo

CO

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W15

Arguments forThere is some support for allowing recall in the Scottishcase of Countess of Dunmore v Alexander (1830)

bull It is argued that actual prior communication of rejectionwould not necessarily prejudice the offeror who bydefinition will be unaware of the lsquoacceptancersquo

bull It is also argued that it would be absurd to insist onenforcing a contract when both parties have acted on therecall This however could be interpreted as anagreement to discharge

Acceptance takes place when and where the message is received

bull It has been suggested that a message sent outsidebusiness hours should be lsquocommunicatedrsquo when it isexpected that it would be read for example at the nextopening of business It is generally accepted that thesame rules should apply to faxes and email as to telex

bull There is no direct authority on telephone answeringmachines It might well be argued that the presence of ananswering machine indicates that communication is notinstantaneous there is a delay between sending andreceiving messages It would then follow that the basicrule should apply that is that acceptance must becommunicated Acceptance therefore would take placewhen the message is actually heard by the offeror

Certainty of terms

The courts will not enforce

CA

VE

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16

Vague agreementsfor example

Scammell v Ouston (1941)

The courts refused toenforce a sale stated to bemade lsquoon hire purchase

termsrsquo neither the rate ofinterest nor the period of

repayment nor the numberof instalments were stated

Incomplete agreementsfor example

lsquoan agreement to make anagreementrsquo will be void

In Walford v Miles (1992) thecourt refused to enforce anlsquoagreement to negotiate in

good faithrsquo

See also May and Butcher v R (1934)

It is for the parties to make their intentions clear

But the uncertainty may be cured by

bull a trade custom where a word has a specific meaning

bull previous dealings between the parties whereby a word orphrase has acquired a specific meaning for exampletimber of lsquofair specificationrsquo in Hillas v Arcos (1932)

bull the contract itself which provides a method for resolvingan uncertainty In Foley v Classique Coaches (1934) therewas an executed contract where the vagueness of lsquoat aprice to be agreedrsquo was cured by a provision in thecontract referring disputes to arbitration Cf May andButcher v R an unexecuted contract where the courtrefused to allow a similar arbitration clause to cure theuncertainty

The courts will strive to find a contract valid where it hasbeen executed

bull The Sale of Goods Act 1979 provides that if no price ormechanism for fixing the price is provided then thebuyer must pay a lsquoreasonable pricersquo but this provisionwill not apply where the contract states that the price islsquoto be agreed between the partiesrsquo

bull Note a lsquolock-out agreementrsquo for example an agreementnot to negotiate with any one else is valid provided it isclearly stated and for a specific length of time This wasapplied by the Court of Appeal in Pitt v PHH AssetManagement (1993) where a promise not to negotiate withany third party for two weeks was enforced

CO

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W17

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W19

2 Consideration and intention

Consideration

Most legal systems will only enforce promises where thereis something to indicate that the promisor intended to bebound that is there is some

Consideration is the normal lsquobadge of enforceabilityrsquo inEnglish law

ReciprocityConsideration

RelianceLord Denning tried to

introduce reliance as basisfor enforcing promisesthrough the doctrine of

promissory estoppel

FormFor example writing English

law will enforce promiseswhich are contained in a

deed (A deed is a document which

is signed and attested andindicates on its face

that it is a deed)

lsquoBadge of

enforceabilityrsquo

Definitions of consideration

Shorter version

Limitation of the definition

bull It makes no mention of why the promisee incurs adetriment or confers a benefit or that the element of abargain is central to the classical notion of considerationFor example in Combe v Combe (1951) it was held thatthere was no consideration for the defendantrsquos promiseto pay his ex-wife pound100 per year even though in relianceon that promise she had not applied to the divorce courtfor maintenance and in that sense she had suffered adetriment The reason why the detriment did notconstitute consideration was that there was no request bythe husband express or implied that she should forbearfrom applying for maintenance There was nolsquoexchangersquo

bull Some writers have preferred to emphasise this elementof bargain and have defined consideration as

CA

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20

A valuable consideration in the eyes of the law mayconsist of (Currie v Misa (1875))

bull either some right interest profit or benefit to oneparty or

bull some forbearance detriment loss orresponsibility given suffered or undertaken bythe other

A benefit to one party or a detriment to the other

lsquothe element of exchange in a contractrsquoor

lsquothe price paid for a promisersquo

bull These definitions however are vague and despite itslimitation the benefitdetriment definition is mostcommonly used

Consideration and condition

Consideration must be distinguished from the fulfilment ofa condition If A says to B lsquoI will give you pound500 if you shouldbreak a legrsquo there is no contract but simply a gratuitouspromise subject to a condition In Carlill v Carbolic Smoke BallCo (1893) the plaintiff provided consideration for thedefendantrsquos promise by using the smoke ball Catchinginfluenza was only a condition of her entitlement to enforcethe promise

Kinds of consideration

bull In Roscorla v Thomas (1842) the defendant promised theplaintiff that a horse which had been bought by him wassound and free from vice It was held that since thispromise was made after the sale had been completedthere was no consideration for it and it could not beenforced In Re McArdle (1951) a promise made lsquoin

CO

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W21

Past consideration that is something already completed before the promise is made cannot

generally amount to consideration

Executed considerationAn act wholly

performed as part of a contract

Executory ConsiderationA promise to do something

in the future

consideration of your carrying out certain improvementsto the propertyrsquo was held by the Court of Appeal to beunenforceable as all the work had been done before thepromise was made

Exceptions to this rule

bull The modern requirements were laid down by LordScarman in Pao On v Lau Yiu Long (1980) Where a serviceis rendered

at the request of the promisor (as in Lampleigh vBraithwait (1615))

on the understanding that a payment will be made (asin Re Caseyrsquos Patents (1892)) and

if the payment would have been legally enforceableif it had been promised in advance

then a subsequent promise to pay a certain sum will beenforced

Note ndash the lsquoinferredrsquo intention to pay makes this a veryflexible exception

Consideration must move from the promisee

bull See Chapter 10 ndash Privity of contract

Consideration need not be adequate

CA

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22

Only a person who has provided consideration for a promise can enforce that promise

The consideration provided by one party need not equal in value the

consideration provided by the other party

It is for the parties themselves to make their own bargainThe consideration need only have lsquosome value in the eyes ofthe lawrsquo (See lsquoConsideration must be sufficientrsquo p 24below)

bull The value may be slight In Chappell Co Ltd v Nestleacute Co Ltd(1960) three wrappers from the defendantrsquos chocolatebars were held to be part of the consideration InMountford v Scott (1975) pound1 was held to be goodconsideration for an option to buy a house

bull Withdrawal of threatened legal proceedings will amountto consideration even if the claim is found to have nolegal basis provided that the parties themselves believethat the claim is valid (Callisher v Bischoffstein (1870))

bull In Pitt v PHH Asset Management (1993) the defendantagreed to a lock-out agreement in return for Pittdropping his claim for an injunction against them Theclaim for an injunction had no merit but had a nuisancevalue and dropping it was therefore good consideration

bull In Alliance Bank v Broome (1964) the bankrsquos forbearance tosue was held to be consideration for the defendantrsquospromise to provide security for a loan

bull In Edmonds v Lawson (2000) it was held that the generalbenefits to chambers of operating a pupillage system wassufficient to provide consideration for contracts withindividual pupils

There is no consideration however where the promises arevague for example lsquoto stop being a nuisance to his fatherrsquo(White v Bluett (1853) but cf Ward v Byham (1956) below) orillusory for example to do something impossible or merelygood for example to show love or affection or gratitude CO

NT

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W23

It has been argued that because the latter are invalidconsideration must have some economic value Buteconomic value is extremely difficult to discern in the othercases cited above Since consideration is a lsquobadge ofenforceabilityrsquo it is argued that nominal consideration isadequate it is only designed to show that the promise isintended to be legally enforceable ndash whether it creates anyeconomic advantage is therefore irrelevant

Consideration must be sufficient

Traditionally the following have no value in the eyes of thelaw

Performing a duty imposed by law

bull For example promising not to commit a crime orpromising to appear in court after being subpoenaed InCollins v Godefroy (1831) a promise to pay a fee to awitness who has been properly subpoenaed to attend a

CA

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24

The consideration must have some value in the eyes of the law

Consideration therefore is found when a person receives whatever he requests

in return for a promise whether or not it has aneconomic value provided it is not too vague

Performing a duty imposed

by law

Performing an existingcontractual duty owed

to the other party

trial was held to have been made without considerationThe witness had a public duty to attend

bull But if a person does or promises to do more than he isrequired to do by law then he is providing considerationIn Glasbrook Bros v Glamorgan CC (1925) the council aspolice authority on the insistence of a colliery owner andin return for a promise of payment provided protectionover and above that required by law Held ndash they hadprovided consideration for the promise to pay

bull In Ward v Byham (1956) the father of an illegitimate childpromised to pay the mother an allowance of pound1 per weekif she proved that the child was lsquowell looked after andhappyrsquo Held ndash the mother was entitled to enforce thepromise because in undertaking to see that the child waslsquowell looked after and happyrsquo she was doing more thanher legal obligation Lord Denning however based hisdecision on the ground that the mother providedconsideration by performing her legal duty to maintainthe child

Treitel agreed with Denning that performance of a dutyimposed by the law can be consideration for a promise Heargues that it is public policy which accounts for the refusalof the law in certain circumstances to enforce promises toperform existing duties Where there are no grounds ofpublic policy involved then a promise given inconsideration of a public duty can be enforced

He cites

bull promises to pay rewards for information leading to thearrest of a felon See Sykes v DPP (1961)

bull Ward v Byham (above) CO

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W25

In most cases it would make no difference whether the courtproceeded on the basis that the matter was one of publicpolicy or a lack of consideration But the former ground doesallow a greater degree of flexibility

Performing an existing contractual duty

Where the duty is owed to the other party this cannot beconsideration for

A request for extra payment

bull In Stilk v Myrick (1809) the captain promised the rest ofcrew extra wages if they would sail the ship back homeafter two sailors had deserted Held ndash the crew werealready bound by their contract to meet the normalemergencies of the voyage and were doing no more thantheir original contractual duty in working the ship home

bull Where the promisor however performs more than hehad originally promised then there can be considerationIn Hartley v Ponsonby (1857) nearly half the crewdeserted This discharged the contracts of the remainingsailors as it was dangerous to sail the ship home withonly half the crew The sailors were therefore free to makea new bargain so the captainrsquos promise to pay themadditional wages was enforceable

Exceptions to the rule in Stilk v Myrick

Factual advantages obtained by the promisorIn Williams v Roffey Bros (1991) the defendants (the maincontractors) were refurbishing a block of flats They sub-

CA

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26

A request for extra payment

A request to avoid part of a debt

contracted the carpentry work to the plaintiff The plaintiffran into financial difficulties whereupon the defendantsagreed to pay the plaintiff an additional sum if theycompleted the work on time Held ndash where a party to anexisting contract later agrees to pay an lsquoextra bonusrsquo in orderthat the other party performs his obligations under theoriginal contract then the new agreement is binding if theparty agreeing to pay the bonus has thereby obtained somenew practical advantage or avoided a disadvantage In thisparticular case the advantage was the avoidance of apenalty clause and the expense of finding new carpenters

bull Note ndash Stilk v Myrick (above) recognises as considerationonly those acts which the promisee was not under a legalobligation to perform Williams v Roffey Bros (above) addsto these factual advantages obtained by the promisor

bull This decision pushes to the fore the principles ofeconomic duress as a means of distinguishing enforceableand unenforceable modifications to a contract (seeChapter 5 on economic duress p 87)

Duties owed to third partyWhere a duty is owed to a third party its performance canalso be consideration for a promise by another It is clear thatthe third party is getting something more than he is entitledto

bull In Shadwell v Shadwell (1860) an uncle promised to pay anannual sum to his nephew on hearing of his intendedmarriage The fact of the marriage providedconsideration although the nephew was already legallycontracted to marry his fianceacutee

bull In Scotson v Pegg (1861) A agreed to deliver coal to Brsquosorder B ordered A to deliver coal to C who promised A to

CO

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W27

unload it Held ndash A could enforce Crsquos promise as Arsquosdelivery of the coal was good considerationnotwithstanding that he was already bound to do so byhis contract with B

bull In New Zealand Shipping Co v Satterthwaite amp Co Ltd TheEurymedon (1975) it was held by the Privy Council thatwhere a stevedore at the request of the consignee ofcertain goods removed the goods from a ship this wasconsideration for the promise by the consignee to give thestevedore the benefit of an exclusion clause although thestevedore in removing the goods was only performingcontractual duties he owed to the carrier

A request to avoid part of a debt

If a creditor is owed pound100 and agrees to accept pound90 in fullsettlement he can later insist on the remaining pound10 beingpaid as there is no consideration for his promise to waive thepound10 (the rule in Pinnelrsquos Case (1602))

bull This rule was confirmed by the House of Lords in Foakesv Beer (1884) Dr Foakes was indebted to Mrs Beer on ajudgment sum of pound2090 It was agreed by Mrs Beer thatif Foakes paid her pound500 in cash and the balance of pound1590in instalments she would not take lsquoany proceedingswhatsoeverrsquo on the judgment Foakes paid the moneyexactly as requested but Mrs Beer then proceeded toclaim an additional pound360 as interest on the judgment debtFoakes refused and when sued pleaded that his duty topay interest had been discharged by the promise not tosue Their Lordships deferred as to whether on its trueconstruction the agreement merely gave Foakes time to

CA

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28

Basic rule payment of a smaller sum will not discharge the duty to pay a higher sum

pay or was intended to cover interest as well But theyheld even on the latter construction there was noconsideration for the promise and that Foakes was stillbound to pay the additional sum

There are situations however where payment of a smallersum will discharge the liability for the higher sum

bull where the promise to accept a smaller sum in fullsettlement is made by deed or in return forconsideration

bull where the original claim was not for a fixed sum or theamount is disputed in good faith

bull where the debtor does something different for examplewhere payment is made at the creditorrsquos request

at an earlier time

at a different place

by a different method (it was held in D amp C BuildersLtd v Rees (1966) that payment by cheque is notpayment by a different method)

bull where payment is accompanied by a benefit of somekind

bull in a composition agreement with creditors

bull where payment is made by a third party (see HirachandPunachand v Temple (1911))

It has been argued that to allow the creditor to sue for theremaining debt would be a fraud on the third parties in thelast two cases above

Note ndash the doctrine of promissory estoppel under certaincircumstances may allow payment of smaller sum todischarge liability for the larger sum

CO

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W29

In Re Selectmove (1995) the Court of Appeal refused toextend the principle laid down in Williams v Roffey Bros topart payment of a debt The company had offered to pay itsarrears by instalments to the Inland Revenue who said thatthey would let them know if this was acceptable They heardnothing further but paid some instalments and thenreceived a threat of being wound up if the full arrears werenot paid immediately The court was not prepared to allowWilliams v Roffey Bros to overturn a rule laid down by theHouse of Lords in Foakes v Beer

Promissory estoppel

There are problems with regard to

Origins

bull It was introduced (obiter) by Lord Denning in the CentralLondon Property Trust Ltd v High Trees House Ltd (1947)where owners of a block of flats had promised to acceptreduced rents in 1939 There was no consideration fortheir promise but Lord Denning nevertheless stated thathe would estop them from recovering any arrears Hebased his statement on the decision in Hughes vMetropolitan Railway (1877)

CA

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30

If a promise intended to be binding andintended to be acted upon is acted upon then the court will not allow the promisor

to go back on his promise

the origins ofthe doctrine

the scope ofthe doctrine

the effect of the doctrine

bull It would however seem to conflict with the House ofLordsrsquo decision in Jorden v Money (1854) where it wasstated that estoppel applied only to statements of fact andnot to promises and also with the decision in Foakes vBeer (1884) where the House of Lords confirmed thatpayment of a smaller sum will not discharge the liabilityfor a larger sum

Scope

bull It only applies to the modification or discharge of anexisting contractual obligation It cannot create a newcontract See Combe v Combe (1951) above (However itwas used to create a new right of action in the Australiancase of Waltons v Maher (1988))

bull It can be used only as a lsquoshield and not a swordrsquo

bull The promise not to enforce rights must be clear andunequivocal In The Scaptrade (1983) the mere fact of nothaving enforced onersquos full rights in the past was notsufficient

bull It must be inequitable for the promisor to go back on hispromise In D amp C Builders v Rees (1966) Mrs Rees had forced the builders to accept her cheque by inequitable means and so could not rely on promissory estoppel

bull The promisee must have acted in reliance on the promisealthough not necessarily to his detriment (Alan amp Co Ltdv El-Nasr Export and Import Co (1972))

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The exact scope of the doctrine is a matter ofdebate but certain requirements must be met

Effect of the doctrine

bull In Tool Metal Manufacturing Co v Tungsten Electric Co(1955) the owner of a patent promised to suspendperiodic payments during the war It was held by theCourt of Appeal that the promise was binding for theduration of the war but the owners could on givingreasonable notice at he end of the war revert to theiroriginal legal entitlements

bull In Ajayi v Briscoe (1964) the Privy Council stated that thepromisee could resile from his promise on givingreasonable notice which allowed the promisee areasonable opportunity of resuming his position but thatthe promise would become final if the promisee could notresume his former position

On one interpretation these cases show that as regardsexisting or past obligations it is extinctive but as regardsfuture obligations it is suspensory

On another interpretation the correct approach is to look atthe nature of the promise If it was intended to bepermanent then the promiseersquos liability will beextinguished

Lord Denning consistently asserted that promissoryestoppel can extinguish debts However this view iscontrary to Foakes v Beer

The view that promissory estoppel is suspensory onlywould reconcile it with the decisions in Jorden v Money

CA

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32

It is not clear whether the doctrine extinguishesrights or merely suspends them

Foakes v Beer and Pinnelrsquos Case but it would deprive it of mostof its usefulness

The question of whether the doctrine is suspensory orextinctive is particularly important with regard to singlepayments

Intention to be legally bound

This presumption may be rebutted but the onus of proof ison the party seeking to exclude legal relations In EssoPetroleum Co Ltd v Commissioners of Customs and Excise (1976)Esso promised to give one world cup coin with every fourgallons of petrol sold A majority of the House of Lordsbelieved that the presumption in favour of legal relationshad not been rebutted

Examples of rebuttals

bull lsquoThis arrangement is not entered into as a formal orlegal agreement and shall not be subject to legaljurisdiction in the law courtsrsquo (Rose and Frank v CromptonBros (1925))

bull Agreement to be binding lsquoin honour onlyrsquo (Jones v VernonPools (1939))

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W33

Commercial andbusiness

agreements

Social anddomestic

agreements

In commercial and business agreements there is a presumption that the parties

intend to create legal relations

bull Letters of comfort for example statements to encouragelending to an associated company It was held inKleinwort Benson Ltd v Malaysia Mining Corpn (1989) thatthe defendantrsquos statement that lsquoit is our policy to ensurethat the business is at all times in a position to meet itsliabilities to yoursquo was a statement of present fact and nota promise for the future As such it was not intended tocreate legal relations

bull Collective agreements are declared not to be legallybinding by the Trade Unions and Labour Relations(Consolidation) Act 1992 unless expressly stated inwriting to be so

This can be rebutted by evidence to the contrary forexample

bull Agreements between husband and wife In Balfour vBalfour (1919) the court refused to enforce a promise bythe husband to give his wife pound50 per month whilst he wasworking abroad However the court will enforce a clearagreement where the parties are separating or separated(Merritt v Merritt (1970))

bull Agreements between members of a family In Jones vPadavatton (1969) Mrs Jones offered a monthly allowanceto her daughter if she would come to England to read forthe Bar Her daughter agreed but was not very successfulMrs Jones stopped paying the monthly allowance butallowed her daughter to live in her house and receive therents from other tenants Mrs Jones later sued forpossession The daughter counterclaimed for breach of

CA

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34

In social and domestic agreements there is a presumption against legal relations

the agreement to pay the monthly allowance andor for accommodation Held (a) the first agreement may havebeen made with the intention of creating legal relationsbut was for a reasonable time and would in any case havelapsed (b) the second agreement was a familyarrangement without an intention to create legalrelations It was very vague and uncertain

bull An intention to be legally bound may be inferred where

one party has acted to his detriment on theagreement (Parker v Clark (1960)) or

a business arrangement is involved (Snelling vSnelling (1973)) or

there is mutuality (Simpkins v Pays (1955))

But in all such cases the agreement must be clear

CO

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W35

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W37

3 Contents of a contract

Once a contract has been formed it is necessary to explorethe scope of the obligations which each party incurs

(Incorporation of terms is covered in Chapter 4)

The distinction between terms and mere

representations

Is a statement part of the contract Statements made duringnegotiations leading to a contract may be either

bull Terms

that is statements which form the express terms of thecontract As such they constitute promises as to thepresent truth of the statement or as to future action Ifsuch a promise is broken (for example because thestatement is untrue) this will involve a breach of contractor

Different weighting may be given to different terms

Distinction between termsand mere representations

Interpretation of expressterms

Identification of impliedterms

This involves

bull Mere representations

that is statements which do not form part of the contractbut which helped to induce the contract If these areuntrue they are lsquomisrepresentationsrsquo

Now that damages can be awarded for negligent misrepresentation the distinction has lost much of itsformer significance but there are still some importantconsequences

In trying to ascertain such intention the court may take intoaccount the following factors

The importance of the statement to the parties

bull In Bannerman v White (1861) the buyer stated lsquoif sulphurhas been used I do not want to know the pricersquo Held ndasha term Similarly in Couchman v Hill (1947) the buyerasked if the cow was in calf stating that if she was hewould not bid The auctioneerrsquos reply that she was not incalf was held to be a term overriding the printedconditions which stated that no warranty was given

The respective knowledge of the parties

bull In Oscar Chess Ltd v Williams (1957) it was held that astatement by a member of the public (a non expert) to agarage (an expert) with regard to the age of a car was amere representation not a term On the other hand astatement made by a garage (an expert) to a member ofthe public (a non-expert) concerning the mileage of a carwas held to be a term (Dick Bentley Productions Ltd vHarold Smith (Motors) Ltd (1965))

CA

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38

Whether a statement has become a term of thecontract depends on the intention of the parties

The manner of the statement

bull For example if it suggests verification (Ecay v Godfrey(1947)) it is unlikely to be a term If it discouragesverification lsquoIf there was anything wrong with the horseI would tell yoursquo (Schawel v Reade (1913)) it is more likelyto be a term

Where a contract has been reduced to writing

The terms will normally be the statements incorporated intothe written contract (Routledge v McKay (1954))

bull But a contract may be partly oral and partly written (seeCouchman v Hill (1947) above) In Evans amp Sons Ltd vAndrea Merzario Ltd (1976) an oral assurance thatmachinery would be stowed under not on the deck washeld to be a term of a contract although it was notincorporated into the written terms The court held thatthe contract was partly oral and partly written and insuch hybrid circumstances the court was entitled to lookat all the circumstances

bull Note ndash the discovery of a collateral contract mayovercome the difficulties of oral warranties in writtencontracts In City of Westminster Properties v Mudd (1959)a tenant signed a lease containing a covenant to use thepremises for business premises only He was induced tosign by a statement that this clause did not apply to himand that he could continue to sleep on the premises Thecourt found that his signing the contract was con-sideration for this promise thus creating a collateralcontract In Evans amp Son Ltd v Andrea Merzario Ltd (1976)Lord Denning considered the oral statement to be acollateral contract In Esso Petroleum Co v Mardon (1976)the court held that the statement by a representative of C

ON

TR

AC

TL

AW

39

Esso with regard to the throughput of a petrol station wascovered by an implied collateral warranty that thestatement had been made with due care and skill

bull The use of a collateral contract will not be possiblehowever if the main contract contains an appropriatelyworded lsquoentire agreementrsquo clause (The Inntrepreneur PubCo (GL) v East Crown Ltd (2000))

Identification of express terms

bull See incorporation of terms in Chapter 4 p 54

Interpretation of express terms of a contract

Oral contracts

The contents is a matter of evidence for the judge Theinterpretation will be undertaken by applying an objectivetest that is what would a reasonable person haveunderstood to have been meant by the words used (Thake vMaurice (1986))

Written contracts

If a contract is reduced to writing then under the lsquoparolevidencersquo rule oral or other evidence extrinsic to thedocument is not normally admissible to lsquoadd to vary orcontradictrsquo (Jacobs v Batavia and General Plantations Trust(1924)) the terms of the written agreement

Exceptions to the parol evidence rule

bull to show that the contract is not legally binding forexample because of mistake or misrepresentation

bull to show that the contract is subject to a lsquoconditionprecedentrsquo In Pym v Campbell (1856) oral evidence was

CA

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40

admitted to show that a contract was not to come intooperation unless a patent was approved by a third party

bull to establish a custom or trade usage (Hutton v Warren(1836) see below)

bull to establish that the written contract is not the wholecontract It is presumed that lsquoa document which lookslike a contract is the whole contractrsquo but this isrebuttable See Couchman v Hill (1947) and Evans v AndreaMerzario (above)

bull a contract may be contained in more than one document(Jacobs v Batavia Plantation Trust Ltd (1924))

bull to establish a collateral contract (City of WestminsterProperties Ltd v Mudd (1959) Evans amp Son Ltd v AndreaMerzario Ltd (1976))

The Law Commission recommended in 1976 that the lsquoparolevidencersquo rule be abolished However in view of the wideexceptions to the rule it recommended in 1986 that no actionneed be taken

Identification of implied terms

In addition to the terms which the parties have expresslyagreed a court may be prepared to hold that other termsmust be implied into the contract Such terms may beimplied by

CO

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W41

Custom Statute The courts

Custom

A contract may be deemed to incorporate any relevantcustom of the market trade or locality in which the contractis made In Hutton v Warren (1836) a tenant established aright to fair allowance for improvements to the land througha local custom

Statute

Parliament as a matter of public policy has in variousinstances seen fit to imply terms into contracts for example

Terms implied into all sales

bull that the seller has the right to sell the goods

bull that goods sold by description correspond with thedescription

Terms implied only into sales by way of business

bull that the goods are of satisfactory quality

Goods are of a satisfactory quality if they meet thestandard that a reasonable person would regard assatisfactory taking account of any description of thegoods the price if relevant and all other relevantcircumstances In particular it will be necessary toconsider their

fitness for all purposes for which goods of that kindare commonly supplied

appearance and finish

CA

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42

The Sale of Goods Act 1979 which impliesthe following terms into contracts

for the sale of goods

freedom from minor defects

safety and

durability

This term does not apply to matters specifically drawn tothe buyerrsquos attention before the contract is made orwhere the buyer examines the goods defects which thatexamination should have revealed

bull that the goods are fit for any special purpose madeknown to the seller

bull that goods sold by sample correspond with the sample

bull In contracts of service there is an implied term that theservice will be carried out with reasonable care and skillwithin a reasonable time and for a reasonable price

In Wilson v Best (1993) it was held that the duty of a travelagent under this provision extended to checking that thelocal safety regulations had been complied with It did notrequire them to ensure that they complied with UKregulations

The courts

CO

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W43

Terms implied in fact Terms implied in law

The Supply of Goods and Services Act 1982implies similar terms into contracts of hire contracts for work and materials and other

contracts not covered by the Sale of Goods Act

Terms implied in fact

When interpreting terms implied in fact the court seeks togive effect to the unexpressed intention of the parties Thereare two tests A term may be implied because

bull It is necessary to give business efficacy to the contract InThe Moorcock (1889) a term was implied that the riverbedwas in a condition that would not damage a shipunloading at the jetty

bull It satisfies the lsquoofficious bystanderrsquo test that is if abystander suggested a term the parties would respondwith a common lsquoof coursersquo In Spring v NASDS (1956) theunion tried to imply the lsquoBridlington Agreementrsquo Thecourt refused on the basis that if an lsquoofficious bystanderhad suggested this the plaintiff would have repliedldquoWhatrsquos thatrdquorsquo

The Moorcock doctrine is used in order to make the contractworkable or where it was so obvious that the parties musthave intended it to apply to the agreement It will not beused merely because it was reasonable or because it wouldimprove the contract

It was suggested in Shell UK Ltd v Lostock Garages Ltd (1977)that the courts will be reluctant to imply a term where theparties have entered into a detailed and carefully draftedwritten agreement

Terms implied in law

bull When terms are implied in law they are implied into allcontracts of a particular kind Here the court is not tryingto put into effect the parties intention but is imposing anobligation on one party often as a matter of public policyFor example the court implies into all contracts ofC

AV

EN

DIS

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RD

S44

employment a term that the employee will carry out hiswork with reasonable care and skill and will indemnifyhis employer against any loss caused by his negligence(Lister v Romford Ice Cold Storage Co (1957))

bull In these cases the implication is not based on thepresumed intention of the parties but on the courtrsquosperception of the nature of the relationship between theparties and whether such an implied term wasreasonable

bull In Liverpool CC v Irwin (1977) the tenants of a block ofcouncil flats failed to persuade the court to imply a termthat the council should be responsible for the commonparts of the building on the Moorcock or lsquoofficiousbystanderrsquo test but succeeded on the basis of the Listertest that is the term should be implied in law in that theagreement was incomplete it involved the relationshipof landlord and tenant and it would be reasonable toexpect the landlord to be responsible for the commonparts of the building

Classification of terms

There is a very important distinction between those terms ofa contract which entitle an innocent party to terminate(rescind or treat as discharged) a contract in the event of a

CO

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W45

Conditions Warranties Innominate terms

breach and those which merely enable a person to claimdamages

Traditionally a distinction has been made in English lawbetween

Conditions

bull The Sale of Goods Act 1979 designates certain impliedterms for example re satisfactory quality as conditions ndashthe breach of which entitles the buyer to terminate (ortreat as discharged) the contract

bull In Poussard v Spiers and Pond (1876) a singer failed to takeup a role in an opera until a week after the season hadstarted Held ndash her promise to perform as from the firstperformance was a condition ndash and its breach entitled themanagement to treat the contract as discharged

Warranties

CA

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46

Contractual terms concerning the less importantor subsidiary statements of facts or promisesIf a warranty is broken this does not entitle

the other party to terminate (or treat asdischarged) the contract it merely entitles

him to sue for damages

Statements of fact or promises which form theessential terms of the contract If the statement is not true or the promise is not fulfilled the

injured party may terminate (or treat as discharged) the contract and claim damages

bull The Sale of Goods Act 1979 designates certain terms aswarranties breach of which do not allow the buyer totreat the contract as discharged but merely to sue fordamages for example the right to quiet enjoyment

bull In Bettini v Gye (1876) a singer was engaged to sing for awhole season and to arrive six days in advance to takepart in rehearsals He only arrived three days in advanceHeld ndash the rehearsal clause was subsidiary to the mainclause It was only a warranty The management wastherefore not entitled to treat the contract as dischargedThey should have kept to the original contract andsought damages for the three daysrsquo delay

Innominate or intermediate terms

bull In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha(1962) it was suggested by the Court of Appeal that itwas not enough to classify terms into conditions andwarranties Regard should also be had to the characterand nature of the breach which has occurred In HongKong Fir the defendants chartered the vessel Hong KongFir to the plaintiffs for 24 months the charter partyprovided that the ship was lsquofitted in every way forordinary cargo servicersquo The vessel spent less than nineweeks of the first seven months at sea because ofbreakdowns and the consequent repairs which werenecessary

CO

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W47

On the facts this was not the case because the charter partystill had a substantial time to run

After the Hong Kong Fir case in 1962 there was someconfusion as to whether the breach based test which appliedto innominate terms had replaced the term based test whichrelied on the distinction between conditions and warrantiesor merely added to it an alternative in certain circumstances

bull In the Mihalis Angelos (1970) the Court of Appeal revertedto the term based test The owners of a vessel stated thatthe vessel was lsquoexpected ready to loadrsquo on or about 1 JulyIt was discovered that this was not so Held ndash the termwas a condition ndash the charterers could treat the contract as discharged

In 1976 two cases were decided on the breach based principle

bull In Cehave v Bremer Handelsgesellshaft MBH The Hansa Nord(1976) the seller had sold a cargo of citrus pellets with aterm in the contract that the shipment be made in goodcondition The buyer rejected the cargo on the basis thatthis term had been broken The defect however was notserious and the court held that although the Sale ofGoods Act had classified some terms as conditions andwarranties it did not follow that all the terms had to be soclassified Accordingly the court could consider the effect

CA

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48

Held ndash the term was neither a condition nor awarranty and in determining whether the

defendants could terminate the contract it wasnecessary to look at the consequences of the

breach to see if it deprived the innocent party ofsubstantially the whole benefit he should

have received under the contract

of the breach since this was not serious the buyer hadnot been entitled to reject

bull In Reardon Smith v Hansen Tangen (1976) an oil tanker wasdescribed as lsquoOsaka No 354rsquo where in fact it was lsquoOshimaNo 004rsquo but was otherwise exactly as specified Becausethe market for oil tankers had collapsed the chartererssought to argue that the number was a condition whichwould enable them to repudiate the contract The Houseof Lords rejected this argument Held ndash the statement wasan innominate term not a condition since the effect ofthe breach was trivial it did not justify termination of thecontract

bull Note ndash the time for determining whether a clause was acondition or an innominate term is at the time ofcontracting ndash not after the breach

Traditionally a term is a condition if it has been establishedas such

bull By statute ndash for example the Sale of Goods Act 1979

bull By precedent after a judicial decision In The MihalisAngelos (1970) the Court of Appeal held that thelsquoexpected readinessrsquo clause in a charter party is acondition

bull By the intention of the parties The court must ascertainthe intention of the parties If the wording clearly revealsthat the parties intended that breach of a particular termshould give rise to a right to rescind that term will beregarded as a condition In Lombard North Central vButterworth (1987) the Court of Appeal held thatcontracting parties can provide expressly in the contractthat lsquospecific breaches could terminate the contractrsquo Inthat case the contract included an express clause that the

CO

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W49

time for payment of instalments was lsquoof the essence of thecontractrsquo An accountant had contracted to hire acomputer for five years agreeing to make an initialpayment and 19 quarterly rental payments He was latein paying some instalments and the owners terminatedthe agreement recovered possession of the computerand claimed damages not only for the arrears but also forloss of future instalments The claim succeeded becausethe contract specifically stated that the time of paymentof each instalment was to be of the essence of the contract

Note the mere use of the word lsquoconditionrsquo is not conclusive

In Schuler v Wickman Tool Sales Ltd (1974) the House of Lordsheld that breach of a lsquoconditionrsquo that a distributor shouldvisit six customers every week could not have been intendedto allow rescission The word lsquoconditionrsquo had not been usedin this particular sense There was in the contract a separateclause which indicated when and how the contract could beterminated

bull By the court ndash deciding according to the subject matter ofthe contract (see Poussard v Spiers (1876) and Bettini v Gye(1876) above)

CA

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50

If a term is not a condition then the lsquowait and seersquotechnique can be used to decide if the gravity of

the breach is such that it deprivedthe innocent party of substantially the whole

benefit of the contract If so ndash then the innocentparty can terminate the contract

(innominate or intermediate term)

Certainty and flexibility

Certainty

bull The term based test is alleged to have the advantage ofpredictability and certainty It is important for the partiesto know their legal rights and liabilities as regards theavailability of termination The character of all terms isascertainable at the moment the contract is concludedNothing that happens after its formation can change thestatus of a term If the term is a condition then the partieswill know that its breach allows the other party toterminate But there can still be uncertainty where theparties have to await the courtrsquos decision on the nature ofthe term

bull The advantage of certainty is however balanced by thefact that it is possible to terminate a contract on atechnicality for sometimes a very minor breach

Flexibility

bull The breach based test is stated to bring flexibility to thelaw Instead of saying that the innocent party can in thecase of a condition always terminate or in the case of awarranty never terminate innominate terms allow thecourts to permit termination where the circumstancesjustify it and the consequences are sufficiently serious

bull It is however more difficult for the innocent party toknow when he has the right to terminate or for the partyin breach to realise in advance the consequence of hisaction

CO

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W51

Note the distinction between the different types of contract terms remains of

considerable importance

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W53

4 Exemption (exclusion or limitation) clauses

A total exclusion is referred to as an exclusion clause apartial exclusion is known as a limitation clause

Exemption clauses are most commonly found in standardform contracts

To be valid an exemption clause must satisfy the tests set bythe

Common law requirements

A clause which purports to exclude wholly or inpart liability for a breach of contract or a tort

Common lawUnfair Contract

Terms Act (UCTA)1977

Regulations onUnfair Terms in ConsumerContracts 1999

The term must be incorporated into the

contract

The wording mustcover what actually

happened

Incorporation

bull This requirement applies to all terms but has beeninterpreted strictly in the case of exemption clauses

A term may be incorporated into a contract by being

Contained in a signed document

In LrsquoEacutestrange v Graucob Ltd (1934) the plaintiff had signed acontract of sale without reading it Held ndash she was bound bythe terms which contained an exemption clause

ExceptionsWhere the offeree has been induced to sign as a result ofmisrepresentation

bull In Curtis v Chemical Cleaning Co (1951) the plaintiffsigned a lsquoreceiptrsquo when she took a dress to be cleaned onbeing told that it was to protect the cleaners in case ofdamage to the sequins In fact the clause excludedliability for all damage Held ndash the cleaners were notprotected for damage to the dress the extent of theclause had been misrepresented and therefore thecleaners could not rely on it

bull lsquoNon est factumrsquo (see p 106 below)

Contained in an unsigned document (ticket cases)

bull This must be seen to be a contractual document

In Chapelton v Barry UDC (1940) on hiring a deckchair the plaintiff was given a ticket with only alarge black 3d on the face of the ticket and exclusionclauses on the back Held ndash the defendants could notrely on the exclusion clauses as it was not apparenton the face of it that the ticket was a contractualdocument rather than just a receipt

CA

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ND

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54

bull Reasonable notice of the term must be given

In Parker v South Eastern Railway Co (1877) theplaintiff received a ticket which stated on the facelsquosee backrsquo Held ndash as long as the railway companyhad given reasonable notice of the exemptionclausersquos existence it did not matter that the plaintiffhad not read the clause

In Thompson v London Midland and Scottish Railway(1930) the ticket indicated that the conditions of thecontract could be seen at the station masterrsquos office oron the timetable The exemption clause was in clause552 of the timetable which cost sixpence ndash the ticketitself only cost two and sixpence In the circumstancesnevertheless reasonable notice had been given

The test is objective and it is irrelevant that the partyaffected by the exemption clause is blind or illiterateor otherwise unable to understand it (Thompson vLMS above)

But in Geir v Kujawa (1970) a notice in English wasstuck on the windscreen of a car stating thatpassengers travelled at their own risk A Germanpassenger who was known to speak no English washeld not to be bound by the clause as reasonable carehad not been taken to bring it to his attention

bull Attention must be drawn to any unusual clause

In Thornton v Shoe Lane Parking (1971) it was statedthat a person who drives his car into a car park mightexpect to find in his contract a clause excludingliability for loss or damage to the car but specialnotice should have been given of a clause purportingto exclude liability for personal injury

CO

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W55

In Interfoto Picture Library v Stiletto Visual Programmes(1989) the Court of Appeal confirmed that onerousconditions required special measures to bring them tothe attention of the defendant The clause in that casewas not an exemption clause but a clause imposingcharges 10 times higher than normal The Court ofAppeal stated that the more unusual the clause thegreater the notice required

bull Notice of the term must be communicated to the otherparty before or at the time that the contract is enteredinto

In Thornton v Shoe Lane Parking Ltd (1971) the plaintiffmade his contract with the car company when heinserted a coin in the ticket machine The ticket wasissued afterwards and in any case referred toconditions displayed inside the car park which hecould see only after entry Notice therefore came toolate

bull The rules of offer and acceptance and the distinctionsbetween offers and invitations to treat must be consultedin order to ascertain when the contract was madeProblems with regard to incorporation can arise in atypical lsquoBattle of the Formsrsquo problem See Butler MachineTool Ltd v Ex-Cell-O Corpn (Chapter 1)

Notice by display

Notices exhibited in premises seeking to exclude liability forloss or damage are common for example lsquocar parked atownerrsquos riskrsquo and must be seen before or at the time of entryinto contract

bull In Olley v Marlborough Court Hotel (1949) Mr and MrsOlley saw a notice on the hotel bedroom wall which

CA

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56

stated lsquothe proprietors will not hold themselvesresponsible for articles lost or stolen unless handed tothe manageress for safe keepingrsquo The contract had beenentered into on registration and the clause was thereforenot incorporated into the contract and could not protectthe proprietors

Notice by a lsquocourse of dealingrsquo

bull If there has been a course of dealing between the partiesthe usual terms may be incorporated into the contractalthough not specifically drawn to the attention of theparties each time a contract is made

In Spurling v Bradshaw (1956) Bradshaw deposited someorange juice in Spurlingrsquos warehouse The contractualdocument excluding liability for loss or damage was notsent to Spurling until several days after the contract Held ndashthe exclusion clauses were valid as the parties had alwaysdone business with each other on this basis

bull Note ndash the transactions must be sufficiently numerous toconstitute a course of dealings The established course ofdealings must be consistent The established course ofdealings must not have been deviated from on the occasion in question

In Hollier v Rambler Motors (1972) the Court of Appeal heldthat bringing a car to be serviced or repaired at a garage onthree or four occasions over a period of five years did notestablish a course of dealings

Notice through patent knowledge

bull In British Crane Hire Corpn v Ipswich Plant Hire (1975) theowner of a crane hired it out to a contractor who was alsoengaged in the same business It was held that the hirer

CO

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W57

was bound by the ownerrsquos usual terms though they werenot actually communicated at the time of the contractThey were however based on a model supplied by atrade association to which both parties belonged It wasstated that they were reasonable and were well known inthe trade

Oral contracts

bull Whether a clause has been incorporated into an oralcontract is a matter of evidence for the court (McCutcheonv MacBrayne (1964))

On a proper construction the clause covers the loss

in question

bull An exclusion clause is interpreted contra proferentem thatis any ambiguity in the clause will be interpreted againstthe party seeking to rely on it

in Houghton v Trafalgar Insurance Co Ltd (1954) it washeld that the word lsquoloadrsquo could not refer to people

in Andrews Bros v Singer amp Co Ltd (1934) an exclusionreferring to implied terms was not allowed to cover aterm that the car was new as this was an express term

It was however suggested by the House of Lords inPhoto Production Ltd v Securicor Ltd (1980) that any needfor a strained and distorted interpretation of contracts inorder to control the effect of exemption clauses had beenreduced by the UCTA

bull Especially clear words must be used in order to excludeliability for negligence for example the use of the wordlsquonegligencersquo or the phrase lsquohowsoever causedrsquo (Smith vSouth Wales Switchgear Ltd (1978))

CA

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58

But if these words are not used provided the wording iswide enough to cover negligence and there is no otherliability to which they can apply then it is assumed thatthey must have been intended to cover negligence(Canada Steamship Lines v The King (1952))

bull It was stated in Ailsa Craig Fishing Co v Malvern Fishing Co(1983) that limitation clauses may be interpreted lessrigidly than exclusion clauses

bull Only a party to a contract can rely on an exclusion clause(See Chapter 10)

bull Especially clear words are required when the breach is ofa fundamental nature In the past Lord Denning andothers argued that it was not possible to exclude breachesof contract which were deemed to be fundamental byany exclusion clause however widely and clearlydrafted

However the House of Lords confirmed in Photo ProductionLtd v Securicor Ltd (1980) that the doctrine of fundamentalbreach was a rule of construction not a rule of law that isliability for a fundamental breach could be excluded if thewords were sufficiently clear and precise

The House also stated that

bull the decision in Harbuttrsquos Plasticine Ltd v Wayne Tank andPump Co (1970) was not good law In that case the Courtof Appeal had held that as a fundamental breach broughta contract to an end there was no exclusion clause left toprotect the perpetrator of the breach

bull there is no difference between a lsquofundamental termrsquo anda lsquoconditionrsquo C

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59

bull a strained construction should not be put on words in anexclusion clause which are clearly and fairly susceptibleof only one meaning

bull where the parties are bargaining on equal terms theyshould be free to apportion risks as they wish

bull the courts should be wary of interfering with the settledpractices of business people as an exclusion clause oftenserves to identify who should insure against a particularloss

Unfair Contract Terms Act 1977

Note ndash the title is misleading

bull The Act does not cover all unfair contract terms onlyexemption clauses

bull The Act covers certain tortious liability as well ascontractual liability The following must be examined

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60

Clauses whichare void

Clauses which are valid only if reasonable

The meaning of lsquoreasonablersquo

Scope of the Act

Scope of the Act

bull s 1 ndash the Act applies to contracts made after 1 February1978 which arise in the course of business lsquoBusinessrsquoincludes a profession and the activities of anygovernment department andor public or localauthority

bull s 5 ndash contracts specifically excluded include contracts ofinsurance contracts for the transfer of land andinternational commercial contracts

bull s 13 ndash the Act limits the effectiveness of clauses thatexclude or restrict liability It also covers clauses whichmake it difficult to enforce a contract for example byimposing restrictive time limits or which excludeparticular remedies In Stewart Gill v Horatio Myer and Co(1992) it was held that a clause restricting a right of set-off or counterclaim was subject to the Act It was alsoheld in Smith v Bush (1990) that it covered lsquodisclaimerswhich restrictively defined a partyrsquos obligation under acontractrsquo In that case a valuation was stated to be givenlsquowithout any acceptance of liability for its accuracyrsquo

Negligence

bull The Act covers contractual tortious and statutory (that isunder the Occupiersrsquo Liability Act 1957) negligence

bull The difference between excluding liability for negligenceand transferring liability for negligence is seen in PhillipsProducts v Hyland Bros (1987) where the contracttransferred liability for the negligence of the driver of ahired excavator to the hirer The driver negligentlydamaged property belonging to the hirer Held ndash theclause was an exclusion clause and was subject to UCTA

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W61

bull In Thompson v Lohan (Plant Hire) (1987) on the otherhand an excavator and driver were hired under the sameconditions The driver negligently killed a third partyHeld ndash the clause transferring liability to the hirer was notan exclusion clause in this case as the third party was ableto sue the hirer It was merely a clause transferring liability

Misrepresentation

bull The difference between excluding liability formisrepresentation and defining the powers of an agent isseen in Cremdean Properties v Nash (1977) where a clausein the special conditions of sale stating that thelsquoparticulars were believed to be correct but theiraccuracy is not guaranteedrsquo was held to be an exclusionclause

bull In Collins v Howell Jones (1980) however the Court ofAppeal held a statement that the lsquovendor does not makeor give any representation or warranty and neither theestate agent or any person in their employment has anyauthority to make or give a representation or warrantywhatsoever in relation to the propertyrsquo had the effect ofdefining or limiting the scope of the agentrsquos authority

Effect of the Act

Clauses which are void

Exclusions of liability

bull for death or personal injury caused by negligence (s 2)

bull in a manufacturerrsquos guarantee for loss or damage causedby negligence (s 5)

bull for the statutory guarantee of title in contracts for the saleof goods or hire purchase (s 6)

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62

bull for the other statutory guarantees in consumer contractsfor the sale of goods or hire purchase (descriptionsatisfactory quality fitness for purpose) (s 6)

bull for similar statutory guarantees in other consumercontracts for the supply of goods for example contractsof hire (s 7)

Clauses which are valid only if reasonable

Clauses excluding liability

bull for loss or damage to property caused by negligence (s 2)

bull for breach of contract in a consumer or standard formcontract (s 3) This includes clauses in such contractsclaiming to render a substantially different performancefrom that reasonably expected or to render noperformance at all (s 3)

bull for statutory guarantees (other than those concerningtitle) in inter-business contracts for the sale of goods andhire purchase (description satisfactory quality andfitness for purpose) (s 6)

bull for statutory guarantees concerning title or possession inother contracts for the supply of goods (for examplehire) (s 7)

bull for other statutory guarantees (description satisfactoryquality fitness for purpose) in other inter-businesscontracts for the supply of goods (s 7)

bull for misrepresentation in all contracts

Note

lsquoConsumer transactionrsquo ndash a person is a lsquoconsumerrsquo where hedoes not make or hold himself out as making the contract in

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W63

the course of business and the other party does make thecontract in the course of business In contracts for the sale ofgoods the goods must also be of a type normally sold forprivate use

bull A controversial interpretation of a lsquoconsumerrsquo was madeby the Court of Appeal in R and B Customs v UnitedDominion Trust (1988) where a car was bought by aprivate company for the business and private use of itsdirectors It was held by the Court of Appeal that it wasnot bought lsquoin the course of a businessrsquo Buying cars wasincidental not central to the business of the company If itis incidental only then the purchase would only be lsquoin thecourse of a businessrsquo if it was one made with sufficientregularity

Note however that in Stevenson v Rogers (1999) the Courtof Appeal refused to apply the R and B Customs Brokersapproach to the question of whether a sale was in the courseof a business for the purpose of s 14(12) of the Sale of GoodsAct 1979

A lsquostandard form contractrsquo occurs when the parties deal onthe basis of a standard form provided by one of them

Reasonableness

In assessing reasonableness the following matters should beconsidered

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64

It is for the person relying on the clause to prove that the clause is reasonable

Section 11 of UCTA 1977

bull Contract terms are to be adjudged reasonable or notaccording to the circumstances which were or oughtreasonably to have been known to the parties when thecontract was made

bull Where a person seeks to restrict liability to a specifiedsum of money regard should be had to the resourceswhich he could expect to be available to him for thepurpose of meeting the liability and as to how far it wasopen to him to cover himself by insurance

bull In determining for the purpose of s 6 or s 7 whether acontract term satisfies the requirement of reasonablenessregard shall be had to

the strength of the bargaining position of the partiesrelative to each other

whether the customer received an inducement toagree to the term and had an opportunity of enteringinto a similar contract with other persons butwithout having to accept similar terms

whether the customer knew or ought reasonably tohave known of the existence and extent of the term

where the exclusion is conditional whether it wasreasonable to expect that compliance with thatcondition would be practicable

whether the goods were manufactured processed oradapted to the special order of the customer(Sched 2)

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W65

Decisions of the courts

In Smith v Bush (1990) and Harris v Wyre Forest DC (1989) theHouse of Lords dealt with two cases involving the validity ofan exclusion clause protecting surveyors who had carriedout valuations of a house The House of Lords decided thatthe clauses were exclusion clauses designed to protect thesurveyors against claims for negligence Lord Griffithsdeclared that there were four matters which should alwaysbe considered

bull were the parties of equal bargaining power

bull in the case of advice would it have been reasonable toobtain advice from another source

bull was the task being undertaken a difficult one for whichthe protection of an exclusion clause was necessary

bull what would be the practical consequences for the partiesof the decision on reasonableness For example wouldthe defendant normally be insured Would the plaintiffhave to bear the cost himself

In inter-business contracts the practices of business peopleare considered

bull In Photo Production v Securicor (1980) the House of Lordsstated that the courts should be reluctant to interfere withthe settled practices of businesses They pointed out thatthe function of an exclusion clause was often to indicatewho should insure against a particular risk

bull In Green v Cade Bros (1983) it was decided that a clauserequiring notice of rejection within three days of deliveryof seed potatoes was unreasonable as a defect could nothave been discovered by inspection within this time buta clause limiting damages to the contract price was

CA

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66

upheld ndash as it had been negotiated by organisationsrepresenting the buyers and sellers and lsquocertifiedrsquopotatoes had been available for a small extra charge (thatis Sched 2 was applied)

bull However in George Mitchell v Finney Lock Seeds Ltd (1983)the buyers suffered losses of pound61000 due to the supply ofthe wrong variety of cabbage seeds The contract limitedthe liability of the seller to a refund of the price paid(pound192) Held ndash the clause was not reasonable Matterstaken into consideration

the clause was inserted unilaterally ndash there was nonegotiation

loss was caused by the negligence of the seller

the seller could have insured against his liability

the sellers implied that they themselves consideredthe clause unreasonable by accepting liability inprevious cases

bull In Overland Shoes Ltd v Schenkers Ltd (1998) the Court ofAppeal upheld a judgersquos ruling that a clause preventingreliance on a lsquoset-offrsquo was not unreasonable on the basisthat it formed part of a set of standard trading conditionsused widely in the shipping industry They had arisenfrom careful negotiation and were generally recognisedin the industry as lsquofair and reasonablersquo

bull In Overseas Medical Supplies Ltd v Orient Transport ServicesLtd (1999) the Court of Appeal summarised the variousfactors which should be looked at in considering the testof reasonableness It confirmed that the lsquoGuidelinesrsquocontained in Sched 2 to UCTA although specificallyintended for consumer contracts for the sale of goods

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W67

should be regarded as relevant wherever the test ofreasonableness is applied

In many of the cases the appeal courts have emphasised thatthe decision on lsquoreasonablenessrsquo is best made by the trialjudge and that the appeal courts should be reluctant tointerfere with the conclusion arrived at at first instance

Unfair Terms in Consumer Contracts Regulations 1999

Based on EU Directive on Unfair Terms in ConsumerContracts The 1999 regulations replaced earlier regulationsmade in 1994

Coverage

The regulations apply to

This will be so even if some other parts of the contract havenot been drafted in advance

bull The regulations do not apply to contracts which relate toemployment family law or succession rights companiesor partnerships terms included in order to comply withlegislation or an international convention

CA

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68

Coverage Fairness Remedies

lsquoany term in a contract between a seller or supplier and a consumer where

the term has not been individually negotiatedrsquo thatis it has been drafted in advance

bull They do however cover insurance policies and contractsrelating to land

bull A lsquobusinessrsquo is defined to include a trade or professionand the activities of any government department or localor public authority

bull A lsquo consumerrsquo means a natural person who is acting for apurpose outside his business

Note ndash they are wider than UCTA in that they cover allterms not only exclusion clauses for example harsh termsconcerning unauthorised overdrafts The regulations arenarrower than UCTA in that they only cover clauses inconsumer contracts which have not been individuallynegotiated The definition of a consumer is also narrower cfR and B Customs v UDT (1988)

Unfairness

Regard must be had to the nature of the goods and servicesprovided the other terms of the contract and all thecircumstances relating to its conclusion

The definition of the main subject matter and the adequacyof the price or remuneration are not subject to the test offairness

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W69

The clause is unfair if contrary to the requirementsof good faith it creates a significant imbalance

in the partiesrsquo rights and obligations to thedetriment of the consumer

lsquoGood faithrsquo is not defined and unlike the earlier (1994)regulations the 1999 regulations do not spell out anyrelevant factors

In Director General of Fair Trading v First National Bank plc(2000) the Court of Appeal emphasised the need foropenness and information which will enable the consumerto make a properly informed choice about entering into thecontract In this case a clause imposing a lsquosurprisingrsquorequirement as to the payment of interest on a loan whichhad been the subject of a court order did not meet therequirement of good faith

The regulations contain a long indicative list of clauses likelyto be unfair These include not only exemption clauses butalso clauses which give the sellersupplier rights withoutcompensating rights for the consumer for example

bull enabling the sellersupplier to raise the price withoutgiving the buyer a chance to back out if the price rise istoo high

bull enabling the sellersupplier to cancel the agreementwithout penalty without also allowing the customer asimilar right

bull automatically extending the duration of the contractunless the customer indicates otherwise within an unreasonably brief period of time

Note also that all terms (including those defining thesubject matter or the price) should be expressed in plainEnglish and any ambiguity should be interpreted in theconsumerrsquos favour

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70

Effect of an unfair term

bull The term itself shall not be binding on the consumer butthe rest of the contract may be enforced

bull The Director General of Fair Trading has a duty toconsider any complaint made to him that a term is unfairHe is empowered to bring proceedings for an injunctionagainst any business using an unfair term It was thispower that was used in the first reported case on theregulations Director General of Fair Trading v FirstNational Bank plc (2000) discussed above For the firsttime a similar power to apply for such an injunction isgiven to certain other lsquoqualifying bodiesrsquo including theData Protection Registrar various Directors General (ofgas supply electricity supply telecommunicationswater services) and the Consumersrsquo Association

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W71

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W73

5 Vitiating elements which render a contract voidable

Significance of a contract being voidable

Thus

bull The innocent party may if he wishes affirm the contract

bull Where the innocent party has not performed thecontract he may refuse to perform and rely on themisrepresentation as a defence

bull The misled party may rescind the contract by

informing the other party or

where a fraudulent party cannot be traced byinforming the police (Car and Universal Finance Co vCaldwell (1965)) or

bringing legal proceedings

The innocent party may set the contractaside if he so wishes

Misrepresentation Duress Undue influence

Certain mistakes (see Chapter 6)

bull It was stated in TSB v Camfield (1995) that the right torescind is that of the representee not the court All thecourt can do is decide whether the representee haslawfully exercised the right to rescind It is not thereforean exercise of equitable relief by the court

Rescission

bull But in Cheese v Thomas (1993) the court declared that thecourt must look at all the circumstances to do what waslsquofair and justrsquo In that case a house which had beenjointly bought had to be sold afterwards at aconsiderable loss The agreement between the twoparties for the purchase of the house was rescinded butthe court held that it was not necessary for the guiltyparty to bear the whole of the loss It was fair and justthat the proceeds should be divided according to thepartiesrsquo respective contributions

bull This contrasts with the normal situation where aproperty has diminished in value and the misled partywould get all his money returned (Erlanger v NewSombrero Phosphate Co (1878))

bull As part of this restoration equity may order a sum ofmoney to be paid to the misled person to indemnify himagainst any obligations necessarily created by the contract

In Whittington v Seale-Hayne (1900) the plaintiffsbreeders of prize poultry were induced to take a lease ofthe defendants premises by his innocent

CA

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74

Restoring the parties as far as is possible to the position they were in before they

entered into the contract

misrepresentation that the premises were in a sanitarycondition Under the lease the plaintiffs covenanted toexecute all works required by any local or publicauthority Owing to the insanitary conditions of thepremises the water supply was poisoned the plaintiffsrsquomanager and his family became very ill and the poultrybecame valueless for breeding purposes or died Inaddition the local authority required the drains to berenewed The plaintiffs sought an indemnity for all theirlosses The court rescinded the lease and held that theplaintiffs could recover an indemnity for what they hadspent on rates rent and repairs under the covenants inthe lease because these expenses arose necessarily out ofthe contract It refused to award compensation for otherlosses since to do so would be to award damages not anindemnity there being no obligation created by thecontract to carry on a poultry farm on the premises or toemploy a manager etc

bull Note ndash rescission even if enforced by the court is alwaysthe act of the defrauded party It is effective from the dateit is communicated to the representor or the police (seeabove) and not from the date of any judgment insubsequent litigation

Rescission is subject to certain barsC

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75

Affirmation of the contract

Lapse of time

Restitution mustbe possible

Third party rights

Affirmation of the contractThe representee may not rescind if he has affirmed thecontract after learning of the misrepresentation either bydeclaring his intention to proceed with the contract or byperforming some act from which such an intention can beinferred In Long v Lloyd (1958) the buyer of a lorryundertook a long journey after discovering serious defects inthe lorry Held ndash he had affirmed the contract

Lapse of timeThis can provide evidence of affirmation where themisrepresentee fails to rescind for a considerable time afterdiscovering the falsity

In cases of innocent misrepresentation lapse of time canoperate as a separate bar to rescission In Leaf v InternationalGalleries (1950) the plaintiff bought a picture which the sellerhad innocently misrepresented to be by Constable Fiveyears later the plaintiff discovered it was not by Constableand immediately sought to rescind the contract Held ndashbarred by lapse of time

Restitution must be possibleA person seeking to rescind the contract must be able andwilling to restore what he has received under it Howeverrescission is an equitable remedy and the court will notallow minor failures in the restoration to the originalposition to stand in the way In Erlanger v New SombreroPhosphate Co (1878) the purchaser had worked phosphatemines briefly Held ndash he could rescind by restoring propertyand accounting for any profit derived from it

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76

Third party rightsThere can be no rescission if third parties have acquiredrights in the subject matter of the contract See Phillips vBrooks (1919) and Lewis v Averay (1972) ndash Chapter 6

Misrepresentation

Representations and terms of a contract

Material statements made during negotiations leading to acontact may be either

bull terms of the contract If these are untrue the untruthconstitutes a breach of contract

bull statements which helped to induce the contractthat is lsquomere representationsrsquo If untrue ndash they arelsquomisrepresentationsrsquo

(For distinctions between terms and lsquomere representationsrsquosee Chapter 3)

Requirements of misrepresentation

It must be

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W77

An untrue statement of fact made by one party tothe contract (representor) to the other (representee)which induces the other to enter into the contract

The requirements ofmisrepresentation

Remedies formisrepresentation

A statement of fact

bull Not a lsquomere puffrsquo that is a statement so vague as to bewithout effect for example describing a house as alsquodesirable residencersquo

bull Not a promise A promise to do something in the futureis only actionable if the promise amounts to a bindingcontract (Kleinwort Benson Ltd v Malaysian Mining CorpnBhd (1989))

bull Not a statement of opinion for example in Bisset vWilkinson (1927) the vendor of a farm which had neverbeen used as a sheep farm stated that in his judgment thefarm would support 2000 sheep Held ndash a statement ofopinion

But a statement expressed as an opinion may be treatedas a statement of fact if the person making the statementwas in a position to know the true facts In Smith v Landand House Prop Corpn (1884) the vendor of a hoteldescribed it as lsquolet to a most desirable tenantrsquo when thetenant had for a long time been in arrears with the rentThe Court of Appeal held there was a misrepresentationof fact

bull Not a statement of intention But if the representor didnot have that intention then it is a misstatement of fact asin Edgington v Fitzmaurice (1885) where the directorsissued a prospectus claiming that the money raised was tobe used to improve the companyrsquos buildings and toexpand its business Their real intention was to pay off thecompanyrsquos debts Held ndash fraudulent misrepresentation

bull Not a statement of law

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78

An active representation

bull The statement will normally be in words but other formsof communication which misrepresent the facts willsuffice as in Horsfall v Thomas (1862) (below)

bull Failure to make a statement however or the non-disclosure of facts will not generally qualify asmisrepresentation

Exceptionsbull Where facts have been selected to give a misleading

impression as in Dimmock v Hallett (1866) where avendor of land stated that farms were let but omitted tosay that the tenants had given notice to quit

bull Where circumstances have changed since arepresentation was made then the representor has a dutyto correct the statement In With v OrsquoFlanagan (1936) itwas stated correctly that a medical practice was worthpound2000 a year but by the time the practice changedhands it was practically worthless Held ndash there was aduty to disclose the changed circumstances

bull Contracts uberrimae fidei (lsquoof the utmost good faithrsquo) forexample

Contract of insurance Material facts must bedisclosed that is facts which would influence aninsurer in deciding whether to accept the proposalor to fix the amount of the premium for example apolicy of life insurance has been avoided because itwas not disclosed that the proposer had already beenturned down by other insurers

Family arrangements In Gordon v Gordon (1816ndash19)a division of property based on the proposition thatthe elder son was illegitimate was set aside upon

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W79

proof that the younger son had concealed hisknowledge of a private marriage ceremonysolemnised before the birth of this brother

Analogous contracts Where there is a duty todisclose not material but unusual facts for examplecontracts of suretyship

It must have been a material inducement

A statement likely to induce a person to contract willnormally be assumed to have done so Moreover if theclaimant can show that he was in fact induced it is nodefence to argue that a reasonable person would have beeninfluenced by the misrepresentation (Museprime PropertiesLtd v Adhill (1990)) There is no inducement however where

bull the misrepresentee or his agent actually knew the truth

bull the misrepresentee was ignorant of the misrepresentationwhen the contract was made In Horsfall v Thomas (1862)the vendor of a gun concealed a defect in the gun(misrepresentation by conduct) The buyer howeverbought the gun without examining it Held ndash theattempted misrepresentation had not induced thecontract

bull the misrepresentee did not allow the representation toaffect his judgment In Attwood v Small (1838) a buyerappointed an agent to check the statement made by theseller as to the reserves in a mine Held ndash not actionablemisrepresentation The buyer had relied on his ownagentrsquos statements not that of the vendor

Note however that

bull provided that the representation was one of theinducements it need not be the sole inducement

CA

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80

bull the fact that the representee did not take advantage of anopportunity to check the statement is no bar to an actionfor misrepresentation

In Redgrave v Hurd (1881) a solicitor was induced topurchase a house and practice by the innocentmisrepresentation of the seller Held ndash he was entitled torescission although he did not examine the documentswhich were available to him and which would haveindicated to him the true state of affairs

bull neither is it contributory negligence not to check astatement made by a vendor (Gran Gelato v Richcliff(1992))

Remedies for misrepresentation

Rescission

Misrepresentation renders a contract voidable ndash see aboveThe Misrepresentation Act 1967 provides that rescission isavailable in relation to

bull lsquoexecutedrsquo contracts for the sale of goods andconveyances of property

bull representations which have been incorporated as a termof the contract

Rescission was not available in these circumstances before1967

Damages

bull There are five ways in which damages may be claimedfor misrepresentation It seems likely that in future thenormal ground for damages will be the

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W81

Misrepresentation Act 1967 but there are still cases wheredamages can only be claimed at common law if at all

bull Note ndash rescission and damages are alternative remediesin many cases but if the victim of fraudulent ornegligent misrepresentation has suffered consequentialloss he may rescind and sue for damages

bull Damages can be claimed on different bases according tothe kind of misrepresentation that was committed

Damages in the tort of deceit for fraudulent misrepresentationIt is up to the misled party to prove that themisrepresentation was made fraudulently that isknowingly without belief in its truth or recklessly as towhether it be true or false (Derry v Peek (1889))

The burden of proof on the misled party is a heavy one

Damages in the tort of negligence Victims of negligent misrepresentation may be able to sueunder Hedley Byrne v Heller amp Partners (1963) Themisrepresentee must prove (1) that the misrepresentorowed him a duty to take reasonable care in making therepresentation that is there must be a lsquospecial relationshiprsquo(2) that the statement had been made negligently

Damages under s 2(1) of the Misrepresentation Act 1967Section 2(1) of the Misrepresentation Act 1967 provides thatwhere a person has entered into a contract after amisrepresentation has been made to him by another partythereto and as a result of it has suffered loss lsquothen if themisrepresentor would be liable for damages if it had beenmade fraudulently he will be so liable notwithstanding thatthe misrepresentation was not made fraudulently unless heproves that he had reasonable grounds to believe and did

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82

believe up to the time the contract was made that the factsrepresented were truersquo

Note that this is a more beneficial remedy for themisrepresentee as he only need prove that the statement isuntrue It is for the misrepresentor to prove that he had goodgrounds for making the statement and the burden of proofis a heavy one In Howard Marine and Dredging Co Ltd vOgden (1978) the owner of two barges told the hirer that thecapacity of the barges was 1600 tons He obtained thesefigures from the Lloydrsquos list but in this case the Lloydrsquos listwas incorrect The court held that he did not have goodgrounds for this statement he should have consulted themanufacturerrsquos specifications which should have been in hispossession

Assessment of damages

The Court of Appeal confirmed in Royscot Trust v Rogerson(1991) that damages under s 2(1) of the MisrepresentationAct should also be awarded on the reliance basis because ofthe lsquofiction of fraudrsquo in the wording of the Act

Remoteness of damage

The Court of Appeal also held in that case because of thelsquofiction of fraudrsquo that the rules of remoteness whichnormally apply only to the tort of deceit should be appliedunder s 2(1)

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W83

Damages in the tort of deceit and the tortof negligence are assessed on the tortious basis of reliance that is the claimant is entitled to be

put in the position he was in before the tort was committed

(In contract and in all torts other than deceit the losses mustbe lsquoreasonably foreseeablersquo)

bull In Royscot Trust v Rogerson (1991) a customer arranged toacquire a car on hire purchase from a car dealer Thefinance was to be provided by a finance company theRoyscot Trust which insisted on a deposit of 20 Thedealer falsified the figures in order to indicate a deposit of20 as required Some months later the customerwrongfully sold the car thus depriving the financecompany of its property The finance company sued thedealer under s 2(1) of the Misrepresentation Act It washeld by the Court of Appeal that the finance companycould recover damages from the car dealer to cover theloss of the car since the loss followed themisrepresentation The remoteness rules applicable to thetort of deceit would be applied and the loss did not needto be foreseeable

Controversy has followed this decision as the tort ofdeceit to which this rule only previously applied isdifficult to establish and involves moral culpability onthe part of the defendant It has now been extended to anaction which is relatively easy to establish (see HowardMarine and Dredging v Ogden) and may only involvecarelessness Some doubts as to whether this was thecorrect approach were expressed obiter by the House ofLords in Smith New Court Securities Ltd v ScrimgeourVickers (Asset Management) Ltd (1996) but for the timebeing Royscot v Rogerson remains good law

CA

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84

That is damages would be awarded to coverall losses which flow directly from the

untrue statement whether or not those losses were foreseeable

bull Further problems are caused by the decision of the Courtof Appeal in East v Maurer (1991) a case in the tort ofdeceit where it was held that lsquoall damages flowingdirectly from the fraudrsquo would cover damages for somedegree of loss of profit ndash a heading previously consideredto be appropriate only to expectation damages incontract It is a matter for speculation whether the courtswill apply this decision to cases under theMisrepresentation Act and bring loss of profit under theheading of reliance loss on the basis that all losses whichflow directly from the misrepresentation should berecoverable

bull A generous interpretation of s 2(1) of the 1967 Act hadalso been applied by the court in Naughton v OrsquoCallaghan(1990) where reliance damages had been awarded tocover not only the difference between the value of the coltand the value it would have had if the statements madeabout it were correct (the quantification rule for breach ofcontract) but also the cost of its maintenance since thesale

It has been alleged that these three cases swell the amount ofdamages which can be awarded under the MisrepresentationAct to a greater extent than intended by Parliament and thatthe damages available for misrepresentation can nowexceed those available for breach of contract

Damages for wholly innocent misrepresentationDamages cannot be claimed for a misrepresentation whichis not fraudulent or negligent but

bull an indemnity may be awarded (see above)

bull damages in lieu of rescission may be awarded under s 2(2) of the Misrepresentation Act 1967 C

ON

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85

In William Sindall v Cambridgeshire CC (1994) the Court ofAppeal stated (obiter) that where the court is consideringwhether to award damages in lieu of rescission threematters should be taken into consideration

the nature of the misrepresentation

the loss which would be caused to the representee ifthe contract were upheld

the hardship caused to the misrepresentor if the con-tract were rescinded The Court of Appeal also statedthat the damages should resemble damages forbreach of warranty

bull lsquodamages in lieursquo can it seems be awarded even if one ofthe bars to recision apply (Thomas Witter Ltd v TBPIndustries (1996))

bull where the misrepresentation has become a term of thecontract the misrepresentee can sue for damages forbreach of contract as an alternative to damages formisrepresentation

Duress

A common law doctrine

Duress to the person

This requires actual or threatened violence to the personOriginally it was the only form of duress recognised by thelaw

CA

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86

Duress involves coercion

Duress to goods

bull Threat of damage to goods ndash traditionally this has notbeen recognised by the law but in view of thedevelopment of economic duress it is assumed thatduress to goods would today be a ground for relief

Economic duress

Requires

Economic duress led to rescission of a contract in UniverseTankships of Monrovia v ITWF (1983) where a union hadlsquoblackedrsquo a tanker and refused to let it leave port untilcertain moneys had been paid The House of Lordsconsidered that this amounted to economic duress andordered return of the money

It has been stated that economic duress requires

Compulsion or coercion of the will

In Pau On v Lau Yiu Long (1980) Lord Scarman listed thefollowing indications of compulsion or coercion of the will

bull did the party coerced have an alternative course open tohim

bull did the party coerced protest

bull did the party coerced have independent advice

bull did the party coerced take steps to avoid the contract

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W87

Compulsion of the will An illegitimate threat

Illegitimate pressure

There must be some element of illegitimacy in the pressureexerted for example a threatened breach of contract Theillegitimacy will normally arise from the fact that what isthreatened is unlawful In CTN Cash and Carry v Gallaher(1994) however the Court of Appeal accepted obiter that anoutrageous but technically lawful threat could amount toduress This possibility has not so far been developed in anylater cases

Economic duress is often pleaded together with lack ofconsideration in cases where a breach of contract isthreatened by the promisor unless he receives additionalpayment

bull In Atlas Express v Kafco (1989) Kafco a small companywhich imported and distributed basketware had acontract to supply Woolworths They contracted withAtlas for delivery of the basketware to Woolworths Thecontract commenced then Atlas discovered they hadunderpriced the contract and told Kafco that unless theypaid a minimum sum for each consignment they wouldcease to deliver Kafco were heavily dependent on theWoolworths contract and knew that a failure to deliverwould lead both to the loss of the contract and an actionfor damages At that time of the year they could not findan alternative carrier and agreed under protest to makethe extra payments Atlas sued for Kafkorsquos non-paymentHeld ndash the agreement was invalid for economic duressand also for lack of consideration

bull Cf Williams v Roffey Bros (1989) ndash Chapter 2

The following threats are probably not illegitimate (subjectto the possibility raised by CTN Cash and Carry v Gallaher(1994) discussed above)

CA

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88

bull a threat not to enter into a contract

bull a threat to institute civil proceedings

bull a threat to call the police

Note ndash not all threatened breaches of contract will amount toeconomic duress It will only do so when the threatenedparty has no reasonable alternative open to him The normalresponse to a breach of contract is to sue for damages

Remedies

bull In North Ocean Shipping Co v Hyundai Construction Co TheAtlantic Baron (1979) the court found economic duressbut refused rescission on the ground that the plaintiff hadaffirmed the contract

Undue influence

An equitable doctrine

bull Undue influence is based on the misuse of a relationshipof trust or confidence between the parties Where foundit renders a contract voidable The innocent party willneed to apply to the court for rescission of the contract(see above)

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W89

Pressure not amounting to duress at common lawwhereby a party is excluded from the exercise of

free and independent judgment

Duress renders a contract voidable Rescission willnormally be sought from the courts See above

Contracts where undue influence is presumed

For example

bull Contracts between certain relationships

parent and child

trustee and beneficiary

solicitor and client

doctor and patient

religious adviser and disciple

bull Where there has been a long relationship of confidenceand trust between the parties

For example between husband and wife or where oneparty had been accustomed to rely for guidance andadvice on the other In Lloyds Bank v Bundy (1975) MrBundy an elderly west country farmer on the advice ofthe local Lloyds Bank assistant manager granted a chargeto the bank over the family farm to guarantee his sonrsquos

CA

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ND

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AR

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90

Contracts where undue influence

is presumed

Contracts where actual undue

influence must be proved

Contracts induced by undue influence are of two kinds

The contract must be manifestly disadvantageous

to the weaker party

Contracts need not be manifestly disadvantageous

to the weaker party

indebtedness to the bank Mr Bundy had all his liferelied on Lloyds Bank for financial advice the court setaside the charge on the ground of undue influence on thepart of the bank

Note ndash a bank will not be presumed to exert undueinfluence in normal circumstances

In Credit Lyonnais Bank Nederland NV v Burch (1997) therelationship between an employer and a junior employee(who was persuaded to put up her own house as securityfor the businessrsquos overdraft) was held to be one of undueinfluence

The stronger party can disprove undue influence byshowing that

bull full disclosure of all material facts was made

bull the consideration was adequate

bull the weaker party was in receipt of independent legaladvice

Contracts where actual undue influence is proved

The burden of proof lies on the claimant to show that suchinfluence did exist and was exerted

Effect of undue influence on a third party

In Barclays Bank v OrsquoBrien (1993) Mrs OrsquoBrien had signed aguarantee which used the jointly owned matrimonial homeas security for a loan made to her husbandrsquos business Herhusband had told her it was for a maximum of pound60000 butin fact it was for pound130000 Mrs OrsquoBrien had not been advisedby the bank to consult an independent solicitor The Houseof Lords held that there was no undue influence in this casebut there was misrepresentation on the part of the husband

CO

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CT

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W91

They further held that where there was undue influence ormisrepresentation or other legal wrong then the injuredpartyrsquos right to have the transaction set aside would beenforceable also against the third party provided the thirdparty had actual or constructive notice of the wrong Suchnotice would arise where

bull the parties were in an emotional relationship forexample co-habitees (heterosexual or homosexual) orchild and aged parents

bull one party was undertaking a financial liability on behalfof the other which was not to her or his advantage

The court also held that in the above situation the third partycould discharge his duty by making clear to the partyconcerned the full nature of the risk he or she is taking onfor example

bull by conducting a personal interview or

bull urging independent advice

Note ndash this doctrine of constructive notice applies to sureties(guarantors) but does not apply where a bank makes a jointloan to both parties as the facts in that situation do not meetthe requirements set out in Barclays Bank v OrsquoBrien See CIBCMortgages v Pitt (1993)

Note

bull A failure by a solicitor to give proper advice cannot beheld against a bank (even if the bank knows that thesolicitor is acting for both the borrower (for example thehusband) and the guarantorsurety (for example thewife)) ndash see Royal Bank of Scotland v Etridge (No 2) (1998)

CA

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92

bull Once undue influence or misrepresentation has beenfound the whole contract is avoided it cannot be upheldin part ndash TSB Bank plc v Camfield (1995)

bull Damages are not available as a remedy for duress orundue influence

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CT

LA

W93

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W95

6 Mistake

There is much disagreement concerning the effect ofmistake on a contract There are many reasons for thisconfusion as to which terms to use a large number of caseswhich can be interpreted in different ways no recentdecisive House of Lords decisions on the subject theintervention of equity

Terminology

Different terms are used by Cheshire and Anson to describethe same kind of mistake and you should ascertain whichterms are used in your textbook

The terms used by Cheshire are used in this LawCard

CHESHIRE ANSON Effect

Same mistake Common Mutual May nullifymade by both mistake mistake agreementparties

Parties at Mutual Unilateral Negativescross-purposes mistake mistake agreement

Parties atcross-purposesbut one party Unilateral Unilateral Negativesknows that mistake mistake agreementthe other is mistaken

Effect of a mistake

If the contract is rendered void then the parties will bereturned to their original positions and this may defeat therights of innocent third parties who may have acquired aninterest in the contract

The reluctance of the courts to develop the common lawdoctrine of mistake is probably due to the unfortunateconsequences for third parties that can result from holdinga contract void Equity has however intervened to producemore flexibility as noted below

CA

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96

In common mistakes the parties are agreed but both are mistaken

In mutual and unilateral mistakes the parties may not have reached agreement and these mistakes are sometimes dealt with

under the heading of agreement

The general rule is that a mistake has no effect on a contract but certain mistakes of a fundamental nature sometimes called

operative mistakes may render a contract void at common law

Operative mistakes

Common mistakes

bull At common law this may render the contract void thatis the contract has no legal effect it is unenforcable byeither party and title to property cannot pass under it

bull In equity a more flexible approach has developedcontracts containing certain common mistakes have beentreated as voidable In setting aside such contracts thecourts have a much wider control over the terms it canimpose on the parties

In Bell v Lever Bros (1932) it was stated that to nullify theagreement the lsquomistake must go to the root of the contractrsquo

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W97

Commonmistakes

re a fundamentalmatter for

example resextincta res sua

the quality of the subject matter

Mutualmistakes

re identity ofsubject matter

of contract

Unilateralmistakes

re terms ofcontract re

identity of otherparty to contract

The parties are agreed but they are both under the same misapprehension If this

misapprehension is sufficiently fundamentalit may nullify the agreement

Lever Bros agreed to pay two directors of a subsidiarycompany substantial sums of money in compensation forloss of office while unaware of the fact that they hadengaged in irregular conduct which would have allowedthem to be dismissed without compensation Lever Brosasked the court to order the return the compensation paid onthe ground that it had been paid as a result of a commonmistake The House of Lords held that the common mistakeconcerning the need to pay compensation was notlsquosufficiently fundamentalrsquo to render the contract void

Common mistakes lsquosufficiently fundamentalrsquo to render a

contract void

A common mistake as to the existence of the subject matter(res extincta)bull In Galloway v Galloway (1914) the parties believing they

were married entered into a separation agreement Laterthey discovered that they were not validly married Held ndashthe separation agreement was void for a common mistake

bull In Strickland v Turner (1852) the court declared void onthe grounds of a common mistake a contract to purchasean annuity on the life of a person who had already died

bull In Couturier v Hastie (1856) a buyer bought a cargo ofcorn which both parties believed to be at sea the cargohad however already been disposed of Held ndash thecontract was void

bull Section 6 of the Sale of Goods Act 1979 declares thatlsquoWhere there is a contract for the sale of specific goodsand the goods without the knowledge of the seller haveperished when the contract is made the contract is voidrsquo

CA

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98

However in McRae v Commonwealth Disposals Commission(1951) the commission sold to McRae the right to salvagea tanker lying on a specified reef There was no such reefof that name nor was there any tanker The court foundthat there was a valid contract and that the commissionhad impliedly guaranteed the existence of the tanker Thecase could be distinguished from the Australianequivalent of s 6 on the ground that there never had beena tanker and it had therefore not perished

Whether a contract is void or valid depends on theconstruction of the contract that is even if the subjectmatter does not exist the contract will be valid

if performance was guaranteed or

if it was the purchase of a lsquochancersquo

Otherwise the contract would be void

Mistake as to title ndash res sua ndash that is the thing sold alreadybelongs to the buyerbull In Cooper v Phibbs (1867) Cooper not realising that a

fishery already belonged to him agreed to lease it fromPhibbs Held ndash the contract was void

Mistake as to the possibility of performing the contractbull In Sheik Bros Ltd v Ochsner (1957) a contract was held

void as the land was not capable of growing the cropcontracted for

bull In Griffith v Brymer (1903) a contract to hire a room toview the coronation of Edward VII which was madeafter the procession had been cancelled was held void(Commercial impossibility) C

ON

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99

Mistake as to the quality of the subject matterLords Atkin and Thankerton both insisted in Bell v Lever Brosthat to render a contract void the mistake must go to thelsquoroot of the contractrsquo

bull It has been argued that if the mistake in Bell was notsufficiently fundamental to render a contract void then itis highly unlikely that any mistake concerning qualitywould do so

bull Similarly in Leaf v International Galleries (1950) whereboth parties mistakenly believed that a painting was byConstable the Court of Appeal stated that the contractwas not void for common mistake

bull In Solle v Butcher (1950) the Court of Appeal declined todeclare void a lease which both parties believed was notsubject to the Rent Acts A similar decision was reachedin Grist v Bailey (1967) where the parties both believedthat a house was subject to a protected tenancy

However Lord Justice Steyn in Associated Japanese Bank vCredit du Nord (1988) stated that not enough attention hadbeen paid to speeches in Bell v Lever Bros which did indicatethat a narrow range of mistakes in quality could render acontract void for example Lord Atkinrsquos statement that lsquoacontract may be void if the mistake is as to the existence ofsome quality which makes the thing without that qualityessentially different from the thing it was believed to bersquo Hegave as an example ndash if a horse believed to be sound turnsout to be unsound then the contract remains valid but if ahorse believed to be a racehorse turns out to be a carthorsethen the contract is void

CA

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100

Equity

The role of equity according to this view is supplementarydesigned to relieve the limitations of the common law

bull Rescission on terms was granted by the Court of Appealin Solle v Butcher (1950) (see above) The court rescindedthe lease but gave the tenant the option of staying thereon terms of his paying the extra rent which the landlordcould have charged in view of the improvements

bull Rescission on terms was also granted in Grist v Bailey(1967) where a house was sold in the mistaken belief thatit had a protected tenancy and in Laurence v LexcourtHoldings (1978) where there was a common mistake withregard to planning permission

bull Rescission without terms was granted in Magee v PennineInsurance Co (1969) where an agreement by an insurancecompany to meet a claim was rescinded because theparties were unaware that it was based on a policy whichwas voidable due to a misrepresentation by the assured

bull In William Sindall plc v Cambridgeshire CC (1994) Evans LJsuggested that whereas the common law only recognisedmistakes as to the subject matter of the contract equitywould recognise a lsquowider and perhaps unlimitedcategory of common mistakersquo In Clarion Ltd v NationalProvident Institution (2000) however Rimer J held that

CO

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LA

W101

Lord Justice Steyn in Associated Japanese Bank v Credit du Nord (1988) stated that a court will first examine whether a

contract is void at common law if it is not then itwill examine whether equity will grant rescission

equity would only intervene where the mistake was as tothe terms of the contract or its subject matter Equity didnot provide relief for a lsquobad bargainrsquo

Mutual and unilateral mistakes

The courts adopt an objective test in deciding whetheragreement has been reached It is not enough for one of theparties to allege that he was mistaken

Mistake can negate consent in the following cases

Mutual mistakes concerning the identity of the subject matter

bull In Raffles v Wichelhaus (1864) a consignment of cotton wasbought to arrive lsquoex Peerless from Bombayrsquo Two shipsboth called Peerless were due to leave Bombay at aroundthe same time Held ndash no agreement as the buyer wasthinking of one ship and the seller was referring to theother ship

bull Similarly there was no agreement in Scriven Bros vHindley amp Co Ltd (1913) where the seller sold lsquotowrsquo andthe buyer bought lsquohemprsquo Again there was an ambiguityas both lots were delivered under the same shippingmark and the catalogue was vague

CA

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102

In these cases the parties are at cross-purposesbut there must have been some ambiguity

in the situation before the courts willdeclare the contract void

These mistakes negate consentthat is they prevent the formation of an agreement

bull But in Smith v Hughes (1871) the court refused to declarevoid an agreement whereby the buyer had thought hewas buying old oats when in fact they were new oats asthe contract was for the sale of lsquooatsrsquo The mistake relatedto the quality not the identity of the subject matter

Unilateral mistake concerning the terms of the contract

bull In Hartog v Colin and Shields (1939) the sellers mistakenlyoffered to sell goods at a given price per pound whenthey intended to offer them per piece All the preliminarynegotiations had been on the basis of per piece Thebuyers must have realised that the sellers had made amistake The contract was declared void

bull In Smith v Hughes however the contract was for the saleof lsquooatsrsquo not lsquoold oatsrsquo it would only have been void iflsquoold oatsrsquo had been a term of the contract

Unilateral mistake as to the identity of other parties to the

contract

There are a number of contradictory cases and theoriesunder this heading

Traditionally a distinction is made between mistakes as toidentity and mistakes as to attributes (for example creditworthiness)

bull In Cundy v Lindsay (1878) a Mr Blenkarn ordered goodsfrom Lindsay signing the letter to give the impressionthat the order came from Blenkiron amp Co a firm knownto Lindsay amp Co Held ndash the contract was void Lindsay

CO

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W103

Here one party has taken advantage of the other partyrsquos error

amp Co had only intended to do business with Blenkiron ampCo There was therefore a mistake concerning the identityof the other party to the contract

bull In Kingrsquos Norton Metal Co v Edridge Merrett amp Co Ltd(1872) on the other hand a Mr Wallis ordered goods onimpressive stationery which indicated that the order hadcome from Hallam amp Co an old established firm withbranches all over the country Held ndash the contractbetween Kingrsquos Norton Metal Co and Wallis was notvoid The sellers intended to do business with the writerof the letter they were merely mistaken as to hisattributes that is the size and credit worthiness of hisbusiness

bull In Boulton v Jones (1857) the defendant sent an order forsome goods to a Mr Brocklehurst unaware that he hadsold the business to his foreman the plaintiff Theplaintiff supplied the goods but the defendant refused topay for them as he had only intended to do business withBrocklehurst against whom he had a set off Held ndash therewas a mistake concerning the identity of the other partyand the contract was therefore void

However the cases all concerned contracts negotiated at adistance

CA

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104

From the above three cases it would seem that acontract is void if the mistaken party intended to do

business with another specific person and the identity of that other person was important to him

bull In Phillips v Brooks (1919) a jeweller sold a gold ring anddelivered it on credit to a customer who had come intohis shop and had falsely claimed to be Sir GeorgeBullough a well known and wealthy man Held ndash thecontract was valid The jeweller had intended to dobusiness with the person in his shop

bull In Lewis v Averay (1972) a rogue claimed to be RichardGreene the film actor and produced a pass to Pinewoodstudios to verify this He was allowed to drive away a carin return for a cheque and subsequently resold the car forcash to Averay The cheque bounced and the sellerclaimed the return of the car on the ground that he wasmistaken as to the identity of the buyer Held ndash thecontract was valid The seller must be presumed to haveintended to deal with the person physically in the roomwith him Averay kept the car

There are two cases however where the plaintiffs were ableto establish a mistake as to the identity of a person in theirpresence

bull In Ingram v Little (1961) two sisters sold a car and handedit over against a worthless cheque to a person whoclaimed to be a Mr Hutchinson of Stanstead HouseCaterham They only did so after one of them hadchecked that there was a man of that name who lived atthat address The Court of Appeal held the contract void C

ON

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105

Where the parties negotiate in person the samerules apply but there is a presumption that the inno-cent party intended to do business with the person

physically in his presence

They considered that the sisters had done enough toestablish that they only intended to deal with MrHutchinson

This case has been greatly criticised as it is difficult toreconcile with Phillips v Brooks and Lewis v Averay

bull In Sowler v Potter (1940) the lease of a cafeacute was granted toPotter who had previously been convicted of keeping adisorderly cafe under the name of Robinson The courtheld that the contract was void because of the lessorrsquosmistaken belief that Potter was not Robinson This casehas also been much criticised and doubted as it did notseem that Sowler had intended to do business with anyother identifiable person The contract could in any casehave been set aside for misrepresentation

The contract would in most cases be voidable in any case formisrepresentation where one party has misled the otherwith regard to his identity The advantage of having the contract declared void for mistake is to avoid the bars torescission

See Chapter 5 pp 75ndash76

Mistake as to the nature of the document signed

Defence of non est factum

bull The scope of this defence has been limited since thedecision in Saunders v Anglia Building Society (Gallie v Lee)(1971) where an old lady was persuaded by her nephewto sign a document conveying her house to her nephewrsquosfriend She had believed that she was signing a deed ofgift to her nephew She had not read the documentbecause her glasses were broken It was held that thedocument was valid It was stated that

CA

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106

It is also thought that it will only protect a person who isunder some disability The defence did succeed in LloydsBank v Waterhouse (1990) where the defendant who wasilliterate signed a guarantee of his sonrsquos debt to the bankThe father thought that the guarantee covered the purchaseprice of a farm but in fact it covered all his sonrsquosindebtedness to the bank It was held that the effect of thedocument was fundamentally different from what it wasbelieved to be There was no negligence and the contractwas therefore void

In UDT Ltd v Western (1976) it was held that these samerules applied to cases where a person had signed a formbefore all the details required by the form had been entered

Mistake in equity

The narrow approach taken by the common law towardsremedies for mistake (that is that it renders the contractvoid) is supplemented by the more flexible approach ofequity The following remedies may be available in equity

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W107

Rescission RectificationRefusal of

specificperformance

The signed document must be fundamentally different in effect from what it was thought to be

The signatory must prove that he had not been negligent in signing the document

Rescission

See common mistake (above)

Rectification

Where there has been a mistake not in the actual agreementbut in reducing it to writing equity will order rectification ofthe document so that it coincides with the true agreement ofthe parties

Necessary conditionsbull The document does not represent the intention of both

parties or

bull one party mistakenly believed a term was included in thedocument and the other party knew of this error InRoberts amp Co Ltd v Leicestershire CC (1961) the completiondate of a contract was rectified at the request of one partybecause it was clear that the other party was aware of theerror when the contract was signed

If the document fails to mention a term which one partybut not the other had intended to be a term of thecontract there is no case for rectification

bull There must have been a concluded agreement but notnecessarily a legally enforceable contract In Joscelyne vNissen (1970) a father and daughter agreed that thedaughter should take over the car hire business Inreturn the father would continue to live in the house andthe daughter would pay all the household expenses Thislast provision was not included in the written contractHeld ndash the contract should be rectified to include it

Note ndash a document which accurately records a prioragreement cannot be rectified because the agreement wasmade under some mistake (Rose v Pym above) Equityrectifies documents not agreements

CA

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108

Rectification is an equitable remedy and is available at thediscretion of the court Lapse of time or conflict with thirdparty rights may prevent rectification

Refusal of specific performance

bull In Webster v Cecil (1861) the defendant having previouslyrefused the plaintiffrsquos offer of pound2000 for his land wrote tothe plaintiff offering to sell it to him for pound1250 instead ofpound2250 as he had intended The plaintiff accepted theoffer Specific performance was refused as the plaintiffmust have been aware of the error (unilateral mistake)

bull Where there is no blame on the claimant the situation ismore difficult In Malins v Freeman (1837) the defendanthad mistakenly bought the wrong property at an auctionSpecific performance was refused In Tamplin v James(1879) however the court ordered specific performancewhere the defendant had bid for a property under anerror as to its true extent Presumably being forced to buya totally different property from the one he intendedwould have caused greater hardship than being forced tobuy a property whose dimensions differed from hisexpectations

CO

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W109

Specific performance will be refused when the contract is void at common law Equity may also

refuse specific performance where a contract is validat law but only lsquowhere a hardship amounting toinjustice would have been inflicted upon him by

holding him to his bargainrsquo (Tamplin v James (1879))

7 Illegality and capacity

Illegal contracts are classified in different ways by differentauthorities In this chapter a distinction is drawn betweencontracts which involve the commission of a common lawor statutory offence and those which are void as beingcontrary to public policy

Illegality

The main issue with regard to illegal contracts is the effectof illegality on a contract The most often examined topicwith regard to contracts which are declared void ongrounds of public policy is contracts in restraint of trade

Illegal contracts

Contracts illegal by statute

bull Statute may declare a contract illegal for example theCompetition Act 1998

bull Statute may prohibit an act but declare that it shall noteffect validity of contract for example the ConsumerProtection Act 1987

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W111

Illegal contracts Contracts void

against public policy

Contracts prohibited by statute

Contracts illegal at common law

bull Statute may prohibit an act but not stipulate its effect onthe contract The status of the contract will in this casebe a matter of interpretation for the court In ReMahmoud and Ispahani (1921) the court decided that astatement that lsquoa person shall not buy or otherwise dealin linseed oil without a licencersquo was a prohibition and acontract entered into by a person without a licence wastherefore void

bull The courts are reluctant to imply a prohibition when thisis not clearly indicated in the statute In Hughes v AssetManagers (1995) the court held a contract valid despitethe fact that a document had not been signed by a personauthorised to do so as required by statute

Contracts illegal at common law

bull An agreement to commit a crime a tort or a fraud forexample defraud the rating authority (Allen v Roscous(1676)) to publish a libel (Clay v Yates)

bull An agreement to defraud the Inland Revenue (Napier vBusiness Associates (1951))

bull Contracts damaging to the countryrsquos safety or foreignrelations

bull Contracts interfering with the course of justice forexample contracts to give false evidence

bull Contracts leading to corruption in public life (Parkinson vRoyal College of Ambulance (1925))

bull Contracts tending to promote sexual immorality (Pearcev Brooks (1866))

CA

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112

Effects of illegality

Contracts illegal as formed

In Pearce v Brooks (1866) the owner of a coach of unusualdesign was unable to recover the cost of hire from aprostitute who to his knowledge had hired it in order toattract clients

In Parkinson v Royal College of Ambulance (1925) Parkinsonwas unable to recover the money he had donated to thedefendants on the understanding that they would obtain aknighthood for him

Exceptionsbull Where the parties are not in pari delicto (that is not

equally at fault) for example where one party isunaware of the illegal nature of the contract or has beeninduced to enter into it by fraudulent misrepresentationor is the party the law was attempting to protect forexample a tenant who has paid an illegal premium(Kiriri Cotton Co v Dewani (1960))

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W113

Contracts illegal as formed

Contracts illegal in their performance

Such contracts are void ab initio there can be no action for breach of contract

Money paid or property transferred under the contract cannot be recovered

bull Where the transferor genuinely repents and repudiatesthe contract before performance In Tribe v Tribe (1995)money was transferred to a son in order to avoid thefatherrsquos creditors At the end of the day the creditorswere all paid in full and the father was allowed to cite theoriginal reason for the transfer in order to rebut thepresumption of advancement (which would have meantthat his son could keep the shares) He had withdrawnfrom the illegal purpose before performance

In Bigos v Boustead (1951) however the court was notconvinced that the plaintiff had genuinely repented

bull Where the transferor can frame his claim without relyingon the contract In Bowmakers v Barnet Instruments (1945)the plaintiffs were able to rely on an action in the tort ofconversion to recover goods delivered under an illegalhire purchase contract

Similarly in Tinsley v Milligan (1993) both parties hadcontributed money towards the purchase of a house putin the name of Tinsley alone in order to allow Milligan tomake various social security claims When Milligan suedfor the return of the money it was argued that theagreement had been entered into for an illegal purposeand that the public conscience lsquowould be affronted byrecognising rights created by illegal transactionsrsquo TheHouse of Lords held however that a resulting trust hadbeen created in favour of Milligan by the contribution tothe purchase price Milligan therefore could rely on theresulting trust and had no need to rely on the illegalagreement

This case shows (a) that the rule applies to equity as wellas to common law (b) the test of lsquoaffront to the publicconsciencersquo previously used by the Court of Appeal is nolonger good law

CA

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114

bull Where part of the contract is lawful the court will notsever the good from the bad In Napier v National BusinessAgency (1951) certain payments were described aslsquoexpensesrsquo in order to defraud the Inland Revenue Thecourt refused to enforce payment of the accompanyingsalary as the whole contract was tainted with the illegality

Note ndash property can pass under an illegal contract as in Singv Ali (1960)

Contracts illegal in their performance

A claim by the innocent party to enforce the contract in thesecases is strong

bull In Marles v Philip Trant (1954) the defendant sold winterwheat described as spring wheat without anaccompanying invoice as required by statute Held ndash theplaintiff could sue for damages for breach of contractThe contract was illegal in its performance but not in itsinception

bull In Strongman v Sincock (1955) Sincock failed to getlicences which were needed to modernise some houseswhich belonged to him and refused to pay for the workon the basis that the contracts were illegal Held ndashStrongman could not sue on the illegal contracts butcould sue Sincock on his collateral promise to obtain thelicences

CO

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W115

The illegality may only arise during the performance of a contract for example

a carrier may break the law by exceeding the speed limit whilst delivering goods

belonging to a client He will be punished but the contract will not necessarily be void

bull In Archbolds v Spanglett (1961) Spanglett contracted tocarry Archbolds whisky in a van which was not licensedto carry any goods other than his own Archbold wasunaware of this and could therefore recover damages forbreach of contract

But in Ashmore Benson Pease amp Co v Dawson Ltd (1973)the other party knew of the overloading of the lorry andcould not therefore recover damages He hadparticipated in the illegality

bull Even the guilty party may enforce the contract if theillegality is incidental

In Shaw v Groom (1970) a landlord failed to give histenant a rent book as required by law Held ndash he could suefor the rent The purpose of the statute was to punish thelandlordrsquos failure to provide a rent book not to render thecontract void

In St John Shipping v Rank (1957) a ship owner who hadoverloaded his ship in contravention of a statute was ableto recover freight

Contracts void at common law on grounds of publicpolicy

CA

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116

Contracts damaging to theinstitution of marriage

For example contracts inrestraint of marriage

marriage brokerage contractscontracts for future separation

(pre-nuptial agreements)

Contracts made after orimmediately beforeseparation are valid

Contracts to oust thejurisdiction of the courts

However arbitrationagreements are valid

In Esso Petroleum v Harpers Garage (1968) it was stated thatthe court will consider

bull whether the contract is in restraint of trade A contract isin restraint of trade if it restricts a personrsquos liberty tocarry on his trade or profession Certain restraints havebecome acceptable over the years for example lsquotiedhousesrsquo restrictive covenants in leases sole agency orsole distributorship agreements

bull whether it should nevertheless be enforced because itprotects a legitimate interest and is reasonable Theonus of proving reasonability is on the promisee Arestraint to be permissible must be no wider than isnecessary to protect the relevant interest of thepromisee

Categories of contracts in restraint of trade

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Restraints onemployees

Restraints on thevendors of a business

Exclusive dealingagreements

A contract in restraint of trade is prima facie void but thecourts will now uphold the restriction if it is shown that

bull the restraint protects a legitimate interest

bull the restraint is reasonable between the parties

bull the restraint is reasonable as regards the interest of thepublic

Contracts in restraint of trade

Restraints on employeesThe restraint is void unless the employer can show

bull That it is necessary to protect a proprietary interest forexample the trade secrets of a works manager in Foster vSuggett (1918) the trade connections of a solicitorrsquosmanaging clerk in Fitch v Dewes (1921)

A restraint merely to prevent competition will not beenforced

In Eastham v Newcastle United FC (1964) the courtaccepted that the proper organisation of football was avalid matter for clubs to protect but found the lsquoretainand transfer systemrsquo unreasonable

bull That the restraint is no greater than is necessary toprotect the employerrsquos interest in terms of time andarea

In Scorer v Seymore-Jones (1966) the court upheld arestriction of 10 miles within branch A at which theemployee had worked but held that a similar restraintcovering branch B at which the employee had notworked was unreasonable and void

bull Problems with area can be overcome by using lsquonon-solicitationrsquo clauses instead

In Home Counties Dairies v Skilton (1970) a milkmanagreed that for one year after leaving his present job hewould not sell milk to his employerrsquos customers Held ndashrestraint valid It was necessary to protect the employeragainst loss of customers

bull The validity of the duration of the restraint depends onthe nature of the business to be protected and on thestatus of the employee

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118

In Briggs v Oates (1991) a restriction of five miles for fiveyears on an assistant solicitor was upheld as reasonable

bull A restraint imposed by indirect means for example byloss of pension rights (Bull v Pitney Bowes (1966)) orwhere two companies agreed not to take on the otherrsquosemployees (Kores v Kolok (1959)) will be judged by thesame criteria

Restraints on the vendor of a business

bull In Vancouver Malt and Sake Brewing Co v VancouverBreweries Ltd (1934) a company which was licensed tobrew beer but which had not at any time brewed beerwas sold and agreed not to brew any beer for 15 yearsHeld ndash the restraint was void since there was no goodwillof a beer brewing business to be transferred

bull In British Concrete v Schelff (1921) S sold his localisedbusiness to B who had branches all over the UK andagreed not to open any business within 10 miles of any ofBrsquos branches Held ndash the restriction was void B wasentitled only to protect the business he had bought notthe business which he already owned

bull In Nordenfelt v Maxim Nordenfelt (1894) N a worldwidesupplier of guns sold his worldwide business to M andagreed not to manufacture guns anywhere in the worldfor 25 years Held ndash the restriction was valid C

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119

Such a restraint is valid if it is intended to protectthe purchaserrsquos interest in the goodwill of the

business bought and is reasonable

Exclusive dealing agreements

bull In Esso Petroleum v Harpers Garage (1968) a solusagreement for four years was held reasonable but asolus agreement for 21 years was held unreasonable andtherefore void

bull Solus agreements were distinguished from restrictivecovenants in a lease When an oil company leases afilling station to X inserting a clause that X should buyall its requirements from the company this is not subjectto restraint of trade rules because the tenant is notgiving up a previously held freedom

bull But in Amoco v Rocca Bros (1975) the court held thatrestraint of trade rules did apply to lease and lease backagreements

bull In Alec Lobb (Garages) v Total Oil (1985) in a similar leaseback arrangement a solus agreement for between sevenand 21 years was held reasonable on the ground that thearrangement was a rescue operation benefiting theplaintiffs and there were lsquobreakrsquo clauses in theunderlease

bull In Schroeder Music Publishing Co v Macaulay (1974) itwas held that a contract by which an unknown songwriter undertook to give his exclusive services to apublisher who made no promise to publish his work

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120

Solus agreements whereby A agrees to buy all his re-quirements of a particular commodity from B

Most exclusive services contracts are found in professional sport or entertainment

was subject to the restraint of trade doctrine as it waslsquocapable of enforcement in an oppressive mannerrsquo

bull In Greig v Insole (1978) the MCC banned any cricketerwho played for a cricketing lsquocircusrsquo from playing forEngland The court held that the ban was void as beingin restraint of trade

It has been suggested that the courts will hold exclusivedealing and service contracts to be within the restraint oftrade doctrine if they contain unusual or novel features orif there is disparity in the bargaining power and theagreement is likely to cause hardship to the weaker party

Cartel agreementsThese are now covered by statute for example the FairTrading Act 1973 and the Competition Act 1998 This mayalso fall within Article 81 of the Treaty of the EuropeanCommunities

Effect of a restraint

Two tests must be satisfied

bull The lsquoblue pencilrsquo test It must be possible to sever theillegal part simply by deleting words in the contract Thecourt will not add words substitute one word foranother rearrange words or in any way redraft the

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W121

A void restraint is severable Severance can be operated intwo ways

bull severance of the whole of the objectionable promiseleaving the rest of the contract to be enforced

bull severance of the objectionable part of the promise

contract In Mason v Provident Clothing Co Ltd (1913) theHouse of Lords refused to redraft a promise not to workwithin 25 miles of London But in Goldsoll v Goldman(1915) a dealer in imitation jewellery promised not todeal in real or imitation jewellery either in the UK orabroad Dealing in real jewellery and dealing abroadwere severed

bull Severance of the objectionable part of the contract mustnot alter the nature (as distinct from the extent) of theoriginal contract The illegal restraint will not be severedif it is the the main purpose of the restraint or if to severit would alter entirely the scope and intention of theagreement In Attwood v Lamont (1920) the court refusedto sever restrictions on a tailor from competing with anydepartment of the department store which had employedhim The court stated that this was a covenant lsquowhichmust stand or fall in its unaltered formrsquo

Capacity

Minors

The law pursues two conflicting policies in the case ofminors On the one hand it tries to protect minors from theirown inexperience on the other it tries to ensure that personsdealing with minors are not dealt with in a harsh manner

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122

Minorspersons under 18

Persons of unsound mindand drunken persons

Contracts with minors can be divided into three categories

Valid contracts ndash contracts which can be enforced

against a minor

Necessaries

bull In Nash v Inman (1908) a student purchased 11 silkwaistcoats while still a minor The court held that silkwaistcoats were suitable to the conditions of life of aCambridge undergraduate at that time but they were notsuitable to his actual needs as he already had a sufficientsupply of waistcoats

It is important to distinguish between luxurious goods ofutility and goods of pure luxury The status of the minor canmake the former into necessaries but the latter can never beclassified as necessaries

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W123

Contracts fornecessaries

Beneficial contracts of service

Valid contracts Voidable contracts Other contracts

Necessary goods are defined in the Sale of GoodsAct 1979 as lsquogoods suitable to his conditionin life and to his actual requirements at the

time of sale and deliveryrsquo

The burden of proving that the goods are necessaries is onthe seller

They must satisfy the same tests as necessary goods

Professor Treitel considers that both executed andunexecuted contracts for necessaries can be enforced Hecites Roberts v Gray (1913) Roberts agreed to take Gray aminor on a billiard tour to instruct him in the profession ofbilliard player Gray repudiated the contract The court heldthat Roberts could recover damages despite the fact that thecontract was executory

Cheshire Fifoot and Furmston agree that executorycontracts for necessary services are enforceable as in Robertsv Gray but deny that executory contracts for necessary goodscan be enforced

They cite

bull the actual wording of the Sale of Goods Act which refersto time of lsquosale and deliveryrsquo

bull the minor has to pay a reasonable price for the goods notthe contractual price

These indicate it is argued that liability is based onacceptance of the goods not on agreement

Beneficial contracts of service

CA

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124 These must be for the benefit of the minor

Necessary services include education medical and legal services

bull In De Francesco v Barnum (1890) a contract whose termswere burdensome and harsh on the minor was held void

bull But in White City Stadium v Doyle (1935) where a minorhad forfeited his payment for a fight because ofdisqualification the contract was neverthelessenforceable against him Where a contract is on the wholefor the benefit of a minor it will not be invalidatedbecause one term has operated in a way which is not tohis advantage

bull In Chaplin v Leslie Frewin (Publishers) Ltd (1966) the courtenforced a contract by a minor to publish his memoirs asthis would train him in becoming an author and enablehim to earn a living

bull But trading contracts (involving the minorrsquos capital) willnot be enforced even if it does help the minor earn aliving In Mercantile Union Guarantee Co Ltd v Ball (1937)the court refused to enforce a hire purchase contract for alorry which would enable a minor to trade as a haulagecontractor

Voidable contracts

These comprise contracts of continuing obligation such ascontracts to acquire an interest in land or partly paid sharesor partnership agreements

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W125

They must be contracts of service or similar to a contract of service

Contracts which can be avoided by the minor beforemajority or within a short time afterwards

The minor can free himself from obligations for the futurefor example an obligation to pay rent under a lease but willhave to pay for benefits already received He cannot recovermoney already paid under the contract unless there has beena total failure of consideration (Steinberg v Scala (Leeds) Ltd(1923))

Other contracts

But

bull The minor himself may enforce such contracts

bull Property can pass under such contracts

bull Where the contract has been carried out by the minor hecannot recover any property unless there has been atotal failure of consideration or some other failingwhich would equally apply to an adult

bull The Minors Contracts Act 1987 provides that

a minor may ratify such a contract on majority and itcan thereafter be enforced against him

a guarantee of a minorrsquos debt will not be voidbecause a minorrsquos debt is unenforceable against him

a court may if it considers it is just and equitable to doso order a minor to return property he has receivedunder a void contract or any property representing itIt is not clear whether property transferred under thecontract covers money for example in money lendingcontracts It is argued that as lsquoproperty representing itrsquo

CA

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126

These cannot be enforced against a minor

must cover money it would therefore be illogical toexclude money acquired directly but there is as yet nodecision on this point Property cannot presumably berecovered under this section where the minor hasgiven away the contract property

bull Equity will order restitution of property acquired byfraud But there can be no restitution of money (Leslie vSheill (1914)) and no restitution if the minor has resold theproperty

bull An action may be brought in tort if it does not in any wayrely on the contract But although a minor is fully liablefor all his torts he may not be sued in tort if this is just anindirect way of enforcing a contract In Leslie v Sheill(1914) a minor obtained a loan by fraudulentlymisrepresenting his age Held ndash he could not be sued inthe tort of deceit as this would be an indirect way ofenforcing a contract which was void

Persons of unsound mind and drunken persons

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W127

A person who has been declared a lsquopatientrsquo under the MentalHealth Act 1983 by the Court of Protection is incapable ofentering into a valid contract

Other mentally disordered persons and drunken personswill be bound by their contracts unless

bull they were so disordered or drunk that they did notunderstand the nature of what they were doing and

bull the other party was aware of this

Such contracts may be affirmed during a sober or lucidmoment The Sale of Goods Act requires that wherelsquonecessaries are sold and delivered to a person who byreason of mental incapacity or drunkenness is incompetentto contract he must pay a reasonable price for themrsquo

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128

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W129

8 Discharge

A contract may be discharged by

Performance

Precision of performance

bull In Cutter v Powell (1795) a shiprsquos engineer undertook tosail a ship from Jamaica to Liverpool but died before thevoyage was complete Held ndash nothing could berecovered in respect of his service he had not fulfilled hisobligation

bull In Bolton v Mahadeva (1972) a central heating systemgave out less heat than it should and there were fumesin one room Held the contractor could not claimpayment although the boiler and pipes had beeninstalled they did not fulfill the primary purpose ofheating the house

A contract is lsquodischargedrsquo when there are noobligations outstanding under it

Performance Agreement Breach Frustration

Precision ofperformance

Time ofperformance

Tender ofperformance

To discharge his obligations under a contract aparty must perform exactly what he promised

These are examples of lsquoentirersquo contracts which consist ofone unseverable obligation

bull Where the contract is divisible payment can berecovered for the completed part for example goodsdelivered by instalments

bull Where the promisee accepts partial performance InSumpter v Hedges (1898) however payment for partialperformance was refused as Hedges had been left with ahalf-built house and had been put in a position where hehad no choice but to accept partial performance

bull Where the promisee prevents complete performance forexample in Plancheacute v Colburn (1831) a writer wasallowed payment for the work he had already donewhen the publisher abandoned the series

bull Where the promisor has performed a substantial part ofthe contract In Hoenig v Isaacs (1952) the plaintiffdecorated the defendantrsquos flat but because of faultyworkmanship the defendant had to pay pound50 to anotherfirm to finish the job Held ndash the plaintiff was entitled topound150 (the contract price) minus the pound50 paid to the otherfirm cf Bolton v Mahadeva (1972) where the courtdeclined to find substantial performance

This has become known as the doctrine of substantialperformance In order for the claimant to rely on thisdoctrine the failure to perform must amount only to a

CA

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130

Despite the rule that performance must be exact the law will allow payment to be made on a

quantum meruit basis for incomplete performance in the following circumstances

breach of warranty or a non-fundamental breach of aninnominate term It will not apply to a fundamentalbreach or to a breach of condition

Time of performance

bull It is stipulated in the contract see Lombard North Centralv Butterworth (1987)

bull One party has given reasonable notice during thecurrency of the contract that performance must takeplace within a certain time In Rickards v Oppenheim(1950) a car body which had been ordered from theplaintiffs was late The defendants gave final notice to theplaintiff that unless it was delivered within three monthsthey would cancel the order Held ndash time had been madeof the essence the defendants could cancel the order

bull The nature of the contract makes it imperative thatstipulations as to time should be observed for examplecontracts for the sale of perishable goods

The Law of Property Act 1925 stipulated that terms as tothe time of performance should be interpreted in thesame way at common law as in equity In Rainieri v Miles(1981) the House of Lords held that that meant that lateperformance would not give rise to a right to terminatebut would give rise to damages

Tender of performance

If one party tenders performance which is refused he maysue for breach of contract

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NT

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W131

Equity considers that time is not lsquoof the essence of a contractrsquo that is a condition

except in the following circumstances

If payment is tendered and rejected the obligation to tenderpayment is discharged but the obligation to pay remains

Agreement

bull If the contract is wholly executory there is no problemwith consideration as both parties surrender their rightsunder the contract

bull If the contract is partly executed one party hascompleted his performance under the contract ndash to makethe agreement binding there must either be a deed (alsquoreleasersquo) or new consideration (lsquoaccord and satisfactionrsquo)or the doctrine of equitable estoppel or waiver mustapply See Chapter 2

CA

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132

A term in the originalcontract for example acondition subsequent

or method for terminating the contract

A new agreement

A contract may be discharged by

As contracts are created by agreement so they may be discharged by agreement Consideration is

necessary to make the agreement binding

Breach

See classification of terms p 45 above

There are special problems where a party repudiates acontract under a wrong assumption that he has a right to doso

bull In Federal Commerce and Navigation v Molena Alpha (1979)the owners of a ship gave instructions not to issue bills oflading without which the charterers could not operatethe ship They wrongly believed that they had the rightto do so Held ndash their conduct constituted a wrongfulrepudiation of the contract which allowed the other partyto treat the contract as discharged

bull In Woodar Investment Development v Wimpey Construction(1980) the purchaser wrongly repudiated a contract forthe sale of land wrongly believing that he had a right todo so Held ndash a wrongful repudiation made in good faithwould not necessarily allow the other party to treat thecontract as discharged

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W133

A breach of condition

A fundamentalbreach of an

innominate term

A breach does not of itself discharge a contract It may allowthe other other party an option to treat the contract as discharged that is to terminate the contract if the breach is sufficiently serious that is if it is

A repudiatory breach

It is difficult to distinguish these decisions The general viewis that the approach in Molena Alpha is to be preferred so thateven a good faith lsquorepudiatoryrsquo response to a non-repudiatory breach will amount to a breach of contract

Effect of treating the contract as discharged

The obligation of both parties to perform (that is theprimary obligation) is discharged from the date of thetermination

However the party in breach may have to pay damages forany losses past and future caused to the innocent party as aresult of the breach (Lombard North Central v Butterworth ndashChapter 3)

The discharge does not operate retrospectively In PhotoProduction v Securicor (1980) Securicor was able to rely on anexclusion clause in the contract despite the fact that thecontract had been discharged

Note ndash it was held by the House of Lords in Vitol v Norelf(1996) that the defendantrsquos failure to perform his ownobligation could constitute acceptance of the plaintiffrsquos repudiation

The decision to terminate cannot be retracted

Anticipatory breach of contract

CA

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134

Explicit

Hochter v La Tour (1853) atravel courier announced

in advance that he would not be fulfilling

his contract

Implicit

Frost v Knight (1872) aparty disabled himself

from carrying out apromise to marry by

marrying another person

Effect of anticipatory breach

bull The other party may sue for damages immediately Hedoes not have to await the date of performance (Hochsterv De La Tour (1853))

bull The innocent party may refuse to accept the repudiationHe may affirm the contract and continue to perform hisobligations under the contract In White and Carter Ltd vMcGregor (1962) the defendants cancelled a contractshortly after it had been signed The plaintiffs refused toaccept the cancellation carried on with the contract andthen sued for the full contract price Held ndash the plaintiffswere entitled to succeed a repudiation does notautomatically bring a contract to an end the innocentparty has an option either to affirm the contract or toterminate the contract unless

the innocent party needs the co-operation of the other party In Hounslow BC v Twickenham GardenDevelopments Ltd (1971) Hounslow council cancelled acontract to lay out a park It was held that thedefendants could not rely on White and Carter vMcGregor because the work was to be performed oncouncil property

the innocent party had no legitimate interestfinancial or otherwise in performing the contractrather than in claiming damages In The AlaskanTrader (1984) a ship chartered to the defendantsrequired extensive repairs at the end of the first yearwhereupon the defendants repudiated the contractThe plaintiffs however refused to accept therepudiation repaired the ship and kept it fullycrewed ready for the defendantrsquos use Held ndash theplaintiffs had no special interest in keeping the

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W135

contract alive They should have accepted therepudiation and sued for damages

Where a party has affirmed the contract

bull He will have to pay damages for any subsequent breachwhich he commits he cannot argue that the other partyrsquosanticipatory breach excuses him (Fercometal SARL vMediterranean Shipping Co (1988))

bull There is a danger that a supervening event may frustratethe contract and deprive the innocent party of his right todamages as in Avery v Bowden (1855) (below)

Frustration

The doctrine has been kept to narrow limits

The basis of the doctrine and the tests

bull Until the 19th century the courts adhered to a theory oflsquoabsolute contractsrsquo as in Paradine v Jane (1647) It wassaid that if the parties wished to evade liability because of

CA

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136

By the courts whohave insisted that the

supervening event mustdestroy a fundamental

assumption

By business persons who have lsquodrafted outrsquo

the doctrine byforce majeure clauses

Frustration occurs where it is established that due to a subsequent change in circumstances the

contract has become impossible to perform or it hasbeen deprived of its commercial purpose

some supervening event then they should provide forthis in the contract However in Taylor v Caldwell (1863)the courts relented and held that if the contract becameimpossible to perform due to some extraneous cause forwhich neither party was responsible then the contactwould be discharged

bull The modern test was enunciated by Lord Simon inNational Carriers v Panalpina (1981) frustration ariseswhere lsquothere supervenes an event (without default ofeither party and for which the contract makes nosufficient provision) which so significantly changes thenature (not merely the expense or onerousness) of theoutstanding contractual rights andor obligations fromwhat the parties could reasonably have contemplated atthe time of its execution that it would be unjust to holdthem to the literal sense of its stipulations in the newcircumstancesrsquo

bull In Davis Contractors v Fareham UDC (1956) Lord Radcliffstated that frustration occurs where to requireperformance would be to render the obligationsomething lsquoradically differentrsquo from what wasundertaken by the contract

Circumstances in which frustration may occur

bull The subject matter of the contract has been destroyed oris otherwise unavailable

In Taylor v Caldwell (1863) a contract to hire a music hallwas held to be frustrated by the destruction of the musichall by fire (see also s 7 of the Sale of Goods Act 1979)

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W137

Note ndash it is not the circumstances but the nature ofthe obligation which must have changed

bull But the unavailable or destroyed object must have beenintended by both parties to be the subject of the contract

In Blackburn Bobbin Co v Allen (1918) the contract was forthe sale of lsquobirch timberrsquo which the seller intended toobtain from Finland Held ndash the contract was not frustratedwhen it became impossible to obtain timber from FinlandThe subject matter of the contract was birch timber notFinnish birch timber

bull Death or incapacity of a party to a contract of personalservice or a contract where the personality of one partyis important

In Condor v The Baron Knights (1966) a contract between apop group and its drummer was held frustrated whenthe drummer became ill and was unable to fulfill theterms of the contract A claim for unfair dismissal can alsosometimes be defeated by the defence of frustrationwhere an employee has become permanentlyincapacitated or imprisoned for a long period

bull The contract has become illegal to perform eitherbecause of a change in the law or the outbreak of war

In Avery v Bowden (1855) a contract to supply goods toRussia was frustrated when the Crimean War broke out Ithad become an illegal contract ndash trading with the enemy

Note the outbreak of war between two foreign States willnot render a contract illegal but may make it impossibleto perform In Finelvet v Vinava Shipping Co (1983) acontract to deliver goods to Basra did not become illegalon the outbreak of the Iraq-Iran war but was frustratedwhen it became too dangerous to sail to Basra

bull The commercial purpose of the contract has failedCA

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138

Establishing whether a contract is impossible or illegal toperform is relatively straightforward but it is more difficultto decide whether the commercial purpose of the contracthas failed

It may happen in the following circumstances

bull Failure of an event upon which the contract was based

In Krell v Henry (1903) the court held that a contract tohire a room overlooking the proposed route of thecoronation procession was frustrated when thecoronation was postponed The purpose of the contractwas to view the coronation not merely to hire a room Ithas been argued that the fact that the hire of the roomwas a lsquoone offrsquo transaction was important The judge inthe case contrasted it with the hire of a taxi to take theclient to Epsom on Derby day This would be a normalcontractual transaction for the taxi driver thecancellation of the Derby would not therefore frustratethe contract

In the case of Herne Bay Steamboat Co v Hutton (1903) thecourt refused to hold that a contract to hire a boat to seethe king review the fleet was frustrated when the reviewwas cancelled the fleet was still there and could beviewed ndash there was therefore no overall failure of thepurpose of the contract

bull Government interference or delay

In Metropolitan Water Board v Dick Kerr (1918) a contracthad been formed in 1913 to build a reservoir within sixyears In 1915 the government ordered the work to bestopped and the plant sold Held ndash the contract wasfrustrated C

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139

In Jackson v Union Marine Insurance Co (1874) a ship waschartered in November to proceed with all dispatch toNewport The ship did not reach Newport until thefollowing August Held ndash the contract was frustratedsince the ship was not available for the voyage for whichshe had been chartered

In The Nema (1982) a charter party was frustrated when along strike closed the port at which the ship was due toload so that of the six or seven voyages contracted to bemade between April and December only two could bemade

Similar difficult problems arise in the case of contracts ofemployment (illness or imprisonment) and leases

It has been suggested that where the contract is of a fixedduration and the unavailability of the subject matter isonly temporary the court should consider the ratio of thelikely interruption to the duration of the contract

LeasesIt had long been thought that the doctrine of frustration didnot apply to leases (see Paradine v Jane (1647) and CricklewoodInvestments v Leightonrsquos Investments (1945))

bull However in National Carriers v Panalpina (1981) theHouse of Lords declared that in principle a lease couldbe frustrated In that case a street which gave the onlyaccess to a warehouse was closed for 18 months Thelease for the warehouse was for 10 years Held ndash the leasewas not frustrated

bull The House of Lords did state however that where therewas only one purpose for the property leased and thispurpose became impossible then the lease would be

CA

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140

frustrated for example a short term holiday lease It isstill true that it will be very rare for a lease to befrustrated

Limits to the doctrine of frustration

It will not be applied

bull In Davis Contractors LTD v Fareham UDC (1956) thecontractors had agreed to build a council estate at a fixedprice Due to strikes bad weather and shortages oflabour and materials there were considerable delays andthe houses could only be built at a substantial loss Heldndash the contract was not frustrated

bull See also the Suez cases where the courts refused to holdshipping contracts frustrated as a result of the closing ofthe Suez Canal unless the contracts specified a routethrough the canal

But a force majeure clause will be interpreted narrowly asin Metropolitan Water Board v Dick Kerr amp Co (1918) wherea reference to lsquodelaysrsquo was held to refer only to ordinarydelays and not to a delay caused by government decree

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W141

lsquoDoctrine must be kept within narrow limitsrsquo

on the grounds of inconvenience increase in expense loss of profit

Where there is an express provision in thecontract covering the intervening event

(that is a force majeure clause)

A force majeure clause will not in any case be applied to covertrading with an enemy

A contract will not be frustrated if the event makingperformance impossible was the voluntary action of oneof the parties If the party concerned had a choice open tohim and chose to act in such a way as to makeperformance impossible then the frustration will be self-induced and the court will refuse to treat the contract asdischarged

bull In The Superservant Two (1990) one of two barges ownedby the defendants and used to transport oil rigs wassunk They were therefore unable to fulfill their contractto transport an oil rig belonging to the plaintiff as theirother barge (Superservant One) was already allocated toother contracts The court held that the contract was notfrustrated The plaintiffs had another barge available butchose not to allocate it to the contract with the plaintiffs

This case illustrates both the courts reluctance to applythe doctrine of frustration and the advantage of using aforce majeure clause

If by reason of special knowledge the event wasforeseeable by one party then he cannot claimfrustration

bull In Amalgamated Investment and Property Co v John Walker ampSons Ltd (1976) the possibility that a building could belisted was foreseen by the plaintiff who had inquiredabout the matter beforehand A failure to obtain planning

CA

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142

Where the frustration is self-induced

Where the event was foreseeable

permission was also foreseeable and was a normal riskfor property developers The contract was therefore notfrustrated

The effect of frustration

This rule could be very unfair in its operation as in Chandlerv Webster (1904) where the hirer had to pay all the sum duefor the hire of a room to view the coronation despite thecourt holding the contract frustrated by the cancellation ofthe coronation

This rule however would only apply in the event of a totalfailure of consideration and could itself in any case causehardship if the other party had expended a considerableamount of money in connection with the contract

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W143

At common law the loss lay where it fell that isthe date of the frustrating event was all important

Anything paid or payable before that datewould have to be paid Anything payable

after that date need not be paid

In the Fibrosa case (1943) the House of Lordsdid move away from this rule and held that

where there was a total failure of considerationthen any money paid or payable in advance

would have to be returned

Note these two sections are to be applied independently Theexpenses in s 1(2) can only be recovered from lsquosums paid orpayable before the frustrating eventrsquo

Section 1(3) was applied in BP Exploration v Hunt (1982)where it was held that the court must

bull identify and value the lsquobenefit obtainedrsquo

bull assess the lsquojust sumrsquo which it is proper to award

The court also stated that

bull the section was designed to prevent unjust enrichmentnot to apportion the loss or to place the parties in theposition they would be in had the contract beenperformed or to restore them to their pre-contractposition

CA

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144

The Law Reform (Frustrated Contracts) Act 1943was therefore passed to remedy these deficiencies

It provided

s 1(2) ndash all sums paid or payable before the frustratingevent shall be recoverable or cease to be payable but

the court has a discretionary power to allow the payeeto set off against the sum so paid expenses he has

incurred before the frustrating event

s 1(3) ndash where one party has obtained a valuablebenefit before the time of discharge the other

party may recover from him such sums asthe court considers just

bull in assessing the valuable benefit the section requiredreference to the end benefit received by a party not thecost of performance In assessing the end benefit theeffect of the frustrating event had to be taken intoaccount

bull the cost of performance can be taken into account inassessing the just sum

In BP v Hunt (1982) BP were to do the exploration andprovide the necessary finance on an oil concession ownedby Mr Hunt in Libya They were also to provide certainlsquofarm-inrsquo payments in cash and oil In return they were toget a half-share in the concession and 5 of theirexpenditure in reimbursement oil A large field wasdiscovered the oil began to flow then in 1971 the LibyanGovernment nationalised the field

The court held

bull the valuable benefit to Hunt was the net amount of oilreceived plus the compensation payable by the LibyanGovernment which amounted to pound85000000

bull the just sum would cover the work done by BP less thevalue of the reimbursement oil already received Thiswas assessed at pound34000000 As the valuable benefitexceeded the just sum BP recovered their expenses infull The position would have been very differenthowever if the field had been nationalised at an earlierstage and no compensation had been paid

CO

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W145

The Law Reform (Frustrated Contracts) Act 1943 does notapply to

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146

Charter parties Contracts of insurance

Contracts for the sale of specificgoods which have perished

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W147

9 Remedies for breach of contract and restitution

not

If no loss has been suffered then nominal damages onlywill be awarded

bull In Surrey CC v Bredero Homes (1993) the court refused toaward damages against a defendant who had notcomplied with planning permission as there was no lossto the council

Unliquidated damages (that is damages assessed by

the court)

The purpose of unliquidated damages is to compensate the claimant for the loss he has

suffered as a result of a breach

Unliquidateddamages

Equitableremedies

Liquidateddamages

Restitutionor

quasi-contract

to punish the defendantPunitive damages are

not awarded for breachof contract

generally to recoup again made by the

defendant (but cf AG vBlake (2000) below)

bull However in Chaplin v Hicks (1911) damages wereawarded for the loss of a chance to win a competitionalthough there was no certainty that the plaintiff wouldhave been one of the winners

Reliance damages rather than expectation damages may beappropriate where the benefits which would have beenobtained by successful performance are difficult to assess asin

bull McRae v Commonwealth Disposals Commission (1951)where the plaintiff recovered the expenses incurred insearching for a wreck which did not exist

bull Anglia Television v Reed (1972) where the leading actor ina film project withdrew at the last moment The plaintiffswere able to recover all their wasted expenditure on theprogramme including even those incurred before thecontract had been signed

CA

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148

Methods of compensating the claimant

Expectation that is loss ofbargain is the traditional

basis for assessing damagesin contract It aims to putthe claimant in the sameposition as far as money

can do it as if the contracthad been performed

Reliance that is out of pocketor wasted expenditure This

is the normal way ofassessing damages in tort

but can be used in contractas illustrated below

bull But cf Regalian Properties v London Dockland Development(1995) where expenses incurred while negotiations wereexpressly lsquosubject to contractrsquo were not recoverable

It has been held that a claimant may freely choose betweenexpectation and reliance damages unless the difficulty inidentifying profits is because he has made a lsquobad bargainrsquo

bull In C and P Haulage v Middleton (1983) the plaintiff hired agarage for six months on the basis that anyimprovements would become the property of thelandlord He was ejected in breach of contract and suedfor the cost of the improvements Held ndash expenditurewould have been wasted even if the contract had beenperformed

bull It is for the defendant to prove that the claimant hadmade a bad bargain as in CCC Films v Impact QuadrantFilms (1985) where the defendant failed to prove that theplaintiff would not have made a profit from distributingthe films had they been delivered in accordance with thecontract

bull In normal circumstances the claimant will ask fordamages on an expectation basis as this is moreprofitable for him

Restitutionary measure

In Attorney General v Blake (2000) the House of Lords for thefirst time recognised that in some circumstances alsquorestitutionaryrsquo measure of damages requiring thedefendant to pay over the profit made as a result of thebreach of contract may be appropriate The case was anunusual one involving a book published by a member ofthe security services who had spied for Russia The House ofLords regarded the defendant as having been under

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W149

something lsquoakin to a fiduciary obligationrsquo and it is not yetclear how far the principle adopted in this case is likely to beapplied in other situations

Contributory negligence

This is only relevant where the liability in contract isidentical with the liability on tort that is the breach is of acontractual duty to take care (Barclays Bank v FaircloughBuilding (1994))

Quantification of damage

Where lsquoloss of bargainrsquo damages are claimed there are twopossible methods of quantification

The court will normally adopt the most appropriate (RuxleyElectronics and Construction v Forsyth (1995))

Prima facie rules

CA

VE

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150

Sale of goods ndash difference in value

Failure to repair (lease) ndash difference in value

Building contracts ndash cost of cure

Difference in value Cost of cure

Failure to deliver goods

bull In Williams Bros v Agius (1914) the profit which wouldhave been earned on a resale was ignored damagesrepresented the difference between the contract price andthe market price (which was higher than the resale price)

Failure to accept delivery and pay

bull If the seller is a dealer in mass produced goods then thedamage to him will be the loss of profit on onetransaction The claimant had sold one item less than heotherwise would have during the year (Thomson vRobinson (1955))

bull However if the mass produced item is in short supplyand the number of sales is governed by supply not bydemand then there is no loss of profit and damageswould not be awarded (Charter v Sullivan (1957))

bull The damages revert to the difference between thecontract price and market price in the case of secondhand goods even if the seller is a dealer (Lazenby Garagesv Wright (1976))

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W151

The Sale of Goods Act 1979 states thatdamages will represent the difference between

the contract price and the market price

The Sale of Goods Act 1979 states that damages willagain represent the difference between the contract

price and the market price

Limitations on principle of expectation

Although the stated aim of the expectation basis of assessingdamages is to put the claimant in the position he would havebeen in had the contract been performed there are a numberof rules which militate against this result

Remoteness of damage

bull In Hadley v Baxendale (1854) a mill was closed because ofthe delay of a carrier in returning a mill shaft The courtheld that the carrier was not liable for damages for theclosure of the mill as he was not aware that the absenceof a mill shaft would lead to this conclusion

The following damages were said to be recoverable

those arising naturally out of the breach

those which because of special knowledge wouldhave been within the contemplation of the parties

bull In Victoria Laundry v Newman Industries (1949) the rulewas restated and based on knowledge The laundry wasable to recover damages for normal loss of profitC

AV

EN

DIS

HL

AW

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RD

S152

Damages cannot be recovered for losses that are tooremote The losses must be lsquowithin the reasonable

contemplationrsquo of the parties

Kind ofloss

CausationDuty of

mitigationRemotenessof damage

following a delay in the delivery of a boiler but not forspecially lucrative dyeing contracts they were offeredduring this time

Damages were said to be recoverable for losses whichwere within the reasonable contemplation of the partiesat the time of the contract either from

imputed knowledge or

actual knowledge

bull In The Heron II (1969) the House of Lords confirmed thata higher degree of foreseeability is required in contractthan in tort Damages were awarded to cover lossesarising from the late delivery of sugar to Basra Theparties must have been aware that the price of sugar inBasra might fluctuate For a loss not to be too remotethere must be

lsquoa real dangerrsquo

lsquoa serious possibilityrsquo

or the loss must be

lsquonot unlikelyrsquo

lsquoliable to resultrsquo

The difference between the tests of remoteness in contractand tort has been criticised but justified on the ground thata contracting party can protect himself against unusual risksby drawing them to the attention of the other party to thecontract

CO

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W153

Application of remoteness rules

bull Imputed knowledge

Hadley v Baxendale (1854) Victoria Laundry v Newman Industries (1949)The Heron II (1967)

bull Actual knowledge

Defendantrsquos knowledge of special circumstances must beprecise This encourages contracting parties to discloseclearly any likely exceptional losses in advance

In Simpson v L amp NWR (1876) the defendant was liable forloss caused to the plaintiff by delivering goods toNewcastle Show Ground the day after the show had finished

In Horne v Midland Railway (1873) defendants were heldnot liable for exceptionally high profit lost by plaintiffthrough late delivery They knew that shoes would haveto be taken back if not delivered on 3 February but notthat the plaintiff would lose an exceptionally high profit

bull In Wroth v Tyler (1974) the defendant was liable for thefull difference between the contract price and the marketprice although the rise in the market price wasexceptional and could not have been foreseen

bull In Parsons (Livestock) Ltd v Uttley Ingham Co Ltd (1978) thedefendants who had supplied inadequately ventilatedhoppers for pig food were held liable for the loss of theplaintiffrsquos pigs even though the disease from which they

CA

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154

Note the test of remoteness determinesentitlement not quantum

died was not foreseeable It was enough that they couldhave contemplated any illness of the pigs (But cf VictoriaLaundry v Newman Industries (1849))

Lord Denning in this case argued that so far as physicaldamage was concerned (not loss of profit) all directlosses should be recoverable as in tort

Lord Scarman has also stated that it would be ridiculousif the amount of damages depended on whether anaction was framed in contract or tort A House of Lordsrsquodecision on these issues is awaited

It is sometimes disputed that the decisions since Hadley vBaxendale have not in any way clarified the rule

Types of loss recognised

This is the normal ground for the award of damages forbreach of contract

However damages for non-pecuniary loss will be awardedin specific cases for example

bull Pain and suffering consequent on physical injury

bull Physical inconvenience

In Watts v Morrow (1991) damages were awarded tocover the inconvenience of living in a house whilst it wasbeing repaired C

ON

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155

Pecuniary loss

Non-pecuniary loss

bull Damage to commercial reputation

In Gibbons v Westminster Bank (1939) damages wereawarded to cover the losses caused by the wrongfulreferring of a cheque

Cf Malik v BCCI (1997) where the House of Lords heldthat compensation was payable for the stigma of havingworked for an organisation which had been run corruptly

bull Distress to claimant

Traditionally damages for injured feelings were notawarded for breach of contract Addis v Gramaphone Co(1909) This general principle has recently been confirmedby the House of Lords in Johnson v Unisys Ltd (2001)

However some limited exceptions to this rule have beenrecognised

Damages for disappointment were awarded againsta holiday company in Jarvis v Swan Tours (1973)where the holiday was not as described

In Hayes v Dodd (1990) the Court of Appealconfirmed that damages for distress are notrecoverable in normal commercial contracts butcould be recovered in contracts

CA

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156

to provide pleasure See Jarvis v Swan Tours Ltd

(1973)

to prevent distress Heywood v Wellers (1976) ndashsolicitorrsquos failure to obtain

an injunction

It has been suggested that damages for distress areparticularly appropriate in lsquoconsumer contractsrsquo

The duty of mitigation

In Payzu v Saunders (1919) the plaintiff had refused the offerof goods at below market price In Brace v Calder (1895) anemployee dismissed by a partnership turned down an offerof similar employment by one of the partners In both casesthe plaintiff was penalised for his failure to mitigate

bull He need not however take lsquounreasonablersquo steps inmitigation

In Pilkington v Wood (1953) it was stated that the plaintiffdid not need to embark on hazardous legal action inmitigation of his loss He should not take unreasonablesteps which would increase losses

bull The claimant cannot recover damages for losses he hasavoided

In British Westinghouse v Underground Electric Railways Co(1912) the plaintiff replaced a defective turbine with anew turbine which was so much more efficient that thesavings exceeded the losses on the defective turbineHeld ndash no loss ndash no damages

bull Note ndash the duty to mitigate does not arise until there hasbeen an actual breach of contract or an anticipatorybreach has been accepted by the other party (see Whiteand Carter v McGregor (above))

CO

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W157

The claimant has a duty to take reasonablesteps to mitigate his loss

Causation (losses which the defendant did not cause)

bull The action of a third party may break the chain ofcausation if it is not foreseeable

In Lambert v Lewis (1981) a farmer continued to use acoupling even though he knew it was broken Held ndash thefarmer was responsible for losses caused by the failure ofthe coupling the manufacturer could not have foreseenthat he would continue to use it knowing it was faulty

bull However where the action is foreseeable the chain ofcausation will not be broken

In Stansbie v Troman (1948) a painter who in breach ofcontract had left a door unlocked was held liable forgoods taken by thieves since this was the kind of loss hehad undertaken to guard against by locking the doors

CA

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158

The breach must have caused the loss as well ashaving preceded the loss

Liquidated damages

Damages set by the parties themselves

The following guidelines for distinguishing between thetwo were suggested in Dunlop Pneumatic Tyre Ltd v NewGarage and Motor Co (1915)

bull a penalty ndash if the sum is extravagant and unconscionable

bull a penalty ndash if a larger sum is payable on the failure to paya smaller sum

bull a penalty ndash if the same sum is payable on major andminor breaches

bull it is no obstacle to the sum being liquidated damages thata precise pre-estimate is almost impossible

CO

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W159

Penalty clauses will not be enforced by the courtInstead the court will award unliquidated damages

The parties may stipulate that a certain sum mustbe paid on a breach of contract

If the sum represents a genuine pre-estimatethen it will be enforced by the court

as liquidated damages

If the sum is not genuine but is an attemptto frighten the other party into performing

then it is a penalty A penalty will not beenforced by the court

The rule against penalties does not apply to

bull Acceleration clauses

Here the whole of a debt becomes payable immediatelyif certain conditions are not observed

bull Deposits

Money paid otherwise than on a breach of contract

Alder v Moore (1961)

Bridge v Campbell Discount Co Ltd (1962)

bull clauses declaring a term to be a condition

Lombard North Central v Butterworth (1987)

Equitable remedies

Specific performance

Traditionally specific performance will only be awardedwhere damages are not an adequate remedy that is

CA

VE

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160

An order of the court directing the defendant to fulfill his obligations under the contract

Specific performance Injunctions

All equitable remedies are discretionary

The following will be taken into account

bull Mutuality Negative ndash a minor cannot get it because it isnot available against a minor Positive ndash a vendor of landmay obtain it although damages would be an adequateremedy because it is also available to a purchaser of land

bull Supervision The need for constant supervisionprevented the appointment of a resident porter beingordered in Ryan v Mutual Tontine Association (1893) but inPosner v Scott Lewis (1986) a similar order was madebecause the terms of the contract were sufficientlyprecise

bull Impossibility ndash Watts v Spence (1976) ndash land belonged to athird party C

ON

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TL

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161

Where damages are difficult to assessfor example annuities

Where there is no alternative remedy available(Beswick v Beswick (1968)) see above

Where the claimant cannot get a satisfactory substitute for example

contracts for the sale of land or contracts for the sale of goods which cannot be

obtained elsewhere for example antiquesvaluable paintings ndash unless bought as an

investment as in Cohen v Roche (1927)

bull Hardship ndash Patel v Ali (1984) ndash defendant would lose thehelp of supportive neighbours

bull Conduct of the claimant ndash Shell (UK) Ltd v Lostock Garages(1977) ndash Shellrsquos behaviour was unreasonable

bull Vagueness ndash Tito v Waddell (1977) ndash see above

bull Mistake ndash Webster v Cecil (1861) ndash see above

Special problems

bull Contracts of personal service

These are considered to involve personal relationshipsand are therefore not thought suitable for an order of specific performance

However such orders were exceptionally made in Hill vCA Parsons Ltd (1972) and Irani v Southampton AHA(1985) on the ground that in the very unusualcircumstances of those cases the mutual trust betweenthe employer and employee had not been destroyed

bull Building contracts

The courts are reluctant to enforce building contracts onthe grounds that damages are generally an adequateremedy the terms are often vague there are difficultieswith supervision

But it was held in Wolverhampton Corpn v Emmons (1901)that provided the terms were clear the problem ofsupervision would not be an absolute barrier

Injunctions

CA

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162

These are orders directing the defendant not to do a certain act

Types of injunction

Injunctions are also discretionary remedies and are subject to the similar constraints to orders of specific performance However an injunction will be granted toenforce a negative stipulation in a contract of employmentas long as this is not an indirect way of enforcing thecontract

bull Warner Bros v Nelson (1937)

bull cf Page One Records v Britton (1968)

CO

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W163

Interim injunction

This is designed to regulatethe position of the parties

pending trial

Prohibitory injunction

This is an ordercommanding the

defendant not to dosomething

Mandatory injunction

This orders thedefendant to undosomething he had

agreed not to

A comparison of the remedies for misrepresentation

and for breach of contract

Setting aside contracts

CA

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164

DamagesDamages available as of right Normally assessedon expectation basis Losses must be within thecontemplation of the parties See above

Damages available in tort of deceit negligentstatements and under s 2(1) of the 1967 ActDamages assessed on reliance basis All lossesflowing directly from misrepresentation will becovered whether or not foreseeable in actions indeceit and under s 2(1) of the 1967 Act (Royscot vRogerson (1991)) Losses must be foreseeable inthe tort of negligence No right to damages forinnocent misrepresentation but may be awardedin lieu of rescission at the discretion of the court

Breach

Misrep

Termination or rescission for breach

Available only for breaches of conditionsfundamental breaches of innominate terms and repudiations

Contract discharged from time of breachdischarge not retrospective Innocent party canalso sue for damages (see Chapter 8)

Rescission

Available for all misrepresentations but atdiscretion of court and subject to certain barsContract cancelled prospectively and retrospectivelyparties returned to the position they were in beforethe contract was entered into (see Chapter 6)

Breach

Misrep

Exclusion clauses

See ss 3 6 7 of UCTA

All clauses must be reasonable

Restitution or quasi-contract (based on unjust

enrichment)

It covers

Money may be recovered

bull Where there is a total failure of consideration (see Fibrosacase (frustration))

In Rowland v Divall (1923) the plaintiff had bought a carwhich turned out to be stolen property and which wasrecovered by the owner Despite the fact that the plaintiffhad had the use of the car for a considerable time and ithad fallen in value during this time the plaintiff was ableto recover the full purchase price of the car from thedefendant There had been a total failure of consideration

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W165

Breach

Misrep

recovery of money payment for work done

Restitution may be available where parties arenot in a contractual relationship

It is based on the principle of unjust enrichment it allows the injured party to

recover money paid or the value of benefitsconferred where it would be unjust to allow the

other party to retain the benefit

bull Money paid under a mistake of fact is recoverableprovided the mistake is as to a fact which if true wouldhave legally or morally obliged the claimant to pay themoney or is sufficiently serious to require payment forexample

In Kleinwort Benson Ltd v Lincoln City Council (1998) theHouse of Lords held that in certain circumstances moneypaid under a mistake of law could also be recovered if itwould be unjust to allow the recipient to retain the money(See also Nurdin and Peacock plc v DB Ramsden amp Co Ltd(1999))

bull Money paid under a void contract

For example contracts void

bull In Westdeutche Landesbank v Islington LBC (1994) thecouncil had entered into a rate swapping arrangementwith the bank under which the bank had paid pound2500000to the council in advance The council had paidapproximately pound1200000 to the bank by instalment andargued that since there was not a total failure ofconsideration it should not have to pay the bank theremaining pound1300000 The Court of Appeal held that theprinciple upon which money must be repaid under a

CA

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166

because ultra vires

as against public policy

for a commonmistake

Mistaken payments underinsurance policies

Mistaken payments intoa bank account

void contract is different from that on a total failure ofconsideration Recovery of money under a void contractis allowed if there is no legal basis for such a payment

bull Note ndash money paid under contract which is void forillegality cannot be recovered unless the action can beframed without relying on the contract

Parkinson v Royal College of Ambulance (1925)Bowmakers v Barnet Instruments (1945) Tinsley v Milligan (1993)

bull Note ndash recovery under these heads will not be possible if

In Lipkin Gorman v Karpnale Ltd (1992) a partner in a firmof solicitors was a compulsive gambler who regularlygambled at a casino run by the defendants In order tofinance his gambling he had drawn cheques on clientaccounts where he was the sole signatory He had spentat least pound154000 of this money at the defendantrsquos casinoand the plaintiff sued for the return of the money as ithad been received under a contract which was void(declared void by statute) Held ndash where the true ownerof stolen money sought to recover it from an innocentthird party the recipient was under an obligation toreturn it where he had given no consideration for itunless he could show that he had altered his position ingood faith In this case the plaintiff was able to recoverthe pound154000 less the winnings paid to the partner The

CO

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W167

the payer hadintended the

payee tobenefit in any

event

there is goodconsiderationfor exampledischarge of

a debt

the payee haschanged

position as aresult of the

payment

casino had altered their position on each gamble in thatthey had become vulnerable to a loss

However in South Tyneside Metropolitan Borough Council vSvenska International (1994) the House of Lords allowedthe council to recover approximately pound200000 it had paidto a bank under a rate swap agreement which had beendeclared ultra vires and void The court rejected thebankrsquos claim that it had changed its position in that it hadentered into financial arrangements with otherorganisations in order to hedge its losses

bull Money paid to a third party for the benefit of thedefendant provided the claimant was not acting as avolunteer (for example a mother paying off a sonrsquos debt)but was acting under some constraint

In Macclesfield Corpn v Great Central Railway (1911) theplaintiffs carried out repairs to a bridge which thedefendants were legally obliged (but had refused) tomaintain They were regarded as purely volunteers andcould not therefore recover the money However in Exallv Partridge (1799) the plaintiff paid off arrears of rentowed by the defendant in order to avoid seizure of theplaintiffrsquos carriage which was kept on the defendantrsquospremises The plaintiff was acting under a constraint andcould therefore recover the money

Payment for work done

bull Where the claimant has prevented performance of thecontract (see Plancheacute v Colburn (1831))

CA

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168

Here the claimant is seeking compensationon a quantum meruit basis (cf s 1(3) of the

Law Reform (Frustrated Contracts) Act 1943)

bull Where work has been carried out under a void contractIn Craven Ellis v Canons Ltd (1936) the plaintiff hadcarried out a great deal of work on behalf of a companyon the understanding that he had been appointedmanaging director It was later discovered that he hadnot properly been appointed managing director Thecourt held that he should be paid on a quantum meruitbasis for the work he had done

bull Where agreement has not been reached and

the work was requested by the defendants InWilliam Lacey v Davis (1957) the plaintiffs hadsubmitted the lowest tender for a building contractand had been led to believe that they would beawarded it At the defendantsrsquo request they thenprepared various plans and estimates Thedefendants then decided not to proceed The courtordered the defendants to pay a reasonable sum on aquantum meruit basis for the work that had beendone on analogy with Craven Ellis v Cannons or

the work had been freely accepted In British SteelCorpn v Cleveland Bridge Engineering Co (1984) a letterof intent was issued by the defendants indicating thatthey intended to enter into a contract with theplaintiffs for the construction and delivery of cast-steel lsquonodesrsquo However it proved impossible to reachagreement on a number of major items Despite this anumber of lsquonodesrsquo were eventually constructed andaccepted by the defendants It was held by the courtthat the defendants should pay for the nodes they hadaccepted

CO

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W169

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W171

10 Privity of contract

Introduction

The traditional approach to the doctrine of privity is that

Privity of contract is closely associated with the rule thatconsideration must move from the promisee See Dunlop vSelfridge (above)

Only a party to a contractcan sue on a contract

Only a party to a contractcan be sued on a contract

In Tweddle v Atkinson(1861) the plaintiff had

married Mr Guyrsquosdaughter The plaintiffrsquosfather and Mr Guy had

agreed together that theywould each pay a sum ofmoney to the plaintiff Mr

Guy died before themoney was paid and the

plaintiff sued hisexecutors The action wasdismissed ndash the plaintiffwas not a party to thecontract which wasmade between the

two fathersSee also

Beswick v Beswick (1968)

In Dunlop v Selfridge(1915) Dew amp Co at the

instigation of Dunlophad placed a minimum

resale price in theircontract with Selfridge

Held ndash Dunlop could notsue Selfridge for breach of contract they were

not parties to the contract nor had they

given consideration to Selfridge

Matters relevant to the doctrine of privity

One part of the traditional approach that is that relating toconferring benefits has recently been significantly changedby legislation which is discussed below In addition thereare a number of situations which fall outside the scope ofthe doctrine

Matters outside the doctrine

It has been argued that it is only because English law hasdeclared many transactions not to be subject to the doctrineof privity that the doctrine itself has survived so long

CA

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172

AssignmentRights can be assignedprovided that certain

formalities are followed

AgencyA principal can sue and

be sued on contractsmade by an agent

on his behalf

TrustsWhere a trust has beencreated the beneficiaryunder the trust can suethe trustees even if hewas not a party to the

original agreement

Multi-partite agreementsIn Clarke v Dunraven(1897) entrants in a

yacht race were allowedto sue each other TheCompanies Act 1985allows shareholders

to sue each other

Land law recognises a number of exceptions

Statutory exceptions

bull Price maintenance agreements

bull Various insurance contracts

bull For example Married Womanrsquos Property Act

bull Law of Property Act 1925 s 56

bull Negotiable instruments

CO

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W173

Collateral contractsIn limited cases the court will find a separate

(collateral) contract between the promisor and the third party

(Shanklin Pier v Detel Products (1951))

LeasesThe benefits and

obligations under a lease can be transferred

to third parties

Law of Property Act 1925 s 56

See below

Restrictive covenantsThese can bind a third party under the rule in

Tulk v Moxhay (1848)

Conferring benefits on a third party

Statutory intervention

The common law rule preventing a third party fromenforcing a contract was much criticised and has now beenreformed by legislation that is the Contracts (Rights ofThird Parties) Act 1999 based on recommendations from theLaw Commission

Main effectA third party will be able to enforce a contractual provisionpurporting to confer a benefit on him or her if both of twoconditions are satisfied (s 1)

Right to vary the contract

Unless they have provided otherwise the contractingparties will lose the right to vary or cancel the provisionbenefiting the third party if (s 2)

bull the third party has communicated his assent or

bull the third party has relied on the term and the promisor isaware of this or

bull the third party has relied on the term and the promisorcould be reasonably expected to have foreseen this

on its proper constructionthe contract is intended to

give the third party a legallyenforceable right

the contract expresslyprovides that the third party

may benefit

CA

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174

DefencesThe promisor can raise against the third party any defencesthat could have been raised against the promisee (forexample misrepresentation duress) (s 3)

The promisor can also rely on defences set-offs orcounterclaims arising from prior dealings with the thirdparty

ExceptionsThere cannot be double liability that is as against thepromisee and the third party (s 5)

Some contracts are excluded from the Act (s 6)

bull contracts on a bill of exchange or promissory note

bull terms of a contract of employment as against anemployee

bull contracts for the carriage of goods by sea or if subject toan international transport convention by road rail or air

The exception for carriage of goods by sea does not apply toreliance on an exclusion clause (as in The Eurymedon (1975)for example)

Note also that the main contracting parties are in control ndashthey can decide that the provisions of the new Act shouldnot apply and there will be nothing that the third party cando about it

The Act does not affect the other part of the privity doctrinendash relating to the imposition of obligations on third parties ndashwhich remains governed by the common law

CO

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W175

The common law approach

The common law developed a number of devices to allow athird party to receive the benefit of contract by

These devices will be of much less importance now that theContracts (Rights of Third Parties) Act 1999 is in force Theymay still be used however particularly in situations wherefor one reason or another the 1999 Act does not apply

Attempts to allow the third party to sue

bull Attempts to extend the use of lsquotrustsrsquo

In Walfordrsquos case (1919) under a charterparty theship owner promised the charterer to pay a broker acommission Held ndash the charterer was trustee of thispromise for the broker who could thus enforce itagainst the ship owner

However in Re Schebsman (1944) a contract betweenSchebsman and X Ltd that in certain circumstanceshis wife and daughter should be paid a lump sumwas held not to create a trust

The trust as a device to outflank privity was limited bythe courts presumably because of concern that theirrevocable nature of the trust may prevent thecontracting parties from changing their minds Thecourts no longer go out of their way to find that theparties intended to create a trust

CA

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176

Allowing the thirdparty to sue

Allowing the promiseeto sue on behalf of the

third party

bull Lord Denning launched a campaign against privity andargued that s 56 of the Law of Property Act 1925 intendedto destroy doctrine altogether This was finally rejected bythe House of Lords in Beswick v Beswick (1968) theyacknowledged that the wording was wide enough tosupport Lord Denningrsquos view but insisted neverthelessthat it must be restricted to contracts concerning land asthe purpose of the Act was to consolidate the law relatingto real property

bull Agency

Agency has been used to allow a third party to takeadvantage of an exclusion clause in a contract to whichhe was not a party

The House of Lords refused to allow stevedores torely on an exclusion clause in a contract between thecarriers and the cargo owner in Scruttons v MidlandSilicones (1962) on the basis that only a party to thecontract could claim the benefit of the contract that isthe exclusion clause

However in The Eurymedon (1975) the Privy Councilon similar facts held that the carriers had negotiateda second contract (a collateral contract) as agents ofthe stevedores and the stevedores could claim thebenefit of the exclusion clause in this contract

But in Southern Water Authority v Carey (1985) sub-contractors sought to rely on a limitation of liabilityclause in a main contract Held ndash they must havespecific authority to negotiate on behalf of a thirdparty before this device could work

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W177

In Norwich City Council v Harvey (1989) instead ofusing an exclusion clause the contract placed the riskof loss or damage by fire on the owner and thisprotected both main contractor and sub-contractor

Attempts to allow the promisee to enforce the contract onbehalf of the third party

bull Specific performance

In Beswick v Beswick (1968) Peter Beswick had transferredhis business to his nephew in return for his nephewrsquospromise to pay his uncle a pension and after his deathan annuity to his widow The nephew paid his uncle thepension but only one payment of the annuity was madeThe widow as administratrix of her husbandrsquos estatesuccessfully sued her nephew for specific performance ofthe contract to pay the annuity although the House ofLords implied that she would not have succeeded if shehad been suing in her own right

bull Injunction

Similarly an injunction may be awarded to restrain abreach of a negative promise on a suit brought by thepromisee for example A promised B not to compete withC or by a stay of proceedings

In Snelling v Snelling Ltd (1973) three brothers lent moneyto a family company and agreed not to reclaim themoney for a certain period A stay of proceedings wasgranted to one of the brothers to stop another brotherfrom breaking his promise and suing the company for thereturn of his money

CA

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178

bull Damages

Damages to cover the disappointment of a third partywas sanctioned by Lord Denning in Jackson v HorizonHolidays Ltd (1975) where the plaintiff entered into acontract with a holiday firm for a holiday for his familyand himself in Ceylon The holiday was a disaster Theplaintiff recovered damages for pound500 for lsquomental stressrsquoOn appeal the court confirmed the amount on theground that witnessing the distress of his family hadincreased the plaintiffrsquos own distress Lord Denninghowever stated that the sum was excessive for theplaintiffrsquos own distress but upheld the award on theground that the plaintiff had made the contract on behalfof himself and of his wife and children and that he couldrecover in respect of their loss as well as their own

This statement by Lord Denning was disapproved by theHouse of Lords in Woodar Investment Development Ltd vWimpey Construction (UK) Ltd (1980) They stated thatdamages should not generally be recovered on behalf ofa third party

Lord Wilberforce however did suggest that there was aspecial category of contracts which called for specialtreatment That is where one party contracted for abenefit to be shared equally between a group forexample family holidays ordering meals in restaurantsfor a party hiring taxis for a group The decision inJackson could therefore be supported on this ground Afurther exception was identified by the House of Lords inLinden Gardens Trust v Lenesta Sludge Disposals Ltd (1993)where in a construction contract the original propertyowner may be able to sue the contractor for damagesresulting from defects in the work even though theproperty has been transferred to a third party The

CO

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W179

damages would be held in trust for the third party Thisexception was again confirmed by the House of Lords inAlfred McAlpine Construction Ltd v Panatown Ltd (2000) inorder to avoid the situation where otherwise no onewould be able to sue the contractor although on the factsthe exception did not apply (because a separatearrangement had been made under which the contractorwas directly liable to the third party)

Attempts to impose obligations on third parties

bull Restrictive covenants inserted into a contract for the saleof land may bind subsequent purchasers provided

they are negative in nature the subsequent purchaser has notice of the covenants

the person claiming the benefit has land capable ofbenefiting from its enforcement (Tulk v Moxhay (1848))

bull The courts extended the rule in Tulk v Moxhay to personalproperty for example a ship in The Strathcona (1926)where the plaintiffs had chartered The Strathcona forcertain months each year The ship was sold to thedefendant who refused to allow the plaintiffs to use theship The plaintiffs sought an injunction on the groundthat the doctrine in Tulk v Moxhay should be extendedfrom land to ships The court granted an injunction

This decision was criticised in Port Line Ltd v Ben Line Ltd(1958) where a ship chartered to the plaintiffs was sold tothe defendants The ship was requisitioned during theSuez war and compensation was paid to the defendantsThis compensation was claimed by the plaintiffs Held ndasheven if The Strathcona case was rightly decided it couldC

AV

EN

DIS

HL

AW

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RD

S180

not be applied in this case as (a) the defendants were notin breach of any duty and (b) the plaintiffs had notsought an injunction but financial compensation whichwas outside Tulk v Moxhay

The decision in The Strathcona has been widely criticisedbecause

a contract of hire creates personal not proprietaryrights in the hired object

the retention of land which can benefit from thecovenant is a necessary condition of the doctrine inTulk v Moxhay

bull However in Swiss Bank Corpn v Lloyds Bank (1979)Browne-Wilkinson J considered that the decision in TheStrathcona was correct He suggested however that thetort of inducing a breach of contract or knowinglyinterfering with a contract would be a more suitable basisfor the decision than Tulk v Moxhay He stated that in hisjudgment a person proposing to deal with property insuch a way as to cause a breach of a contract affecting thatproperty will be restrained by injunction from doing so ifwhen he acquired that property he had actualknowledge of the contract

CO

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W181

• Book Cover
• Title
• Copyright
• Contents
• 1 Agreement
• 2 Consideration and intention
• 3 Contents of a contract
• 4 Exemption (exclusion or
• 5 Vitiating elements which render
• 6 Mistake
• 7 Illegality and capacity
• 8 Discharge
• 9 Remedies for breach of contract
• 10 Privity of contract

Contents

1 Agreement 1

2 Consideration and intention 19

3 Contents of a contract 37

4 Exemption (exclusion or

limitation) clauses 53

5 Vitiating elements which render

a contract voidable 73

6 Mistake 93

7 Illegality and capacity 111

8 Discharge 129

9 Remedies for breach of contract

and restitution 147

10 Privity of contract 171

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W1

1 Agreement

The traditional view that an agreement requires theidentification of a valid offer and a valid acceptance of thatoffer has been challenged in recent years by

bull Lord Denning in Gibson v Manchester City Council (1979)and Butler Machine Tool Co Ltd v Ex-Cell-O Corpn Ltd(1979) where he stated that providing the parties wereagreed on all material points then there was no need forthe traditional analysis

bull Lord Justice Steyn (obiter) in Trentham Ltd v Archital Luxfer(1993) where he stated that a strict analysis of offer andacceptance was not necessary in an executed contract ina commercial setting

The traditional view however was applied by the House ofLords in Gibson v Manchester City Council (1979)

Lord Diplock did recognise that there may be somelsquoexceptional contracts which do not fit easily into an analysisof offer and acceptancersquo for example a multi-partitecontract as in Clarke v Dunraven (1897) but he stressed thatin most contracts the lsquoconventionalrsquo approach of seeking anoffer and an acceptance of that offer must be adhered to

Offer Acceptance

In normal cases therefore a valid offer and a validacceptance of that offer must be identified

Unilateral and bilateral agreements

The distinction is important with regard to

bull advertisements

bull revocation of offers

bull communication of acceptance

Offer

A valid offer

bull must be communicated so that the offeree may accept orreject it

bull may be communicated in writing orally or by conduct

CA

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2

A bilateral agreementconsists of an exchange of

promises for example

Offer ndash I will sell my carfor pound500

Acceptance ndash I will giveyou pound500 for your car

In a unilateral agreementthe offeror alone makes a

promise The offer is accepted by doing what is

set out in the offer forexample

Offer ndash I will pay pound500 toanyone who returns my

lost kitten

Acceptance ndash The lost kitten is returned

A definite promise to be bound provided that certain specified terms are accepted

(There is no general requirement that an agreement must bein writing Important exceptions include contracts relatingto interests in land (Law of Property (MiscellaneousProvisions) Act 1989 s 2(1)) and consumer credit(Consumer Credit Act 1974))

bull May be made to a particular person to a group ofpersons or to the whole world In Carlill v Carbolic SmokeBall Co Ltd (1893) the defendants issued anadvertisement in which they offered to pay pound100 to anyperson who used their smoke balls and then succumbedto influenza Mrs Carlill saw the advertisement and usedthe smoke ball but then immediately caught influenzaShe sued for the pound100 The defendants argued that it wasnot possible in English law to make an offer to the wholeworld Held ndash an offer can be made to the whole world

bull Must be definite in substance (see certainty of terms p 16below)

bull Must be distinguished from an invitation to treat

Invitations to treat

In Gibson v Manchester City Council (1979) the councilrsquos letterstated lsquowe may be prepared to sell you rsquo The House ofLords did not regard this as an lsquoofferrsquo

A response to an invitation to treat does not lead to anagreement The response may however be an offer CO

NT

RA

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W3

An indication that the invitor is willing to enter into negotiations but is not prepared to be

bound immediately

The distinction between an offer and an invitation to treatdepends on the reasonable expectations of the parties

The courts have established that there is no intention to bebound in the following cases

Display of goods for sale

bull In a shop In Pharmaceutical Society of GB v Boots CashChemists Ltd (1952) the Court of Appeal held that in aself-service shop the sale takes place when the assistantaccepts the customerrsquos offer to buy the goods Thedisplay of goods is a mere invitation to treat

bull In a shop window In Fisher v Bell (1961) it was held thatthe display of a lsquoflick knifersquo in a shop window with aprice attached was an invitation to treat

However it was suggested by Lord Denning in Thorntonv Shoe Lane Parking (1971) (see below) that vendingmachines and automatic ticket machines are makingoffers since once the money has been inserted thetransaction is irrevocable

bull In an advertisement In Partridge v Crittenden (1968) anadvertisement which said lsquoBramblefinch cocks and hensndash 25srsquo was held to be an invitation to treat The courtpointed out that if the advertisement was treated as anoffer this could lead to many actions for breach ofcontract against the advertiser as his stock of birds waslimited He could not have intended the advertisement tobe an offer

However if the advertisement is unilateral in nature andthere is no problem of limited stock then it may be an offerSee Carlill v Carbolic Smoke Ball Co Ltd (above) Advertising areward may also be a unilateral offer

CA

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4

Auctions

bull An auctioneerrsquos request for bids in Payne v Cave (1789)was held to be an invitation to treat The offer was madeby the bidder (cf Sale of Goods Act 1979 s 57(2))

bull A notice of an auction In Harris v Nickerson (1873) it washeld that a notice that an auction would be held on acertain date was not an offer which then could beaccepted by turning up at the stated time It was astatement of intention

If the auction is stated to be lsquowithout reserversquo then there isstill no necessity to hold an auction but if the auction isheld lots must be sold to the highest bidder (Barry vHeathcote Ball (2001) confirming obiter dicta in Warlow vHarrison (1859)) The phrase lsquowithout reserversquo constitutes aunilateral offer which can be accepted by turning up andsubmitting the highest bid

Tenders

A request for tenders is normally an invitation to treat

bull However it was held in Harvela Ltd v Royal Trust ofCanada (1985) that if the request is made to specifiedparties and it is stated that the contract will be awardedto the lowest or the highest bidder then this will bebinding as an implied unilateral offer It was also held inthat case that a referential bid for example lsquothe highestother bid plus 10rsquo was not a valid bid

bull It was also held in Blackpool and Fylde Aero Club v BlackpoolBC (1990) that if the request is addressed to specifiedparties this amounts to a unilateral offer thatconsideration will be given to each tender which isproperly submitted C

ON

TR

AC

TL

AW

5

Subject to contract

The words lsquosubject to contractrsquo may be placed on top of a letter in order to indicate that an offer is not to be legallybinding (Walford v Miles (1992))

Termination of the offer

Revocation (termination by the offeror)

An offeror may withdraw an offer at any time before it hasbeen accepted

bull The revocation must be communicated to the offereebefore acceptance In Byrne v van Tienhoven (1880) thewithdrawal of an offer sent by telegram was held to becommunicated only when the telegram was received

bull Communication need not be made by the offerorcommunication through a third party will suffice InDickinson v Dodds (1876) the plaintiff was told by aneighbour that a property which had been offered to himhad been sold to a third party Held ndash the offer had beenvalidly revoked

bull An offer to keep an offer open for a certain length of timecan be withdrawn like any other unless an option hasbeen purchased for example consideration has beengiven to keep the offer open (Routledge v Grant (1828))

Unilateral offersbull Communication of the revocation is difficult if the offer

was to the whole world It was suggested however inthe American case of Shuey v USA (1875) that

CA

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6

Revocation Lapse Rejection

communication will be assumed if the offeror takesreasonable steps to inform the public for example placesan advertisement in the same newspaper

bull It now seems established that revocation cannot takeplace if the offeree has started to perform In Errington vErrington (1952) a father promised his daughter and son-in-law that if they paid off the mortgage on a house heowned he would give it to them The young couple dulypaid the instalments but the offer was withdrawnshortly before the whole debt was paid Held ndash there wasan implied term in the offer that it was irrevocable onceperformance had begun This is also supported by dictain Daulia v Four Millbank Nominees (1978)

Lapse (termination by operation of law)

An offer may lapse and thus be incapable of being acceptedbecause of

bull Passage of time

at the end of a stipulated time (if any) or

if no time is stipulated after a reasonable time InRamsgate Victoria Hotel Co v Montefiore (1866) anattempt to accept an offer to buy shares after fivemonths failed as the offer had clearly lapsed

bull Death

of the offeror if the offer was of a personal nature

of the offeree

bull Failure of a condition

an express condition or CO

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W7

an implied condition In Financings Ltd v Stimson(1962) it was held that an offer to buy a car lapsedwhen the car was badly damaged on the ground thatthe offer contained an implied term that the carwould remain in the same condition as when the offer was made

Rejection (termination by the offeree)

A rejection may be

bull express

bull implied

A counter offer is an implied rejectionbull Traditionally an acceptance must be a mirror image of

the offer If any alteration is made or anything addedthen this will be a counter offer and will terminate theoffer In Hyde v Wrench (1840) the defendant offered tosell a farm for pound1000 The plaintiff said he would givepound950 for it Held ndash this was a counter offer whichterminated the original offer which was therefore nolonger open for acceptance In Brogden v MetropolitanRailway (1877) the defendant sent to the plaintiff forsignature a written agreement which they hadnegotiated The plaintiff signed the agreement andentered in the name of an arbitrator on a space which hadbeen left empty for this purpose Held ndash the returneddocument was not an acceptance but a counter offer

bull This is particularly important for businesses whocontract by means of sales forms and purchase forms forexample if an order placed by the buyerrsquos purchase formis lsquoacceptedrsquo on the sellerrsquos sales form and the conditionson the back of the two forms are not identical (which theyare very unlikely to be) then the lsquoacceptancersquo is a counter

CA

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8

offer and an implied rejection In Butler Machine Tool CoLtd v Ex-Cell-O Corpn Ltd (1979) the sellers offered to sella machine tool to the buyers for pound75535 on their ownconditions of sale which were stated to prevail over anyconditions in the buyersrsquo order form and whichcontained a price variation clause The buyers lsquoacceptedrsquothe offer on their own order form which stated that theprice was a fixed price and which contained a tear offslip which said lsquowe accept your order on the terms andconditions stated thereonrsquo This was in effect a lsquocounterofferrsquo The sellers signed and returned the slip togetherwith a letter which stated that they were carrying out theorder in accordance with their original offer When theydelivered the machine they claimed the price hadincreased by pound2892 The buyers refused to pay the extrasum Held ndash the contract was concluded on the buyersrsquoterms the signing and returning of the tear-off slip wasconclusive that the sellers had accepted the buyersrsquocounter offer The court analysed the transaction bylooking for matching offer and acceptance

Note ndash a request for further information is not a counteroffer In Stevenson v McLean (1880) the defendant offered tosell to the plaintiff iron at 40s a ton The plaintiff telegraphedto inquire whether he could pay by instalments Held ndash thiswas a mere inquiry for information not a counter offer andso the original offer was not rejected

A conditional acceptance

A conditional acceptance may be a counter offer capable ofacceptance for example I will pay pound500 for your car if youpaint it red If the owner agrees to this condition a contractwill be formed CO

NT

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W9

A valid acceptance must

bull be made while the offer is still in force (see termination ofoffer above)

bull be made by the offeree

bull exactly match the terms of the offer (see counter offersabove)

bull be written oral or implied from conduct In Brogden vMetropolitan Railway (1877) (above) the returneddocument was held to be a counter offer which thedefendants then accepted either by ordering coal fromBrogden or by accepting delivery of the coal (see alsolsquoThe Battle of the Formsrsquo)

However the offeror may require the acceptance to be madein a certain way If the requirement is mandatory it must befollowed

If the requirement is not mandatory then another equallyeffective method will suffice In Manchester Diocesan Councilfor Education v Commercial and General Investments Ltd (1969)an invitation to tender stated that the person whose bid was

CA

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10

The fact of acceptance

An acceptance is a final and unqualified assent to all the terms of the offer

The fact of acceptance

Acceptance

Communication ofacceptance

accepted would be informed by a letter to the address givenin the tender The acceptance was eventually sent not to thisaddress but to the defendantrsquos surveyor Held ndash thestatement in the tender was not mandatory the tender hadtherefore been validly accepted

bull Where the offer is made in alternative terms theacceptance must make it clear to which set of terms itrelates

bull A person cannot accept an offer of which he has noknowledge (Clarke (1927) (Australia))

But a personrsquos motive in accepting the offer is irrelevantIn Williams v Carwardine (1833) (Australia) the plaintiffknew of the offer of a reward in exchange forinformation but her motive was to salve her conscienceHeld ndash she was entitled to the reward

bull lsquoCross-offersrsquo do not constitute an agreement (Tinn vHoffman amp Co (1873))

Communication of acceptance

Acceptance must be communicated by the offeree or hisagent In Powell v Lee (1908) an unauthorised communicationby one of the managers that the Board of Managers hadselected a particular candidate for a headship was held notto be a valid acceptance

Silence as communication

An offeror may not stipulate that silence of the offeree is toamount to acceptance In Felthouse v Bindley (1862) the

CO

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W11

Acceptance must be communicated

plaintiff wrote to his nephew offering to buy a horse andadding lsquoIf I hear no more I will take it that the horse isminersquo The nephew did not reply to this letter Held ndash nocontract Acceptance had not been communicated to theofferor

It has been suggested that this does not mean that silencecan never amount to acceptance for example if in Felthousev Bindley the offeree had relied on the offerorrsquos statementthat he need not communicate his acceptance and wished toclaim acceptance on that basis the court could decide thatthe need for acceptance had been waived by the offeror (seebelow)

Exceptions to the rule that acceptance must be

communicated

bull In a unilateral contract where communication isexpressly or impliedly waived (see Carlill v CarbolicSmoke Ball Co Ltd (above))

bull Possibly where failure of communication is the fault ofthe offeror This was suggested by Lord Denning inEntores Ltd v Miles Far East Corpn (1955)

bull Where the post is deemed to be the proper method ofcommunication In Adams v Lindsell (1818) thedefendants wrote to the plaintiffs offering to sell them aquantity of wool and requiring acceptance by post Theplaintiffs immediately posted an acceptance on 5December Held ndash the contract was completed on 5December

CA

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12

The postal rule

bull Adams v Lindsell (1818) above

bull Acceptance is effective on posting even when the letter islost in the post In Household Fire Insurance Co Ltd v Grant(1879) the defendant offered to buy shares in theplaintiffrsquos company A letter of allotment was posted tothe defendant but it never reached him Held ndash thecontract was completed when the letter was posted

bull Note the difference between acceptance and revocationof an offer by post

Acceptance of an offer takes place when a letter isposted

Revocation of an offer takes place when the letter isreceived

bull Byrne v van Tienhoven (1880) above

Limitations to the postal rule

bull It only applies to acceptances and not to any other typeof communication (for example an offer or a revocation)

bull It only applies to letters and telegrams It does not applyto instantaneous methods of communication such astelex or probably fax or email

bull It must be reasonable to use the post as the means ofcommunication (for example an offer by telephone or byfax might indicate that a rapid method of response wasrequired)

CO

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W13

Acceptance takes place when a letter is postednot when it is received

bull Letters of acceptance must be properly addressed andstamped

bull The rule is easily displaced for example it may beexcluded by the offeror either expressly or impliedly InHolwell Securities Ltd v Hughes (1974) it was excluded bythe offeror requiring lsquonotice in writingrsquo It was alsosuggested by the court that the postal rule would not beused where it would lead to manifest inconvenience

There is no direct English authority on this point

CA

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14

Arguments againstLogic ndash once a letter is posted the offer is accepted there isno provision in law for revoking an acceptance

bull The lsquologicalrsquo view is supported by the New Zealand caseof Wenckheim v Arndt (1878) and the South African case ofA to Z Bazaars (Pty) Ltd v Minister of Agriculture (1974)

Fairness ndash

bull Cheshire argues that it would be unfair to the offeror whowould be bound as soon as the letter was posted whereasthe offeree could keep his options open

Query ndash can a letter of acceptance be cancelled byactual communication before the letter is delivered

Communication by instantaneouselectronic means

bull The rules on telephones and telex were laid down inEntores v Miles (above) and confirmed in Brinkibon Ltd vStahag Stahl (1983) where it was suggested that duringnormal office hours acceptance takes place when themessage is printed out not when it is read The House ofLords however accepted that communication by telexmay not always be instantaneous for example whenreceived at night or when the office is closed

bull Lord Wilberforce stated

lsquoNo universal rule could cover all such cases theymust be resolved by reference to the intention of theparties by sound business practice and in some casesby a judgment of where the risk should liersquo

CO

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W15

Arguments forThere is some support for allowing recall in the Scottishcase of Countess of Dunmore v Alexander (1830)

bull It is argued that actual prior communication of rejectionwould not necessarily prejudice the offeror who bydefinition will be unaware of the lsquoacceptancersquo

bull It is also argued that it would be absurd to insist onenforcing a contract when both parties have acted on therecall This however could be interpreted as anagreement to discharge

Acceptance takes place when and where the message is received

bull It has been suggested that a message sent outsidebusiness hours should be lsquocommunicatedrsquo when it isexpected that it would be read for example at the nextopening of business It is generally accepted that thesame rules should apply to faxes and email as to telex

bull There is no direct authority on telephone answeringmachines It might well be argued that the presence of ananswering machine indicates that communication is notinstantaneous there is a delay between sending andreceiving messages It would then follow that the basicrule should apply that is that acceptance must becommunicated Acceptance therefore would take placewhen the message is actually heard by the offeror

Certainty of terms

The courts will not enforce

CA

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16

Vague agreementsfor example

Scammell v Ouston (1941)

The courts refused toenforce a sale stated to bemade lsquoon hire purchase

termsrsquo neither the rate ofinterest nor the period of

repayment nor the numberof instalments were stated

Incomplete agreementsfor example

lsquoan agreement to make anagreementrsquo will be void

In Walford v Miles (1992) thecourt refused to enforce anlsquoagreement to negotiate in

good faithrsquo

See also May and Butcher v R (1934)

It is for the parties to make their intentions clear

But the uncertainty may be cured by

bull a trade custom where a word has a specific meaning

bull previous dealings between the parties whereby a word orphrase has acquired a specific meaning for exampletimber of lsquofair specificationrsquo in Hillas v Arcos (1932)

bull the contract itself which provides a method for resolvingan uncertainty In Foley v Classique Coaches (1934) therewas an executed contract where the vagueness of lsquoat aprice to be agreedrsquo was cured by a provision in thecontract referring disputes to arbitration Cf May andButcher v R an unexecuted contract where the courtrefused to allow a similar arbitration clause to cure theuncertainty

The courts will strive to find a contract valid where it hasbeen executed

bull The Sale of Goods Act 1979 provides that if no price ormechanism for fixing the price is provided then thebuyer must pay a lsquoreasonable pricersquo but this provisionwill not apply where the contract states that the price islsquoto be agreed between the partiesrsquo

bull Note a lsquolock-out agreementrsquo for example an agreementnot to negotiate with any one else is valid provided it isclearly stated and for a specific length of time This wasapplied by the Court of Appeal in Pitt v PHH AssetManagement (1993) where a promise not to negotiate withany third party for two weeks was enforced

CO

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W17

CO

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W19

2 Consideration and intention

Consideration

Most legal systems will only enforce promises where thereis something to indicate that the promisor intended to bebound that is there is some

Consideration is the normal lsquobadge of enforceabilityrsquo inEnglish law

ReciprocityConsideration

RelianceLord Denning tried to

introduce reliance as basisfor enforcing promisesthrough the doctrine of

promissory estoppel

FormFor example writing English

law will enforce promiseswhich are contained in a

deed (A deed is a document which

is signed and attested andindicates on its face

that it is a deed)

lsquoBadge of

enforceabilityrsquo

Definitions of consideration

Shorter version

Limitation of the definition

bull It makes no mention of why the promisee incurs adetriment or confers a benefit or that the element of abargain is central to the classical notion of considerationFor example in Combe v Combe (1951) it was held thatthere was no consideration for the defendantrsquos promiseto pay his ex-wife pound100 per year even though in relianceon that promise she had not applied to the divorce courtfor maintenance and in that sense she had suffered adetriment The reason why the detriment did notconstitute consideration was that there was no request bythe husband express or implied that she should forbearfrom applying for maintenance There was nolsquoexchangersquo

bull Some writers have preferred to emphasise this elementof bargain and have defined consideration as

CA

VE

ND

ISH

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20

A valuable consideration in the eyes of the law mayconsist of (Currie v Misa (1875))

bull either some right interest profit or benefit to oneparty or

bull some forbearance detriment loss orresponsibility given suffered or undertaken bythe other

A benefit to one party or a detriment to the other

lsquothe element of exchange in a contractrsquoor

lsquothe price paid for a promisersquo

bull These definitions however are vague and despite itslimitation the benefitdetriment definition is mostcommonly used

Consideration and condition

Consideration must be distinguished from the fulfilment ofa condition If A says to B lsquoI will give you pound500 if you shouldbreak a legrsquo there is no contract but simply a gratuitouspromise subject to a condition In Carlill v Carbolic Smoke BallCo (1893) the plaintiff provided consideration for thedefendantrsquos promise by using the smoke ball Catchinginfluenza was only a condition of her entitlement to enforcethe promise

Kinds of consideration

bull In Roscorla v Thomas (1842) the defendant promised theplaintiff that a horse which had been bought by him wassound and free from vice It was held that since thispromise was made after the sale had been completedthere was no consideration for it and it could not beenforced In Re McArdle (1951) a promise made lsquoin

CO

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RA

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LA

W21

Past consideration that is something already completed before the promise is made cannot

generally amount to consideration

Executed considerationAn act wholly

performed as part of a contract

Executory ConsiderationA promise to do something

in the future

consideration of your carrying out certain improvementsto the propertyrsquo was held by the Court of Appeal to beunenforceable as all the work had been done before thepromise was made

Exceptions to this rule

bull The modern requirements were laid down by LordScarman in Pao On v Lau Yiu Long (1980) Where a serviceis rendered

at the request of the promisor (as in Lampleigh vBraithwait (1615))

on the understanding that a payment will be made (asin Re Caseyrsquos Patents (1892)) and

if the payment would have been legally enforceableif it had been promised in advance

then a subsequent promise to pay a certain sum will beenforced

Note ndash the lsquoinferredrsquo intention to pay makes this a veryflexible exception

Consideration must move from the promisee

bull See Chapter 10 ndash Privity of contract

Consideration need not be adequate

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VE

ND

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22

Only a person who has provided consideration for a promise can enforce that promise

The consideration provided by one party need not equal in value the

consideration provided by the other party

It is for the parties themselves to make their own bargainThe consideration need only have lsquosome value in the eyes ofthe lawrsquo (See lsquoConsideration must be sufficientrsquo p 24below)

bull The value may be slight In Chappell Co Ltd v Nestleacute Co Ltd(1960) three wrappers from the defendantrsquos chocolatebars were held to be part of the consideration InMountford v Scott (1975) pound1 was held to be goodconsideration for an option to buy a house

bull Withdrawal of threatened legal proceedings will amountto consideration even if the claim is found to have nolegal basis provided that the parties themselves believethat the claim is valid (Callisher v Bischoffstein (1870))

bull In Pitt v PHH Asset Management (1993) the defendantagreed to a lock-out agreement in return for Pittdropping his claim for an injunction against them Theclaim for an injunction had no merit but had a nuisancevalue and dropping it was therefore good consideration

bull In Alliance Bank v Broome (1964) the bankrsquos forbearance tosue was held to be consideration for the defendantrsquospromise to provide security for a loan

bull In Edmonds v Lawson (2000) it was held that the generalbenefits to chambers of operating a pupillage system wassufficient to provide consideration for contracts withindividual pupils

There is no consideration however where the promises arevague for example lsquoto stop being a nuisance to his fatherrsquo(White v Bluett (1853) but cf Ward v Byham (1956) below) orillusory for example to do something impossible or merelygood for example to show love or affection or gratitude CO

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W23

It has been argued that because the latter are invalidconsideration must have some economic value Buteconomic value is extremely difficult to discern in the othercases cited above Since consideration is a lsquobadge ofenforceabilityrsquo it is argued that nominal consideration isadequate it is only designed to show that the promise isintended to be legally enforceable ndash whether it creates anyeconomic advantage is therefore irrelevant

Consideration must be sufficient

Traditionally the following have no value in the eyes of thelaw

Performing a duty imposed by law

bull For example promising not to commit a crime orpromising to appear in court after being subpoenaed InCollins v Godefroy (1831) a promise to pay a fee to awitness who has been properly subpoenaed to attend a

CA

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24

The consideration must have some value in the eyes of the law

Consideration therefore is found when a person receives whatever he requests

in return for a promise whether or not it has aneconomic value provided it is not too vague

Performing a duty imposed

by law

Performing an existingcontractual duty owed

to the other party

trial was held to have been made without considerationThe witness had a public duty to attend

bull But if a person does or promises to do more than he isrequired to do by law then he is providing considerationIn Glasbrook Bros v Glamorgan CC (1925) the council aspolice authority on the insistence of a colliery owner andin return for a promise of payment provided protectionover and above that required by law Held ndash they hadprovided consideration for the promise to pay

bull In Ward v Byham (1956) the father of an illegitimate childpromised to pay the mother an allowance of pound1 per weekif she proved that the child was lsquowell looked after andhappyrsquo Held ndash the mother was entitled to enforce thepromise because in undertaking to see that the child waslsquowell looked after and happyrsquo she was doing more thanher legal obligation Lord Denning however based hisdecision on the ground that the mother providedconsideration by performing her legal duty to maintainthe child

Treitel agreed with Denning that performance of a dutyimposed by the law can be consideration for a promise Heargues that it is public policy which accounts for the refusalof the law in certain circumstances to enforce promises toperform existing duties Where there are no grounds ofpublic policy involved then a promise given inconsideration of a public duty can be enforced

He cites

bull promises to pay rewards for information leading to thearrest of a felon See Sykes v DPP (1961)

bull Ward v Byham (above) CO

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W25

In most cases it would make no difference whether the courtproceeded on the basis that the matter was one of publicpolicy or a lack of consideration But the former ground doesallow a greater degree of flexibility

Performing an existing contractual duty

Where the duty is owed to the other party this cannot beconsideration for

A request for extra payment

bull In Stilk v Myrick (1809) the captain promised the rest ofcrew extra wages if they would sail the ship back homeafter two sailors had deserted Held ndash the crew werealready bound by their contract to meet the normalemergencies of the voyage and were doing no more thantheir original contractual duty in working the ship home

bull Where the promisor however performs more than hehad originally promised then there can be considerationIn Hartley v Ponsonby (1857) nearly half the crewdeserted This discharged the contracts of the remainingsailors as it was dangerous to sail the ship home withonly half the crew The sailors were therefore free to makea new bargain so the captainrsquos promise to pay themadditional wages was enforceable

Exceptions to the rule in Stilk v Myrick

Factual advantages obtained by the promisorIn Williams v Roffey Bros (1991) the defendants (the maincontractors) were refurbishing a block of flats They sub-

CA

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26

A request for extra payment

A request to avoid part of a debt

contracted the carpentry work to the plaintiff The plaintiffran into financial difficulties whereupon the defendantsagreed to pay the plaintiff an additional sum if theycompleted the work on time Held ndash where a party to anexisting contract later agrees to pay an lsquoextra bonusrsquo in orderthat the other party performs his obligations under theoriginal contract then the new agreement is binding if theparty agreeing to pay the bonus has thereby obtained somenew practical advantage or avoided a disadvantage In thisparticular case the advantage was the avoidance of apenalty clause and the expense of finding new carpenters

bull Note ndash Stilk v Myrick (above) recognises as considerationonly those acts which the promisee was not under a legalobligation to perform Williams v Roffey Bros (above) addsto these factual advantages obtained by the promisor

bull This decision pushes to the fore the principles ofeconomic duress as a means of distinguishing enforceableand unenforceable modifications to a contract (seeChapter 5 on economic duress p 87)

Duties owed to third partyWhere a duty is owed to a third party its performance canalso be consideration for a promise by another It is clear thatthe third party is getting something more than he is entitledto

bull In Shadwell v Shadwell (1860) an uncle promised to pay anannual sum to his nephew on hearing of his intendedmarriage The fact of the marriage providedconsideration although the nephew was already legallycontracted to marry his fianceacutee

bull In Scotson v Pegg (1861) A agreed to deliver coal to Brsquosorder B ordered A to deliver coal to C who promised A to

CO

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W27

unload it Held ndash A could enforce Crsquos promise as Arsquosdelivery of the coal was good considerationnotwithstanding that he was already bound to do so byhis contract with B

bull In New Zealand Shipping Co v Satterthwaite amp Co Ltd TheEurymedon (1975) it was held by the Privy Council thatwhere a stevedore at the request of the consignee ofcertain goods removed the goods from a ship this wasconsideration for the promise by the consignee to give thestevedore the benefit of an exclusion clause although thestevedore in removing the goods was only performingcontractual duties he owed to the carrier

A request to avoid part of a debt

If a creditor is owed pound100 and agrees to accept pound90 in fullsettlement he can later insist on the remaining pound10 beingpaid as there is no consideration for his promise to waive thepound10 (the rule in Pinnelrsquos Case (1602))

bull This rule was confirmed by the House of Lords in Foakesv Beer (1884) Dr Foakes was indebted to Mrs Beer on ajudgment sum of pound2090 It was agreed by Mrs Beer thatif Foakes paid her pound500 in cash and the balance of pound1590in instalments she would not take lsquoany proceedingswhatsoeverrsquo on the judgment Foakes paid the moneyexactly as requested but Mrs Beer then proceeded toclaim an additional pound360 as interest on the judgment debtFoakes refused and when sued pleaded that his duty topay interest had been discharged by the promise not tosue Their Lordships deferred as to whether on its trueconstruction the agreement merely gave Foakes time to

CA

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28

Basic rule payment of a smaller sum will not discharge the duty to pay a higher sum

pay or was intended to cover interest as well But theyheld even on the latter construction there was noconsideration for the promise and that Foakes was stillbound to pay the additional sum

There are situations however where payment of a smallersum will discharge the liability for the higher sum

bull where the promise to accept a smaller sum in fullsettlement is made by deed or in return forconsideration

bull where the original claim was not for a fixed sum or theamount is disputed in good faith

bull where the debtor does something different for examplewhere payment is made at the creditorrsquos request

at an earlier time

at a different place

by a different method (it was held in D amp C BuildersLtd v Rees (1966) that payment by cheque is notpayment by a different method)

bull where payment is accompanied by a benefit of somekind

bull in a composition agreement with creditors

bull where payment is made by a third party (see HirachandPunachand v Temple (1911))

It has been argued that to allow the creditor to sue for theremaining debt would be a fraud on the third parties in thelast two cases above

Note ndash the doctrine of promissory estoppel under certaincircumstances may allow payment of smaller sum todischarge liability for the larger sum

CO

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W29

In Re Selectmove (1995) the Court of Appeal refused toextend the principle laid down in Williams v Roffey Bros topart payment of a debt The company had offered to pay itsarrears by instalments to the Inland Revenue who said thatthey would let them know if this was acceptable They heardnothing further but paid some instalments and thenreceived a threat of being wound up if the full arrears werenot paid immediately The court was not prepared to allowWilliams v Roffey Bros to overturn a rule laid down by theHouse of Lords in Foakes v Beer

Promissory estoppel

There are problems with regard to

Origins

bull It was introduced (obiter) by Lord Denning in the CentralLondon Property Trust Ltd v High Trees House Ltd (1947)where owners of a block of flats had promised to acceptreduced rents in 1939 There was no consideration fortheir promise but Lord Denning nevertheless stated thathe would estop them from recovering any arrears Hebased his statement on the decision in Hughes vMetropolitan Railway (1877)

CA

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30

If a promise intended to be binding andintended to be acted upon is acted upon then the court will not allow the promisor

to go back on his promise

the origins ofthe doctrine

the scope ofthe doctrine

the effect of the doctrine

bull It would however seem to conflict with the House ofLordsrsquo decision in Jorden v Money (1854) where it wasstated that estoppel applied only to statements of fact andnot to promises and also with the decision in Foakes vBeer (1884) where the House of Lords confirmed thatpayment of a smaller sum will not discharge the liabilityfor a larger sum

Scope

bull It only applies to the modification or discharge of anexisting contractual obligation It cannot create a newcontract See Combe v Combe (1951) above (However itwas used to create a new right of action in the Australiancase of Waltons v Maher (1988))

bull It can be used only as a lsquoshield and not a swordrsquo

bull The promise not to enforce rights must be clear andunequivocal In The Scaptrade (1983) the mere fact of nothaving enforced onersquos full rights in the past was notsufficient

bull It must be inequitable for the promisor to go back on hispromise In D amp C Builders v Rees (1966) Mrs Rees had forced the builders to accept her cheque by inequitable means and so could not rely on promissory estoppel

bull The promisee must have acted in reliance on the promisealthough not necessarily to his detriment (Alan amp Co Ltdv El-Nasr Export and Import Co (1972))

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W31

The exact scope of the doctrine is a matter ofdebate but certain requirements must be met

Effect of the doctrine

bull In Tool Metal Manufacturing Co v Tungsten Electric Co(1955) the owner of a patent promised to suspendperiodic payments during the war It was held by theCourt of Appeal that the promise was binding for theduration of the war but the owners could on givingreasonable notice at he end of the war revert to theiroriginal legal entitlements

bull In Ajayi v Briscoe (1964) the Privy Council stated that thepromisee could resile from his promise on givingreasonable notice which allowed the promisee areasonable opportunity of resuming his position but thatthe promise would become final if the promisee could notresume his former position

On one interpretation these cases show that as regardsexisting or past obligations it is extinctive but as regardsfuture obligations it is suspensory

On another interpretation the correct approach is to look atthe nature of the promise If it was intended to bepermanent then the promiseersquos liability will beextinguished

Lord Denning consistently asserted that promissoryestoppel can extinguish debts However this view iscontrary to Foakes v Beer

The view that promissory estoppel is suspensory onlywould reconcile it with the decisions in Jorden v Money

CA

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ND

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32

It is not clear whether the doctrine extinguishesrights or merely suspends them

Foakes v Beer and Pinnelrsquos Case but it would deprive it of mostof its usefulness

The question of whether the doctrine is suspensory orextinctive is particularly important with regard to singlepayments

Intention to be legally bound

This presumption may be rebutted but the onus of proof ison the party seeking to exclude legal relations In EssoPetroleum Co Ltd v Commissioners of Customs and Excise (1976)Esso promised to give one world cup coin with every fourgallons of petrol sold A majority of the House of Lordsbelieved that the presumption in favour of legal relationshad not been rebutted

Examples of rebuttals

bull lsquoThis arrangement is not entered into as a formal orlegal agreement and shall not be subject to legaljurisdiction in the law courtsrsquo (Rose and Frank v CromptonBros (1925))

bull Agreement to be binding lsquoin honour onlyrsquo (Jones v VernonPools (1939))

CO

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W33

Commercial andbusiness

agreements

Social anddomestic

agreements

In commercial and business agreements there is a presumption that the parties

intend to create legal relations

bull Letters of comfort for example statements to encouragelending to an associated company It was held inKleinwort Benson Ltd v Malaysia Mining Corpn (1989) thatthe defendantrsquos statement that lsquoit is our policy to ensurethat the business is at all times in a position to meet itsliabilities to yoursquo was a statement of present fact and nota promise for the future As such it was not intended tocreate legal relations

bull Collective agreements are declared not to be legallybinding by the Trade Unions and Labour Relations(Consolidation) Act 1992 unless expressly stated inwriting to be so

This can be rebutted by evidence to the contrary forexample

bull Agreements between husband and wife In Balfour vBalfour (1919) the court refused to enforce a promise bythe husband to give his wife pound50 per month whilst he wasworking abroad However the court will enforce a clearagreement where the parties are separating or separated(Merritt v Merritt (1970))

bull Agreements between members of a family In Jones vPadavatton (1969) Mrs Jones offered a monthly allowanceto her daughter if she would come to England to read forthe Bar Her daughter agreed but was not very successfulMrs Jones stopped paying the monthly allowance butallowed her daughter to live in her house and receive therents from other tenants Mrs Jones later sued forpossession The daughter counterclaimed for breach of

CA

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34

In social and domestic agreements there is a presumption against legal relations

the agreement to pay the monthly allowance andor for accommodation Held (a) the first agreement may havebeen made with the intention of creating legal relationsbut was for a reasonable time and would in any case havelapsed (b) the second agreement was a familyarrangement without an intention to create legalrelations It was very vague and uncertain

bull An intention to be legally bound may be inferred where

one party has acted to his detriment on theagreement (Parker v Clark (1960)) or

a business arrangement is involved (Snelling vSnelling (1973)) or

there is mutuality (Simpkins v Pays (1955))

But in all such cases the agreement must be clear

CO

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W35

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W37

3 Contents of a contract

Once a contract has been formed it is necessary to explorethe scope of the obligations which each party incurs

(Incorporation of terms is covered in Chapter 4)

The distinction between terms and mere

representations

Is a statement part of the contract Statements made duringnegotiations leading to a contract may be either

bull Terms

that is statements which form the express terms of thecontract As such they constitute promises as to thepresent truth of the statement or as to future action Ifsuch a promise is broken (for example because thestatement is untrue) this will involve a breach of contractor

Different weighting may be given to different terms

Distinction between termsand mere representations

Interpretation of expressterms

Identification of impliedterms

This involves

bull Mere representations

that is statements which do not form part of the contractbut which helped to induce the contract If these areuntrue they are lsquomisrepresentationsrsquo

Now that damages can be awarded for negligent misrepresentation the distinction has lost much of itsformer significance but there are still some importantconsequences

In trying to ascertain such intention the court may take intoaccount the following factors

The importance of the statement to the parties

bull In Bannerman v White (1861) the buyer stated lsquoif sulphurhas been used I do not want to know the pricersquo Held ndasha term Similarly in Couchman v Hill (1947) the buyerasked if the cow was in calf stating that if she was hewould not bid The auctioneerrsquos reply that she was not incalf was held to be a term overriding the printedconditions which stated that no warranty was given

The respective knowledge of the parties

bull In Oscar Chess Ltd v Williams (1957) it was held that astatement by a member of the public (a non expert) to agarage (an expert) with regard to the age of a car was amere representation not a term On the other hand astatement made by a garage (an expert) to a member ofthe public (a non-expert) concerning the mileage of a carwas held to be a term (Dick Bentley Productions Ltd vHarold Smith (Motors) Ltd (1965))

CA

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38

Whether a statement has become a term of thecontract depends on the intention of the parties

The manner of the statement

bull For example if it suggests verification (Ecay v Godfrey(1947)) it is unlikely to be a term If it discouragesverification lsquoIf there was anything wrong with the horseI would tell yoursquo (Schawel v Reade (1913)) it is more likelyto be a term

Where a contract has been reduced to writing

The terms will normally be the statements incorporated intothe written contract (Routledge v McKay (1954))

bull But a contract may be partly oral and partly written (seeCouchman v Hill (1947) above) In Evans amp Sons Ltd vAndrea Merzario Ltd (1976) an oral assurance thatmachinery would be stowed under not on the deck washeld to be a term of a contract although it was notincorporated into the written terms The court held thatthe contract was partly oral and partly written and insuch hybrid circumstances the court was entitled to lookat all the circumstances

bull Note ndash the discovery of a collateral contract mayovercome the difficulties of oral warranties in writtencontracts In City of Westminster Properties v Mudd (1959)a tenant signed a lease containing a covenant to use thepremises for business premises only He was induced tosign by a statement that this clause did not apply to himand that he could continue to sleep on the premises Thecourt found that his signing the contract was con-sideration for this promise thus creating a collateralcontract In Evans amp Son Ltd v Andrea Merzario Ltd (1976)Lord Denning considered the oral statement to be acollateral contract In Esso Petroleum Co v Mardon (1976)the court held that the statement by a representative of C

ON

TR

AC

TL

AW

39

Esso with regard to the throughput of a petrol station wascovered by an implied collateral warranty that thestatement had been made with due care and skill

bull The use of a collateral contract will not be possiblehowever if the main contract contains an appropriatelyworded lsquoentire agreementrsquo clause (The Inntrepreneur PubCo (GL) v East Crown Ltd (2000))

Identification of express terms

bull See incorporation of terms in Chapter 4 p 54

Interpretation of express terms of a contract

Oral contracts

The contents is a matter of evidence for the judge Theinterpretation will be undertaken by applying an objectivetest that is what would a reasonable person haveunderstood to have been meant by the words used (Thake vMaurice (1986))

Written contracts

If a contract is reduced to writing then under the lsquoparolevidencersquo rule oral or other evidence extrinsic to thedocument is not normally admissible to lsquoadd to vary orcontradictrsquo (Jacobs v Batavia and General Plantations Trust(1924)) the terms of the written agreement

Exceptions to the parol evidence rule

bull to show that the contract is not legally binding forexample because of mistake or misrepresentation

bull to show that the contract is subject to a lsquoconditionprecedentrsquo In Pym v Campbell (1856) oral evidence was

CA

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40

admitted to show that a contract was not to come intooperation unless a patent was approved by a third party

bull to establish a custom or trade usage (Hutton v Warren(1836) see below)

bull to establish that the written contract is not the wholecontract It is presumed that lsquoa document which lookslike a contract is the whole contractrsquo but this isrebuttable See Couchman v Hill (1947) and Evans v AndreaMerzario (above)

bull a contract may be contained in more than one document(Jacobs v Batavia Plantation Trust Ltd (1924))

bull to establish a collateral contract (City of WestminsterProperties Ltd v Mudd (1959) Evans amp Son Ltd v AndreaMerzario Ltd (1976))

The Law Commission recommended in 1976 that the lsquoparolevidencersquo rule be abolished However in view of the wideexceptions to the rule it recommended in 1986 that no actionneed be taken

Identification of implied terms

In addition to the terms which the parties have expresslyagreed a court may be prepared to hold that other termsmust be implied into the contract Such terms may beimplied by

CO

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W41

Custom Statute The courts

Custom

A contract may be deemed to incorporate any relevantcustom of the market trade or locality in which the contractis made In Hutton v Warren (1836) a tenant established aright to fair allowance for improvements to the land througha local custom

Statute

Parliament as a matter of public policy has in variousinstances seen fit to imply terms into contracts for example

Terms implied into all sales

bull that the seller has the right to sell the goods

bull that goods sold by description correspond with thedescription

Terms implied only into sales by way of business

bull that the goods are of satisfactory quality

Goods are of a satisfactory quality if they meet thestandard that a reasonable person would regard assatisfactory taking account of any description of thegoods the price if relevant and all other relevantcircumstances In particular it will be necessary toconsider their

fitness for all purposes for which goods of that kindare commonly supplied

appearance and finish

CA

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ND

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42

The Sale of Goods Act 1979 which impliesthe following terms into contracts

for the sale of goods

freedom from minor defects

safety and

durability

This term does not apply to matters specifically drawn tothe buyerrsquos attention before the contract is made orwhere the buyer examines the goods defects which thatexamination should have revealed

bull that the goods are fit for any special purpose madeknown to the seller

bull that goods sold by sample correspond with the sample

bull In contracts of service there is an implied term that theservice will be carried out with reasonable care and skillwithin a reasonable time and for a reasonable price

In Wilson v Best (1993) it was held that the duty of a travelagent under this provision extended to checking that thelocal safety regulations had been complied with It did notrequire them to ensure that they complied with UKregulations

The courts

CO

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W43

Terms implied in fact Terms implied in law

The Supply of Goods and Services Act 1982implies similar terms into contracts of hire contracts for work and materials and other

contracts not covered by the Sale of Goods Act

Terms implied in fact

When interpreting terms implied in fact the court seeks togive effect to the unexpressed intention of the parties Thereare two tests A term may be implied because

bull It is necessary to give business efficacy to the contract InThe Moorcock (1889) a term was implied that the riverbedwas in a condition that would not damage a shipunloading at the jetty

bull It satisfies the lsquoofficious bystanderrsquo test that is if abystander suggested a term the parties would respondwith a common lsquoof coursersquo In Spring v NASDS (1956) theunion tried to imply the lsquoBridlington Agreementrsquo Thecourt refused on the basis that if an lsquoofficious bystanderhad suggested this the plaintiff would have repliedldquoWhatrsquos thatrdquorsquo

The Moorcock doctrine is used in order to make the contractworkable or where it was so obvious that the parties musthave intended it to apply to the agreement It will not beused merely because it was reasonable or because it wouldimprove the contract

It was suggested in Shell UK Ltd v Lostock Garages Ltd (1977)that the courts will be reluctant to imply a term where theparties have entered into a detailed and carefully draftedwritten agreement

Terms implied in law

bull When terms are implied in law they are implied into allcontracts of a particular kind Here the court is not tryingto put into effect the parties intention but is imposing anobligation on one party often as a matter of public policyFor example the court implies into all contracts ofC

AV

EN

DIS

HL

AW

CA

RD

S44

employment a term that the employee will carry out hiswork with reasonable care and skill and will indemnifyhis employer against any loss caused by his negligence(Lister v Romford Ice Cold Storage Co (1957))

bull In these cases the implication is not based on thepresumed intention of the parties but on the courtrsquosperception of the nature of the relationship between theparties and whether such an implied term wasreasonable

bull In Liverpool CC v Irwin (1977) the tenants of a block ofcouncil flats failed to persuade the court to imply a termthat the council should be responsible for the commonparts of the building on the Moorcock or lsquoofficiousbystanderrsquo test but succeeded on the basis of the Listertest that is the term should be implied in law in that theagreement was incomplete it involved the relationshipof landlord and tenant and it would be reasonable toexpect the landlord to be responsible for the commonparts of the building

Classification of terms

There is a very important distinction between those terms ofa contract which entitle an innocent party to terminate(rescind or treat as discharged) a contract in the event of a

CO

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W45

Conditions Warranties Innominate terms

breach and those which merely enable a person to claimdamages

Traditionally a distinction has been made in English lawbetween

Conditions

bull The Sale of Goods Act 1979 designates certain impliedterms for example re satisfactory quality as conditions ndashthe breach of which entitles the buyer to terminate (ortreat as discharged) the contract

bull In Poussard v Spiers and Pond (1876) a singer failed to takeup a role in an opera until a week after the season hadstarted Held ndash her promise to perform as from the firstperformance was a condition ndash and its breach entitled themanagement to treat the contract as discharged

Warranties

CA

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46

Contractual terms concerning the less importantor subsidiary statements of facts or promisesIf a warranty is broken this does not entitle

the other party to terminate (or treat asdischarged) the contract it merely entitles

him to sue for damages

Statements of fact or promises which form theessential terms of the contract If the statement is not true or the promise is not fulfilled the

injured party may terminate (or treat as discharged) the contract and claim damages

bull The Sale of Goods Act 1979 designates certain terms aswarranties breach of which do not allow the buyer totreat the contract as discharged but merely to sue fordamages for example the right to quiet enjoyment

bull In Bettini v Gye (1876) a singer was engaged to sing for awhole season and to arrive six days in advance to takepart in rehearsals He only arrived three days in advanceHeld ndash the rehearsal clause was subsidiary to the mainclause It was only a warranty The management wastherefore not entitled to treat the contract as dischargedThey should have kept to the original contract andsought damages for the three daysrsquo delay

Innominate or intermediate terms

bull In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha(1962) it was suggested by the Court of Appeal that itwas not enough to classify terms into conditions andwarranties Regard should also be had to the characterand nature of the breach which has occurred In HongKong Fir the defendants chartered the vessel Hong KongFir to the plaintiffs for 24 months the charter partyprovided that the ship was lsquofitted in every way forordinary cargo servicersquo The vessel spent less than nineweeks of the first seven months at sea because ofbreakdowns and the consequent repairs which werenecessary

CO

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W47

On the facts this was not the case because the charter partystill had a substantial time to run

After the Hong Kong Fir case in 1962 there was someconfusion as to whether the breach based test which appliedto innominate terms had replaced the term based test whichrelied on the distinction between conditions and warrantiesor merely added to it an alternative in certain circumstances

bull In the Mihalis Angelos (1970) the Court of Appeal revertedto the term based test The owners of a vessel stated thatthe vessel was lsquoexpected ready to loadrsquo on or about 1 JulyIt was discovered that this was not so Held ndash the termwas a condition ndash the charterers could treat the contract as discharged

In 1976 two cases were decided on the breach based principle

bull In Cehave v Bremer Handelsgesellshaft MBH The Hansa Nord(1976) the seller had sold a cargo of citrus pellets with aterm in the contract that the shipment be made in goodcondition The buyer rejected the cargo on the basis thatthis term had been broken The defect however was notserious and the court held that although the Sale ofGoods Act had classified some terms as conditions andwarranties it did not follow that all the terms had to be soclassified Accordingly the court could consider the effect

CA

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48

Held ndash the term was neither a condition nor awarranty and in determining whether the

defendants could terminate the contract it wasnecessary to look at the consequences of the

breach to see if it deprived the innocent party ofsubstantially the whole benefit he should

have received under the contract

of the breach since this was not serious the buyer hadnot been entitled to reject

bull In Reardon Smith v Hansen Tangen (1976) an oil tanker wasdescribed as lsquoOsaka No 354rsquo where in fact it was lsquoOshimaNo 004rsquo but was otherwise exactly as specified Becausethe market for oil tankers had collapsed the chartererssought to argue that the number was a condition whichwould enable them to repudiate the contract The Houseof Lords rejected this argument Held ndash the statement wasan innominate term not a condition since the effect ofthe breach was trivial it did not justify termination of thecontract

bull Note ndash the time for determining whether a clause was acondition or an innominate term is at the time ofcontracting ndash not after the breach

Traditionally a term is a condition if it has been establishedas such

bull By statute ndash for example the Sale of Goods Act 1979

bull By precedent after a judicial decision In The MihalisAngelos (1970) the Court of Appeal held that thelsquoexpected readinessrsquo clause in a charter party is acondition

bull By the intention of the parties The court must ascertainthe intention of the parties If the wording clearly revealsthat the parties intended that breach of a particular termshould give rise to a right to rescind that term will beregarded as a condition In Lombard North Central vButterworth (1987) the Court of Appeal held thatcontracting parties can provide expressly in the contractthat lsquospecific breaches could terminate the contractrsquo Inthat case the contract included an express clause that the

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W49

time for payment of instalments was lsquoof the essence of thecontractrsquo An accountant had contracted to hire acomputer for five years agreeing to make an initialpayment and 19 quarterly rental payments He was latein paying some instalments and the owners terminatedthe agreement recovered possession of the computerand claimed damages not only for the arrears but also forloss of future instalments The claim succeeded becausethe contract specifically stated that the time of paymentof each instalment was to be of the essence of the contract

Note the mere use of the word lsquoconditionrsquo is not conclusive

In Schuler v Wickman Tool Sales Ltd (1974) the House of Lordsheld that breach of a lsquoconditionrsquo that a distributor shouldvisit six customers every week could not have been intendedto allow rescission The word lsquoconditionrsquo had not been usedin this particular sense There was in the contract a separateclause which indicated when and how the contract could beterminated

bull By the court ndash deciding according to the subject matter ofthe contract (see Poussard v Spiers (1876) and Bettini v Gye(1876) above)

CA

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50

If a term is not a condition then the lsquowait and seersquotechnique can be used to decide if the gravity of

the breach is such that it deprivedthe innocent party of substantially the whole

benefit of the contract If so ndash then the innocentparty can terminate the contract

(innominate or intermediate term)

Certainty and flexibility

Certainty

bull The term based test is alleged to have the advantage ofpredictability and certainty It is important for the partiesto know their legal rights and liabilities as regards theavailability of termination The character of all terms isascertainable at the moment the contract is concludedNothing that happens after its formation can change thestatus of a term If the term is a condition then the partieswill know that its breach allows the other party toterminate But there can still be uncertainty where theparties have to await the courtrsquos decision on the nature ofthe term

bull The advantage of certainty is however balanced by thefact that it is possible to terminate a contract on atechnicality for sometimes a very minor breach

Flexibility

bull The breach based test is stated to bring flexibility to thelaw Instead of saying that the innocent party can in thecase of a condition always terminate or in the case of awarranty never terminate innominate terms allow thecourts to permit termination where the circumstancesjustify it and the consequences are sufficiently serious

bull It is however more difficult for the innocent party toknow when he has the right to terminate or for the partyin breach to realise in advance the consequence of hisaction

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W51

Note the distinction between the different types of contract terms remains of

considerable importance

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W53

4 Exemption (exclusion or limitation) clauses

A total exclusion is referred to as an exclusion clause apartial exclusion is known as a limitation clause

Exemption clauses are most commonly found in standardform contracts

To be valid an exemption clause must satisfy the tests set bythe

Common law requirements

A clause which purports to exclude wholly or inpart liability for a breach of contract or a tort

Common lawUnfair Contract

Terms Act (UCTA)1977

Regulations onUnfair Terms in ConsumerContracts 1999

The term must be incorporated into the

contract

The wording mustcover what actually

happened

Incorporation

bull This requirement applies to all terms but has beeninterpreted strictly in the case of exemption clauses

A term may be incorporated into a contract by being

Contained in a signed document

In LrsquoEacutestrange v Graucob Ltd (1934) the plaintiff had signed acontract of sale without reading it Held ndash she was bound bythe terms which contained an exemption clause

ExceptionsWhere the offeree has been induced to sign as a result ofmisrepresentation

bull In Curtis v Chemical Cleaning Co (1951) the plaintiffsigned a lsquoreceiptrsquo when she took a dress to be cleaned onbeing told that it was to protect the cleaners in case ofdamage to the sequins In fact the clause excludedliability for all damage Held ndash the cleaners were notprotected for damage to the dress the extent of theclause had been misrepresented and therefore thecleaners could not rely on it

bull lsquoNon est factumrsquo (see p 106 below)

Contained in an unsigned document (ticket cases)

bull This must be seen to be a contractual document

In Chapelton v Barry UDC (1940) on hiring a deckchair the plaintiff was given a ticket with only alarge black 3d on the face of the ticket and exclusionclauses on the back Held ndash the defendants could notrely on the exclusion clauses as it was not apparenton the face of it that the ticket was a contractualdocument rather than just a receipt

CA

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54

bull Reasonable notice of the term must be given

In Parker v South Eastern Railway Co (1877) theplaintiff received a ticket which stated on the facelsquosee backrsquo Held ndash as long as the railway companyhad given reasonable notice of the exemptionclausersquos existence it did not matter that the plaintiffhad not read the clause

In Thompson v London Midland and Scottish Railway(1930) the ticket indicated that the conditions of thecontract could be seen at the station masterrsquos office oron the timetable The exemption clause was in clause552 of the timetable which cost sixpence ndash the ticketitself only cost two and sixpence In the circumstancesnevertheless reasonable notice had been given

The test is objective and it is irrelevant that the partyaffected by the exemption clause is blind or illiterateor otherwise unable to understand it (Thompson vLMS above)

But in Geir v Kujawa (1970) a notice in English wasstuck on the windscreen of a car stating thatpassengers travelled at their own risk A Germanpassenger who was known to speak no English washeld not to be bound by the clause as reasonable carehad not been taken to bring it to his attention

bull Attention must be drawn to any unusual clause

In Thornton v Shoe Lane Parking (1971) it was statedthat a person who drives his car into a car park mightexpect to find in his contract a clause excludingliability for loss or damage to the car but specialnotice should have been given of a clause purportingto exclude liability for personal injury

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W55

In Interfoto Picture Library v Stiletto Visual Programmes(1989) the Court of Appeal confirmed that onerousconditions required special measures to bring them tothe attention of the defendant The clause in that casewas not an exemption clause but a clause imposingcharges 10 times higher than normal The Court ofAppeal stated that the more unusual the clause thegreater the notice required

bull Notice of the term must be communicated to the otherparty before or at the time that the contract is enteredinto

In Thornton v Shoe Lane Parking Ltd (1971) the plaintiffmade his contract with the car company when heinserted a coin in the ticket machine The ticket wasissued afterwards and in any case referred toconditions displayed inside the car park which hecould see only after entry Notice therefore came toolate

bull The rules of offer and acceptance and the distinctionsbetween offers and invitations to treat must be consultedin order to ascertain when the contract was madeProblems with regard to incorporation can arise in atypical lsquoBattle of the Formsrsquo problem See Butler MachineTool Ltd v Ex-Cell-O Corpn (Chapter 1)

Notice by display

Notices exhibited in premises seeking to exclude liability forloss or damage are common for example lsquocar parked atownerrsquos riskrsquo and must be seen before or at the time of entryinto contract

bull In Olley v Marlborough Court Hotel (1949) Mr and MrsOlley saw a notice on the hotel bedroom wall which

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56

stated lsquothe proprietors will not hold themselvesresponsible for articles lost or stolen unless handed tothe manageress for safe keepingrsquo The contract had beenentered into on registration and the clause was thereforenot incorporated into the contract and could not protectthe proprietors

Notice by a lsquocourse of dealingrsquo

bull If there has been a course of dealing between the partiesthe usual terms may be incorporated into the contractalthough not specifically drawn to the attention of theparties each time a contract is made

In Spurling v Bradshaw (1956) Bradshaw deposited someorange juice in Spurlingrsquos warehouse The contractualdocument excluding liability for loss or damage was notsent to Spurling until several days after the contract Held ndashthe exclusion clauses were valid as the parties had alwaysdone business with each other on this basis

bull Note ndash the transactions must be sufficiently numerous toconstitute a course of dealings The established course ofdealings must be consistent The established course ofdealings must not have been deviated from on the occasion in question

In Hollier v Rambler Motors (1972) the Court of Appeal heldthat bringing a car to be serviced or repaired at a garage onthree or four occasions over a period of five years did notestablish a course of dealings

Notice through patent knowledge

bull In British Crane Hire Corpn v Ipswich Plant Hire (1975) theowner of a crane hired it out to a contractor who was alsoengaged in the same business It was held that the hirer

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W57

was bound by the ownerrsquos usual terms though they werenot actually communicated at the time of the contractThey were however based on a model supplied by atrade association to which both parties belonged It wasstated that they were reasonable and were well known inthe trade

Oral contracts

bull Whether a clause has been incorporated into an oralcontract is a matter of evidence for the court (McCutcheonv MacBrayne (1964))

On a proper construction the clause covers the loss

in question

bull An exclusion clause is interpreted contra proferentem thatis any ambiguity in the clause will be interpreted againstthe party seeking to rely on it

in Houghton v Trafalgar Insurance Co Ltd (1954) it washeld that the word lsquoloadrsquo could not refer to people

in Andrews Bros v Singer amp Co Ltd (1934) an exclusionreferring to implied terms was not allowed to cover aterm that the car was new as this was an express term

It was however suggested by the House of Lords inPhoto Production Ltd v Securicor Ltd (1980) that any needfor a strained and distorted interpretation of contracts inorder to control the effect of exemption clauses had beenreduced by the UCTA

bull Especially clear words must be used in order to excludeliability for negligence for example the use of the wordlsquonegligencersquo or the phrase lsquohowsoever causedrsquo (Smith vSouth Wales Switchgear Ltd (1978))

CA

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58

But if these words are not used provided the wording iswide enough to cover negligence and there is no otherliability to which they can apply then it is assumed thatthey must have been intended to cover negligence(Canada Steamship Lines v The King (1952))

bull It was stated in Ailsa Craig Fishing Co v Malvern Fishing Co(1983) that limitation clauses may be interpreted lessrigidly than exclusion clauses

bull Only a party to a contract can rely on an exclusion clause(See Chapter 10)

bull Especially clear words are required when the breach is ofa fundamental nature In the past Lord Denning andothers argued that it was not possible to exclude breachesof contract which were deemed to be fundamental byany exclusion clause however widely and clearlydrafted

However the House of Lords confirmed in Photo ProductionLtd v Securicor Ltd (1980) that the doctrine of fundamentalbreach was a rule of construction not a rule of law that isliability for a fundamental breach could be excluded if thewords were sufficiently clear and precise

The House also stated that

bull the decision in Harbuttrsquos Plasticine Ltd v Wayne Tank andPump Co (1970) was not good law In that case the Courtof Appeal had held that as a fundamental breach broughta contract to an end there was no exclusion clause left toprotect the perpetrator of the breach

bull there is no difference between a lsquofundamental termrsquo anda lsquoconditionrsquo C

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59

bull a strained construction should not be put on words in anexclusion clause which are clearly and fairly susceptibleof only one meaning

bull where the parties are bargaining on equal terms theyshould be free to apportion risks as they wish

bull the courts should be wary of interfering with the settledpractices of business people as an exclusion clause oftenserves to identify who should insure against a particularloss

Unfair Contract Terms Act 1977

Note ndash the title is misleading

bull The Act does not cover all unfair contract terms onlyexemption clauses

bull The Act covers certain tortious liability as well ascontractual liability The following must be examined

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60

Clauses whichare void

Clauses which are valid only if reasonable

The meaning of lsquoreasonablersquo

Scope of the Act

Scope of the Act

bull s 1 ndash the Act applies to contracts made after 1 February1978 which arise in the course of business lsquoBusinessrsquoincludes a profession and the activities of anygovernment department andor public or localauthority

bull s 5 ndash contracts specifically excluded include contracts ofinsurance contracts for the transfer of land andinternational commercial contracts

bull s 13 ndash the Act limits the effectiveness of clauses thatexclude or restrict liability It also covers clauses whichmake it difficult to enforce a contract for example byimposing restrictive time limits or which excludeparticular remedies In Stewart Gill v Horatio Myer and Co(1992) it was held that a clause restricting a right of set-off or counterclaim was subject to the Act It was alsoheld in Smith v Bush (1990) that it covered lsquodisclaimerswhich restrictively defined a partyrsquos obligation under acontractrsquo In that case a valuation was stated to be givenlsquowithout any acceptance of liability for its accuracyrsquo

Negligence

bull The Act covers contractual tortious and statutory (that isunder the Occupiersrsquo Liability Act 1957) negligence

bull The difference between excluding liability for negligenceand transferring liability for negligence is seen in PhillipsProducts v Hyland Bros (1987) where the contracttransferred liability for the negligence of the driver of ahired excavator to the hirer The driver negligentlydamaged property belonging to the hirer Held ndash theclause was an exclusion clause and was subject to UCTA

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W61

bull In Thompson v Lohan (Plant Hire) (1987) on the otherhand an excavator and driver were hired under the sameconditions The driver negligently killed a third partyHeld ndash the clause transferring liability to the hirer was notan exclusion clause in this case as the third party was ableto sue the hirer It was merely a clause transferring liability

Misrepresentation

bull The difference between excluding liability formisrepresentation and defining the powers of an agent isseen in Cremdean Properties v Nash (1977) where a clausein the special conditions of sale stating that thelsquoparticulars were believed to be correct but theiraccuracy is not guaranteedrsquo was held to be an exclusionclause

bull In Collins v Howell Jones (1980) however the Court ofAppeal held a statement that the lsquovendor does not makeor give any representation or warranty and neither theestate agent or any person in their employment has anyauthority to make or give a representation or warrantywhatsoever in relation to the propertyrsquo had the effect ofdefining or limiting the scope of the agentrsquos authority

Effect of the Act

Clauses which are void

Exclusions of liability

bull for death or personal injury caused by negligence (s 2)

bull in a manufacturerrsquos guarantee for loss or damage causedby negligence (s 5)

bull for the statutory guarantee of title in contracts for the saleof goods or hire purchase (s 6)

CA

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62

bull for the other statutory guarantees in consumer contractsfor the sale of goods or hire purchase (descriptionsatisfactory quality fitness for purpose) (s 6)

bull for similar statutory guarantees in other consumercontracts for the supply of goods for example contractsof hire (s 7)

Clauses which are valid only if reasonable

Clauses excluding liability

bull for loss or damage to property caused by negligence (s 2)

bull for breach of contract in a consumer or standard formcontract (s 3) This includes clauses in such contractsclaiming to render a substantially different performancefrom that reasonably expected or to render noperformance at all (s 3)

bull for statutory guarantees (other than those concerningtitle) in inter-business contracts for the sale of goods andhire purchase (description satisfactory quality andfitness for purpose) (s 6)

bull for statutory guarantees concerning title or possession inother contracts for the supply of goods (for examplehire) (s 7)

bull for other statutory guarantees (description satisfactoryquality fitness for purpose) in other inter-businesscontracts for the supply of goods (s 7)

bull for misrepresentation in all contracts

Note

lsquoConsumer transactionrsquo ndash a person is a lsquoconsumerrsquo where hedoes not make or hold himself out as making the contract in

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W63

the course of business and the other party does make thecontract in the course of business In contracts for the sale ofgoods the goods must also be of a type normally sold forprivate use

bull A controversial interpretation of a lsquoconsumerrsquo was madeby the Court of Appeal in R and B Customs v UnitedDominion Trust (1988) where a car was bought by aprivate company for the business and private use of itsdirectors It was held by the Court of Appeal that it wasnot bought lsquoin the course of a businessrsquo Buying cars wasincidental not central to the business of the company If itis incidental only then the purchase would only be lsquoin thecourse of a businessrsquo if it was one made with sufficientregularity

Note however that in Stevenson v Rogers (1999) the Courtof Appeal refused to apply the R and B Customs Brokersapproach to the question of whether a sale was in the courseof a business for the purpose of s 14(12) of the Sale of GoodsAct 1979

A lsquostandard form contractrsquo occurs when the parties deal onthe basis of a standard form provided by one of them

Reasonableness

In assessing reasonableness the following matters should beconsidered

CA

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64

It is for the person relying on the clause to prove that the clause is reasonable

Section 11 of UCTA 1977

bull Contract terms are to be adjudged reasonable or notaccording to the circumstances which were or oughtreasonably to have been known to the parties when thecontract was made

bull Where a person seeks to restrict liability to a specifiedsum of money regard should be had to the resourceswhich he could expect to be available to him for thepurpose of meeting the liability and as to how far it wasopen to him to cover himself by insurance

bull In determining for the purpose of s 6 or s 7 whether acontract term satisfies the requirement of reasonablenessregard shall be had to

the strength of the bargaining position of the partiesrelative to each other

whether the customer received an inducement toagree to the term and had an opportunity of enteringinto a similar contract with other persons butwithout having to accept similar terms

whether the customer knew or ought reasonably tohave known of the existence and extent of the term

where the exclusion is conditional whether it wasreasonable to expect that compliance with thatcondition would be practicable

whether the goods were manufactured processed oradapted to the special order of the customer(Sched 2)

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W65

Decisions of the courts

In Smith v Bush (1990) and Harris v Wyre Forest DC (1989) theHouse of Lords dealt with two cases involving the validity ofan exclusion clause protecting surveyors who had carriedout valuations of a house The House of Lords decided thatthe clauses were exclusion clauses designed to protect thesurveyors against claims for negligence Lord Griffithsdeclared that there were four matters which should alwaysbe considered

bull were the parties of equal bargaining power

bull in the case of advice would it have been reasonable toobtain advice from another source

bull was the task being undertaken a difficult one for whichthe protection of an exclusion clause was necessary

bull what would be the practical consequences for the partiesof the decision on reasonableness For example wouldthe defendant normally be insured Would the plaintiffhave to bear the cost himself

In inter-business contracts the practices of business peopleare considered

bull In Photo Production v Securicor (1980) the House of Lordsstated that the courts should be reluctant to interfere withthe settled practices of businesses They pointed out thatthe function of an exclusion clause was often to indicatewho should insure against a particular risk

bull In Green v Cade Bros (1983) it was decided that a clauserequiring notice of rejection within three days of deliveryof seed potatoes was unreasonable as a defect could nothave been discovered by inspection within this time buta clause limiting damages to the contract price was

CA

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66

upheld ndash as it had been negotiated by organisationsrepresenting the buyers and sellers and lsquocertifiedrsquopotatoes had been available for a small extra charge (thatis Sched 2 was applied)

bull However in George Mitchell v Finney Lock Seeds Ltd (1983)the buyers suffered losses of pound61000 due to the supply ofthe wrong variety of cabbage seeds The contract limitedthe liability of the seller to a refund of the price paid(pound192) Held ndash the clause was not reasonable Matterstaken into consideration

the clause was inserted unilaterally ndash there was nonegotiation

loss was caused by the negligence of the seller

the seller could have insured against his liability

the sellers implied that they themselves consideredthe clause unreasonable by accepting liability inprevious cases

bull In Overland Shoes Ltd v Schenkers Ltd (1998) the Court ofAppeal upheld a judgersquos ruling that a clause preventingreliance on a lsquoset-offrsquo was not unreasonable on the basisthat it formed part of a set of standard trading conditionsused widely in the shipping industry They had arisenfrom careful negotiation and were generally recognisedin the industry as lsquofair and reasonablersquo

bull In Overseas Medical Supplies Ltd v Orient Transport ServicesLtd (1999) the Court of Appeal summarised the variousfactors which should be looked at in considering the testof reasonableness It confirmed that the lsquoGuidelinesrsquocontained in Sched 2 to UCTA although specificallyintended for consumer contracts for the sale of goods

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W67

should be regarded as relevant wherever the test ofreasonableness is applied

In many of the cases the appeal courts have emphasised thatthe decision on lsquoreasonablenessrsquo is best made by the trialjudge and that the appeal courts should be reluctant tointerfere with the conclusion arrived at at first instance

Unfair Terms in Consumer Contracts Regulations 1999

Based on EU Directive on Unfair Terms in ConsumerContracts The 1999 regulations replaced earlier regulationsmade in 1994

Coverage

The regulations apply to

This will be so even if some other parts of the contract havenot been drafted in advance

bull The regulations do not apply to contracts which relate toemployment family law or succession rights companiesor partnerships terms included in order to comply withlegislation or an international convention

CA

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68

Coverage Fairness Remedies

lsquoany term in a contract between a seller or supplier and a consumer where

the term has not been individually negotiatedrsquo thatis it has been drafted in advance

bull They do however cover insurance policies and contractsrelating to land

bull A lsquobusinessrsquo is defined to include a trade or professionand the activities of any government department or localor public authority

bull A lsquo consumerrsquo means a natural person who is acting for apurpose outside his business

Note ndash they are wider than UCTA in that they cover allterms not only exclusion clauses for example harsh termsconcerning unauthorised overdrafts The regulations arenarrower than UCTA in that they only cover clauses inconsumer contracts which have not been individuallynegotiated The definition of a consumer is also narrower cfR and B Customs v UDT (1988)

Unfairness

Regard must be had to the nature of the goods and servicesprovided the other terms of the contract and all thecircumstances relating to its conclusion

The definition of the main subject matter and the adequacyof the price or remuneration are not subject to the test offairness

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W69

The clause is unfair if contrary to the requirementsof good faith it creates a significant imbalance

in the partiesrsquo rights and obligations to thedetriment of the consumer

lsquoGood faithrsquo is not defined and unlike the earlier (1994)regulations the 1999 regulations do not spell out anyrelevant factors

In Director General of Fair Trading v First National Bank plc(2000) the Court of Appeal emphasised the need foropenness and information which will enable the consumerto make a properly informed choice about entering into thecontract In this case a clause imposing a lsquosurprisingrsquorequirement as to the payment of interest on a loan whichhad been the subject of a court order did not meet therequirement of good faith

The regulations contain a long indicative list of clauses likelyto be unfair These include not only exemption clauses butalso clauses which give the sellersupplier rights withoutcompensating rights for the consumer for example

bull enabling the sellersupplier to raise the price withoutgiving the buyer a chance to back out if the price rise istoo high

bull enabling the sellersupplier to cancel the agreementwithout penalty without also allowing the customer asimilar right

bull automatically extending the duration of the contractunless the customer indicates otherwise within an unreasonably brief period of time

Note also that all terms (including those defining thesubject matter or the price) should be expressed in plainEnglish and any ambiguity should be interpreted in theconsumerrsquos favour

CA

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70

Effect of an unfair term

bull The term itself shall not be binding on the consumer butthe rest of the contract may be enforced

bull The Director General of Fair Trading has a duty toconsider any complaint made to him that a term is unfairHe is empowered to bring proceedings for an injunctionagainst any business using an unfair term It was thispower that was used in the first reported case on theregulations Director General of Fair Trading v FirstNational Bank plc (2000) discussed above For the firsttime a similar power to apply for such an injunction isgiven to certain other lsquoqualifying bodiesrsquo including theData Protection Registrar various Directors General (ofgas supply electricity supply telecommunicationswater services) and the Consumersrsquo Association

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W71

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W73

5 Vitiating elements which render a contract voidable

Significance of a contract being voidable

Thus

bull The innocent party may if he wishes affirm the contract

bull Where the innocent party has not performed thecontract he may refuse to perform and rely on themisrepresentation as a defence

bull The misled party may rescind the contract by

informing the other party or

where a fraudulent party cannot be traced byinforming the police (Car and Universal Finance Co vCaldwell (1965)) or

bringing legal proceedings

The innocent party may set the contractaside if he so wishes

Misrepresentation Duress Undue influence

Certain mistakes (see Chapter 6)

bull It was stated in TSB v Camfield (1995) that the right torescind is that of the representee not the court All thecourt can do is decide whether the representee haslawfully exercised the right to rescind It is not thereforean exercise of equitable relief by the court

Rescission

bull But in Cheese v Thomas (1993) the court declared that thecourt must look at all the circumstances to do what waslsquofair and justrsquo In that case a house which had beenjointly bought had to be sold afterwards at aconsiderable loss The agreement between the twoparties for the purchase of the house was rescinded butthe court held that it was not necessary for the guiltyparty to bear the whole of the loss It was fair and justthat the proceeds should be divided according to thepartiesrsquo respective contributions

bull This contrasts with the normal situation where aproperty has diminished in value and the misled partywould get all his money returned (Erlanger v NewSombrero Phosphate Co (1878))

bull As part of this restoration equity may order a sum ofmoney to be paid to the misled person to indemnify himagainst any obligations necessarily created by the contract

In Whittington v Seale-Hayne (1900) the plaintiffsbreeders of prize poultry were induced to take a lease ofthe defendants premises by his innocent

CA

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74

Restoring the parties as far as is possible to the position they were in before they

entered into the contract

misrepresentation that the premises were in a sanitarycondition Under the lease the plaintiffs covenanted toexecute all works required by any local or publicauthority Owing to the insanitary conditions of thepremises the water supply was poisoned the plaintiffsrsquomanager and his family became very ill and the poultrybecame valueless for breeding purposes or died Inaddition the local authority required the drains to berenewed The plaintiffs sought an indemnity for all theirlosses The court rescinded the lease and held that theplaintiffs could recover an indemnity for what they hadspent on rates rent and repairs under the covenants inthe lease because these expenses arose necessarily out ofthe contract It refused to award compensation for otherlosses since to do so would be to award damages not anindemnity there being no obligation created by thecontract to carry on a poultry farm on the premises or toemploy a manager etc

bull Note ndash rescission even if enforced by the court is alwaysthe act of the defrauded party It is effective from the dateit is communicated to the representor or the police (seeabove) and not from the date of any judgment insubsequent litigation

Rescission is subject to certain barsC

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75

Affirmation of the contract

Lapse of time

Restitution mustbe possible

Third party rights

Affirmation of the contractThe representee may not rescind if he has affirmed thecontract after learning of the misrepresentation either bydeclaring his intention to proceed with the contract or byperforming some act from which such an intention can beinferred In Long v Lloyd (1958) the buyer of a lorryundertook a long journey after discovering serious defects inthe lorry Held ndash he had affirmed the contract

Lapse of timeThis can provide evidence of affirmation where themisrepresentee fails to rescind for a considerable time afterdiscovering the falsity

In cases of innocent misrepresentation lapse of time canoperate as a separate bar to rescission In Leaf v InternationalGalleries (1950) the plaintiff bought a picture which the sellerhad innocently misrepresented to be by Constable Fiveyears later the plaintiff discovered it was not by Constableand immediately sought to rescind the contract Held ndashbarred by lapse of time

Restitution must be possibleA person seeking to rescind the contract must be able andwilling to restore what he has received under it Howeverrescission is an equitable remedy and the court will notallow minor failures in the restoration to the originalposition to stand in the way In Erlanger v New SombreroPhosphate Co (1878) the purchaser had worked phosphatemines briefly Held ndash he could rescind by restoring propertyand accounting for any profit derived from it

CA

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76

Third party rightsThere can be no rescission if third parties have acquiredrights in the subject matter of the contract See Phillips vBrooks (1919) and Lewis v Averay (1972) ndash Chapter 6

Misrepresentation

Representations and terms of a contract

Material statements made during negotiations leading to acontact may be either

bull terms of the contract If these are untrue the untruthconstitutes a breach of contract

bull statements which helped to induce the contractthat is lsquomere representationsrsquo If untrue ndash they arelsquomisrepresentationsrsquo

(For distinctions between terms and lsquomere representationsrsquosee Chapter 3)

Requirements of misrepresentation

It must be

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W77

An untrue statement of fact made by one party tothe contract (representor) to the other (representee)which induces the other to enter into the contract

The requirements ofmisrepresentation

Remedies formisrepresentation

A statement of fact

bull Not a lsquomere puffrsquo that is a statement so vague as to bewithout effect for example describing a house as alsquodesirable residencersquo

bull Not a promise A promise to do something in the futureis only actionable if the promise amounts to a bindingcontract (Kleinwort Benson Ltd v Malaysian Mining CorpnBhd (1989))

bull Not a statement of opinion for example in Bisset vWilkinson (1927) the vendor of a farm which had neverbeen used as a sheep farm stated that in his judgment thefarm would support 2000 sheep Held ndash a statement ofopinion

But a statement expressed as an opinion may be treatedas a statement of fact if the person making the statementwas in a position to know the true facts In Smith v Landand House Prop Corpn (1884) the vendor of a hoteldescribed it as lsquolet to a most desirable tenantrsquo when thetenant had for a long time been in arrears with the rentThe Court of Appeal held there was a misrepresentationof fact

bull Not a statement of intention But if the representor didnot have that intention then it is a misstatement of fact asin Edgington v Fitzmaurice (1885) where the directorsissued a prospectus claiming that the money raised was tobe used to improve the companyrsquos buildings and toexpand its business Their real intention was to pay off thecompanyrsquos debts Held ndash fraudulent misrepresentation

bull Not a statement of law

CA

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An active representation

bull The statement will normally be in words but other formsof communication which misrepresent the facts willsuffice as in Horsfall v Thomas (1862) (below)

bull Failure to make a statement however or the non-disclosure of facts will not generally qualify asmisrepresentation

Exceptionsbull Where facts have been selected to give a misleading

impression as in Dimmock v Hallett (1866) where avendor of land stated that farms were let but omitted tosay that the tenants had given notice to quit

bull Where circumstances have changed since arepresentation was made then the representor has a dutyto correct the statement In With v OrsquoFlanagan (1936) itwas stated correctly that a medical practice was worthpound2000 a year but by the time the practice changedhands it was practically worthless Held ndash there was aduty to disclose the changed circumstances

bull Contracts uberrimae fidei (lsquoof the utmost good faithrsquo) forexample

Contract of insurance Material facts must bedisclosed that is facts which would influence aninsurer in deciding whether to accept the proposalor to fix the amount of the premium for example apolicy of life insurance has been avoided because itwas not disclosed that the proposer had already beenturned down by other insurers

Family arrangements In Gordon v Gordon (1816ndash19)a division of property based on the proposition thatthe elder son was illegitimate was set aside upon

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proof that the younger son had concealed hisknowledge of a private marriage ceremonysolemnised before the birth of this brother

Analogous contracts Where there is a duty todisclose not material but unusual facts for examplecontracts of suretyship

It must have been a material inducement

A statement likely to induce a person to contract willnormally be assumed to have done so Moreover if theclaimant can show that he was in fact induced it is nodefence to argue that a reasonable person would have beeninfluenced by the misrepresentation (Museprime PropertiesLtd v Adhill (1990)) There is no inducement however where

bull the misrepresentee or his agent actually knew the truth

bull the misrepresentee was ignorant of the misrepresentationwhen the contract was made In Horsfall v Thomas (1862)the vendor of a gun concealed a defect in the gun(misrepresentation by conduct) The buyer howeverbought the gun without examining it Held ndash theattempted misrepresentation had not induced thecontract

bull the misrepresentee did not allow the representation toaffect his judgment In Attwood v Small (1838) a buyerappointed an agent to check the statement made by theseller as to the reserves in a mine Held ndash not actionablemisrepresentation The buyer had relied on his ownagentrsquos statements not that of the vendor

Note however that

bull provided that the representation was one of theinducements it need not be the sole inducement

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80

bull the fact that the representee did not take advantage of anopportunity to check the statement is no bar to an actionfor misrepresentation

In Redgrave v Hurd (1881) a solicitor was induced topurchase a house and practice by the innocentmisrepresentation of the seller Held ndash he was entitled torescission although he did not examine the documentswhich were available to him and which would haveindicated to him the true state of affairs

bull neither is it contributory negligence not to check astatement made by a vendor (Gran Gelato v Richcliff(1992))

Remedies for misrepresentation

Rescission

Misrepresentation renders a contract voidable ndash see aboveThe Misrepresentation Act 1967 provides that rescission isavailable in relation to

bull lsquoexecutedrsquo contracts for the sale of goods andconveyances of property

bull representations which have been incorporated as a termof the contract

Rescission was not available in these circumstances before1967

Damages

bull There are five ways in which damages may be claimedfor misrepresentation It seems likely that in future thenormal ground for damages will be the

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W81

Misrepresentation Act 1967 but there are still cases wheredamages can only be claimed at common law if at all

bull Note ndash rescission and damages are alternative remediesin many cases but if the victim of fraudulent ornegligent misrepresentation has suffered consequentialloss he may rescind and sue for damages

bull Damages can be claimed on different bases according tothe kind of misrepresentation that was committed

Damages in the tort of deceit for fraudulent misrepresentationIt is up to the misled party to prove that themisrepresentation was made fraudulently that isknowingly without belief in its truth or recklessly as towhether it be true or false (Derry v Peek (1889))

The burden of proof on the misled party is a heavy one

Damages in the tort of negligence Victims of negligent misrepresentation may be able to sueunder Hedley Byrne v Heller amp Partners (1963) Themisrepresentee must prove (1) that the misrepresentorowed him a duty to take reasonable care in making therepresentation that is there must be a lsquospecial relationshiprsquo(2) that the statement had been made negligently

Damages under s 2(1) of the Misrepresentation Act 1967Section 2(1) of the Misrepresentation Act 1967 provides thatwhere a person has entered into a contract after amisrepresentation has been made to him by another partythereto and as a result of it has suffered loss lsquothen if themisrepresentor would be liable for damages if it had beenmade fraudulently he will be so liable notwithstanding thatthe misrepresentation was not made fraudulently unless heproves that he had reasonable grounds to believe and did

CA

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82

believe up to the time the contract was made that the factsrepresented were truersquo

Note that this is a more beneficial remedy for themisrepresentee as he only need prove that the statement isuntrue It is for the misrepresentor to prove that he had goodgrounds for making the statement and the burden of proofis a heavy one In Howard Marine and Dredging Co Ltd vOgden (1978) the owner of two barges told the hirer that thecapacity of the barges was 1600 tons He obtained thesefigures from the Lloydrsquos list but in this case the Lloydrsquos listwas incorrect The court held that he did not have goodgrounds for this statement he should have consulted themanufacturerrsquos specifications which should have been in hispossession

Assessment of damages

The Court of Appeal confirmed in Royscot Trust v Rogerson(1991) that damages under s 2(1) of the MisrepresentationAct should also be awarded on the reliance basis because ofthe lsquofiction of fraudrsquo in the wording of the Act

Remoteness of damage

The Court of Appeal also held in that case because of thelsquofiction of fraudrsquo that the rules of remoteness whichnormally apply only to the tort of deceit should be appliedunder s 2(1)

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W83

Damages in the tort of deceit and the tortof negligence are assessed on the tortious basis of reliance that is the claimant is entitled to be

put in the position he was in before the tort was committed

(In contract and in all torts other than deceit the losses mustbe lsquoreasonably foreseeablersquo)

bull In Royscot Trust v Rogerson (1991) a customer arranged toacquire a car on hire purchase from a car dealer Thefinance was to be provided by a finance company theRoyscot Trust which insisted on a deposit of 20 Thedealer falsified the figures in order to indicate a deposit of20 as required Some months later the customerwrongfully sold the car thus depriving the financecompany of its property The finance company sued thedealer under s 2(1) of the Misrepresentation Act It washeld by the Court of Appeal that the finance companycould recover damages from the car dealer to cover theloss of the car since the loss followed themisrepresentation The remoteness rules applicable to thetort of deceit would be applied and the loss did not needto be foreseeable

Controversy has followed this decision as the tort ofdeceit to which this rule only previously applied isdifficult to establish and involves moral culpability onthe part of the defendant It has now been extended to anaction which is relatively easy to establish (see HowardMarine and Dredging v Ogden) and may only involvecarelessness Some doubts as to whether this was thecorrect approach were expressed obiter by the House ofLords in Smith New Court Securities Ltd v ScrimgeourVickers (Asset Management) Ltd (1996) but for the timebeing Royscot v Rogerson remains good law

CA

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84

That is damages would be awarded to coverall losses which flow directly from the

untrue statement whether or not those losses were foreseeable

bull Further problems are caused by the decision of the Courtof Appeal in East v Maurer (1991) a case in the tort ofdeceit where it was held that lsquoall damages flowingdirectly from the fraudrsquo would cover damages for somedegree of loss of profit ndash a heading previously consideredto be appropriate only to expectation damages incontract It is a matter for speculation whether the courtswill apply this decision to cases under theMisrepresentation Act and bring loss of profit under theheading of reliance loss on the basis that all losses whichflow directly from the misrepresentation should berecoverable

bull A generous interpretation of s 2(1) of the 1967 Act hadalso been applied by the court in Naughton v OrsquoCallaghan(1990) where reliance damages had been awarded tocover not only the difference between the value of the coltand the value it would have had if the statements madeabout it were correct (the quantification rule for breach ofcontract) but also the cost of its maintenance since thesale

It has been alleged that these three cases swell the amount ofdamages which can be awarded under the MisrepresentationAct to a greater extent than intended by Parliament and thatthe damages available for misrepresentation can nowexceed those available for breach of contract

Damages for wholly innocent misrepresentationDamages cannot be claimed for a misrepresentation whichis not fraudulent or negligent but

bull an indemnity may be awarded (see above)

bull damages in lieu of rescission may be awarded under s 2(2) of the Misrepresentation Act 1967 C

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85

In William Sindall v Cambridgeshire CC (1994) the Court ofAppeal stated (obiter) that where the court is consideringwhether to award damages in lieu of rescission threematters should be taken into consideration

the nature of the misrepresentation

the loss which would be caused to the representee ifthe contract were upheld

the hardship caused to the misrepresentor if the con-tract were rescinded The Court of Appeal also statedthat the damages should resemble damages forbreach of warranty

bull lsquodamages in lieursquo can it seems be awarded even if one ofthe bars to recision apply (Thomas Witter Ltd v TBPIndustries (1996))

bull where the misrepresentation has become a term of thecontract the misrepresentee can sue for damages forbreach of contract as an alternative to damages formisrepresentation

Duress

A common law doctrine

Duress to the person

This requires actual or threatened violence to the personOriginally it was the only form of duress recognised by thelaw

CA

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86

Duress involves coercion

Duress to goods

bull Threat of damage to goods ndash traditionally this has notbeen recognised by the law but in view of thedevelopment of economic duress it is assumed thatduress to goods would today be a ground for relief

Economic duress

Requires

Economic duress led to rescission of a contract in UniverseTankships of Monrovia v ITWF (1983) where a union hadlsquoblackedrsquo a tanker and refused to let it leave port untilcertain moneys had been paid The House of Lordsconsidered that this amounted to economic duress andordered return of the money

It has been stated that economic duress requires

Compulsion or coercion of the will

In Pau On v Lau Yiu Long (1980) Lord Scarman listed thefollowing indications of compulsion or coercion of the will

bull did the party coerced have an alternative course open tohim

bull did the party coerced protest

bull did the party coerced have independent advice

bull did the party coerced take steps to avoid the contract

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W87

Compulsion of the will An illegitimate threat

Illegitimate pressure

There must be some element of illegitimacy in the pressureexerted for example a threatened breach of contract Theillegitimacy will normally arise from the fact that what isthreatened is unlawful In CTN Cash and Carry v Gallaher(1994) however the Court of Appeal accepted obiter that anoutrageous but technically lawful threat could amount toduress This possibility has not so far been developed in anylater cases

Economic duress is often pleaded together with lack ofconsideration in cases where a breach of contract isthreatened by the promisor unless he receives additionalpayment

bull In Atlas Express v Kafco (1989) Kafco a small companywhich imported and distributed basketware had acontract to supply Woolworths They contracted withAtlas for delivery of the basketware to Woolworths Thecontract commenced then Atlas discovered they hadunderpriced the contract and told Kafco that unless theypaid a minimum sum for each consignment they wouldcease to deliver Kafco were heavily dependent on theWoolworths contract and knew that a failure to deliverwould lead both to the loss of the contract and an actionfor damages At that time of the year they could not findan alternative carrier and agreed under protest to makethe extra payments Atlas sued for Kafkorsquos non-paymentHeld ndash the agreement was invalid for economic duressand also for lack of consideration

bull Cf Williams v Roffey Bros (1989) ndash Chapter 2

The following threats are probably not illegitimate (subjectto the possibility raised by CTN Cash and Carry v Gallaher(1994) discussed above)

CA

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88

bull a threat not to enter into a contract

bull a threat to institute civil proceedings

bull a threat to call the police

Note ndash not all threatened breaches of contract will amount toeconomic duress It will only do so when the threatenedparty has no reasonable alternative open to him The normalresponse to a breach of contract is to sue for damages

Remedies

bull In North Ocean Shipping Co v Hyundai Construction Co TheAtlantic Baron (1979) the court found economic duressbut refused rescission on the ground that the plaintiff hadaffirmed the contract

Undue influence

An equitable doctrine

bull Undue influence is based on the misuse of a relationshipof trust or confidence between the parties Where foundit renders a contract voidable The innocent party willneed to apply to the court for rescission of the contract(see above)

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W89

Pressure not amounting to duress at common lawwhereby a party is excluded from the exercise of

free and independent judgment

Duress renders a contract voidable Rescission willnormally be sought from the courts See above

Contracts where undue influence is presumed

For example

bull Contracts between certain relationships

parent and child

trustee and beneficiary

solicitor and client

doctor and patient

religious adviser and disciple

bull Where there has been a long relationship of confidenceand trust between the parties

For example between husband and wife or where oneparty had been accustomed to rely for guidance andadvice on the other In Lloyds Bank v Bundy (1975) MrBundy an elderly west country farmer on the advice ofthe local Lloyds Bank assistant manager granted a chargeto the bank over the family farm to guarantee his sonrsquos

CA

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90

Contracts where undue influence

is presumed

Contracts where actual undue

influence must be proved

Contracts induced by undue influence are of two kinds

The contract must be manifestly disadvantageous

to the weaker party

Contracts need not be manifestly disadvantageous

to the weaker party

indebtedness to the bank Mr Bundy had all his liferelied on Lloyds Bank for financial advice the court setaside the charge on the ground of undue influence on thepart of the bank

Note ndash a bank will not be presumed to exert undueinfluence in normal circumstances

In Credit Lyonnais Bank Nederland NV v Burch (1997) therelationship between an employer and a junior employee(who was persuaded to put up her own house as securityfor the businessrsquos overdraft) was held to be one of undueinfluence

The stronger party can disprove undue influence byshowing that

bull full disclosure of all material facts was made

bull the consideration was adequate

bull the weaker party was in receipt of independent legaladvice

Contracts where actual undue influence is proved

The burden of proof lies on the claimant to show that suchinfluence did exist and was exerted

Effect of undue influence on a third party

In Barclays Bank v OrsquoBrien (1993) Mrs OrsquoBrien had signed aguarantee which used the jointly owned matrimonial homeas security for a loan made to her husbandrsquos business Herhusband had told her it was for a maximum of pound60000 butin fact it was for pound130000 Mrs OrsquoBrien had not been advisedby the bank to consult an independent solicitor The Houseof Lords held that there was no undue influence in this casebut there was misrepresentation on the part of the husband

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W91

They further held that where there was undue influence ormisrepresentation or other legal wrong then the injuredpartyrsquos right to have the transaction set aside would beenforceable also against the third party provided the thirdparty had actual or constructive notice of the wrong Suchnotice would arise where

bull the parties were in an emotional relationship forexample co-habitees (heterosexual or homosexual) orchild and aged parents

bull one party was undertaking a financial liability on behalfof the other which was not to her or his advantage

The court also held that in the above situation the third partycould discharge his duty by making clear to the partyconcerned the full nature of the risk he or she is taking onfor example

bull by conducting a personal interview or

bull urging independent advice

Note ndash this doctrine of constructive notice applies to sureties(guarantors) but does not apply where a bank makes a jointloan to both parties as the facts in that situation do not meetthe requirements set out in Barclays Bank v OrsquoBrien See CIBCMortgages v Pitt (1993)

Note

bull A failure by a solicitor to give proper advice cannot beheld against a bank (even if the bank knows that thesolicitor is acting for both the borrower (for example thehusband) and the guarantorsurety (for example thewife)) ndash see Royal Bank of Scotland v Etridge (No 2) (1998)

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92

bull Once undue influence or misrepresentation has beenfound the whole contract is avoided it cannot be upheldin part ndash TSB Bank plc v Camfield (1995)

bull Damages are not available as a remedy for duress orundue influence

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W93

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W95

6 Mistake

There is much disagreement concerning the effect ofmistake on a contract There are many reasons for thisconfusion as to which terms to use a large number of caseswhich can be interpreted in different ways no recentdecisive House of Lords decisions on the subject theintervention of equity

Terminology

Different terms are used by Cheshire and Anson to describethe same kind of mistake and you should ascertain whichterms are used in your textbook

The terms used by Cheshire are used in this LawCard

CHESHIRE ANSON Effect

Same mistake Common Mutual May nullifymade by both mistake mistake agreementparties

Parties at Mutual Unilateral Negativescross-purposes mistake mistake agreement

Parties atcross-purposesbut one party Unilateral Unilateral Negativesknows that mistake mistake agreementthe other is mistaken

Effect of a mistake

If the contract is rendered void then the parties will bereturned to their original positions and this may defeat therights of innocent third parties who may have acquired aninterest in the contract

The reluctance of the courts to develop the common lawdoctrine of mistake is probably due to the unfortunateconsequences for third parties that can result from holdinga contract void Equity has however intervened to producemore flexibility as noted below

CA

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96

In common mistakes the parties are agreed but both are mistaken

In mutual and unilateral mistakes the parties may not have reached agreement and these mistakes are sometimes dealt with

under the heading of agreement

The general rule is that a mistake has no effect on a contract but certain mistakes of a fundamental nature sometimes called

operative mistakes may render a contract void at common law

Operative mistakes

Common mistakes

bull At common law this may render the contract void thatis the contract has no legal effect it is unenforcable byeither party and title to property cannot pass under it

bull In equity a more flexible approach has developedcontracts containing certain common mistakes have beentreated as voidable In setting aside such contracts thecourts have a much wider control over the terms it canimpose on the parties

In Bell v Lever Bros (1932) it was stated that to nullify theagreement the lsquomistake must go to the root of the contractrsquo

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W97

Commonmistakes

re a fundamentalmatter for

example resextincta res sua

the quality of the subject matter

Mutualmistakes

re identity ofsubject matter

of contract

Unilateralmistakes

re terms ofcontract re

identity of otherparty to contract

The parties are agreed but they are both under the same misapprehension If this

misapprehension is sufficiently fundamentalit may nullify the agreement

Lever Bros agreed to pay two directors of a subsidiarycompany substantial sums of money in compensation forloss of office while unaware of the fact that they hadengaged in irregular conduct which would have allowedthem to be dismissed without compensation Lever Brosasked the court to order the return the compensation paid onthe ground that it had been paid as a result of a commonmistake The House of Lords held that the common mistakeconcerning the need to pay compensation was notlsquosufficiently fundamentalrsquo to render the contract void

Common mistakes lsquosufficiently fundamentalrsquo to render a

contract void

A common mistake as to the existence of the subject matter(res extincta)bull In Galloway v Galloway (1914) the parties believing they

were married entered into a separation agreement Laterthey discovered that they were not validly married Held ndashthe separation agreement was void for a common mistake

bull In Strickland v Turner (1852) the court declared void onthe grounds of a common mistake a contract to purchasean annuity on the life of a person who had already died

bull In Couturier v Hastie (1856) a buyer bought a cargo ofcorn which both parties believed to be at sea the cargohad however already been disposed of Held ndash thecontract was void

bull Section 6 of the Sale of Goods Act 1979 declares thatlsquoWhere there is a contract for the sale of specific goodsand the goods without the knowledge of the seller haveperished when the contract is made the contract is voidrsquo

CA

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98

However in McRae v Commonwealth Disposals Commission(1951) the commission sold to McRae the right to salvagea tanker lying on a specified reef There was no such reefof that name nor was there any tanker The court foundthat there was a valid contract and that the commissionhad impliedly guaranteed the existence of the tanker Thecase could be distinguished from the Australianequivalent of s 6 on the ground that there never had beena tanker and it had therefore not perished

Whether a contract is void or valid depends on theconstruction of the contract that is even if the subjectmatter does not exist the contract will be valid

if performance was guaranteed or

if it was the purchase of a lsquochancersquo

Otherwise the contract would be void

Mistake as to title ndash res sua ndash that is the thing sold alreadybelongs to the buyerbull In Cooper v Phibbs (1867) Cooper not realising that a

fishery already belonged to him agreed to lease it fromPhibbs Held ndash the contract was void

Mistake as to the possibility of performing the contractbull In Sheik Bros Ltd v Ochsner (1957) a contract was held

void as the land was not capable of growing the cropcontracted for

bull In Griffith v Brymer (1903) a contract to hire a room toview the coronation of Edward VII which was madeafter the procession had been cancelled was held void(Commercial impossibility) C

ON

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99

Mistake as to the quality of the subject matterLords Atkin and Thankerton both insisted in Bell v Lever Brosthat to render a contract void the mistake must go to thelsquoroot of the contractrsquo

bull It has been argued that if the mistake in Bell was notsufficiently fundamental to render a contract void then itis highly unlikely that any mistake concerning qualitywould do so

bull Similarly in Leaf v International Galleries (1950) whereboth parties mistakenly believed that a painting was byConstable the Court of Appeal stated that the contractwas not void for common mistake

bull In Solle v Butcher (1950) the Court of Appeal declined todeclare void a lease which both parties believed was notsubject to the Rent Acts A similar decision was reachedin Grist v Bailey (1967) where the parties both believedthat a house was subject to a protected tenancy

However Lord Justice Steyn in Associated Japanese Bank vCredit du Nord (1988) stated that not enough attention hadbeen paid to speeches in Bell v Lever Bros which did indicatethat a narrow range of mistakes in quality could render acontract void for example Lord Atkinrsquos statement that lsquoacontract may be void if the mistake is as to the existence ofsome quality which makes the thing without that qualityessentially different from the thing it was believed to bersquo Hegave as an example ndash if a horse believed to be sound turnsout to be unsound then the contract remains valid but if ahorse believed to be a racehorse turns out to be a carthorsethen the contract is void

CA

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100

Equity

The role of equity according to this view is supplementarydesigned to relieve the limitations of the common law

bull Rescission on terms was granted by the Court of Appealin Solle v Butcher (1950) (see above) The court rescindedthe lease but gave the tenant the option of staying thereon terms of his paying the extra rent which the landlordcould have charged in view of the improvements

bull Rescission on terms was also granted in Grist v Bailey(1967) where a house was sold in the mistaken belief thatit had a protected tenancy and in Laurence v LexcourtHoldings (1978) where there was a common mistake withregard to planning permission

bull Rescission without terms was granted in Magee v PennineInsurance Co (1969) where an agreement by an insurancecompany to meet a claim was rescinded because theparties were unaware that it was based on a policy whichwas voidable due to a misrepresentation by the assured

bull In William Sindall plc v Cambridgeshire CC (1994) Evans LJsuggested that whereas the common law only recognisedmistakes as to the subject matter of the contract equitywould recognise a lsquowider and perhaps unlimitedcategory of common mistakersquo In Clarion Ltd v NationalProvident Institution (2000) however Rimer J held that

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W101

Lord Justice Steyn in Associated Japanese Bank v Credit du Nord (1988) stated that a court will first examine whether a

contract is void at common law if it is not then itwill examine whether equity will grant rescission

equity would only intervene where the mistake was as tothe terms of the contract or its subject matter Equity didnot provide relief for a lsquobad bargainrsquo

Mutual and unilateral mistakes

The courts adopt an objective test in deciding whetheragreement has been reached It is not enough for one of theparties to allege that he was mistaken

Mistake can negate consent in the following cases

Mutual mistakes concerning the identity of the subject matter

bull In Raffles v Wichelhaus (1864) a consignment of cotton wasbought to arrive lsquoex Peerless from Bombayrsquo Two shipsboth called Peerless were due to leave Bombay at aroundthe same time Held ndash no agreement as the buyer wasthinking of one ship and the seller was referring to theother ship

bull Similarly there was no agreement in Scriven Bros vHindley amp Co Ltd (1913) where the seller sold lsquotowrsquo andthe buyer bought lsquohemprsquo Again there was an ambiguityas both lots were delivered under the same shippingmark and the catalogue was vague

CA

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102

In these cases the parties are at cross-purposesbut there must have been some ambiguity

in the situation before the courts willdeclare the contract void

These mistakes negate consentthat is they prevent the formation of an agreement

bull But in Smith v Hughes (1871) the court refused to declarevoid an agreement whereby the buyer had thought hewas buying old oats when in fact they were new oats asthe contract was for the sale of lsquooatsrsquo The mistake relatedto the quality not the identity of the subject matter

Unilateral mistake concerning the terms of the contract

bull In Hartog v Colin and Shields (1939) the sellers mistakenlyoffered to sell goods at a given price per pound whenthey intended to offer them per piece All the preliminarynegotiations had been on the basis of per piece Thebuyers must have realised that the sellers had made amistake The contract was declared void

bull In Smith v Hughes however the contract was for the saleof lsquooatsrsquo not lsquoold oatsrsquo it would only have been void iflsquoold oatsrsquo had been a term of the contract

Unilateral mistake as to the identity of other parties to the

contract

There are a number of contradictory cases and theoriesunder this heading

Traditionally a distinction is made between mistakes as toidentity and mistakes as to attributes (for example creditworthiness)

bull In Cundy v Lindsay (1878) a Mr Blenkarn ordered goodsfrom Lindsay signing the letter to give the impressionthat the order came from Blenkiron amp Co a firm knownto Lindsay amp Co Held ndash the contract was void Lindsay

CO

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W103

Here one party has taken advantage of the other partyrsquos error

amp Co had only intended to do business with Blenkiron ampCo There was therefore a mistake concerning the identityof the other party to the contract

bull In Kingrsquos Norton Metal Co v Edridge Merrett amp Co Ltd(1872) on the other hand a Mr Wallis ordered goods onimpressive stationery which indicated that the order hadcome from Hallam amp Co an old established firm withbranches all over the country Held ndash the contractbetween Kingrsquos Norton Metal Co and Wallis was notvoid The sellers intended to do business with the writerof the letter they were merely mistaken as to hisattributes that is the size and credit worthiness of hisbusiness

bull In Boulton v Jones (1857) the defendant sent an order forsome goods to a Mr Brocklehurst unaware that he hadsold the business to his foreman the plaintiff Theplaintiff supplied the goods but the defendant refused topay for them as he had only intended to do business withBrocklehurst against whom he had a set off Held ndash therewas a mistake concerning the identity of the other partyand the contract was therefore void

However the cases all concerned contracts negotiated at adistance

CA

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104

From the above three cases it would seem that acontract is void if the mistaken party intended to do

business with another specific person and the identity of that other person was important to him

bull In Phillips v Brooks (1919) a jeweller sold a gold ring anddelivered it on credit to a customer who had come intohis shop and had falsely claimed to be Sir GeorgeBullough a well known and wealthy man Held ndash thecontract was valid The jeweller had intended to dobusiness with the person in his shop

bull In Lewis v Averay (1972) a rogue claimed to be RichardGreene the film actor and produced a pass to Pinewoodstudios to verify this He was allowed to drive away a carin return for a cheque and subsequently resold the car forcash to Averay The cheque bounced and the sellerclaimed the return of the car on the ground that he wasmistaken as to the identity of the buyer Held ndash thecontract was valid The seller must be presumed to haveintended to deal with the person physically in the roomwith him Averay kept the car

There are two cases however where the plaintiffs were ableto establish a mistake as to the identity of a person in theirpresence

bull In Ingram v Little (1961) two sisters sold a car and handedit over against a worthless cheque to a person whoclaimed to be a Mr Hutchinson of Stanstead HouseCaterham They only did so after one of them hadchecked that there was a man of that name who lived atthat address The Court of Appeal held the contract void C

ON

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105

Where the parties negotiate in person the samerules apply but there is a presumption that the inno-cent party intended to do business with the person

physically in his presence

They considered that the sisters had done enough toestablish that they only intended to deal with MrHutchinson

This case has been greatly criticised as it is difficult toreconcile with Phillips v Brooks and Lewis v Averay

bull In Sowler v Potter (1940) the lease of a cafeacute was granted toPotter who had previously been convicted of keeping adisorderly cafe under the name of Robinson The courtheld that the contract was void because of the lessorrsquosmistaken belief that Potter was not Robinson This casehas also been much criticised and doubted as it did notseem that Sowler had intended to do business with anyother identifiable person The contract could in any casehave been set aside for misrepresentation

The contract would in most cases be voidable in any case formisrepresentation where one party has misled the otherwith regard to his identity The advantage of having the contract declared void for mistake is to avoid the bars torescission

See Chapter 5 pp 75ndash76

Mistake as to the nature of the document signed

Defence of non est factum

bull The scope of this defence has been limited since thedecision in Saunders v Anglia Building Society (Gallie v Lee)(1971) where an old lady was persuaded by her nephewto sign a document conveying her house to her nephewrsquosfriend She had believed that she was signing a deed ofgift to her nephew She had not read the documentbecause her glasses were broken It was held that thedocument was valid It was stated that

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106

It is also thought that it will only protect a person who isunder some disability The defence did succeed in LloydsBank v Waterhouse (1990) where the defendant who wasilliterate signed a guarantee of his sonrsquos debt to the bankThe father thought that the guarantee covered the purchaseprice of a farm but in fact it covered all his sonrsquosindebtedness to the bank It was held that the effect of thedocument was fundamentally different from what it wasbelieved to be There was no negligence and the contractwas therefore void

In UDT Ltd v Western (1976) it was held that these samerules applied to cases where a person had signed a formbefore all the details required by the form had been entered

Mistake in equity

The narrow approach taken by the common law towardsremedies for mistake (that is that it renders the contractvoid) is supplemented by the more flexible approach ofequity The following remedies may be available in equity

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Rescission RectificationRefusal of

specificperformance

The signed document must be fundamentally different in effect from what it was thought to be

The signatory must prove that he had not been negligent in signing the document

Rescission

See common mistake (above)

Rectification

Where there has been a mistake not in the actual agreementbut in reducing it to writing equity will order rectification ofthe document so that it coincides with the true agreement ofthe parties

Necessary conditionsbull The document does not represent the intention of both

parties or

bull one party mistakenly believed a term was included in thedocument and the other party knew of this error InRoberts amp Co Ltd v Leicestershire CC (1961) the completiondate of a contract was rectified at the request of one partybecause it was clear that the other party was aware of theerror when the contract was signed

If the document fails to mention a term which one partybut not the other had intended to be a term of thecontract there is no case for rectification

bull There must have been a concluded agreement but notnecessarily a legally enforceable contract In Joscelyne vNissen (1970) a father and daughter agreed that thedaughter should take over the car hire business Inreturn the father would continue to live in the house andthe daughter would pay all the household expenses Thislast provision was not included in the written contractHeld ndash the contract should be rectified to include it

Note ndash a document which accurately records a prioragreement cannot be rectified because the agreement wasmade under some mistake (Rose v Pym above) Equityrectifies documents not agreements

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108

Rectification is an equitable remedy and is available at thediscretion of the court Lapse of time or conflict with thirdparty rights may prevent rectification

Refusal of specific performance

bull In Webster v Cecil (1861) the defendant having previouslyrefused the plaintiffrsquos offer of pound2000 for his land wrote tothe plaintiff offering to sell it to him for pound1250 instead ofpound2250 as he had intended The plaintiff accepted theoffer Specific performance was refused as the plaintiffmust have been aware of the error (unilateral mistake)

bull Where there is no blame on the claimant the situation ismore difficult In Malins v Freeman (1837) the defendanthad mistakenly bought the wrong property at an auctionSpecific performance was refused In Tamplin v James(1879) however the court ordered specific performancewhere the defendant had bid for a property under anerror as to its true extent Presumably being forced to buya totally different property from the one he intendedwould have caused greater hardship than being forced tobuy a property whose dimensions differed from hisexpectations

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W109

Specific performance will be refused when the contract is void at common law Equity may also

refuse specific performance where a contract is validat law but only lsquowhere a hardship amounting toinjustice would have been inflicted upon him by

holding him to his bargainrsquo (Tamplin v James (1879))

7 Illegality and capacity

Illegal contracts are classified in different ways by differentauthorities In this chapter a distinction is drawn betweencontracts which involve the commission of a common lawor statutory offence and those which are void as beingcontrary to public policy

Illegality

The main issue with regard to illegal contracts is the effectof illegality on a contract The most often examined topicwith regard to contracts which are declared void ongrounds of public policy is contracts in restraint of trade

Illegal contracts

Contracts illegal by statute

bull Statute may declare a contract illegal for example theCompetition Act 1998

bull Statute may prohibit an act but declare that it shall noteffect validity of contract for example the ConsumerProtection Act 1987

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W111

Illegal contracts Contracts void

against public policy

Contracts prohibited by statute

Contracts illegal at common law

bull Statute may prohibit an act but not stipulate its effect onthe contract The status of the contract will in this casebe a matter of interpretation for the court In ReMahmoud and Ispahani (1921) the court decided that astatement that lsquoa person shall not buy or otherwise dealin linseed oil without a licencersquo was a prohibition and acontract entered into by a person without a licence wastherefore void

bull The courts are reluctant to imply a prohibition when thisis not clearly indicated in the statute In Hughes v AssetManagers (1995) the court held a contract valid despitethe fact that a document had not been signed by a personauthorised to do so as required by statute

Contracts illegal at common law

bull An agreement to commit a crime a tort or a fraud forexample defraud the rating authority (Allen v Roscous(1676)) to publish a libel (Clay v Yates)

bull An agreement to defraud the Inland Revenue (Napier vBusiness Associates (1951))

bull Contracts damaging to the countryrsquos safety or foreignrelations

bull Contracts interfering with the course of justice forexample contracts to give false evidence

bull Contracts leading to corruption in public life (Parkinson vRoyal College of Ambulance (1925))

bull Contracts tending to promote sexual immorality (Pearcev Brooks (1866))

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112

Effects of illegality

Contracts illegal as formed

In Pearce v Brooks (1866) the owner of a coach of unusualdesign was unable to recover the cost of hire from aprostitute who to his knowledge had hired it in order toattract clients

In Parkinson v Royal College of Ambulance (1925) Parkinsonwas unable to recover the money he had donated to thedefendants on the understanding that they would obtain aknighthood for him

Exceptionsbull Where the parties are not in pari delicto (that is not

equally at fault) for example where one party isunaware of the illegal nature of the contract or has beeninduced to enter into it by fraudulent misrepresentationor is the party the law was attempting to protect forexample a tenant who has paid an illegal premium(Kiriri Cotton Co v Dewani (1960))

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W113

Contracts illegal as formed

Contracts illegal in their performance

Such contracts are void ab initio there can be no action for breach of contract

Money paid or property transferred under the contract cannot be recovered

bull Where the transferor genuinely repents and repudiatesthe contract before performance In Tribe v Tribe (1995)money was transferred to a son in order to avoid thefatherrsquos creditors At the end of the day the creditorswere all paid in full and the father was allowed to cite theoriginal reason for the transfer in order to rebut thepresumption of advancement (which would have meantthat his son could keep the shares) He had withdrawnfrom the illegal purpose before performance

In Bigos v Boustead (1951) however the court was notconvinced that the plaintiff had genuinely repented

bull Where the transferor can frame his claim without relyingon the contract In Bowmakers v Barnet Instruments (1945)the plaintiffs were able to rely on an action in the tort ofconversion to recover goods delivered under an illegalhire purchase contract

Similarly in Tinsley v Milligan (1993) both parties hadcontributed money towards the purchase of a house putin the name of Tinsley alone in order to allow Milligan tomake various social security claims When Milligan suedfor the return of the money it was argued that theagreement had been entered into for an illegal purposeand that the public conscience lsquowould be affronted byrecognising rights created by illegal transactionsrsquo TheHouse of Lords held however that a resulting trust hadbeen created in favour of Milligan by the contribution tothe purchase price Milligan therefore could rely on theresulting trust and had no need to rely on the illegalagreement

This case shows (a) that the rule applies to equity as wellas to common law (b) the test of lsquoaffront to the publicconsciencersquo previously used by the Court of Appeal is nolonger good law

CA

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114

bull Where part of the contract is lawful the court will notsever the good from the bad In Napier v National BusinessAgency (1951) certain payments were described aslsquoexpensesrsquo in order to defraud the Inland Revenue Thecourt refused to enforce payment of the accompanyingsalary as the whole contract was tainted with the illegality

Note ndash property can pass under an illegal contract as in Singv Ali (1960)

Contracts illegal in their performance

A claim by the innocent party to enforce the contract in thesecases is strong

bull In Marles v Philip Trant (1954) the defendant sold winterwheat described as spring wheat without anaccompanying invoice as required by statute Held ndash theplaintiff could sue for damages for breach of contractThe contract was illegal in its performance but not in itsinception

bull In Strongman v Sincock (1955) Sincock failed to getlicences which were needed to modernise some houseswhich belonged to him and refused to pay for the workon the basis that the contracts were illegal Held ndashStrongman could not sue on the illegal contracts butcould sue Sincock on his collateral promise to obtain thelicences

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W115

The illegality may only arise during the performance of a contract for example

a carrier may break the law by exceeding the speed limit whilst delivering goods

belonging to a client He will be punished but the contract will not necessarily be void

bull In Archbolds v Spanglett (1961) Spanglett contracted tocarry Archbolds whisky in a van which was not licensedto carry any goods other than his own Archbold wasunaware of this and could therefore recover damages forbreach of contract

But in Ashmore Benson Pease amp Co v Dawson Ltd (1973)the other party knew of the overloading of the lorry andcould not therefore recover damages He hadparticipated in the illegality

bull Even the guilty party may enforce the contract if theillegality is incidental

In Shaw v Groom (1970) a landlord failed to give histenant a rent book as required by law Held ndash he could suefor the rent The purpose of the statute was to punish thelandlordrsquos failure to provide a rent book not to render thecontract void

In St John Shipping v Rank (1957) a ship owner who hadoverloaded his ship in contravention of a statute was ableto recover freight

Contracts void at common law on grounds of publicpolicy

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116

Contracts damaging to theinstitution of marriage

For example contracts inrestraint of marriage

marriage brokerage contractscontracts for future separation

(pre-nuptial agreements)

Contracts made after orimmediately beforeseparation are valid

Contracts to oust thejurisdiction of the courts

However arbitrationagreements are valid

In Esso Petroleum v Harpers Garage (1968) it was stated thatthe court will consider

bull whether the contract is in restraint of trade A contract isin restraint of trade if it restricts a personrsquos liberty tocarry on his trade or profession Certain restraints havebecome acceptable over the years for example lsquotiedhousesrsquo restrictive covenants in leases sole agency orsole distributorship agreements

bull whether it should nevertheless be enforced because itprotects a legitimate interest and is reasonable Theonus of proving reasonability is on the promisee Arestraint to be permissible must be no wider than isnecessary to protect the relevant interest of thepromisee

Categories of contracts in restraint of trade

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W117

Restraints onemployees

Restraints on thevendors of a business

Exclusive dealingagreements

A contract in restraint of trade is prima facie void but thecourts will now uphold the restriction if it is shown that

bull the restraint protects a legitimate interest

bull the restraint is reasonable between the parties

bull the restraint is reasonable as regards the interest of thepublic

Contracts in restraint of trade

Restraints on employeesThe restraint is void unless the employer can show

bull That it is necessary to protect a proprietary interest forexample the trade secrets of a works manager in Foster vSuggett (1918) the trade connections of a solicitorrsquosmanaging clerk in Fitch v Dewes (1921)

A restraint merely to prevent competition will not beenforced

In Eastham v Newcastle United FC (1964) the courtaccepted that the proper organisation of football was avalid matter for clubs to protect but found the lsquoretainand transfer systemrsquo unreasonable

bull That the restraint is no greater than is necessary toprotect the employerrsquos interest in terms of time andarea

In Scorer v Seymore-Jones (1966) the court upheld arestriction of 10 miles within branch A at which theemployee had worked but held that a similar restraintcovering branch B at which the employee had notworked was unreasonable and void

bull Problems with area can be overcome by using lsquonon-solicitationrsquo clauses instead

In Home Counties Dairies v Skilton (1970) a milkmanagreed that for one year after leaving his present job hewould not sell milk to his employerrsquos customers Held ndashrestraint valid It was necessary to protect the employeragainst loss of customers

bull The validity of the duration of the restraint depends onthe nature of the business to be protected and on thestatus of the employee

CA

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118

In Briggs v Oates (1991) a restriction of five miles for fiveyears on an assistant solicitor was upheld as reasonable

bull A restraint imposed by indirect means for example byloss of pension rights (Bull v Pitney Bowes (1966)) orwhere two companies agreed not to take on the otherrsquosemployees (Kores v Kolok (1959)) will be judged by thesame criteria

Restraints on the vendor of a business

bull In Vancouver Malt and Sake Brewing Co v VancouverBreweries Ltd (1934) a company which was licensed tobrew beer but which had not at any time brewed beerwas sold and agreed not to brew any beer for 15 yearsHeld ndash the restraint was void since there was no goodwillof a beer brewing business to be transferred

bull In British Concrete v Schelff (1921) S sold his localisedbusiness to B who had branches all over the UK andagreed not to open any business within 10 miles of any ofBrsquos branches Held ndash the restriction was void B wasentitled only to protect the business he had bought notthe business which he already owned

bull In Nordenfelt v Maxim Nordenfelt (1894) N a worldwidesupplier of guns sold his worldwide business to M andagreed not to manufacture guns anywhere in the worldfor 25 years Held ndash the restriction was valid C

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AW

119

Such a restraint is valid if it is intended to protectthe purchaserrsquos interest in the goodwill of the

business bought and is reasonable

Exclusive dealing agreements

bull In Esso Petroleum v Harpers Garage (1968) a solusagreement for four years was held reasonable but asolus agreement for 21 years was held unreasonable andtherefore void

bull Solus agreements were distinguished from restrictivecovenants in a lease When an oil company leases afilling station to X inserting a clause that X should buyall its requirements from the company this is not subjectto restraint of trade rules because the tenant is notgiving up a previously held freedom

bull But in Amoco v Rocca Bros (1975) the court held thatrestraint of trade rules did apply to lease and lease backagreements

bull In Alec Lobb (Garages) v Total Oil (1985) in a similar leaseback arrangement a solus agreement for between sevenand 21 years was held reasonable on the ground that thearrangement was a rescue operation benefiting theplaintiffs and there were lsquobreakrsquo clauses in theunderlease

bull In Schroeder Music Publishing Co v Macaulay (1974) itwas held that a contract by which an unknown songwriter undertook to give his exclusive services to apublisher who made no promise to publish his work

CA

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120

Solus agreements whereby A agrees to buy all his re-quirements of a particular commodity from B

Most exclusive services contracts are found in professional sport or entertainment

was subject to the restraint of trade doctrine as it waslsquocapable of enforcement in an oppressive mannerrsquo

bull In Greig v Insole (1978) the MCC banned any cricketerwho played for a cricketing lsquocircusrsquo from playing forEngland The court held that the ban was void as beingin restraint of trade

It has been suggested that the courts will hold exclusivedealing and service contracts to be within the restraint oftrade doctrine if they contain unusual or novel features orif there is disparity in the bargaining power and theagreement is likely to cause hardship to the weaker party

Cartel agreementsThese are now covered by statute for example the FairTrading Act 1973 and the Competition Act 1998 This mayalso fall within Article 81 of the Treaty of the EuropeanCommunities

Effect of a restraint

Two tests must be satisfied

bull The lsquoblue pencilrsquo test It must be possible to sever theillegal part simply by deleting words in the contract Thecourt will not add words substitute one word foranother rearrange words or in any way redraft the

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W121

A void restraint is severable Severance can be operated intwo ways

bull severance of the whole of the objectionable promiseleaving the rest of the contract to be enforced

bull severance of the objectionable part of the promise

contract In Mason v Provident Clothing Co Ltd (1913) theHouse of Lords refused to redraft a promise not to workwithin 25 miles of London But in Goldsoll v Goldman(1915) a dealer in imitation jewellery promised not todeal in real or imitation jewellery either in the UK orabroad Dealing in real jewellery and dealing abroadwere severed

bull Severance of the objectionable part of the contract mustnot alter the nature (as distinct from the extent) of theoriginal contract The illegal restraint will not be severedif it is the the main purpose of the restraint or if to severit would alter entirely the scope and intention of theagreement In Attwood v Lamont (1920) the court refusedto sever restrictions on a tailor from competing with anydepartment of the department store which had employedhim The court stated that this was a covenant lsquowhichmust stand or fall in its unaltered formrsquo

Capacity

Minors

The law pursues two conflicting policies in the case ofminors On the one hand it tries to protect minors from theirown inexperience on the other it tries to ensure that personsdealing with minors are not dealt with in a harsh manner

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122

Minorspersons under 18

Persons of unsound mindand drunken persons

Contracts with minors can be divided into three categories

Valid contracts ndash contracts which can be enforced

against a minor

Necessaries

bull In Nash v Inman (1908) a student purchased 11 silkwaistcoats while still a minor The court held that silkwaistcoats were suitable to the conditions of life of aCambridge undergraduate at that time but they were notsuitable to his actual needs as he already had a sufficientsupply of waistcoats

It is important to distinguish between luxurious goods ofutility and goods of pure luxury The status of the minor canmake the former into necessaries but the latter can never beclassified as necessaries

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W123

Contracts fornecessaries

Beneficial contracts of service

Valid contracts Voidable contracts Other contracts

Necessary goods are defined in the Sale of GoodsAct 1979 as lsquogoods suitable to his conditionin life and to his actual requirements at the

time of sale and deliveryrsquo

The burden of proving that the goods are necessaries is onthe seller

They must satisfy the same tests as necessary goods

Professor Treitel considers that both executed andunexecuted contracts for necessaries can be enforced Hecites Roberts v Gray (1913) Roberts agreed to take Gray aminor on a billiard tour to instruct him in the profession ofbilliard player Gray repudiated the contract The court heldthat Roberts could recover damages despite the fact that thecontract was executory

Cheshire Fifoot and Furmston agree that executorycontracts for necessary services are enforceable as in Robertsv Gray but deny that executory contracts for necessary goodscan be enforced

They cite

bull the actual wording of the Sale of Goods Act which refersto time of lsquosale and deliveryrsquo

bull the minor has to pay a reasonable price for the goods notthe contractual price

These indicate it is argued that liability is based onacceptance of the goods not on agreement

Beneficial contracts of service

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124 These must be for the benefit of the minor

Necessary services include education medical and legal services

bull In De Francesco v Barnum (1890) a contract whose termswere burdensome and harsh on the minor was held void

bull But in White City Stadium v Doyle (1935) where a minorhad forfeited his payment for a fight because ofdisqualification the contract was neverthelessenforceable against him Where a contract is on the wholefor the benefit of a minor it will not be invalidatedbecause one term has operated in a way which is not tohis advantage

bull In Chaplin v Leslie Frewin (Publishers) Ltd (1966) the courtenforced a contract by a minor to publish his memoirs asthis would train him in becoming an author and enablehim to earn a living

bull But trading contracts (involving the minorrsquos capital) willnot be enforced even if it does help the minor earn aliving In Mercantile Union Guarantee Co Ltd v Ball (1937)the court refused to enforce a hire purchase contract for alorry which would enable a minor to trade as a haulagecontractor

Voidable contracts

These comprise contracts of continuing obligation such ascontracts to acquire an interest in land or partly paid sharesor partnership agreements

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W125

They must be contracts of service or similar to a contract of service

Contracts which can be avoided by the minor beforemajority or within a short time afterwards

The minor can free himself from obligations for the futurefor example an obligation to pay rent under a lease but willhave to pay for benefits already received He cannot recovermoney already paid under the contract unless there has beena total failure of consideration (Steinberg v Scala (Leeds) Ltd(1923))

Other contracts

But

bull The minor himself may enforce such contracts

bull Property can pass under such contracts

bull Where the contract has been carried out by the minor hecannot recover any property unless there has been atotal failure of consideration or some other failingwhich would equally apply to an adult

bull The Minors Contracts Act 1987 provides that

a minor may ratify such a contract on majority and itcan thereafter be enforced against him

a guarantee of a minorrsquos debt will not be voidbecause a minorrsquos debt is unenforceable against him

a court may if it considers it is just and equitable to doso order a minor to return property he has receivedunder a void contract or any property representing itIt is not clear whether property transferred under thecontract covers money for example in money lendingcontracts It is argued that as lsquoproperty representing itrsquo

CA

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126

These cannot be enforced against a minor

must cover money it would therefore be illogical toexclude money acquired directly but there is as yet nodecision on this point Property cannot presumably berecovered under this section where the minor hasgiven away the contract property

bull Equity will order restitution of property acquired byfraud But there can be no restitution of money (Leslie vSheill (1914)) and no restitution if the minor has resold theproperty

bull An action may be brought in tort if it does not in any wayrely on the contract But although a minor is fully liablefor all his torts he may not be sued in tort if this is just anindirect way of enforcing a contract In Leslie v Sheill(1914) a minor obtained a loan by fraudulentlymisrepresenting his age Held ndash he could not be sued inthe tort of deceit as this would be an indirect way ofenforcing a contract which was void

Persons of unsound mind and drunken persons

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W127

A person who has been declared a lsquopatientrsquo under the MentalHealth Act 1983 by the Court of Protection is incapable ofentering into a valid contract

Other mentally disordered persons and drunken personswill be bound by their contracts unless

bull they were so disordered or drunk that they did notunderstand the nature of what they were doing and

bull the other party was aware of this

Such contracts may be affirmed during a sober or lucidmoment The Sale of Goods Act requires that wherelsquonecessaries are sold and delivered to a person who byreason of mental incapacity or drunkenness is incompetentto contract he must pay a reasonable price for themrsquo

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128

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W129

8 Discharge

A contract may be discharged by

Performance

Precision of performance

bull In Cutter v Powell (1795) a shiprsquos engineer undertook tosail a ship from Jamaica to Liverpool but died before thevoyage was complete Held ndash nothing could berecovered in respect of his service he had not fulfilled hisobligation

bull In Bolton v Mahadeva (1972) a central heating systemgave out less heat than it should and there were fumesin one room Held the contractor could not claimpayment although the boiler and pipes had beeninstalled they did not fulfill the primary purpose ofheating the house

A contract is lsquodischargedrsquo when there are noobligations outstanding under it

Performance Agreement Breach Frustration

Precision ofperformance

Time ofperformance

Tender ofperformance

To discharge his obligations under a contract aparty must perform exactly what he promised

These are examples of lsquoentirersquo contracts which consist ofone unseverable obligation

bull Where the contract is divisible payment can berecovered for the completed part for example goodsdelivered by instalments

bull Where the promisee accepts partial performance InSumpter v Hedges (1898) however payment for partialperformance was refused as Hedges had been left with ahalf-built house and had been put in a position where hehad no choice but to accept partial performance

bull Where the promisee prevents complete performance forexample in Plancheacute v Colburn (1831) a writer wasallowed payment for the work he had already donewhen the publisher abandoned the series

bull Where the promisor has performed a substantial part ofthe contract In Hoenig v Isaacs (1952) the plaintiffdecorated the defendantrsquos flat but because of faultyworkmanship the defendant had to pay pound50 to anotherfirm to finish the job Held ndash the plaintiff was entitled topound150 (the contract price) minus the pound50 paid to the otherfirm cf Bolton v Mahadeva (1972) where the courtdeclined to find substantial performance

This has become known as the doctrine of substantialperformance In order for the claimant to rely on thisdoctrine the failure to perform must amount only to a

CA

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130

Despite the rule that performance must be exact the law will allow payment to be made on a

quantum meruit basis for incomplete performance in the following circumstances

breach of warranty or a non-fundamental breach of aninnominate term It will not apply to a fundamentalbreach or to a breach of condition

Time of performance

bull It is stipulated in the contract see Lombard North Centralv Butterworth (1987)

bull One party has given reasonable notice during thecurrency of the contract that performance must takeplace within a certain time In Rickards v Oppenheim(1950) a car body which had been ordered from theplaintiffs was late The defendants gave final notice to theplaintiff that unless it was delivered within three monthsthey would cancel the order Held ndash time had been madeof the essence the defendants could cancel the order

bull The nature of the contract makes it imperative thatstipulations as to time should be observed for examplecontracts for the sale of perishable goods

The Law of Property Act 1925 stipulated that terms as tothe time of performance should be interpreted in thesame way at common law as in equity In Rainieri v Miles(1981) the House of Lords held that that meant that lateperformance would not give rise to a right to terminatebut would give rise to damages

Tender of performance

If one party tenders performance which is refused he maysue for breach of contract

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W131

Equity considers that time is not lsquoof the essence of a contractrsquo that is a condition

except in the following circumstances

If payment is tendered and rejected the obligation to tenderpayment is discharged but the obligation to pay remains

Agreement

bull If the contract is wholly executory there is no problemwith consideration as both parties surrender their rightsunder the contract

bull If the contract is partly executed one party hascompleted his performance under the contract ndash to makethe agreement binding there must either be a deed (alsquoreleasersquo) or new consideration (lsquoaccord and satisfactionrsquo)or the doctrine of equitable estoppel or waiver mustapply See Chapter 2

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132

A term in the originalcontract for example acondition subsequent

or method for terminating the contract

A new agreement

A contract may be discharged by

As contracts are created by agreement so they may be discharged by agreement Consideration is

necessary to make the agreement binding

Breach

See classification of terms p 45 above

There are special problems where a party repudiates acontract under a wrong assumption that he has a right to doso

bull In Federal Commerce and Navigation v Molena Alpha (1979)the owners of a ship gave instructions not to issue bills oflading without which the charterers could not operatethe ship They wrongly believed that they had the rightto do so Held ndash their conduct constituted a wrongfulrepudiation of the contract which allowed the other partyto treat the contract as discharged

bull In Woodar Investment Development v Wimpey Construction(1980) the purchaser wrongly repudiated a contract forthe sale of land wrongly believing that he had a right todo so Held ndash a wrongful repudiation made in good faithwould not necessarily allow the other party to treat thecontract as discharged

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W133

A breach of condition

A fundamentalbreach of an

innominate term

A breach does not of itself discharge a contract It may allowthe other other party an option to treat the contract as discharged that is to terminate the contract if the breach is sufficiently serious that is if it is

A repudiatory breach

It is difficult to distinguish these decisions The general viewis that the approach in Molena Alpha is to be preferred so thateven a good faith lsquorepudiatoryrsquo response to a non-repudiatory breach will amount to a breach of contract

Effect of treating the contract as discharged

The obligation of both parties to perform (that is theprimary obligation) is discharged from the date of thetermination

However the party in breach may have to pay damages forany losses past and future caused to the innocent party as aresult of the breach (Lombard North Central v Butterworth ndashChapter 3)

The discharge does not operate retrospectively In PhotoProduction v Securicor (1980) Securicor was able to rely on anexclusion clause in the contract despite the fact that thecontract had been discharged

Note ndash it was held by the House of Lords in Vitol v Norelf(1996) that the defendantrsquos failure to perform his ownobligation could constitute acceptance of the plaintiffrsquos repudiation

The decision to terminate cannot be retracted

Anticipatory breach of contract

CA

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134

Explicit

Hochter v La Tour (1853) atravel courier announced

in advance that he would not be fulfilling

his contract

Implicit

Frost v Knight (1872) aparty disabled himself

from carrying out apromise to marry by

marrying another person

Effect of anticipatory breach

bull The other party may sue for damages immediately Hedoes not have to await the date of performance (Hochsterv De La Tour (1853))

bull The innocent party may refuse to accept the repudiationHe may affirm the contract and continue to perform hisobligations under the contract In White and Carter Ltd vMcGregor (1962) the defendants cancelled a contractshortly after it had been signed The plaintiffs refused toaccept the cancellation carried on with the contract andthen sued for the full contract price Held ndash the plaintiffswere entitled to succeed a repudiation does notautomatically bring a contract to an end the innocentparty has an option either to affirm the contract or toterminate the contract unless

the innocent party needs the co-operation of the other party In Hounslow BC v Twickenham GardenDevelopments Ltd (1971) Hounslow council cancelled acontract to lay out a park It was held that thedefendants could not rely on White and Carter vMcGregor because the work was to be performed oncouncil property

the innocent party had no legitimate interestfinancial or otherwise in performing the contractrather than in claiming damages In The AlaskanTrader (1984) a ship chartered to the defendantsrequired extensive repairs at the end of the first yearwhereupon the defendants repudiated the contractThe plaintiffs however refused to accept therepudiation repaired the ship and kept it fullycrewed ready for the defendantrsquos use Held ndash theplaintiffs had no special interest in keeping the

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W135

contract alive They should have accepted therepudiation and sued for damages

Where a party has affirmed the contract

bull He will have to pay damages for any subsequent breachwhich he commits he cannot argue that the other partyrsquosanticipatory breach excuses him (Fercometal SARL vMediterranean Shipping Co (1988))

bull There is a danger that a supervening event may frustratethe contract and deprive the innocent party of his right todamages as in Avery v Bowden (1855) (below)

Frustration

The doctrine has been kept to narrow limits

The basis of the doctrine and the tests

bull Until the 19th century the courts adhered to a theory oflsquoabsolute contractsrsquo as in Paradine v Jane (1647) It wassaid that if the parties wished to evade liability because of

CA

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136

By the courts whohave insisted that the

supervening event mustdestroy a fundamental

assumption

By business persons who have lsquodrafted outrsquo

the doctrine byforce majeure clauses

Frustration occurs where it is established that due to a subsequent change in circumstances the

contract has become impossible to perform or it hasbeen deprived of its commercial purpose

some supervening event then they should provide forthis in the contract However in Taylor v Caldwell (1863)the courts relented and held that if the contract becameimpossible to perform due to some extraneous cause forwhich neither party was responsible then the contactwould be discharged

bull The modern test was enunciated by Lord Simon inNational Carriers v Panalpina (1981) frustration ariseswhere lsquothere supervenes an event (without default ofeither party and for which the contract makes nosufficient provision) which so significantly changes thenature (not merely the expense or onerousness) of theoutstanding contractual rights andor obligations fromwhat the parties could reasonably have contemplated atthe time of its execution that it would be unjust to holdthem to the literal sense of its stipulations in the newcircumstancesrsquo

bull In Davis Contractors v Fareham UDC (1956) Lord Radcliffstated that frustration occurs where to requireperformance would be to render the obligationsomething lsquoradically differentrsquo from what wasundertaken by the contract

Circumstances in which frustration may occur

bull The subject matter of the contract has been destroyed oris otherwise unavailable

In Taylor v Caldwell (1863) a contract to hire a music hallwas held to be frustrated by the destruction of the musichall by fire (see also s 7 of the Sale of Goods Act 1979)

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W137

Note ndash it is not the circumstances but the nature ofthe obligation which must have changed

bull But the unavailable or destroyed object must have beenintended by both parties to be the subject of the contract

In Blackburn Bobbin Co v Allen (1918) the contract was forthe sale of lsquobirch timberrsquo which the seller intended toobtain from Finland Held ndash the contract was not frustratedwhen it became impossible to obtain timber from FinlandThe subject matter of the contract was birch timber notFinnish birch timber

bull Death or incapacity of a party to a contract of personalservice or a contract where the personality of one partyis important

In Condor v The Baron Knights (1966) a contract between apop group and its drummer was held frustrated whenthe drummer became ill and was unable to fulfill theterms of the contract A claim for unfair dismissal can alsosometimes be defeated by the defence of frustrationwhere an employee has become permanentlyincapacitated or imprisoned for a long period

bull The contract has become illegal to perform eitherbecause of a change in the law or the outbreak of war

In Avery v Bowden (1855) a contract to supply goods toRussia was frustrated when the Crimean War broke out Ithad become an illegal contract ndash trading with the enemy

Note the outbreak of war between two foreign States willnot render a contract illegal but may make it impossibleto perform In Finelvet v Vinava Shipping Co (1983) acontract to deliver goods to Basra did not become illegalon the outbreak of the Iraq-Iran war but was frustratedwhen it became too dangerous to sail to Basra

bull The commercial purpose of the contract has failedCA

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138

Establishing whether a contract is impossible or illegal toperform is relatively straightforward but it is more difficultto decide whether the commercial purpose of the contracthas failed

It may happen in the following circumstances

bull Failure of an event upon which the contract was based

In Krell v Henry (1903) the court held that a contract tohire a room overlooking the proposed route of thecoronation procession was frustrated when thecoronation was postponed The purpose of the contractwas to view the coronation not merely to hire a room Ithas been argued that the fact that the hire of the roomwas a lsquoone offrsquo transaction was important The judge inthe case contrasted it with the hire of a taxi to take theclient to Epsom on Derby day This would be a normalcontractual transaction for the taxi driver thecancellation of the Derby would not therefore frustratethe contract

In the case of Herne Bay Steamboat Co v Hutton (1903) thecourt refused to hold that a contract to hire a boat to seethe king review the fleet was frustrated when the reviewwas cancelled the fleet was still there and could beviewed ndash there was therefore no overall failure of thepurpose of the contract

bull Government interference or delay

In Metropolitan Water Board v Dick Kerr (1918) a contracthad been formed in 1913 to build a reservoir within sixyears In 1915 the government ordered the work to bestopped and the plant sold Held ndash the contract wasfrustrated C

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139

In Jackson v Union Marine Insurance Co (1874) a ship waschartered in November to proceed with all dispatch toNewport The ship did not reach Newport until thefollowing August Held ndash the contract was frustratedsince the ship was not available for the voyage for whichshe had been chartered

In The Nema (1982) a charter party was frustrated when along strike closed the port at which the ship was due toload so that of the six or seven voyages contracted to bemade between April and December only two could bemade

Similar difficult problems arise in the case of contracts ofemployment (illness or imprisonment) and leases

It has been suggested that where the contract is of a fixedduration and the unavailability of the subject matter isonly temporary the court should consider the ratio of thelikely interruption to the duration of the contract

LeasesIt had long been thought that the doctrine of frustration didnot apply to leases (see Paradine v Jane (1647) and CricklewoodInvestments v Leightonrsquos Investments (1945))

bull However in National Carriers v Panalpina (1981) theHouse of Lords declared that in principle a lease couldbe frustrated In that case a street which gave the onlyaccess to a warehouse was closed for 18 months Thelease for the warehouse was for 10 years Held ndash the leasewas not frustrated

bull The House of Lords did state however that where therewas only one purpose for the property leased and thispurpose became impossible then the lease would be

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140

frustrated for example a short term holiday lease It isstill true that it will be very rare for a lease to befrustrated

Limits to the doctrine of frustration

It will not be applied

bull In Davis Contractors LTD v Fareham UDC (1956) thecontractors had agreed to build a council estate at a fixedprice Due to strikes bad weather and shortages oflabour and materials there were considerable delays andthe houses could only be built at a substantial loss Heldndash the contract was not frustrated

bull See also the Suez cases where the courts refused to holdshipping contracts frustrated as a result of the closing ofthe Suez Canal unless the contracts specified a routethrough the canal

But a force majeure clause will be interpreted narrowly asin Metropolitan Water Board v Dick Kerr amp Co (1918) wherea reference to lsquodelaysrsquo was held to refer only to ordinarydelays and not to a delay caused by government decree

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W141

lsquoDoctrine must be kept within narrow limitsrsquo

on the grounds of inconvenience increase in expense loss of profit

Where there is an express provision in thecontract covering the intervening event

(that is a force majeure clause)

A force majeure clause will not in any case be applied to covertrading with an enemy

A contract will not be frustrated if the event makingperformance impossible was the voluntary action of oneof the parties If the party concerned had a choice open tohim and chose to act in such a way as to makeperformance impossible then the frustration will be self-induced and the court will refuse to treat the contract asdischarged

bull In The Superservant Two (1990) one of two barges ownedby the defendants and used to transport oil rigs wassunk They were therefore unable to fulfill their contractto transport an oil rig belonging to the plaintiff as theirother barge (Superservant One) was already allocated toother contracts The court held that the contract was notfrustrated The plaintiffs had another barge available butchose not to allocate it to the contract with the plaintiffs

This case illustrates both the courts reluctance to applythe doctrine of frustration and the advantage of using aforce majeure clause

If by reason of special knowledge the event wasforeseeable by one party then he cannot claimfrustration

bull In Amalgamated Investment and Property Co v John Walker ampSons Ltd (1976) the possibility that a building could belisted was foreseen by the plaintiff who had inquiredabout the matter beforehand A failure to obtain planning

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142

Where the frustration is self-induced

Where the event was foreseeable

permission was also foreseeable and was a normal riskfor property developers The contract was therefore notfrustrated

The effect of frustration

This rule could be very unfair in its operation as in Chandlerv Webster (1904) where the hirer had to pay all the sum duefor the hire of a room to view the coronation despite thecourt holding the contract frustrated by the cancellation ofthe coronation

This rule however would only apply in the event of a totalfailure of consideration and could itself in any case causehardship if the other party had expended a considerableamount of money in connection with the contract

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W143

At common law the loss lay where it fell that isthe date of the frustrating event was all important

Anything paid or payable before that datewould have to be paid Anything payable

after that date need not be paid

In the Fibrosa case (1943) the House of Lordsdid move away from this rule and held that

where there was a total failure of considerationthen any money paid or payable in advance

would have to be returned

Note these two sections are to be applied independently Theexpenses in s 1(2) can only be recovered from lsquosums paid orpayable before the frustrating eventrsquo

Section 1(3) was applied in BP Exploration v Hunt (1982)where it was held that the court must

bull identify and value the lsquobenefit obtainedrsquo

bull assess the lsquojust sumrsquo which it is proper to award

The court also stated that

bull the section was designed to prevent unjust enrichmentnot to apportion the loss or to place the parties in theposition they would be in had the contract beenperformed or to restore them to their pre-contractposition

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144

The Law Reform (Frustrated Contracts) Act 1943was therefore passed to remedy these deficiencies

It provided

s 1(2) ndash all sums paid or payable before the frustratingevent shall be recoverable or cease to be payable but

the court has a discretionary power to allow the payeeto set off against the sum so paid expenses he has

incurred before the frustrating event

s 1(3) ndash where one party has obtained a valuablebenefit before the time of discharge the other

party may recover from him such sums asthe court considers just

bull in assessing the valuable benefit the section requiredreference to the end benefit received by a party not thecost of performance In assessing the end benefit theeffect of the frustrating event had to be taken intoaccount

bull the cost of performance can be taken into account inassessing the just sum

In BP v Hunt (1982) BP were to do the exploration andprovide the necessary finance on an oil concession ownedby Mr Hunt in Libya They were also to provide certainlsquofarm-inrsquo payments in cash and oil In return they were toget a half-share in the concession and 5 of theirexpenditure in reimbursement oil A large field wasdiscovered the oil began to flow then in 1971 the LibyanGovernment nationalised the field

The court held

bull the valuable benefit to Hunt was the net amount of oilreceived plus the compensation payable by the LibyanGovernment which amounted to pound85000000

bull the just sum would cover the work done by BP less thevalue of the reimbursement oil already received Thiswas assessed at pound34000000 As the valuable benefitexceeded the just sum BP recovered their expenses infull The position would have been very differenthowever if the field had been nationalised at an earlierstage and no compensation had been paid

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W145

The Law Reform (Frustrated Contracts) Act 1943 does notapply to

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146

Charter parties Contracts of insurance

Contracts for the sale of specificgoods which have perished

CO

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W147

9 Remedies for breach of contract and restitution

not

If no loss has been suffered then nominal damages onlywill be awarded

bull In Surrey CC v Bredero Homes (1993) the court refused toaward damages against a defendant who had notcomplied with planning permission as there was no lossto the council

Unliquidated damages (that is damages assessed by

the court)

The purpose of unliquidated damages is to compensate the claimant for the loss he has

suffered as a result of a breach

Unliquidateddamages

Equitableremedies

Liquidateddamages

Restitutionor

quasi-contract

to punish the defendantPunitive damages are

not awarded for breachof contract

generally to recoup again made by the

defendant (but cf AG vBlake (2000) below)

bull However in Chaplin v Hicks (1911) damages wereawarded for the loss of a chance to win a competitionalthough there was no certainty that the plaintiff wouldhave been one of the winners

Reliance damages rather than expectation damages may beappropriate where the benefits which would have beenobtained by successful performance are difficult to assess asin

bull McRae v Commonwealth Disposals Commission (1951)where the plaintiff recovered the expenses incurred insearching for a wreck which did not exist

bull Anglia Television v Reed (1972) where the leading actor ina film project withdrew at the last moment The plaintiffswere able to recover all their wasted expenditure on theprogramme including even those incurred before thecontract had been signed

CA

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148

Methods of compensating the claimant

Expectation that is loss ofbargain is the traditional

basis for assessing damagesin contract It aims to putthe claimant in the sameposition as far as money

can do it as if the contracthad been performed

Reliance that is out of pocketor wasted expenditure This

is the normal way ofassessing damages in tort

but can be used in contractas illustrated below

bull But cf Regalian Properties v London Dockland Development(1995) where expenses incurred while negotiations wereexpressly lsquosubject to contractrsquo were not recoverable

It has been held that a claimant may freely choose betweenexpectation and reliance damages unless the difficulty inidentifying profits is because he has made a lsquobad bargainrsquo

bull In C and P Haulage v Middleton (1983) the plaintiff hired agarage for six months on the basis that anyimprovements would become the property of thelandlord He was ejected in breach of contract and suedfor the cost of the improvements Held ndash expenditurewould have been wasted even if the contract had beenperformed

bull It is for the defendant to prove that the claimant hadmade a bad bargain as in CCC Films v Impact QuadrantFilms (1985) where the defendant failed to prove that theplaintiff would not have made a profit from distributingthe films had they been delivered in accordance with thecontract

bull In normal circumstances the claimant will ask fordamages on an expectation basis as this is moreprofitable for him

Restitutionary measure

In Attorney General v Blake (2000) the House of Lords for thefirst time recognised that in some circumstances alsquorestitutionaryrsquo measure of damages requiring thedefendant to pay over the profit made as a result of thebreach of contract may be appropriate The case was anunusual one involving a book published by a member ofthe security services who had spied for Russia The House ofLords regarded the defendant as having been under

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W149

something lsquoakin to a fiduciary obligationrsquo and it is not yetclear how far the principle adopted in this case is likely to beapplied in other situations

Contributory negligence

This is only relevant where the liability in contract isidentical with the liability on tort that is the breach is of acontractual duty to take care (Barclays Bank v FaircloughBuilding (1994))

Quantification of damage

Where lsquoloss of bargainrsquo damages are claimed there are twopossible methods of quantification

The court will normally adopt the most appropriate (RuxleyElectronics and Construction v Forsyth (1995))

Prima facie rules

CA

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150

Sale of goods ndash difference in value

Failure to repair (lease) ndash difference in value

Building contracts ndash cost of cure

Difference in value Cost of cure

Failure to deliver goods

bull In Williams Bros v Agius (1914) the profit which wouldhave been earned on a resale was ignored damagesrepresented the difference between the contract price andthe market price (which was higher than the resale price)

Failure to accept delivery and pay

bull If the seller is a dealer in mass produced goods then thedamage to him will be the loss of profit on onetransaction The claimant had sold one item less than heotherwise would have during the year (Thomson vRobinson (1955))

bull However if the mass produced item is in short supplyand the number of sales is governed by supply not bydemand then there is no loss of profit and damageswould not be awarded (Charter v Sullivan (1957))

bull The damages revert to the difference between thecontract price and market price in the case of secondhand goods even if the seller is a dealer (Lazenby Garagesv Wright (1976))

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W151

The Sale of Goods Act 1979 states thatdamages will represent the difference between

the contract price and the market price

The Sale of Goods Act 1979 states that damages willagain represent the difference between the contract

price and the market price

Limitations on principle of expectation

Although the stated aim of the expectation basis of assessingdamages is to put the claimant in the position he would havebeen in had the contract been performed there are a numberof rules which militate against this result

Remoteness of damage

bull In Hadley v Baxendale (1854) a mill was closed because ofthe delay of a carrier in returning a mill shaft The courtheld that the carrier was not liable for damages for theclosure of the mill as he was not aware that the absenceof a mill shaft would lead to this conclusion

The following damages were said to be recoverable

those arising naturally out of the breach

those which because of special knowledge wouldhave been within the contemplation of the parties

bull In Victoria Laundry v Newman Industries (1949) the rulewas restated and based on knowledge The laundry wasable to recover damages for normal loss of profitC

AV

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S152

Damages cannot be recovered for losses that are tooremote The losses must be lsquowithin the reasonable

contemplationrsquo of the parties

Kind ofloss

CausationDuty of

mitigationRemotenessof damage

following a delay in the delivery of a boiler but not forspecially lucrative dyeing contracts they were offeredduring this time

Damages were said to be recoverable for losses whichwere within the reasonable contemplation of the partiesat the time of the contract either from

imputed knowledge or

actual knowledge

bull In The Heron II (1969) the House of Lords confirmed thata higher degree of foreseeability is required in contractthan in tort Damages were awarded to cover lossesarising from the late delivery of sugar to Basra Theparties must have been aware that the price of sugar inBasra might fluctuate For a loss not to be too remotethere must be

lsquoa real dangerrsquo

lsquoa serious possibilityrsquo

or the loss must be

lsquonot unlikelyrsquo

lsquoliable to resultrsquo

The difference between the tests of remoteness in contractand tort has been criticised but justified on the ground thata contracting party can protect himself against unusual risksby drawing them to the attention of the other party to thecontract

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W153

Application of remoteness rules

bull Imputed knowledge

Hadley v Baxendale (1854) Victoria Laundry v Newman Industries (1949)The Heron II (1967)

bull Actual knowledge

Defendantrsquos knowledge of special circumstances must beprecise This encourages contracting parties to discloseclearly any likely exceptional losses in advance

In Simpson v L amp NWR (1876) the defendant was liable forloss caused to the plaintiff by delivering goods toNewcastle Show Ground the day after the show had finished

In Horne v Midland Railway (1873) defendants were heldnot liable for exceptionally high profit lost by plaintiffthrough late delivery They knew that shoes would haveto be taken back if not delivered on 3 February but notthat the plaintiff would lose an exceptionally high profit

bull In Wroth v Tyler (1974) the defendant was liable for thefull difference between the contract price and the marketprice although the rise in the market price wasexceptional and could not have been foreseen

bull In Parsons (Livestock) Ltd v Uttley Ingham Co Ltd (1978) thedefendants who had supplied inadequately ventilatedhoppers for pig food were held liable for the loss of theplaintiffrsquos pigs even though the disease from which they

CA

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154

Note the test of remoteness determinesentitlement not quantum

died was not foreseeable It was enough that they couldhave contemplated any illness of the pigs (But cf VictoriaLaundry v Newman Industries (1849))

Lord Denning in this case argued that so far as physicaldamage was concerned (not loss of profit) all directlosses should be recoverable as in tort

Lord Scarman has also stated that it would be ridiculousif the amount of damages depended on whether anaction was framed in contract or tort A House of Lordsrsquodecision on these issues is awaited

It is sometimes disputed that the decisions since Hadley vBaxendale have not in any way clarified the rule

Types of loss recognised

This is the normal ground for the award of damages forbreach of contract

However damages for non-pecuniary loss will be awardedin specific cases for example

bull Pain and suffering consequent on physical injury

bull Physical inconvenience

In Watts v Morrow (1991) damages were awarded tocover the inconvenience of living in a house whilst it wasbeing repaired C

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155

Pecuniary loss

Non-pecuniary loss

bull Damage to commercial reputation

In Gibbons v Westminster Bank (1939) damages wereawarded to cover the losses caused by the wrongfulreferring of a cheque

Cf Malik v BCCI (1997) where the House of Lords heldthat compensation was payable for the stigma of havingworked for an organisation which had been run corruptly

bull Distress to claimant

Traditionally damages for injured feelings were notawarded for breach of contract Addis v Gramaphone Co(1909) This general principle has recently been confirmedby the House of Lords in Johnson v Unisys Ltd (2001)

However some limited exceptions to this rule have beenrecognised

Damages for disappointment were awarded againsta holiday company in Jarvis v Swan Tours (1973)where the holiday was not as described

In Hayes v Dodd (1990) the Court of Appealconfirmed that damages for distress are notrecoverable in normal commercial contracts butcould be recovered in contracts

CA

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156

to provide pleasure See Jarvis v Swan Tours Ltd

(1973)

to prevent distress Heywood v Wellers (1976) ndashsolicitorrsquos failure to obtain

an injunction

It has been suggested that damages for distress areparticularly appropriate in lsquoconsumer contractsrsquo

The duty of mitigation

In Payzu v Saunders (1919) the plaintiff had refused the offerof goods at below market price In Brace v Calder (1895) anemployee dismissed by a partnership turned down an offerof similar employment by one of the partners In both casesthe plaintiff was penalised for his failure to mitigate

bull He need not however take lsquounreasonablersquo steps inmitigation

In Pilkington v Wood (1953) it was stated that the plaintiffdid not need to embark on hazardous legal action inmitigation of his loss He should not take unreasonablesteps which would increase losses

bull The claimant cannot recover damages for losses he hasavoided

In British Westinghouse v Underground Electric Railways Co(1912) the plaintiff replaced a defective turbine with anew turbine which was so much more efficient that thesavings exceeded the losses on the defective turbineHeld ndash no loss ndash no damages

bull Note ndash the duty to mitigate does not arise until there hasbeen an actual breach of contract or an anticipatorybreach has been accepted by the other party (see Whiteand Carter v McGregor (above))

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W157

The claimant has a duty to take reasonablesteps to mitigate his loss

Causation (losses which the defendant did not cause)

bull The action of a third party may break the chain ofcausation if it is not foreseeable

In Lambert v Lewis (1981) a farmer continued to use acoupling even though he knew it was broken Held ndash thefarmer was responsible for losses caused by the failure ofthe coupling the manufacturer could not have foreseenthat he would continue to use it knowing it was faulty

bull However where the action is foreseeable the chain ofcausation will not be broken

In Stansbie v Troman (1948) a painter who in breach ofcontract had left a door unlocked was held liable forgoods taken by thieves since this was the kind of loss hehad undertaken to guard against by locking the doors

CA

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158

The breach must have caused the loss as well ashaving preceded the loss

Liquidated damages

Damages set by the parties themselves

The following guidelines for distinguishing between thetwo were suggested in Dunlop Pneumatic Tyre Ltd v NewGarage and Motor Co (1915)

bull a penalty ndash if the sum is extravagant and unconscionable

bull a penalty ndash if a larger sum is payable on the failure to paya smaller sum

bull a penalty ndash if the same sum is payable on major andminor breaches

bull it is no obstacle to the sum being liquidated damages thata precise pre-estimate is almost impossible

CO

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W159

Penalty clauses will not be enforced by the courtInstead the court will award unliquidated damages

The parties may stipulate that a certain sum mustbe paid on a breach of contract

If the sum represents a genuine pre-estimatethen it will be enforced by the court

as liquidated damages

If the sum is not genuine but is an attemptto frighten the other party into performing

then it is a penalty A penalty will not beenforced by the court

The rule against penalties does not apply to

bull Acceleration clauses

Here the whole of a debt becomes payable immediatelyif certain conditions are not observed

bull Deposits

Money paid otherwise than on a breach of contract

Alder v Moore (1961)

Bridge v Campbell Discount Co Ltd (1962)

bull clauses declaring a term to be a condition

Lombard North Central v Butterworth (1987)

Equitable remedies

Specific performance

Traditionally specific performance will only be awardedwhere damages are not an adequate remedy that is

CA

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160

An order of the court directing the defendant to fulfill his obligations under the contract

Specific performance Injunctions

All equitable remedies are discretionary

The following will be taken into account

bull Mutuality Negative ndash a minor cannot get it because it isnot available against a minor Positive ndash a vendor of landmay obtain it although damages would be an adequateremedy because it is also available to a purchaser of land

bull Supervision The need for constant supervisionprevented the appointment of a resident porter beingordered in Ryan v Mutual Tontine Association (1893) but inPosner v Scott Lewis (1986) a similar order was madebecause the terms of the contract were sufficientlyprecise

bull Impossibility ndash Watts v Spence (1976) ndash land belonged to athird party C

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161

Where damages are difficult to assessfor example annuities

Where there is no alternative remedy available(Beswick v Beswick (1968)) see above

Where the claimant cannot get a satisfactory substitute for example

contracts for the sale of land or contracts for the sale of goods which cannot be

obtained elsewhere for example antiquesvaluable paintings ndash unless bought as an

investment as in Cohen v Roche (1927)

bull Hardship ndash Patel v Ali (1984) ndash defendant would lose thehelp of supportive neighbours

bull Conduct of the claimant ndash Shell (UK) Ltd v Lostock Garages(1977) ndash Shellrsquos behaviour was unreasonable

bull Vagueness ndash Tito v Waddell (1977) ndash see above

bull Mistake ndash Webster v Cecil (1861) ndash see above

Special problems

bull Contracts of personal service

These are considered to involve personal relationshipsand are therefore not thought suitable for an order of specific performance

However such orders were exceptionally made in Hill vCA Parsons Ltd (1972) and Irani v Southampton AHA(1985) on the ground that in the very unusualcircumstances of those cases the mutual trust betweenthe employer and employee had not been destroyed

bull Building contracts

The courts are reluctant to enforce building contracts onthe grounds that damages are generally an adequateremedy the terms are often vague there are difficultieswith supervision

But it was held in Wolverhampton Corpn v Emmons (1901)that provided the terms were clear the problem ofsupervision would not be an absolute barrier

Injunctions

CA

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162

These are orders directing the defendant not to do a certain act

Types of injunction

Injunctions are also discretionary remedies and are subject to the similar constraints to orders of specific performance However an injunction will be granted toenforce a negative stipulation in a contract of employmentas long as this is not an indirect way of enforcing thecontract

bull Warner Bros v Nelson (1937)

bull cf Page One Records v Britton (1968)

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W163

Interim injunction

This is designed to regulatethe position of the parties

pending trial

Prohibitory injunction

This is an ordercommanding the

defendant not to dosomething

Mandatory injunction

This orders thedefendant to undosomething he had

agreed not to

A comparison of the remedies for misrepresentation

and for breach of contract

Setting aside contracts

CA

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164

DamagesDamages available as of right Normally assessedon expectation basis Losses must be within thecontemplation of the parties See above

Damages available in tort of deceit negligentstatements and under s 2(1) of the 1967 ActDamages assessed on reliance basis All lossesflowing directly from misrepresentation will becovered whether or not foreseeable in actions indeceit and under s 2(1) of the 1967 Act (Royscot vRogerson (1991)) Losses must be foreseeable inthe tort of negligence No right to damages forinnocent misrepresentation but may be awardedin lieu of rescission at the discretion of the court

Breach

Misrep

Termination or rescission for breach

Available only for breaches of conditionsfundamental breaches of innominate terms and repudiations

Contract discharged from time of breachdischarge not retrospective Innocent party canalso sue for damages (see Chapter 8)

Rescission

Available for all misrepresentations but atdiscretion of court and subject to certain barsContract cancelled prospectively and retrospectivelyparties returned to the position they were in beforethe contract was entered into (see Chapter 6)

Breach

Misrep

Exclusion clauses

See ss 3 6 7 of UCTA

All clauses must be reasonable

Restitution or quasi-contract (based on unjust

enrichment)

It covers

Money may be recovered

bull Where there is a total failure of consideration (see Fibrosacase (frustration))

In Rowland v Divall (1923) the plaintiff had bought a carwhich turned out to be stolen property and which wasrecovered by the owner Despite the fact that the plaintiffhad had the use of the car for a considerable time and ithad fallen in value during this time the plaintiff was ableto recover the full purchase price of the car from thedefendant There had been a total failure of consideration

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Breach

Misrep

recovery of money payment for work done

Restitution may be available where parties arenot in a contractual relationship

It is based on the principle of unjust enrichment it allows the injured party to

recover money paid or the value of benefitsconferred where it would be unjust to allow the

other party to retain the benefit

bull Money paid under a mistake of fact is recoverableprovided the mistake is as to a fact which if true wouldhave legally or morally obliged the claimant to pay themoney or is sufficiently serious to require payment forexample

In Kleinwort Benson Ltd v Lincoln City Council (1998) theHouse of Lords held that in certain circumstances moneypaid under a mistake of law could also be recovered if itwould be unjust to allow the recipient to retain the money(See also Nurdin and Peacock plc v DB Ramsden amp Co Ltd(1999))

bull Money paid under a void contract

For example contracts void

bull In Westdeutche Landesbank v Islington LBC (1994) thecouncil had entered into a rate swapping arrangementwith the bank under which the bank had paid pound2500000to the council in advance The council had paidapproximately pound1200000 to the bank by instalment andargued that since there was not a total failure ofconsideration it should not have to pay the bank theremaining pound1300000 The Court of Appeal held that theprinciple upon which money must be repaid under a

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166

because ultra vires

as against public policy

for a commonmistake

Mistaken payments underinsurance policies

Mistaken payments intoa bank account

void contract is different from that on a total failure ofconsideration Recovery of money under a void contractis allowed if there is no legal basis for such a payment

bull Note ndash money paid under contract which is void forillegality cannot be recovered unless the action can beframed without relying on the contract

Parkinson v Royal College of Ambulance (1925)Bowmakers v Barnet Instruments (1945) Tinsley v Milligan (1993)

bull Note ndash recovery under these heads will not be possible if

In Lipkin Gorman v Karpnale Ltd (1992) a partner in a firmof solicitors was a compulsive gambler who regularlygambled at a casino run by the defendants In order tofinance his gambling he had drawn cheques on clientaccounts where he was the sole signatory He had spentat least pound154000 of this money at the defendantrsquos casinoand the plaintiff sued for the return of the money as ithad been received under a contract which was void(declared void by statute) Held ndash where the true ownerof stolen money sought to recover it from an innocentthird party the recipient was under an obligation toreturn it where he had given no consideration for itunless he could show that he had altered his position ingood faith In this case the plaintiff was able to recoverthe pound154000 less the winnings paid to the partner The

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W167

the payer hadintended the

payee tobenefit in any

event

there is goodconsiderationfor exampledischarge of

a debt

the payee haschanged

position as aresult of the

payment

casino had altered their position on each gamble in thatthey had become vulnerable to a loss

However in South Tyneside Metropolitan Borough Council vSvenska International (1994) the House of Lords allowedthe council to recover approximately pound200000 it had paidto a bank under a rate swap agreement which had beendeclared ultra vires and void The court rejected thebankrsquos claim that it had changed its position in that it hadentered into financial arrangements with otherorganisations in order to hedge its losses

bull Money paid to a third party for the benefit of thedefendant provided the claimant was not acting as avolunteer (for example a mother paying off a sonrsquos debt)but was acting under some constraint

In Macclesfield Corpn v Great Central Railway (1911) theplaintiffs carried out repairs to a bridge which thedefendants were legally obliged (but had refused) tomaintain They were regarded as purely volunteers andcould not therefore recover the money However in Exallv Partridge (1799) the plaintiff paid off arrears of rentowed by the defendant in order to avoid seizure of theplaintiffrsquos carriage which was kept on the defendantrsquospremises The plaintiff was acting under a constraint andcould therefore recover the money

Payment for work done

bull Where the claimant has prevented performance of thecontract (see Plancheacute v Colburn (1831))

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168

Here the claimant is seeking compensationon a quantum meruit basis (cf s 1(3) of the

Law Reform (Frustrated Contracts) Act 1943)

bull Where work has been carried out under a void contractIn Craven Ellis v Canons Ltd (1936) the plaintiff hadcarried out a great deal of work on behalf of a companyon the understanding that he had been appointedmanaging director It was later discovered that he hadnot properly been appointed managing director Thecourt held that he should be paid on a quantum meruitbasis for the work he had done

bull Where agreement has not been reached and

the work was requested by the defendants InWilliam Lacey v Davis (1957) the plaintiffs hadsubmitted the lowest tender for a building contractand had been led to believe that they would beawarded it At the defendantsrsquo request they thenprepared various plans and estimates Thedefendants then decided not to proceed The courtordered the defendants to pay a reasonable sum on aquantum meruit basis for the work that had beendone on analogy with Craven Ellis v Cannons or

the work had been freely accepted In British SteelCorpn v Cleveland Bridge Engineering Co (1984) a letterof intent was issued by the defendants indicating thatthey intended to enter into a contract with theplaintiffs for the construction and delivery of cast-steel lsquonodesrsquo However it proved impossible to reachagreement on a number of major items Despite this anumber of lsquonodesrsquo were eventually constructed andaccepted by the defendants It was held by the courtthat the defendants should pay for the nodes they hadaccepted

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W169

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W171

10 Privity of contract

Introduction

The traditional approach to the doctrine of privity is that

Privity of contract is closely associated with the rule thatconsideration must move from the promisee See Dunlop vSelfridge (above)

Only a party to a contractcan sue on a contract

Only a party to a contractcan be sued on a contract

In Tweddle v Atkinson(1861) the plaintiff had

married Mr Guyrsquosdaughter The plaintiffrsquosfather and Mr Guy had

agreed together that theywould each pay a sum ofmoney to the plaintiff Mr

Guy died before themoney was paid and the

plaintiff sued hisexecutors The action wasdismissed ndash the plaintiffwas not a party to thecontract which wasmade between the

two fathersSee also

Beswick v Beswick (1968)

In Dunlop v Selfridge(1915) Dew amp Co at the

instigation of Dunlophad placed a minimum

resale price in theircontract with Selfridge

Held ndash Dunlop could notsue Selfridge for breach of contract they were

not parties to the contract nor had they

given consideration to Selfridge

Matters relevant to the doctrine of privity

One part of the traditional approach that is that relating toconferring benefits has recently been significantly changedby legislation which is discussed below In addition thereare a number of situations which fall outside the scope ofthe doctrine

Matters outside the doctrine

It has been argued that it is only because English law hasdeclared many transactions not to be subject to the doctrineof privity that the doctrine itself has survived so long

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172

AssignmentRights can be assignedprovided that certain

formalities are followed

AgencyA principal can sue and

be sued on contractsmade by an agent

on his behalf

TrustsWhere a trust has beencreated the beneficiaryunder the trust can suethe trustees even if hewas not a party to the

original agreement

Multi-partite agreementsIn Clarke v Dunraven(1897) entrants in a

yacht race were allowedto sue each other TheCompanies Act 1985allows shareholders

to sue each other

Land law recognises a number of exceptions

Statutory exceptions

bull Price maintenance agreements

bull Various insurance contracts

bull For example Married Womanrsquos Property Act

bull Law of Property Act 1925 s 56

bull Negotiable instruments

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W173

Collateral contractsIn limited cases the court will find a separate

(collateral) contract between the promisor and the third party

(Shanklin Pier v Detel Products (1951))

LeasesThe benefits and

obligations under a lease can be transferred

to third parties

Law of Property Act 1925 s 56

See below

Restrictive covenantsThese can bind a third party under the rule in

Tulk v Moxhay (1848)

Conferring benefits on a third party

Statutory intervention

The common law rule preventing a third party fromenforcing a contract was much criticised and has now beenreformed by legislation that is the Contracts (Rights ofThird Parties) Act 1999 based on recommendations from theLaw Commission

Main effectA third party will be able to enforce a contractual provisionpurporting to confer a benefit on him or her if both of twoconditions are satisfied (s 1)

Right to vary the contract

Unless they have provided otherwise the contractingparties will lose the right to vary or cancel the provisionbenefiting the third party if (s 2)

bull the third party has communicated his assent or

bull the third party has relied on the term and the promisor isaware of this or

bull the third party has relied on the term and the promisorcould be reasonably expected to have foreseen this

on its proper constructionthe contract is intended to

give the third party a legallyenforceable right

the contract expresslyprovides that the third party

may benefit

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174

DefencesThe promisor can raise against the third party any defencesthat could have been raised against the promisee (forexample misrepresentation duress) (s 3)

The promisor can also rely on defences set-offs orcounterclaims arising from prior dealings with the thirdparty

ExceptionsThere cannot be double liability that is as against thepromisee and the third party (s 5)

Some contracts are excluded from the Act (s 6)

bull contracts on a bill of exchange or promissory note

bull terms of a contract of employment as against anemployee

bull contracts for the carriage of goods by sea or if subject toan international transport convention by road rail or air

The exception for carriage of goods by sea does not apply toreliance on an exclusion clause (as in The Eurymedon (1975)for example)

Note also that the main contracting parties are in control ndashthey can decide that the provisions of the new Act shouldnot apply and there will be nothing that the third party cando about it

The Act does not affect the other part of the privity doctrinendash relating to the imposition of obligations on third parties ndashwhich remains governed by the common law

CO

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W175

The common law approach

The common law developed a number of devices to allow athird party to receive the benefit of contract by

These devices will be of much less importance now that theContracts (Rights of Third Parties) Act 1999 is in force Theymay still be used however particularly in situations wherefor one reason or another the 1999 Act does not apply

Attempts to allow the third party to sue

bull Attempts to extend the use of lsquotrustsrsquo

In Walfordrsquos case (1919) under a charterparty theship owner promised the charterer to pay a broker acommission Held ndash the charterer was trustee of thispromise for the broker who could thus enforce itagainst the ship owner

However in Re Schebsman (1944) a contract betweenSchebsman and X Ltd that in certain circumstanceshis wife and daughter should be paid a lump sumwas held not to create a trust

The trust as a device to outflank privity was limited bythe courts presumably because of concern that theirrevocable nature of the trust may prevent thecontracting parties from changing their minds Thecourts no longer go out of their way to find that theparties intended to create a trust

CA

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176

Allowing the thirdparty to sue

Allowing the promiseeto sue on behalf of the

third party

bull Lord Denning launched a campaign against privity andargued that s 56 of the Law of Property Act 1925 intendedto destroy doctrine altogether This was finally rejected bythe House of Lords in Beswick v Beswick (1968) theyacknowledged that the wording was wide enough tosupport Lord Denningrsquos view but insisted neverthelessthat it must be restricted to contracts concerning land asthe purpose of the Act was to consolidate the law relatingto real property

bull Agency

Agency has been used to allow a third party to takeadvantage of an exclusion clause in a contract to whichhe was not a party

The House of Lords refused to allow stevedores torely on an exclusion clause in a contract between thecarriers and the cargo owner in Scruttons v MidlandSilicones (1962) on the basis that only a party to thecontract could claim the benefit of the contract that isthe exclusion clause

However in The Eurymedon (1975) the Privy Councilon similar facts held that the carriers had negotiateda second contract (a collateral contract) as agents ofthe stevedores and the stevedores could claim thebenefit of the exclusion clause in this contract

But in Southern Water Authority v Carey (1985) sub-contractors sought to rely on a limitation of liabilityclause in a main contract Held ndash they must havespecific authority to negotiate on behalf of a thirdparty before this device could work

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W177

In Norwich City Council v Harvey (1989) instead ofusing an exclusion clause the contract placed the riskof loss or damage by fire on the owner and thisprotected both main contractor and sub-contractor

Attempts to allow the promisee to enforce the contract onbehalf of the third party

bull Specific performance

In Beswick v Beswick (1968) Peter Beswick had transferredhis business to his nephew in return for his nephewrsquospromise to pay his uncle a pension and after his deathan annuity to his widow The nephew paid his uncle thepension but only one payment of the annuity was madeThe widow as administratrix of her husbandrsquos estatesuccessfully sued her nephew for specific performance ofthe contract to pay the annuity although the House ofLords implied that she would not have succeeded if shehad been suing in her own right

bull Injunction

Similarly an injunction may be awarded to restrain abreach of a negative promise on a suit brought by thepromisee for example A promised B not to compete withC or by a stay of proceedings

In Snelling v Snelling Ltd (1973) three brothers lent moneyto a family company and agreed not to reclaim themoney for a certain period A stay of proceedings wasgranted to one of the brothers to stop another brotherfrom breaking his promise and suing the company for thereturn of his money

CA

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178

bull Damages

Damages to cover the disappointment of a third partywas sanctioned by Lord Denning in Jackson v HorizonHolidays Ltd (1975) where the plaintiff entered into acontract with a holiday firm for a holiday for his familyand himself in Ceylon The holiday was a disaster Theplaintiff recovered damages for pound500 for lsquomental stressrsquoOn appeal the court confirmed the amount on theground that witnessing the distress of his family hadincreased the plaintiffrsquos own distress Lord Denninghowever stated that the sum was excessive for theplaintiffrsquos own distress but upheld the award on theground that the plaintiff had made the contract on behalfof himself and of his wife and children and that he couldrecover in respect of their loss as well as their own

This statement by Lord Denning was disapproved by theHouse of Lords in Woodar Investment Development Ltd vWimpey Construction (UK) Ltd (1980) They stated thatdamages should not generally be recovered on behalf ofa third party

Lord Wilberforce however did suggest that there was aspecial category of contracts which called for specialtreatment That is where one party contracted for abenefit to be shared equally between a group forexample family holidays ordering meals in restaurantsfor a party hiring taxis for a group The decision inJackson could therefore be supported on this ground Afurther exception was identified by the House of Lords inLinden Gardens Trust v Lenesta Sludge Disposals Ltd (1993)where in a construction contract the original propertyowner may be able to sue the contractor for damagesresulting from defects in the work even though theproperty has been transferred to a third party The

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W179

damages would be held in trust for the third party Thisexception was again confirmed by the House of Lords inAlfred McAlpine Construction Ltd v Panatown Ltd (2000) inorder to avoid the situation where otherwise no onewould be able to sue the contractor although on the factsthe exception did not apply (because a separatearrangement had been made under which the contractorwas directly liable to the third party)

Attempts to impose obligations on third parties

bull Restrictive covenants inserted into a contract for the saleof land may bind subsequent purchasers provided

they are negative in nature the subsequent purchaser has notice of the covenants

the person claiming the benefit has land capable ofbenefiting from its enforcement (Tulk v Moxhay (1848))

bull The courts extended the rule in Tulk v Moxhay to personalproperty for example a ship in The Strathcona (1926)where the plaintiffs had chartered The Strathcona forcertain months each year The ship was sold to thedefendant who refused to allow the plaintiffs to use theship The plaintiffs sought an injunction on the groundthat the doctrine in Tulk v Moxhay should be extendedfrom land to ships The court granted an injunction

This decision was criticised in Port Line Ltd v Ben Line Ltd(1958) where a ship chartered to the plaintiffs was sold tothe defendants The ship was requisitioned during theSuez war and compensation was paid to the defendantsThis compensation was claimed by the plaintiffs Held ndasheven if The Strathcona case was rightly decided it couldC

AV

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DIS

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S180

not be applied in this case as (a) the defendants were notin breach of any duty and (b) the plaintiffs had notsought an injunction but financial compensation whichwas outside Tulk v Moxhay

The decision in The Strathcona has been widely criticisedbecause

a contract of hire creates personal not proprietaryrights in the hired object

the retention of land which can benefit from thecovenant is a necessary condition of the doctrine inTulk v Moxhay

bull However in Swiss Bank Corpn v Lloyds Bank (1979)Browne-Wilkinson J considered that the decision in TheStrathcona was correct He suggested however that thetort of inducing a breach of contract or knowinglyinterfering with a contract would be a more suitable basisfor the decision than Tulk v Moxhay He stated that in hisjudgment a person proposing to deal with property insuch a way as to cause a breach of a contract affecting thatproperty will be restrained by injunction from doing so ifwhen he acquired that property he had actualknowledge of the contract

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• Book Cover
• Title
• Copyright
• Contents
• 1 Agreement
• 2 Consideration and intention
• 3 Contents of a contract
• 4 Exemption (exclusion or
• 5 Vitiating elements which render
• 6 Mistake
• 7 Illegality and capacity
• 8 Discharge
• 9 Remedies for breach of contract
• 10 Privity of contract

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W1

1 Agreement

The traditional view that an agreement requires theidentification of a valid offer and a valid acceptance of thatoffer has been challenged in recent years by

bull Lord Denning in Gibson v Manchester City Council (1979)and Butler Machine Tool Co Ltd v Ex-Cell-O Corpn Ltd(1979) where he stated that providing the parties wereagreed on all material points then there was no need forthe traditional analysis

bull Lord Justice Steyn (obiter) in Trentham Ltd v Archital Luxfer(1993) where he stated that a strict analysis of offer andacceptance was not necessary in an executed contract ina commercial setting

The traditional view however was applied by the House ofLords in Gibson v Manchester City Council (1979)

Lord Diplock did recognise that there may be somelsquoexceptional contracts which do not fit easily into an analysisof offer and acceptancersquo for example a multi-partitecontract as in Clarke v Dunraven (1897) but he stressed thatin most contracts the lsquoconventionalrsquo approach of seeking anoffer and an acceptance of that offer must be adhered to

Offer Acceptance

In normal cases therefore a valid offer and a validacceptance of that offer must be identified

Unilateral and bilateral agreements

The distinction is important with regard to

bull advertisements

bull revocation of offers

bull communication of acceptance

Offer

A valid offer

bull must be communicated so that the offeree may accept orreject it

bull may be communicated in writing orally or by conduct

CA

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2

A bilateral agreementconsists of an exchange of

promises for example

Offer ndash I will sell my carfor pound500

Acceptance ndash I will giveyou pound500 for your car

In a unilateral agreementthe offeror alone makes a

promise The offer is accepted by doing what is

set out in the offer forexample

Offer ndash I will pay pound500 toanyone who returns my

lost kitten

Acceptance ndash The lost kitten is returned

A definite promise to be bound provided that certain specified terms are accepted

(There is no general requirement that an agreement must bein writing Important exceptions include contracts relatingto interests in land (Law of Property (MiscellaneousProvisions) Act 1989 s 2(1)) and consumer credit(Consumer Credit Act 1974))

bull May be made to a particular person to a group ofpersons or to the whole world In Carlill v Carbolic SmokeBall Co Ltd (1893) the defendants issued anadvertisement in which they offered to pay pound100 to anyperson who used their smoke balls and then succumbedto influenza Mrs Carlill saw the advertisement and usedthe smoke ball but then immediately caught influenzaShe sued for the pound100 The defendants argued that it wasnot possible in English law to make an offer to the wholeworld Held ndash an offer can be made to the whole world

bull Must be definite in substance (see certainty of terms p 16below)

bull Must be distinguished from an invitation to treat

Invitations to treat

In Gibson v Manchester City Council (1979) the councilrsquos letterstated lsquowe may be prepared to sell you rsquo The House ofLords did not regard this as an lsquoofferrsquo

A response to an invitation to treat does not lead to anagreement The response may however be an offer CO

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W3

An indication that the invitor is willing to enter into negotiations but is not prepared to be

bound immediately

The distinction between an offer and an invitation to treatdepends on the reasonable expectations of the parties

The courts have established that there is no intention to bebound in the following cases

Display of goods for sale

bull In a shop In Pharmaceutical Society of GB v Boots CashChemists Ltd (1952) the Court of Appeal held that in aself-service shop the sale takes place when the assistantaccepts the customerrsquos offer to buy the goods Thedisplay of goods is a mere invitation to treat

bull In a shop window In Fisher v Bell (1961) it was held thatthe display of a lsquoflick knifersquo in a shop window with aprice attached was an invitation to treat

However it was suggested by Lord Denning in Thorntonv Shoe Lane Parking (1971) (see below) that vendingmachines and automatic ticket machines are makingoffers since once the money has been inserted thetransaction is irrevocable

bull In an advertisement In Partridge v Crittenden (1968) anadvertisement which said lsquoBramblefinch cocks and hensndash 25srsquo was held to be an invitation to treat The courtpointed out that if the advertisement was treated as anoffer this could lead to many actions for breach ofcontract against the advertiser as his stock of birds waslimited He could not have intended the advertisement tobe an offer

However if the advertisement is unilateral in nature andthere is no problem of limited stock then it may be an offerSee Carlill v Carbolic Smoke Ball Co Ltd (above) Advertising areward may also be a unilateral offer

CA

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4

Auctions

bull An auctioneerrsquos request for bids in Payne v Cave (1789)was held to be an invitation to treat The offer was madeby the bidder (cf Sale of Goods Act 1979 s 57(2))

bull A notice of an auction In Harris v Nickerson (1873) it washeld that a notice that an auction would be held on acertain date was not an offer which then could beaccepted by turning up at the stated time It was astatement of intention

If the auction is stated to be lsquowithout reserversquo then there isstill no necessity to hold an auction but if the auction isheld lots must be sold to the highest bidder (Barry vHeathcote Ball (2001) confirming obiter dicta in Warlow vHarrison (1859)) The phrase lsquowithout reserversquo constitutes aunilateral offer which can be accepted by turning up andsubmitting the highest bid

Tenders

A request for tenders is normally an invitation to treat

bull However it was held in Harvela Ltd v Royal Trust ofCanada (1985) that if the request is made to specifiedparties and it is stated that the contract will be awardedto the lowest or the highest bidder then this will bebinding as an implied unilateral offer It was also held inthat case that a referential bid for example lsquothe highestother bid plus 10rsquo was not a valid bid

bull It was also held in Blackpool and Fylde Aero Club v BlackpoolBC (1990) that if the request is addressed to specifiedparties this amounts to a unilateral offer thatconsideration will be given to each tender which isproperly submitted C

ON

TR

AC

TL

AW

5

Subject to contract

The words lsquosubject to contractrsquo may be placed on top of a letter in order to indicate that an offer is not to be legallybinding (Walford v Miles (1992))

Termination of the offer

Revocation (termination by the offeror)

An offeror may withdraw an offer at any time before it hasbeen accepted

bull The revocation must be communicated to the offereebefore acceptance In Byrne v van Tienhoven (1880) thewithdrawal of an offer sent by telegram was held to becommunicated only when the telegram was received

bull Communication need not be made by the offerorcommunication through a third party will suffice InDickinson v Dodds (1876) the plaintiff was told by aneighbour that a property which had been offered to himhad been sold to a third party Held ndash the offer had beenvalidly revoked

bull An offer to keep an offer open for a certain length of timecan be withdrawn like any other unless an option hasbeen purchased for example consideration has beengiven to keep the offer open (Routledge v Grant (1828))

Unilateral offersbull Communication of the revocation is difficult if the offer

was to the whole world It was suggested however inthe American case of Shuey v USA (1875) that

CA

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6

Revocation Lapse Rejection

communication will be assumed if the offeror takesreasonable steps to inform the public for example placesan advertisement in the same newspaper

bull It now seems established that revocation cannot takeplace if the offeree has started to perform In Errington vErrington (1952) a father promised his daughter and son-in-law that if they paid off the mortgage on a house heowned he would give it to them The young couple dulypaid the instalments but the offer was withdrawnshortly before the whole debt was paid Held ndash there wasan implied term in the offer that it was irrevocable onceperformance had begun This is also supported by dictain Daulia v Four Millbank Nominees (1978)

Lapse (termination by operation of law)

An offer may lapse and thus be incapable of being acceptedbecause of

bull Passage of time

at the end of a stipulated time (if any) or

if no time is stipulated after a reasonable time InRamsgate Victoria Hotel Co v Montefiore (1866) anattempt to accept an offer to buy shares after fivemonths failed as the offer had clearly lapsed

bull Death

of the offeror if the offer was of a personal nature

of the offeree

bull Failure of a condition

an express condition or CO

NT

RA

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W7

an implied condition In Financings Ltd v Stimson(1962) it was held that an offer to buy a car lapsedwhen the car was badly damaged on the ground thatthe offer contained an implied term that the carwould remain in the same condition as when the offer was made

Rejection (termination by the offeree)

A rejection may be

bull express

bull implied

A counter offer is an implied rejectionbull Traditionally an acceptance must be a mirror image of

the offer If any alteration is made or anything addedthen this will be a counter offer and will terminate theoffer In Hyde v Wrench (1840) the defendant offered tosell a farm for pound1000 The plaintiff said he would givepound950 for it Held ndash this was a counter offer whichterminated the original offer which was therefore nolonger open for acceptance In Brogden v MetropolitanRailway (1877) the defendant sent to the plaintiff forsignature a written agreement which they hadnegotiated The plaintiff signed the agreement andentered in the name of an arbitrator on a space which hadbeen left empty for this purpose Held ndash the returneddocument was not an acceptance but a counter offer

bull This is particularly important for businesses whocontract by means of sales forms and purchase forms forexample if an order placed by the buyerrsquos purchase formis lsquoacceptedrsquo on the sellerrsquos sales form and the conditionson the back of the two forms are not identical (which theyare very unlikely to be) then the lsquoacceptancersquo is a counter

CA

VE

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8

offer and an implied rejection In Butler Machine Tool CoLtd v Ex-Cell-O Corpn Ltd (1979) the sellers offered to sella machine tool to the buyers for pound75535 on their ownconditions of sale which were stated to prevail over anyconditions in the buyersrsquo order form and whichcontained a price variation clause The buyers lsquoacceptedrsquothe offer on their own order form which stated that theprice was a fixed price and which contained a tear offslip which said lsquowe accept your order on the terms andconditions stated thereonrsquo This was in effect a lsquocounterofferrsquo The sellers signed and returned the slip togetherwith a letter which stated that they were carrying out theorder in accordance with their original offer When theydelivered the machine they claimed the price hadincreased by pound2892 The buyers refused to pay the extrasum Held ndash the contract was concluded on the buyersrsquoterms the signing and returning of the tear-off slip wasconclusive that the sellers had accepted the buyersrsquocounter offer The court analysed the transaction bylooking for matching offer and acceptance

Note ndash a request for further information is not a counteroffer In Stevenson v McLean (1880) the defendant offered tosell to the plaintiff iron at 40s a ton The plaintiff telegraphedto inquire whether he could pay by instalments Held ndash thiswas a mere inquiry for information not a counter offer andso the original offer was not rejected

A conditional acceptance

A conditional acceptance may be a counter offer capable ofacceptance for example I will pay pound500 for your car if youpaint it red If the owner agrees to this condition a contractwill be formed CO

NT

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W9

A valid acceptance must

bull be made while the offer is still in force (see termination ofoffer above)

bull be made by the offeree

bull exactly match the terms of the offer (see counter offersabove)

bull be written oral or implied from conduct In Brogden vMetropolitan Railway (1877) (above) the returneddocument was held to be a counter offer which thedefendants then accepted either by ordering coal fromBrogden or by accepting delivery of the coal (see alsolsquoThe Battle of the Formsrsquo)

However the offeror may require the acceptance to be madein a certain way If the requirement is mandatory it must befollowed

If the requirement is not mandatory then another equallyeffective method will suffice In Manchester Diocesan Councilfor Education v Commercial and General Investments Ltd (1969)an invitation to tender stated that the person whose bid was

CA

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10

The fact of acceptance

An acceptance is a final and unqualified assent to all the terms of the offer

The fact of acceptance

Acceptance

Communication ofacceptance

accepted would be informed by a letter to the address givenin the tender The acceptance was eventually sent not to thisaddress but to the defendantrsquos surveyor Held ndash thestatement in the tender was not mandatory the tender hadtherefore been validly accepted

bull Where the offer is made in alternative terms theacceptance must make it clear to which set of terms itrelates

bull A person cannot accept an offer of which he has noknowledge (Clarke (1927) (Australia))

But a personrsquos motive in accepting the offer is irrelevantIn Williams v Carwardine (1833) (Australia) the plaintiffknew of the offer of a reward in exchange forinformation but her motive was to salve her conscienceHeld ndash she was entitled to the reward

bull lsquoCross-offersrsquo do not constitute an agreement (Tinn vHoffman amp Co (1873))

Communication of acceptance

Acceptance must be communicated by the offeree or hisagent In Powell v Lee (1908) an unauthorised communicationby one of the managers that the Board of Managers hadselected a particular candidate for a headship was held notto be a valid acceptance

Silence as communication

An offeror may not stipulate that silence of the offeree is toamount to acceptance In Felthouse v Bindley (1862) the

CO

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W11

Acceptance must be communicated

plaintiff wrote to his nephew offering to buy a horse andadding lsquoIf I hear no more I will take it that the horse isminersquo The nephew did not reply to this letter Held ndash nocontract Acceptance had not been communicated to theofferor

It has been suggested that this does not mean that silencecan never amount to acceptance for example if in Felthousev Bindley the offeree had relied on the offerorrsquos statementthat he need not communicate his acceptance and wished toclaim acceptance on that basis the court could decide thatthe need for acceptance had been waived by the offeror (seebelow)

Exceptions to the rule that acceptance must be

communicated

bull In a unilateral contract where communication isexpressly or impliedly waived (see Carlill v CarbolicSmoke Ball Co Ltd (above))

bull Possibly where failure of communication is the fault ofthe offeror This was suggested by Lord Denning inEntores Ltd v Miles Far East Corpn (1955)

bull Where the post is deemed to be the proper method ofcommunication In Adams v Lindsell (1818) thedefendants wrote to the plaintiffs offering to sell them aquantity of wool and requiring acceptance by post Theplaintiffs immediately posted an acceptance on 5December Held ndash the contract was completed on 5December

CA

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12

The postal rule

bull Adams v Lindsell (1818) above

bull Acceptance is effective on posting even when the letter islost in the post In Household Fire Insurance Co Ltd v Grant(1879) the defendant offered to buy shares in theplaintiffrsquos company A letter of allotment was posted tothe defendant but it never reached him Held ndash thecontract was completed when the letter was posted

bull Note the difference between acceptance and revocationof an offer by post

Acceptance of an offer takes place when a letter isposted

Revocation of an offer takes place when the letter isreceived

bull Byrne v van Tienhoven (1880) above

Limitations to the postal rule

bull It only applies to acceptances and not to any other typeof communication (for example an offer or a revocation)

bull It only applies to letters and telegrams It does not applyto instantaneous methods of communication such astelex or probably fax or email

bull It must be reasonable to use the post as the means ofcommunication (for example an offer by telephone or byfax might indicate that a rapid method of response wasrequired)

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W13

Acceptance takes place when a letter is postednot when it is received

bull Letters of acceptance must be properly addressed andstamped

bull The rule is easily displaced for example it may beexcluded by the offeror either expressly or impliedly InHolwell Securities Ltd v Hughes (1974) it was excluded bythe offeror requiring lsquonotice in writingrsquo It was alsosuggested by the court that the postal rule would not beused where it would lead to manifest inconvenience

There is no direct English authority on this point

CA

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14

Arguments againstLogic ndash once a letter is posted the offer is accepted there isno provision in law for revoking an acceptance

bull The lsquologicalrsquo view is supported by the New Zealand caseof Wenckheim v Arndt (1878) and the South African case ofA to Z Bazaars (Pty) Ltd v Minister of Agriculture (1974)

Fairness ndash

bull Cheshire argues that it would be unfair to the offeror whowould be bound as soon as the letter was posted whereasthe offeree could keep his options open

Query ndash can a letter of acceptance be cancelled byactual communication before the letter is delivered

Communication by instantaneouselectronic means

bull The rules on telephones and telex were laid down inEntores v Miles (above) and confirmed in Brinkibon Ltd vStahag Stahl (1983) where it was suggested that duringnormal office hours acceptance takes place when themessage is printed out not when it is read The House ofLords however accepted that communication by telexmay not always be instantaneous for example whenreceived at night or when the office is closed

bull Lord Wilberforce stated

lsquoNo universal rule could cover all such cases theymust be resolved by reference to the intention of theparties by sound business practice and in some casesby a judgment of where the risk should liersquo

CO

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W15

Arguments forThere is some support for allowing recall in the Scottishcase of Countess of Dunmore v Alexander (1830)

bull It is argued that actual prior communication of rejectionwould not necessarily prejudice the offeror who bydefinition will be unaware of the lsquoacceptancersquo

bull It is also argued that it would be absurd to insist onenforcing a contract when both parties have acted on therecall This however could be interpreted as anagreement to discharge

Acceptance takes place when and where the message is received

bull It has been suggested that a message sent outsidebusiness hours should be lsquocommunicatedrsquo when it isexpected that it would be read for example at the nextopening of business It is generally accepted that thesame rules should apply to faxes and email as to telex

bull There is no direct authority on telephone answeringmachines It might well be argued that the presence of ananswering machine indicates that communication is notinstantaneous there is a delay between sending andreceiving messages It would then follow that the basicrule should apply that is that acceptance must becommunicated Acceptance therefore would take placewhen the message is actually heard by the offeror

Certainty of terms

The courts will not enforce

CA

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16

Vague agreementsfor example

Scammell v Ouston (1941)

The courts refused toenforce a sale stated to bemade lsquoon hire purchase

termsrsquo neither the rate ofinterest nor the period of

repayment nor the numberof instalments were stated

Incomplete agreementsfor example

lsquoan agreement to make anagreementrsquo will be void

In Walford v Miles (1992) thecourt refused to enforce anlsquoagreement to negotiate in

good faithrsquo

See also May and Butcher v R (1934)

It is for the parties to make their intentions clear

But the uncertainty may be cured by

bull a trade custom where a word has a specific meaning

bull previous dealings between the parties whereby a word orphrase has acquired a specific meaning for exampletimber of lsquofair specificationrsquo in Hillas v Arcos (1932)

bull the contract itself which provides a method for resolvingan uncertainty In Foley v Classique Coaches (1934) therewas an executed contract where the vagueness of lsquoat aprice to be agreedrsquo was cured by a provision in thecontract referring disputes to arbitration Cf May andButcher v R an unexecuted contract where the courtrefused to allow a similar arbitration clause to cure theuncertainty

The courts will strive to find a contract valid where it hasbeen executed

bull The Sale of Goods Act 1979 provides that if no price ormechanism for fixing the price is provided then thebuyer must pay a lsquoreasonable pricersquo but this provisionwill not apply where the contract states that the price islsquoto be agreed between the partiesrsquo

bull Note a lsquolock-out agreementrsquo for example an agreementnot to negotiate with any one else is valid provided it isclearly stated and for a specific length of time This wasapplied by the Court of Appeal in Pitt v PHH AssetManagement (1993) where a promise not to negotiate withany third party for two weeks was enforced

CO

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W17

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W19

2 Consideration and intention

Consideration

Most legal systems will only enforce promises where thereis something to indicate that the promisor intended to bebound that is there is some

Consideration is the normal lsquobadge of enforceabilityrsquo inEnglish law

ReciprocityConsideration

RelianceLord Denning tried to

introduce reliance as basisfor enforcing promisesthrough the doctrine of

promissory estoppel

FormFor example writing English

law will enforce promiseswhich are contained in a

deed (A deed is a document which

is signed and attested andindicates on its face

that it is a deed)

lsquoBadge of

enforceabilityrsquo

Definitions of consideration

Shorter version

Limitation of the definition

bull It makes no mention of why the promisee incurs adetriment or confers a benefit or that the element of abargain is central to the classical notion of considerationFor example in Combe v Combe (1951) it was held thatthere was no consideration for the defendantrsquos promiseto pay his ex-wife pound100 per year even though in relianceon that promise she had not applied to the divorce courtfor maintenance and in that sense she had suffered adetriment The reason why the detriment did notconstitute consideration was that there was no request bythe husband express or implied that she should forbearfrom applying for maintenance There was nolsquoexchangersquo

bull Some writers have preferred to emphasise this elementof bargain and have defined consideration as

CA

VE

ND

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20

A valuable consideration in the eyes of the law mayconsist of (Currie v Misa (1875))

bull either some right interest profit or benefit to oneparty or

bull some forbearance detriment loss orresponsibility given suffered or undertaken bythe other

A benefit to one party or a detriment to the other

lsquothe element of exchange in a contractrsquoor

lsquothe price paid for a promisersquo

bull These definitions however are vague and despite itslimitation the benefitdetriment definition is mostcommonly used

Consideration and condition

Consideration must be distinguished from the fulfilment ofa condition If A says to B lsquoI will give you pound500 if you shouldbreak a legrsquo there is no contract but simply a gratuitouspromise subject to a condition In Carlill v Carbolic Smoke BallCo (1893) the plaintiff provided consideration for thedefendantrsquos promise by using the smoke ball Catchinginfluenza was only a condition of her entitlement to enforcethe promise

Kinds of consideration

bull In Roscorla v Thomas (1842) the defendant promised theplaintiff that a horse which had been bought by him wassound and free from vice It was held that since thispromise was made after the sale had been completedthere was no consideration for it and it could not beenforced In Re McArdle (1951) a promise made lsquoin

CO

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W21

Past consideration that is something already completed before the promise is made cannot

generally amount to consideration

Executed considerationAn act wholly

performed as part of a contract

Executory ConsiderationA promise to do something

in the future

consideration of your carrying out certain improvementsto the propertyrsquo was held by the Court of Appeal to beunenforceable as all the work had been done before thepromise was made

Exceptions to this rule

bull The modern requirements were laid down by LordScarman in Pao On v Lau Yiu Long (1980) Where a serviceis rendered

at the request of the promisor (as in Lampleigh vBraithwait (1615))

on the understanding that a payment will be made (asin Re Caseyrsquos Patents (1892)) and

if the payment would have been legally enforceableif it had been promised in advance

then a subsequent promise to pay a certain sum will beenforced

Note ndash the lsquoinferredrsquo intention to pay makes this a veryflexible exception

Consideration must move from the promisee

bull See Chapter 10 ndash Privity of contract

Consideration need not be adequate

CA

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22

Only a person who has provided consideration for a promise can enforce that promise

The consideration provided by one party need not equal in value the

consideration provided by the other party

It is for the parties themselves to make their own bargainThe consideration need only have lsquosome value in the eyes ofthe lawrsquo (See lsquoConsideration must be sufficientrsquo p 24below)

bull The value may be slight In Chappell Co Ltd v Nestleacute Co Ltd(1960) three wrappers from the defendantrsquos chocolatebars were held to be part of the consideration InMountford v Scott (1975) pound1 was held to be goodconsideration for an option to buy a house

bull Withdrawal of threatened legal proceedings will amountto consideration even if the claim is found to have nolegal basis provided that the parties themselves believethat the claim is valid (Callisher v Bischoffstein (1870))

bull In Pitt v PHH Asset Management (1993) the defendantagreed to a lock-out agreement in return for Pittdropping his claim for an injunction against them Theclaim for an injunction had no merit but had a nuisancevalue and dropping it was therefore good consideration

bull In Alliance Bank v Broome (1964) the bankrsquos forbearance tosue was held to be consideration for the defendantrsquospromise to provide security for a loan

bull In Edmonds v Lawson (2000) it was held that the generalbenefits to chambers of operating a pupillage system wassufficient to provide consideration for contracts withindividual pupils

There is no consideration however where the promises arevague for example lsquoto stop being a nuisance to his fatherrsquo(White v Bluett (1853) but cf Ward v Byham (1956) below) orillusory for example to do something impossible or merelygood for example to show love or affection or gratitude CO

NT

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W23

It has been argued that because the latter are invalidconsideration must have some economic value Buteconomic value is extremely difficult to discern in the othercases cited above Since consideration is a lsquobadge ofenforceabilityrsquo it is argued that nominal consideration isadequate it is only designed to show that the promise isintended to be legally enforceable ndash whether it creates anyeconomic advantage is therefore irrelevant

Consideration must be sufficient

Traditionally the following have no value in the eyes of thelaw

Performing a duty imposed by law

bull For example promising not to commit a crime orpromising to appear in court after being subpoenaed InCollins v Godefroy (1831) a promise to pay a fee to awitness who has been properly subpoenaed to attend a

CA

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24

The consideration must have some value in the eyes of the law

Consideration therefore is found when a person receives whatever he requests

in return for a promise whether or not it has aneconomic value provided it is not too vague

Performing a duty imposed

by law

Performing an existingcontractual duty owed

to the other party

trial was held to have been made without considerationThe witness had a public duty to attend

bull But if a person does or promises to do more than he isrequired to do by law then he is providing considerationIn Glasbrook Bros v Glamorgan CC (1925) the council aspolice authority on the insistence of a colliery owner andin return for a promise of payment provided protectionover and above that required by law Held ndash they hadprovided consideration for the promise to pay

bull In Ward v Byham (1956) the father of an illegitimate childpromised to pay the mother an allowance of pound1 per weekif she proved that the child was lsquowell looked after andhappyrsquo Held ndash the mother was entitled to enforce thepromise because in undertaking to see that the child waslsquowell looked after and happyrsquo she was doing more thanher legal obligation Lord Denning however based hisdecision on the ground that the mother providedconsideration by performing her legal duty to maintainthe child

Treitel agreed with Denning that performance of a dutyimposed by the law can be consideration for a promise Heargues that it is public policy which accounts for the refusalof the law in certain circumstances to enforce promises toperform existing duties Where there are no grounds ofpublic policy involved then a promise given inconsideration of a public duty can be enforced

He cites

bull promises to pay rewards for information leading to thearrest of a felon See Sykes v DPP (1961)

bull Ward v Byham (above) CO

NT

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W25

In most cases it would make no difference whether the courtproceeded on the basis that the matter was one of publicpolicy or a lack of consideration But the former ground doesallow a greater degree of flexibility

Performing an existing contractual duty

Where the duty is owed to the other party this cannot beconsideration for

A request for extra payment

bull In Stilk v Myrick (1809) the captain promised the rest ofcrew extra wages if they would sail the ship back homeafter two sailors had deserted Held ndash the crew werealready bound by their contract to meet the normalemergencies of the voyage and were doing no more thantheir original contractual duty in working the ship home

bull Where the promisor however performs more than hehad originally promised then there can be considerationIn Hartley v Ponsonby (1857) nearly half the crewdeserted This discharged the contracts of the remainingsailors as it was dangerous to sail the ship home withonly half the crew The sailors were therefore free to makea new bargain so the captainrsquos promise to pay themadditional wages was enforceable

Exceptions to the rule in Stilk v Myrick

Factual advantages obtained by the promisorIn Williams v Roffey Bros (1991) the defendants (the maincontractors) were refurbishing a block of flats They sub-

CA

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26

A request for extra payment

A request to avoid part of a debt

contracted the carpentry work to the plaintiff The plaintiffran into financial difficulties whereupon the defendantsagreed to pay the plaintiff an additional sum if theycompleted the work on time Held ndash where a party to anexisting contract later agrees to pay an lsquoextra bonusrsquo in orderthat the other party performs his obligations under theoriginal contract then the new agreement is binding if theparty agreeing to pay the bonus has thereby obtained somenew practical advantage or avoided a disadvantage In thisparticular case the advantage was the avoidance of apenalty clause and the expense of finding new carpenters

bull Note ndash Stilk v Myrick (above) recognises as considerationonly those acts which the promisee was not under a legalobligation to perform Williams v Roffey Bros (above) addsto these factual advantages obtained by the promisor

bull This decision pushes to the fore the principles ofeconomic duress as a means of distinguishing enforceableand unenforceable modifications to a contract (seeChapter 5 on economic duress p 87)

Duties owed to third partyWhere a duty is owed to a third party its performance canalso be consideration for a promise by another It is clear thatthe third party is getting something more than he is entitledto

bull In Shadwell v Shadwell (1860) an uncle promised to pay anannual sum to his nephew on hearing of his intendedmarriage The fact of the marriage providedconsideration although the nephew was already legallycontracted to marry his fianceacutee

bull In Scotson v Pegg (1861) A agreed to deliver coal to Brsquosorder B ordered A to deliver coal to C who promised A to

CO

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W27

unload it Held ndash A could enforce Crsquos promise as Arsquosdelivery of the coal was good considerationnotwithstanding that he was already bound to do so byhis contract with B

bull In New Zealand Shipping Co v Satterthwaite amp Co Ltd TheEurymedon (1975) it was held by the Privy Council thatwhere a stevedore at the request of the consignee ofcertain goods removed the goods from a ship this wasconsideration for the promise by the consignee to give thestevedore the benefit of an exclusion clause although thestevedore in removing the goods was only performingcontractual duties he owed to the carrier

A request to avoid part of a debt

If a creditor is owed pound100 and agrees to accept pound90 in fullsettlement he can later insist on the remaining pound10 beingpaid as there is no consideration for his promise to waive thepound10 (the rule in Pinnelrsquos Case (1602))

bull This rule was confirmed by the House of Lords in Foakesv Beer (1884) Dr Foakes was indebted to Mrs Beer on ajudgment sum of pound2090 It was agreed by Mrs Beer thatif Foakes paid her pound500 in cash and the balance of pound1590in instalments she would not take lsquoany proceedingswhatsoeverrsquo on the judgment Foakes paid the moneyexactly as requested but Mrs Beer then proceeded toclaim an additional pound360 as interest on the judgment debtFoakes refused and when sued pleaded that his duty topay interest had been discharged by the promise not tosue Their Lordships deferred as to whether on its trueconstruction the agreement merely gave Foakes time to

CA

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28

Basic rule payment of a smaller sum will not discharge the duty to pay a higher sum

pay or was intended to cover interest as well But theyheld even on the latter construction there was noconsideration for the promise and that Foakes was stillbound to pay the additional sum

There are situations however where payment of a smallersum will discharge the liability for the higher sum

bull where the promise to accept a smaller sum in fullsettlement is made by deed or in return forconsideration

bull where the original claim was not for a fixed sum or theamount is disputed in good faith

bull where the debtor does something different for examplewhere payment is made at the creditorrsquos request

at an earlier time

at a different place

by a different method (it was held in D amp C BuildersLtd v Rees (1966) that payment by cheque is notpayment by a different method)

bull where payment is accompanied by a benefit of somekind

bull in a composition agreement with creditors

bull where payment is made by a third party (see HirachandPunachand v Temple (1911))

It has been argued that to allow the creditor to sue for theremaining debt would be a fraud on the third parties in thelast two cases above

Note ndash the doctrine of promissory estoppel under certaincircumstances may allow payment of smaller sum todischarge liability for the larger sum

CO

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W29

In Re Selectmove (1995) the Court of Appeal refused toextend the principle laid down in Williams v Roffey Bros topart payment of a debt The company had offered to pay itsarrears by instalments to the Inland Revenue who said thatthey would let them know if this was acceptable They heardnothing further but paid some instalments and thenreceived a threat of being wound up if the full arrears werenot paid immediately The court was not prepared to allowWilliams v Roffey Bros to overturn a rule laid down by theHouse of Lords in Foakes v Beer

Promissory estoppel

There are problems with regard to

Origins

bull It was introduced (obiter) by Lord Denning in the CentralLondon Property Trust Ltd v High Trees House Ltd (1947)where owners of a block of flats had promised to acceptreduced rents in 1939 There was no consideration fortheir promise but Lord Denning nevertheless stated thathe would estop them from recovering any arrears Hebased his statement on the decision in Hughes vMetropolitan Railway (1877)

CA

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30

If a promise intended to be binding andintended to be acted upon is acted upon then the court will not allow the promisor

to go back on his promise

the origins ofthe doctrine

the scope ofthe doctrine

the effect of the doctrine

bull It would however seem to conflict with the House ofLordsrsquo decision in Jorden v Money (1854) where it wasstated that estoppel applied only to statements of fact andnot to promises and also with the decision in Foakes vBeer (1884) where the House of Lords confirmed thatpayment of a smaller sum will not discharge the liabilityfor a larger sum

Scope

bull It only applies to the modification or discharge of anexisting contractual obligation It cannot create a newcontract See Combe v Combe (1951) above (However itwas used to create a new right of action in the Australiancase of Waltons v Maher (1988))

bull It can be used only as a lsquoshield and not a swordrsquo

bull The promise not to enforce rights must be clear andunequivocal In The Scaptrade (1983) the mere fact of nothaving enforced onersquos full rights in the past was notsufficient

bull It must be inequitable for the promisor to go back on hispromise In D amp C Builders v Rees (1966) Mrs Rees had forced the builders to accept her cheque by inequitable means and so could not rely on promissory estoppel

bull The promisee must have acted in reliance on the promisealthough not necessarily to his detriment (Alan amp Co Ltdv El-Nasr Export and Import Co (1972))

CO

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W31

The exact scope of the doctrine is a matter ofdebate but certain requirements must be met

Effect of the doctrine

bull In Tool Metal Manufacturing Co v Tungsten Electric Co(1955) the owner of a patent promised to suspendperiodic payments during the war It was held by theCourt of Appeal that the promise was binding for theduration of the war but the owners could on givingreasonable notice at he end of the war revert to theiroriginal legal entitlements

bull In Ajayi v Briscoe (1964) the Privy Council stated that thepromisee could resile from his promise on givingreasonable notice which allowed the promisee areasonable opportunity of resuming his position but thatthe promise would become final if the promisee could notresume his former position

On one interpretation these cases show that as regardsexisting or past obligations it is extinctive but as regardsfuture obligations it is suspensory

On another interpretation the correct approach is to look atthe nature of the promise If it was intended to bepermanent then the promiseersquos liability will beextinguished

Lord Denning consistently asserted that promissoryestoppel can extinguish debts However this view iscontrary to Foakes v Beer

The view that promissory estoppel is suspensory onlywould reconcile it with the decisions in Jorden v Money

CA

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32

It is not clear whether the doctrine extinguishesrights or merely suspends them

Foakes v Beer and Pinnelrsquos Case but it would deprive it of mostof its usefulness

The question of whether the doctrine is suspensory orextinctive is particularly important with regard to singlepayments

Intention to be legally bound

This presumption may be rebutted but the onus of proof ison the party seeking to exclude legal relations In EssoPetroleum Co Ltd v Commissioners of Customs and Excise (1976)Esso promised to give one world cup coin with every fourgallons of petrol sold A majority of the House of Lordsbelieved that the presumption in favour of legal relationshad not been rebutted

Examples of rebuttals

bull lsquoThis arrangement is not entered into as a formal orlegal agreement and shall not be subject to legaljurisdiction in the law courtsrsquo (Rose and Frank v CromptonBros (1925))

bull Agreement to be binding lsquoin honour onlyrsquo (Jones v VernonPools (1939))

CO

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W33

Commercial andbusiness

agreements

Social anddomestic

agreements

In commercial and business agreements there is a presumption that the parties

intend to create legal relations

bull Letters of comfort for example statements to encouragelending to an associated company It was held inKleinwort Benson Ltd v Malaysia Mining Corpn (1989) thatthe defendantrsquos statement that lsquoit is our policy to ensurethat the business is at all times in a position to meet itsliabilities to yoursquo was a statement of present fact and nota promise for the future As such it was not intended tocreate legal relations

bull Collective agreements are declared not to be legallybinding by the Trade Unions and Labour Relations(Consolidation) Act 1992 unless expressly stated inwriting to be so

This can be rebutted by evidence to the contrary forexample

bull Agreements between husband and wife In Balfour vBalfour (1919) the court refused to enforce a promise bythe husband to give his wife pound50 per month whilst he wasworking abroad However the court will enforce a clearagreement where the parties are separating or separated(Merritt v Merritt (1970))

bull Agreements between members of a family In Jones vPadavatton (1969) Mrs Jones offered a monthly allowanceto her daughter if she would come to England to read forthe Bar Her daughter agreed but was not very successfulMrs Jones stopped paying the monthly allowance butallowed her daughter to live in her house and receive therents from other tenants Mrs Jones later sued forpossession The daughter counterclaimed for breach of

CA

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34

In social and domestic agreements there is a presumption against legal relations

the agreement to pay the monthly allowance andor for accommodation Held (a) the first agreement may havebeen made with the intention of creating legal relationsbut was for a reasonable time and would in any case havelapsed (b) the second agreement was a familyarrangement without an intention to create legalrelations It was very vague and uncertain

bull An intention to be legally bound may be inferred where

one party has acted to his detriment on theagreement (Parker v Clark (1960)) or

a business arrangement is involved (Snelling vSnelling (1973)) or

there is mutuality (Simpkins v Pays (1955))

But in all such cases the agreement must be clear

CO

NT

RA

CT

LA

W35

CO

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W37

3 Contents of a contract

Once a contract has been formed it is necessary to explorethe scope of the obligations which each party incurs

(Incorporation of terms is covered in Chapter 4)

The distinction between terms and mere

representations

Is a statement part of the contract Statements made duringnegotiations leading to a contract may be either

bull Terms

that is statements which form the express terms of thecontract As such they constitute promises as to thepresent truth of the statement or as to future action Ifsuch a promise is broken (for example because thestatement is untrue) this will involve a breach of contractor

Different weighting may be given to different terms

Distinction between termsand mere representations

Interpretation of expressterms

Identification of impliedterms

This involves

bull Mere representations

that is statements which do not form part of the contractbut which helped to induce the contract If these areuntrue they are lsquomisrepresentationsrsquo

Now that damages can be awarded for negligent misrepresentation the distinction has lost much of itsformer significance but there are still some importantconsequences

In trying to ascertain such intention the court may take intoaccount the following factors

The importance of the statement to the parties

bull In Bannerman v White (1861) the buyer stated lsquoif sulphurhas been used I do not want to know the pricersquo Held ndasha term Similarly in Couchman v Hill (1947) the buyerasked if the cow was in calf stating that if she was hewould not bid The auctioneerrsquos reply that she was not incalf was held to be a term overriding the printedconditions which stated that no warranty was given

The respective knowledge of the parties

bull In Oscar Chess Ltd v Williams (1957) it was held that astatement by a member of the public (a non expert) to agarage (an expert) with regard to the age of a car was amere representation not a term On the other hand astatement made by a garage (an expert) to a member ofthe public (a non-expert) concerning the mileage of a carwas held to be a term (Dick Bentley Productions Ltd vHarold Smith (Motors) Ltd (1965))

CA

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38

Whether a statement has become a term of thecontract depends on the intention of the parties

The manner of the statement

bull For example if it suggests verification (Ecay v Godfrey(1947)) it is unlikely to be a term If it discouragesverification lsquoIf there was anything wrong with the horseI would tell yoursquo (Schawel v Reade (1913)) it is more likelyto be a term

Where a contract has been reduced to writing

The terms will normally be the statements incorporated intothe written contract (Routledge v McKay (1954))

bull But a contract may be partly oral and partly written (seeCouchman v Hill (1947) above) In Evans amp Sons Ltd vAndrea Merzario Ltd (1976) an oral assurance thatmachinery would be stowed under not on the deck washeld to be a term of a contract although it was notincorporated into the written terms The court held thatthe contract was partly oral and partly written and insuch hybrid circumstances the court was entitled to lookat all the circumstances

bull Note ndash the discovery of a collateral contract mayovercome the difficulties of oral warranties in writtencontracts In City of Westminster Properties v Mudd (1959)a tenant signed a lease containing a covenant to use thepremises for business premises only He was induced tosign by a statement that this clause did not apply to himand that he could continue to sleep on the premises Thecourt found that his signing the contract was con-sideration for this promise thus creating a collateralcontract In Evans amp Son Ltd v Andrea Merzario Ltd (1976)Lord Denning considered the oral statement to be acollateral contract In Esso Petroleum Co v Mardon (1976)the court held that the statement by a representative of C

ON

TR

AC

TL

AW

39

Esso with regard to the throughput of a petrol station wascovered by an implied collateral warranty that thestatement had been made with due care and skill

bull The use of a collateral contract will not be possiblehowever if the main contract contains an appropriatelyworded lsquoentire agreementrsquo clause (The Inntrepreneur PubCo (GL) v East Crown Ltd (2000))

Identification of express terms

bull See incorporation of terms in Chapter 4 p 54

Interpretation of express terms of a contract

Oral contracts

The contents is a matter of evidence for the judge Theinterpretation will be undertaken by applying an objectivetest that is what would a reasonable person haveunderstood to have been meant by the words used (Thake vMaurice (1986))

Written contracts

If a contract is reduced to writing then under the lsquoparolevidencersquo rule oral or other evidence extrinsic to thedocument is not normally admissible to lsquoadd to vary orcontradictrsquo (Jacobs v Batavia and General Plantations Trust(1924)) the terms of the written agreement

Exceptions to the parol evidence rule

bull to show that the contract is not legally binding forexample because of mistake or misrepresentation

bull to show that the contract is subject to a lsquoconditionprecedentrsquo In Pym v Campbell (1856) oral evidence was

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40

admitted to show that a contract was not to come intooperation unless a patent was approved by a third party

bull to establish a custom or trade usage (Hutton v Warren(1836) see below)

bull to establish that the written contract is not the wholecontract It is presumed that lsquoa document which lookslike a contract is the whole contractrsquo but this isrebuttable See Couchman v Hill (1947) and Evans v AndreaMerzario (above)

bull a contract may be contained in more than one document(Jacobs v Batavia Plantation Trust Ltd (1924))

bull to establish a collateral contract (City of WestminsterProperties Ltd v Mudd (1959) Evans amp Son Ltd v AndreaMerzario Ltd (1976))

The Law Commission recommended in 1976 that the lsquoparolevidencersquo rule be abolished However in view of the wideexceptions to the rule it recommended in 1986 that no actionneed be taken

Identification of implied terms

In addition to the terms which the parties have expresslyagreed a court may be prepared to hold that other termsmust be implied into the contract Such terms may beimplied by

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W41

Custom Statute The courts

Custom

A contract may be deemed to incorporate any relevantcustom of the market trade or locality in which the contractis made In Hutton v Warren (1836) a tenant established aright to fair allowance for improvements to the land througha local custom

Statute

Parliament as a matter of public policy has in variousinstances seen fit to imply terms into contracts for example

Terms implied into all sales

bull that the seller has the right to sell the goods

bull that goods sold by description correspond with thedescription

Terms implied only into sales by way of business

bull that the goods are of satisfactory quality

Goods are of a satisfactory quality if they meet thestandard that a reasonable person would regard assatisfactory taking account of any description of thegoods the price if relevant and all other relevantcircumstances In particular it will be necessary toconsider their

fitness for all purposes for which goods of that kindare commonly supplied

appearance and finish

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42

The Sale of Goods Act 1979 which impliesthe following terms into contracts

for the sale of goods

freedom from minor defects

safety and

durability

This term does not apply to matters specifically drawn tothe buyerrsquos attention before the contract is made orwhere the buyer examines the goods defects which thatexamination should have revealed

bull that the goods are fit for any special purpose madeknown to the seller

bull that goods sold by sample correspond with the sample

bull In contracts of service there is an implied term that theservice will be carried out with reasonable care and skillwithin a reasonable time and for a reasonable price

In Wilson v Best (1993) it was held that the duty of a travelagent under this provision extended to checking that thelocal safety regulations had been complied with It did notrequire them to ensure that they complied with UKregulations

The courts

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W43

Terms implied in fact Terms implied in law

The Supply of Goods and Services Act 1982implies similar terms into contracts of hire contracts for work and materials and other

contracts not covered by the Sale of Goods Act

Terms implied in fact

When interpreting terms implied in fact the court seeks togive effect to the unexpressed intention of the parties Thereare two tests A term may be implied because

bull It is necessary to give business efficacy to the contract InThe Moorcock (1889) a term was implied that the riverbedwas in a condition that would not damage a shipunloading at the jetty

bull It satisfies the lsquoofficious bystanderrsquo test that is if abystander suggested a term the parties would respondwith a common lsquoof coursersquo In Spring v NASDS (1956) theunion tried to imply the lsquoBridlington Agreementrsquo Thecourt refused on the basis that if an lsquoofficious bystanderhad suggested this the plaintiff would have repliedldquoWhatrsquos thatrdquorsquo

The Moorcock doctrine is used in order to make the contractworkable or where it was so obvious that the parties musthave intended it to apply to the agreement It will not beused merely because it was reasonable or because it wouldimprove the contract

It was suggested in Shell UK Ltd v Lostock Garages Ltd (1977)that the courts will be reluctant to imply a term where theparties have entered into a detailed and carefully draftedwritten agreement

Terms implied in law

bull When terms are implied in law they are implied into allcontracts of a particular kind Here the court is not tryingto put into effect the parties intention but is imposing anobligation on one party often as a matter of public policyFor example the court implies into all contracts ofC

AV

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DIS

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RD

S44

employment a term that the employee will carry out hiswork with reasonable care and skill and will indemnifyhis employer against any loss caused by his negligence(Lister v Romford Ice Cold Storage Co (1957))

bull In these cases the implication is not based on thepresumed intention of the parties but on the courtrsquosperception of the nature of the relationship between theparties and whether such an implied term wasreasonable

bull In Liverpool CC v Irwin (1977) the tenants of a block ofcouncil flats failed to persuade the court to imply a termthat the council should be responsible for the commonparts of the building on the Moorcock or lsquoofficiousbystanderrsquo test but succeeded on the basis of the Listertest that is the term should be implied in law in that theagreement was incomplete it involved the relationshipof landlord and tenant and it would be reasonable toexpect the landlord to be responsible for the commonparts of the building

Classification of terms

There is a very important distinction between those terms ofa contract which entitle an innocent party to terminate(rescind or treat as discharged) a contract in the event of a

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W45

Conditions Warranties Innominate terms

breach and those which merely enable a person to claimdamages

Traditionally a distinction has been made in English lawbetween

Conditions

bull The Sale of Goods Act 1979 designates certain impliedterms for example re satisfactory quality as conditions ndashthe breach of which entitles the buyer to terminate (ortreat as discharged) the contract

bull In Poussard v Spiers and Pond (1876) a singer failed to takeup a role in an opera until a week after the season hadstarted Held ndash her promise to perform as from the firstperformance was a condition ndash and its breach entitled themanagement to treat the contract as discharged

Warranties

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46

Contractual terms concerning the less importantor subsidiary statements of facts or promisesIf a warranty is broken this does not entitle

the other party to terminate (or treat asdischarged) the contract it merely entitles

him to sue for damages

Statements of fact or promises which form theessential terms of the contract If the statement is not true or the promise is not fulfilled the

injured party may terminate (or treat as discharged) the contract and claim damages

bull The Sale of Goods Act 1979 designates certain terms aswarranties breach of which do not allow the buyer totreat the contract as discharged but merely to sue fordamages for example the right to quiet enjoyment

bull In Bettini v Gye (1876) a singer was engaged to sing for awhole season and to arrive six days in advance to takepart in rehearsals He only arrived three days in advanceHeld ndash the rehearsal clause was subsidiary to the mainclause It was only a warranty The management wastherefore not entitled to treat the contract as dischargedThey should have kept to the original contract andsought damages for the three daysrsquo delay

Innominate or intermediate terms

bull In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha(1962) it was suggested by the Court of Appeal that itwas not enough to classify terms into conditions andwarranties Regard should also be had to the characterand nature of the breach which has occurred In HongKong Fir the defendants chartered the vessel Hong KongFir to the plaintiffs for 24 months the charter partyprovided that the ship was lsquofitted in every way forordinary cargo servicersquo The vessel spent less than nineweeks of the first seven months at sea because ofbreakdowns and the consequent repairs which werenecessary

CO

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W47

On the facts this was not the case because the charter partystill had a substantial time to run

After the Hong Kong Fir case in 1962 there was someconfusion as to whether the breach based test which appliedto innominate terms had replaced the term based test whichrelied on the distinction between conditions and warrantiesor merely added to it an alternative in certain circumstances

bull In the Mihalis Angelos (1970) the Court of Appeal revertedto the term based test The owners of a vessel stated thatthe vessel was lsquoexpected ready to loadrsquo on or about 1 JulyIt was discovered that this was not so Held ndash the termwas a condition ndash the charterers could treat the contract as discharged

In 1976 two cases were decided on the breach based principle

bull In Cehave v Bremer Handelsgesellshaft MBH The Hansa Nord(1976) the seller had sold a cargo of citrus pellets with aterm in the contract that the shipment be made in goodcondition The buyer rejected the cargo on the basis thatthis term had been broken The defect however was notserious and the court held that although the Sale ofGoods Act had classified some terms as conditions andwarranties it did not follow that all the terms had to be soclassified Accordingly the court could consider the effect

CA

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48

Held ndash the term was neither a condition nor awarranty and in determining whether the

defendants could terminate the contract it wasnecessary to look at the consequences of the

breach to see if it deprived the innocent party ofsubstantially the whole benefit he should

have received under the contract

of the breach since this was not serious the buyer hadnot been entitled to reject

bull In Reardon Smith v Hansen Tangen (1976) an oil tanker wasdescribed as lsquoOsaka No 354rsquo where in fact it was lsquoOshimaNo 004rsquo but was otherwise exactly as specified Becausethe market for oil tankers had collapsed the chartererssought to argue that the number was a condition whichwould enable them to repudiate the contract The Houseof Lords rejected this argument Held ndash the statement wasan innominate term not a condition since the effect ofthe breach was trivial it did not justify termination of thecontract

bull Note ndash the time for determining whether a clause was acondition or an innominate term is at the time ofcontracting ndash not after the breach

Traditionally a term is a condition if it has been establishedas such

bull By statute ndash for example the Sale of Goods Act 1979

bull By precedent after a judicial decision In The MihalisAngelos (1970) the Court of Appeal held that thelsquoexpected readinessrsquo clause in a charter party is acondition

bull By the intention of the parties The court must ascertainthe intention of the parties If the wording clearly revealsthat the parties intended that breach of a particular termshould give rise to a right to rescind that term will beregarded as a condition In Lombard North Central vButterworth (1987) the Court of Appeal held thatcontracting parties can provide expressly in the contractthat lsquospecific breaches could terminate the contractrsquo Inthat case the contract included an express clause that the

CO

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W49

time for payment of instalments was lsquoof the essence of thecontractrsquo An accountant had contracted to hire acomputer for five years agreeing to make an initialpayment and 19 quarterly rental payments He was latein paying some instalments and the owners terminatedthe agreement recovered possession of the computerand claimed damages not only for the arrears but also forloss of future instalments The claim succeeded becausethe contract specifically stated that the time of paymentof each instalment was to be of the essence of the contract

Note the mere use of the word lsquoconditionrsquo is not conclusive

In Schuler v Wickman Tool Sales Ltd (1974) the House of Lordsheld that breach of a lsquoconditionrsquo that a distributor shouldvisit six customers every week could not have been intendedto allow rescission The word lsquoconditionrsquo had not been usedin this particular sense There was in the contract a separateclause which indicated when and how the contract could beterminated

bull By the court ndash deciding according to the subject matter ofthe contract (see Poussard v Spiers (1876) and Bettini v Gye(1876) above)

CA

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50

If a term is not a condition then the lsquowait and seersquotechnique can be used to decide if the gravity of

the breach is such that it deprivedthe innocent party of substantially the whole

benefit of the contract If so ndash then the innocentparty can terminate the contract

(innominate or intermediate term)

Certainty and flexibility

Certainty

bull The term based test is alleged to have the advantage ofpredictability and certainty It is important for the partiesto know their legal rights and liabilities as regards theavailability of termination The character of all terms isascertainable at the moment the contract is concludedNothing that happens after its formation can change thestatus of a term If the term is a condition then the partieswill know that its breach allows the other party toterminate But there can still be uncertainty where theparties have to await the courtrsquos decision on the nature ofthe term

bull The advantage of certainty is however balanced by thefact that it is possible to terminate a contract on atechnicality for sometimes a very minor breach

Flexibility

bull The breach based test is stated to bring flexibility to thelaw Instead of saying that the innocent party can in thecase of a condition always terminate or in the case of awarranty never terminate innominate terms allow thecourts to permit termination where the circumstancesjustify it and the consequences are sufficiently serious

bull It is however more difficult for the innocent party toknow when he has the right to terminate or for the partyin breach to realise in advance the consequence of hisaction

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W51

Note the distinction between the different types of contract terms remains of

considerable importance

CO

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W53

4 Exemption (exclusion or limitation) clauses

A total exclusion is referred to as an exclusion clause apartial exclusion is known as a limitation clause

Exemption clauses are most commonly found in standardform contracts

To be valid an exemption clause must satisfy the tests set bythe

Common law requirements

A clause which purports to exclude wholly or inpart liability for a breach of contract or a tort

Common lawUnfair Contract

Terms Act (UCTA)1977

Regulations onUnfair Terms in ConsumerContracts 1999

The term must be incorporated into the

contract

The wording mustcover what actually

happened

Incorporation

bull This requirement applies to all terms but has beeninterpreted strictly in the case of exemption clauses

A term may be incorporated into a contract by being

Contained in a signed document

In LrsquoEacutestrange v Graucob Ltd (1934) the plaintiff had signed acontract of sale without reading it Held ndash she was bound bythe terms which contained an exemption clause

ExceptionsWhere the offeree has been induced to sign as a result ofmisrepresentation

bull In Curtis v Chemical Cleaning Co (1951) the plaintiffsigned a lsquoreceiptrsquo when she took a dress to be cleaned onbeing told that it was to protect the cleaners in case ofdamage to the sequins In fact the clause excludedliability for all damage Held ndash the cleaners were notprotected for damage to the dress the extent of theclause had been misrepresented and therefore thecleaners could not rely on it

bull lsquoNon est factumrsquo (see p 106 below)

Contained in an unsigned document (ticket cases)

bull This must be seen to be a contractual document

In Chapelton v Barry UDC (1940) on hiring a deckchair the plaintiff was given a ticket with only alarge black 3d on the face of the ticket and exclusionclauses on the back Held ndash the defendants could notrely on the exclusion clauses as it was not apparenton the face of it that the ticket was a contractualdocument rather than just a receipt

CA

VE

ND

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54

bull Reasonable notice of the term must be given

In Parker v South Eastern Railway Co (1877) theplaintiff received a ticket which stated on the facelsquosee backrsquo Held ndash as long as the railway companyhad given reasonable notice of the exemptionclausersquos existence it did not matter that the plaintiffhad not read the clause

In Thompson v London Midland and Scottish Railway(1930) the ticket indicated that the conditions of thecontract could be seen at the station masterrsquos office oron the timetable The exemption clause was in clause552 of the timetable which cost sixpence ndash the ticketitself only cost two and sixpence In the circumstancesnevertheless reasonable notice had been given

The test is objective and it is irrelevant that the partyaffected by the exemption clause is blind or illiterateor otherwise unable to understand it (Thompson vLMS above)

But in Geir v Kujawa (1970) a notice in English wasstuck on the windscreen of a car stating thatpassengers travelled at their own risk A Germanpassenger who was known to speak no English washeld not to be bound by the clause as reasonable carehad not been taken to bring it to his attention

bull Attention must be drawn to any unusual clause

In Thornton v Shoe Lane Parking (1971) it was statedthat a person who drives his car into a car park mightexpect to find in his contract a clause excludingliability for loss or damage to the car but specialnotice should have been given of a clause purportingto exclude liability for personal injury

CO

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W55

In Interfoto Picture Library v Stiletto Visual Programmes(1989) the Court of Appeal confirmed that onerousconditions required special measures to bring them tothe attention of the defendant The clause in that casewas not an exemption clause but a clause imposingcharges 10 times higher than normal The Court ofAppeal stated that the more unusual the clause thegreater the notice required

bull Notice of the term must be communicated to the otherparty before or at the time that the contract is enteredinto

In Thornton v Shoe Lane Parking Ltd (1971) the plaintiffmade his contract with the car company when heinserted a coin in the ticket machine The ticket wasissued afterwards and in any case referred toconditions displayed inside the car park which hecould see only after entry Notice therefore came toolate

bull The rules of offer and acceptance and the distinctionsbetween offers and invitations to treat must be consultedin order to ascertain when the contract was madeProblems with regard to incorporation can arise in atypical lsquoBattle of the Formsrsquo problem See Butler MachineTool Ltd v Ex-Cell-O Corpn (Chapter 1)

Notice by display

Notices exhibited in premises seeking to exclude liability forloss or damage are common for example lsquocar parked atownerrsquos riskrsquo and must be seen before or at the time of entryinto contract

bull In Olley v Marlborough Court Hotel (1949) Mr and MrsOlley saw a notice on the hotel bedroom wall which

CA

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56

stated lsquothe proprietors will not hold themselvesresponsible for articles lost or stolen unless handed tothe manageress for safe keepingrsquo The contract had beenentered into on registration and the clause was thereforenot incorporated into the contract and could not protectthe proprietors

Notice by a lsquocourse of dealingrsquo

bull If there has been a course of dealing between the partiesthe usual terms may be incorporated into the contractalthough not specifically drawn to the attention of theparties each time a contract is made

In Spurling v Bradshaw (1956) Bradshaw deposited someorange juice in Spurlingrsquos warehouse The contractualdocument excluding liability for loss or damage was notsent to Spurling until several days after the contract Held ndashthe exclusion clauses were valid as the parties had alwaysdone business with each other on this basis

bull Note ndash the transactions must be sufficiently numerous toconstitute a course of dealings The established course ofdealings must be consistent The established course ofdealings must not have been deviated from on the occasion in question

In Hollier v Rambler Motors (1972) the Court of Appeal heldthat bringing a car to be serviced or repaired at a garage onthree or four occasions over a period of five years did notestablish a course of dealings

Notice through patent knowledge

bull In British Crane Hire Corpn v Ipswich Plant Hire (1975) theowner of a crane hired it out to a contractor who was alsoengaged in the same business It was held that the hirer

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W57

was bound by the ownerrsquos usual terms though they werenot actually communicated at the time of the contractThey were however based on a model supplied by atrade association to which both parties belonged It wasstated that they were reasonable and were well known inthe trade

Oral contracts

bull Whether a clause has been incorporated into an oralcontract is a matter of evidence for the court (McCutcheonv MacBrayne (1964))

On a proper construction the clause covers the loss

in question

bull An exclusion clause is interpreted contra proferentem thatis any ambiguity in the clause will be interpreted againstthe party seeking to rely on it

in Houghton v Trafalgar Insurance Co Ltd (1954) it washeld that the word lsquoloadrsquo could not refer to people

in Andrews Bros v Singer amp Co Ltd (1934) an exclusionreferring to implied terms was not allowed to cover aterm that the car was new as this was an express term

It was however suggested by the House of Lords inPhoto Production Ltd v Securicor Ltd (1980) that any needfor a strained and distorted interpretation of contracts inorder to control the effect of exemption clauses had beenreduced by the UCTA

bull Especially clear words must be used in order to excludeliability for negligence for example the use of the wordlsquonegligencersquo or the phrase lsquohowsoever causedrsquo (Smith vSouth Wales Switchgear Ltd (1978))

CA

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58

But if these words are not used provided the wording iswide enough to cover negligence and there is no otherliability to which they can apply then it is assumed thatthey must have been intended to cover negligence(Canada Steamship Lines v The King (1952))

bull It was stated in Ailsa Craig Fishing Co v Malvern Fishing Co(1983) that limitation clauses may be interpreted lessrigidly than exclusion clauses

bull Only a party to a contract can rely on an exclusion clause(See Chapter 10)

bull Especially clear words are required when the breach is ofa fundamental nature In the past Lord Denning andothers argued that it was not possible to exclude breachesof contract which were deemed to be fundamental byany exclusion clause however widely and clearlydrafted

However the House of Lords confirmed in Photo ProductionLtd v Securicor Ltd (1980) that the doctrine of fundamentalbreach was a rule of construction not a rule of law that isliability for a fundamental breach could be excluded if thewords were sufficiently clear and precise

The House also stated that

bull the decision in Harbuttrsquos Plasticine Ltd v Wayne Tank andPump Co (1970) was not good law In that case the Courtof Appeal had held that as a fundamental breach broughta contract to an end there was no exclusion clause left toprotect the perpetrator of the breach

bull there is no difference between a lsquofundamental termrsquo anda lsquoconditionrsquo C

ON

TR

AC

TL

AW

59

bull a strained construction should not be put on words in anexclusion clause which are clearly and fairly susceptibleof only one meaning

bull where the parties are bargaining on equal terms theyshould be free to apportion risks as they wish

bull the courts should be wary of interfering with the settledpractices of business people as an exclusion clause oftenserves to identify who should insure against a particularloss

Unfair Contract Terms Act 1977

Note ndash the title is misleading

bull The Act does not cover all unfair contract terms onlyexemption clauses

bull The Act covers certain tortious liability as well ascontractual liability The following must be examined

CA

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60

Clauses whichare void

Clauses which are valid only if reasonable

The meaning of lsquoreasonablersquo

Scope of the Act

Scope of the Act

bull s 1 ndash the Act applies to contracts made after 1 February1978 which arise in the course of business lsquoBusinessrsquoincludes a profession and the activities of anygovernment department andor public or localauthority

bull s 5 ndash contracts specifically excluded include contracts ofinsurance contracts for the transfer of land andinternational commercial contracts

bull s 13 ndash the Act limits the effectiveness of clauses thatexclude or restrict liability It also covers clauses whichmake it difficult to enforce a contract for example byimposing restrictive time limits or which excludeparticular remedies In Stewart Gill v Horatio Myer and Co(1992) it was held that a clause restricting a right of set-off or counterclaim was subject to the Act It was alsoheld in Smith v Bush (1990) that it covered lsquodisclaimerswhich restrictively defined a partyrsquos obligation under acontractrsquo In that case a valuation was stated to be givenlsquowithout any acceptance of liability for its accuracyrsquo

Negligence

bull The Act covers contractual tortious and statutory (that isunder the Occupiersrsquo Liability Act 1957) negligence

bull The difference between excluding liability for negligenceand transferring liability for negligence is seen in PhillipsProducts v Hyland Bros (1987) where the contracttransferred liability for the negligence of the driver of ahired excavator to the hirer The driver negligentlydamaged property belonging to the hirer Held ndash theclause was an exclusion clause and was subject to UCTA

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W61

bull In Thompson v Lohan (Plant Hire) (1987) on the otherhand an excavator and driver were hired under the sameconditions The driver negligently killed a third partyHeld ndash the clause transferring liability to the hirer was notan exclusion clause in this case as the third party was ableto sue the hirer It was merely a clause transferring liability

Misrepresentation

bull The difference between excluding liability formisrepresentation and defining the powers of an agent isseen in Cremdean Properties v Nash (1977) where a clausein the special conditions of sale stating that thelsquoparticulars were believed to be correct but theiraccuracy is not guaranteedrsquo was held to be an exclusionclause

bull In Collins v Howell Jones (1980) however the Court ofAppeal held a statement that the lsquovendor does not makeor give any representation or warranty and neither theestate agent or any person in their employment has anyauthority to make or give a representation or warrantywhatsoever in relation to the propertyrsquo had the effect ofdefining or limiting the scope of the agentrsquos authority

Effect of the Act

Clauses which are void

Exclusions of liability

bull for death or personal injury caused by negligence (s 2)

bull in a manufacturerrsquos guarantee for loss or damage causedby negligence (s 5)

bull for the statutory guarantee of title in contracts for the saleof goods or hire purchase (s 6)

CA

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62

bull for the other statutory guarantees in consumer contractsfor the sale of goods or hire purchase (descriptionsatisfactory quality fitness for purpose) (s 6)

bull for similar statutory guarantees in other consumercontracts for the supply of goods for example contractsof hire (s 7)

Clauses which are valid only if reasonable

Clauses excluding liability

bull for loss or damage to property caused by negligence (s 2)

bull for breach of contract in a consumer or standard formcontract (s 3) This includes clauses in such contractsclaiming to render a substantially different performancefrom that reasonably expected or to render noperformance at all (s 3)

bull for statutory guarantees (other than those concerningtitle) in inter-business contracts for the sale of goods andhire purchase (description satisfactory quality andfitness for purpose) (s 6)

bull for statutory guarantees concerning title or possession inother contracts for the supply of goods (for examplehire) (s 7)

bull for other statutory guarantees (description satisfactoryquality fitness for purpose) in other inter-businesscontracts for the supply of goods (s 7)

bull for misrepresentation in all contracts

Note

lsquoConsumer transactionrsquo ndash a person is a lsquoconsumerrsquo where hedoes not make or hold himself out as making the contract in

CO

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W63

the course of business and the other party does make thecontract in the course of business In contracts for the sale ofgoods the goods must also be of a type normally sold forprivate use

bull A controversial interpretation of a lsquoconsumerrsquo was madeby the Court of Appeal in R and B Customs v UnitedDominion Trust (1988) where a car was bought by aprivate company for the business and private use of itsdirectors It was held by the Court of Appeal that it wasnot bought lsquoin the course of a businessrsquo Buying cars wasincidental not central to the business of the company If itis incidental only then the purchase would only be lsquoin thecourse of a businessrsquo if it was one made with sufficientregularity

Note however that in Stevenson v Rogers (1999) the Courtof Appeal refused to apply the R and B Customs Brokersapproach to the question of whether a sale was in the courseof a business for the purpose of s 14(12) of the Sale of GoodsAct 1979

A lsquostandard form contractrsquo occurs when the parties deal onthe basis of a standard form provided by one of them

Reasonableness

In assessing reasonableness the following matters should beconsidered

CA

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64

It is for the person relying on the clause to prove that the clause is reasonable

Section 11 of UCTA 1977

bull Contract terms are to be adjudged reasonable or notaccording to the circumstances which were or oughtreasonably to have been known to the parties when thecontract was made

bull Where a person seeks to restrict liability to a specifiedsum of money regard should be had to the resourceswhich he could expect to be available to him for thepurpose of meeting the liability and as to how far it wasopen to him to cover himself by insurance

bull In determining for the purpose of s 6 or s 7 whether acontract term satisfies the requirement of reasonablenessregard shall be had to

the strength of the bargaining position of the partiesrelative to each other

whether the customer received an inducement toagree to the term and had an opportunity of enteringinto a similar contract with other persons butwithout having to accept similar terms

whether the customer knew or ought reasonably tohave known of the existence and extent of the term

where the exclusion is conditional whether it wasreasonable to expect that compliance with thatcondition would be practicable

whether the goods were manufactured processed oradapted to the special order of the customer(Sched 2)

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W65

Decisions of the courts

In Smith v Bush (1990) and Harris v Wyre Forest DC (1989) theHouse of Lords dealt with two cases involving the validity ofan exclusion clause protecting surveyors who had carriedout valuations of a house The House of Lords decided thatthe clauses were exclusion clauses designed to protect thesurveyors against claims for negligence Lord Griffithsdeclared that there were four matters which should alwaysbe considered

bull were the parties of equal bargaining power

bull in the case of advice would it have been reasonable toobtain advice from another source

bull was the task being undertaken a difficult one for whichthe protection of an exclusion clause was necessary

bull what would be the practical consequences for the partiesof the decision on reasonableness For example wouldthe defendant normally be insured Would the plaintiffhave to bear the cost himself

In inter-business contracts the practices of business peopleare considered

bull In Photo Production v Securicor (1980) the House of Lordsstated that the courts should be reluctant to interfere withthe settled practices of businesses They pointed out thatthe function of an exclusion clause was often to indicatewho should insure against a particular risk

bull In Green v Cade Bros (1983) it was decided that a clauserequiring notice of rejection within three days of deliveryof seed potatoes was unreasonable as a defect could nothave been discovered by inspection within this time buta clause limiting damages to the contract price was

CA

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66

upheld ndash as it had been negotiated by organisationsrepresenting the buyers and sellers and lsquocertifiedrsquopotatoes had been available for a small extra charge (thatis Sched 2 was applied)

bull However in George Mitchell v Finney Lock Seeds Ltd (1983)the buyers suffered losses of pound61000 due to the supply ofthe wrong variety of cabbage seeds The contract limitedthe liability of the seller to a refund of the price paid(pound192) Held ndash the clause was not reasonable Matterstaken into consideration

the clause was inserted unilaterally ndash there was nonegotiation

loss was caused by the negligence of the seller

the seller could have insured against his liability

the sellers implied that they themselves consideredthe clause unreasonable by accepting liability inprevious cases

bull In Overland Shoes Ltd v Schenkers Ltd (1998) the Court ofAppeal upheld a judgersquos ruling that a clause preventingreliance on a lsquoset-offrsquo was not unreasonable on the basisthat it formed part of a set of standard trading conditionsused widely in the shipping industry They had arisenfrom careful negotiation and were generally recognisedin the industry as lsquofair and reasonablersquo

bull In Overseas Medical Supplies Ltd v Orient Transport ServicesLtd (1999) the Court of Appeal summarised the variousfactors which should be looked at in considering the testof reasonableness It confirmed that the lsquoGuidelinesrsquocontained in Sched 2 to UCTA although specificallyintended for consumer contracts for the sale of goods

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W67

should be regarded as relevant wherever the test ofreasonableness is applied

In many of the cases the appeal courts have emphasised thatthe decision on lsquoreasonablenessrsquo is best made by the trialjudge and that the appeal courts should be reluctant tointerfere with the conclusion arrived at at first instance

Unfair Terms in Consumer Contracts Regulations 1999

Based on EU Directive on Unfair Terms in ConsumerContracts The 1999 regulations replaced earlier regulationsmade in 1994

Coverage

The regulations apply to

This will be so even if some other parts of the contract havenot been drafted in advance

bull The regulations do not apply to contracts which relate toemployment family law or succession rights companiesor partnerships terms included in order to comply withlegislation or an international convention

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68

Coverage Fairness Remedies

lsquoany term in a contract between a seller or supplier and a consumer where

the term has not been individually negotiatedrsquo thatis it has been drafted in advance

bull They do however cover insurance policies and contractsrelating to land

bull A lsquobusinessrsquo is defined to include a trade or professionand the activities of any government department or localor public authority

bull A lsquo consumerrsquo means a natural person who is acting for apurpose outside his business

Note ndash they are wider than UCTA in that they cover allterms not only exclusion clauses for example harsh termsconcerning unauthorised overdrafts The regulations arenarrower than UCTA in that they only cover clauses inconsumer contracts which have not been individuallynegotiated The definition of a consumer is also narrower cfR and B Customs v UDT (1988)

Unfairness

Regard must be had to the nature of the goods and servicesprovided the other terms of the contract and all thecircumstances relating to its conclusion

The definition of the main subject matter and the adequacyof the price or remuneration are not subject to the test offairness

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W69

The clause is unfair if contrary to the requirementsof good faith it creates a significant imbalance

in the partiesrsquo rights and obligations to thedetriment of the consumer

lsquoGood faithrsquo is not defined and unlike the earlier (1994)regulations the 1999 regulations do not spell out anyrelevant factors

In Director General of Fair Trading v First National Bank plc(2000) the Court of Appeal emphasised the need foropenness and information which will enable the consumerto make a properly informed choice about entering into thecontract In this case a clause imposing a lsquosurprisingrsquorequirement as to the payment of interest on a loan whichhad been the subject of a court order did not meet therequirement of good faith

The regulations contain a long indicative list of clauses likelyto be unfair These include not only exemption clauses butalso clauses which give the sellersupplier rights withoutcompensating rights for the consumer for example

bull enabling the sellersupplier to raise the price withoutgiving the buyer a chance to back out if the price rise istoo high

bull enabling the sellersupplier to cancel the agreementwithout penalty without also allowing the customer asimilar right

bull automatically extending the duration of the contractunless the customer indicates otherwise within an unreasonably brief period of time

Note also that all terms (including those defining thesubject matter or the price) should be expressed in plainEnglish and any ambiguity should be interpreted in theconsumerrsquos favour

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70

Effect of an unfair term

bull The term itself shall not be binding on the consumer butthe rest of the contract may be enforced

bull The Director General of Fair Trading has a duty toconsider any complaint made to him that a term is unfairHe is empowered to bring proceedings for an injunctionagainst any business using an unfair term It was thispower that was used in the first reported case on theregulations Director General of Fair Trading v FirstNational Bank plc (2000) discussed above For the firsttime a similar power to apply for such an injunction isgiven to certain other lsquoqualifying bodiesrsquo including theData Protection Registrar various Directors General (ofgas supply electricity supply telecommunicationswater services) and the Consumersrsquo Association

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W71

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W73

5 Vitiating elements which render a contract voidable

Significance of a contract being voidable

Thus

bull The innocent party may if he wishes affirm the contract

bull Where the innocent party has not performed thecontract he may refuse to perform and rely on themisrepresentation as a defence

bull The misled party may rescind the contract by

informing the other party or

where a fraudulent party cannot be traced byinforming the police (Car and Universal Finance Co vCaldwell (1965)) or

bringing legal proceedings

The innocent party may set the contractaside if he so wishes

Misrepresentation Duress Undue influence

Certain mistakes (see Chapter 6)

bull It was stated in TSB v Camfield (1995) that the right torescind is that of the representee not the court All thecourt can do is decide whether the representee haslawfully exercised the right to rescind It is not thereforean exercise of equitable relief by the court

Rescission

bull But in Cheese v Thomas (1993) the court declared that thecourt must look at all the circumstances to do what waslsquofair and justrsquo In that case a house which had beenjointly bought had to be sold afterwards at aconsiderable loss The agreement between the twoparties for the purchase of the house was rescinded butthe court held that it was not necessary for the guiltyparty to bear the whole of the loss It was fair and justthat the proceeds should be divided according to thepartiesrsquo respective contributions

bull This contrasts with the normal situation where aproperty has diminished in value and the misled partywould get all his money returned (Erlanger v NewSombrero Phosphate Co (1878))

bull As part of this restoration equity may order a sum ofmoney to be paid to the misled person to indemnify himagainst any obligations necessarily created by the contract

In Whittington v Seale-Hayne (1900) the plaintiffsbreeders of prize poultry were induced to take a lease ofthe defendants premises by his innocent

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74

Restoring the parties as far as is possible to the position they were in before they

entered into the contract

misrepresentation that the premises were in a sanitarycondition Under the lease the plaintiffs covenanted toexecute all works required by any local or publicauthority Owing to the insanitary conditions of thepremises the water supply was poisoned the plaintiffsrsquomanager and his family became very ill and the poultrybecame valueless for breeding purposes or died Inaddition the local authority required the drains to berenewed The plaintiffs sought an indemnity for all theirlosses The court rescinded the lease and held that theplaintiffs could recover an indemnity for what they hadspent on rates rent and repairs under the covenants inthe lease because these expenses arose necessarily out ofthe contract It refused to award compensation for otherlosses since to do so would be to award damages not anindemnity there being no obligation created by thecontract to carry on a poultry farm on the premises or toemploy a manager etc

bull Note ndash rescission even if enforced by the court is alwaysthe act of the defrauded party It is effective from the dateit is communicated to the representor or the police (seeabove) and not from the date of any judgment insubsequent litigation

Rescission is subject to certain barsC

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75

Affirmation of the contract

Lapse of time

Restitution mustbe possible

Third party rights

Affirmation of the contractThe representee may not rescind if he has affirmed thecontract after learning of the misrepresentation either bydeclaring his intention to proceed with the contract or byperforming some act from which such an intention can beinferred In Long v Lloyd (1958) the buyer of a lorryundertook a long journey after discovering serious defects inthe lorry Held ndash he had affirmed the contract

Lapse of timeThis can provide evidence of affirmation where themisrepresentee fails to rescind for a considerable time afterdiscovering the falsity

In cases of innocent misrepresentation lapse of time canoperate as a separate bar to rescission In Leaf v InternationalGalleries (1950) the plaintiff bought a picture which the sellerhad innocently misrepresented to be by Constable Fiveyears later the plaintiff discovered it was not by Constableand immediately sought to rescind the contract Held ndashbarred by lapse of time

Restitution must be possibleA person seeking to rescind the contract must be able andwilling to restore what he has received under it Howeverrescission is an equitable remedy and the court will notallow minor failures in the restoration to the originalposition to stand in the way In Erlanger v New SombreroPhosphate Co (1878) the purchaser had worked phosphatemines briefly Held ndash he could rescind by restoring propertyand accounting for any profit derived from it

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76

Third party rightsThere can be no rescission if third parties have acquiredrights in the subject matter of the contract See Phillips vBrooks (1919) and Lewis v Averay (1972) ndash Chapter 6

Misrepresentation

Representations and terms of a contract

Material statements made during negotiations leading to acontact may be either

bull terms of the contract If these are untrue the untruthconstitutes a breach of contract

bull statements which helped to induce the contractthat is lsquomere representationsrsquo If untrue ndash they arelsquomisrepresentationsrsquo

(For distinctions between terms and lsquomere representationsrsquosee Chapter 3)

Requirements of misrepresentation

It must be

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W77

An untrue statement of fact made by one party tothe contract (representor) to the other (representee)which induces the other to enter into the contract

The requirements ofmisrepresentation

Remedies formisrepresentation

A statement of fact

bull Not a lsquomere puffrsquo that is a statement so vague as to bewithout effect for example describing a house as alsquodesirable residencersquo

bull Not a promise A promise to do something in the futureis only actionable if the promise amounts to a bindingcontract (Kleinwort Benson Ltd v Malaysian Mining CorpnBhd (1989))

bull Not a statement of opinion for example in Bisset vWilkinson (1927) the vendor of a farm which had neverbeen used as a sheep farm stated that in his judgment thefarm would support 2000 sheep Held ndash a statement ofopinion

But a statement expressed as an opinion may be treatedas a statement of fact if the person making the statementwas in a position to know the true facts In Smith v Landand House Prop Corpn (1884) the vendor of a hoteldescribed it as lsquolet to a most desirable tenantrsquo when thetenant had for a long time been in arrears with the rentThe Court of Appeal held there was a misrepresentationof fact

bull Not a statement of intention But if the representor didnot have that intention then it is a misstatement of fact asin Edgington v Fitzmaurice (1885) where the directorsissued a prospectus claiming that the money raised was tobe used to improve the companyrsquos buildings and toexpand its business Their real intention was to pay off thecompanyrsquos debts Held ndash fraudulent misrepresentation

bull Not a statement of law

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78

An active representation

bull The statement will normally be in words but other formsof communication which misrepresent the facts willsuffice as in Horsfall v Thomas (1862) (below)

bull Failure to make a statement however or the non-disclosure of facts will not generally qualify asmisrepresentation

Exceptionsbull Where facts have been selected to give a misleading

impression as in Dimmock v Hallett (1866) where avendor of land stated that farms were let but omitted tosay that the tenants had given notice to quit

bull Where circumstances have changed since arepresentation was made then the representor has a dutyto correct the statement In With v OrsquoFlanagan (1936) itwas stated correctly that a medical practice was worthpound2000 a year but by the time the practice changedhands it was practically worthless Held ndash there was aduty to disclose the changed circumstances

bull Contracts uberrimae fidei (lsquoof the utmost good faithrsquo) forexample

Contract of insurance Material facts must bedisclosed that is facts which would influence aninsurer in deciding whether to accept the proposalor to fix the amount of the premium for example apolicy of life insurance has been avoided because itwas not disclosed that the proposer had already beenturned down by other insurers

Family arrangements In Gordon v Gordon (1816ndash19)a division of property based on the proposition thatthe elder son was illegitimate was set aside upon

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W79

proof that the younger son had concealed hisknowledge of a private marriage ceremonysolemnised before the birth of this brother

Analogous contracts Where there is a duty todisclose not material but unusual facts for examplecontracts of suretyship

It must have been a material inducement

A statement likely to induce a person to contract willnormally be assumed to have done so Moreover if theclaimant can show that he was in fact induced it is nodefence to argue that a reasonable person would have beeninfluenced by the misrepresentation (Museprime PropertiesLtd v Adhill (1990)) There is no inducement however where

bull the misrepresentee or his agent actually knew the truth

bull the misrepresentee was ignorant of the misrepresentationwhen the contract was made In Horsfall v Thomas (1862)the vendor of a gun concealed a defect in the gun(misrepresentation by conduct) The buyer howeverbought the gun without examining it Held ndash theattempted misrepresentation had not induced thecontract

bull the misrepresentee did not allow the representation toaffect his judgment In Attwood v Small (1838) a buyerappointed an agent to check the statement made by theseller as to the reserves in a mine Held ndash not actionablemisrepresentation The buyer had relied on his ownagentrsquos statements not that of the vendor

Note however that

bull provided that the representation was one of theinducements it need not be the sole inducement

CA

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80

bull the fact that the representee did not take advantage of anopportunity to check the statement is no bar to an actionfor misrepresentation

In Redgrave v Hurd (1881) a solicitor was induced topurchase a house and practice by the innocentmisrepresentation of the seller Held ndash he was entitled torescission although he did not examine the documentswhich were available to him and which would haveindicated to him the true state of affairs

bull neither is it contributory negligence not to check astatement made by a vendor (Gran Gelato v Richcliff(1992))

Remedies for misrepresentation

Rescission

Misrepresentation renders a contract voidable ndash see aboveThe Misrepresentation Act 1967 provides that rescission isavailable in relation to

bull lsquoexecutedrsquo contracts for the sale of goods andconveyances of property

bull representations which have been incorporated as a termof the contract

Rescission was not available in these circumstances before1967

Damages

bull There are five ways in which damages may be claimedfor misrepresentation It seems likely that in future thenormal ground for damages will be the

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W81

Misrepresentation Act 1967 but there are still cases wheredamages can only be claimed at common law if at all

bull Note ndash rescission and damages are alternative remediesin many cases but if the victim of fraudulent ornegligent misrepresentation has suffered consequentialloss he may rescind and sue for damages

bull Damages can be claimed on different bases according tothe kind of misrepresentation that was committed

Damages in the tort of deceit for fraudulent misrepresentationIt is up to the misled party to prove that themisrepresentation was made fraudulently that isknowingly without belief in its truth or recklessly as towhether it be true or false (Derry v Peek (1889))

The burden of proof on the misled party is a heavy one

Damages in the tort of negligence Victims of negligent misrepresentation may be able to sueunder Hedley Byrne v Heller amp Partners (1963) Themisrepresentee must prove (1) that the misrepresentorowed him a duty to take reasonable care in making therepresentation that is there must be a lsquospecial relationshiprsquo(2) that the statement had been made negligently

Damages under s 2(1) of the Misrepresentation Act 1967Section 2(1) of the Misrepresentation Act 1967 provides thatwhere a person has entered into a contract after amisrepresentation has been made to him by another partythereto and as a result of it has suffered loss lsquothen if themisrepresentor would be liable for damages if it had beenmade fraudulently he will be so liable notwithstanding thatthe misrepresentation was not made fraudulently unless heproves that he had reasonable grounds to believe and did

CA

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82

believe up to the time the contract was made that the factsrepresented were truersquo

Note that this is a more beneficial remedy for themisrepresentee as he only need prove that the statement isuntrue It is for the misrepresentor to prove that he had goodgrounds for making the statement and the burden of proofis a heavy one In Howard Marine and Dredging Co Ltd vOgden (1978) the owner of two barges told the hirer that thecapacity of the barges was 1600 tons He obtained thesefigures from the Lloydrsquos list but in this case the Lloydrsquos listwas incorrect The court held that he did not have goodgrounds for this statement he should have consulted themanufacturerrsquos specifications which should have been in hispossession

Assessment of damages

The Court of Appeal confirmed in Royscot Trust v Rogerson(1991) that damages under s 2(1) of the MisrepresentationAct should also be awarded on the reliance basis because ofthe lsquofiction of fraudrsquo in the wording of the Act

Remoteness of damage

The Court of Appeal also held in that case because of thelsquofiction of fraudrsquo that the rules of remoteness whichnormally apply only to the tort of deceit should be appliedunder s 2(1)

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W83

Damages in the tort of deceit and the tortof negligence are assessed on the tortious basis of reliance that is the claimant is entitled to be

put in the position he was in before the tort was committed

(In contract and in all torts other than deceit the losses mustbe lsquoreasonably foreseeablersquo)

bull In Royscot Trust v Rogerson (1991) a customer arranged toacquire a car on hire purchase from a car dealer Thefinance was to be provided by a finance company theRoyscot Trust which insisted on a deposit of 20 Thedealer falsified the figures in order to indicate a deposit of20 as required Some months later the customerwrongfully sold the car thus depriving the financecompany of its property The finance company sued thedealer under s 2(1) of the Misrepresentation Act It washeld by the Court of Appeal that the finance companycould recover damages from the car dealer to cover theloss of the car since the loss followed themisrepresentation The remoteness rules applicable to thetort of deceit would be applied and the loss did not needto be foreseeable

Controversy has followed this decision as the tort ofdeceit to which this rule only previously applied isdifficult to establish and involves moral culpability onthe part of the defendant It has now been extended to anaction which is relatively easy to establish (see HowardMarine and Dredging v Ogden) and may only involvecarelessness Some doubts as to whether this was thecorrect approach were expressed obiter by the House ofLords in Smith New Court Securities Ltd v ScrimgeourVickers (Asset Management) Ltd (1996) but for the timebeing Royscot v Rogerson remains good law

CA

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84

That is damages would be awarded to coverall losses which flow directly from the

untrue statement whether or not those losses were foreseeable

bull Further problems are caused by the decision of the Courtof Appeal in East v Maurer (1991) a case in the tort ofdeceit where it was held that lsquoall damages flowingdirectly from the fraudrsquo would cover damages for somedegree of loss of profit ndash a heading previously consideredto be appropriate only to expectation damages incontract It is a matter for speculation whether the courtswill apply this decision to cases under theMisrepresentation Act and bring loss of profit under theheading of reliance loss on the basis that all losses whichflow directly from the misrepresentation should berecoverable

bull A generous interpretation of s 2(1) of the 1967 Act hadalso been applied by the court in Naughton v OrsquoCallaghan(1990) where reliance damages had been awarded tocover not only the difference between the value of the coltand the value it would have had if the statements madeabout it were correct (the quantification rule for breach ofcontract) but also the cost of its maintenance since thesale

It has been alleged that these three cases swell the amount ofdamages which can be awarded under the MisrepresentationAct to a greater extent than intended by Parliament and thatthe damages available for misrepresentation can nowexceed those available for breach of contract

Damages for wholly innocent misrepresentationDamages cannot be claimed for a misrepresentation whichis not fraudulent or negligent but

bull an indemnity may be awarded (see above)

bull damages in lieu of rescission may be awarded under s 2(2) of the Misrepresentation Act 1967 C

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85

In William Sindall v Cambridgeshire CC (1994) the Court ofAppeal stated (obiter) that where the court is consideringwhether to award damages in lieu of rescission threematters should be taken into consideration

the nature of the misrepresentation

the loss which would be caused to the representee ifthe contract were upheld

the hardship caused to the misrepresentor if the con-tract were rescinded The Court of Appeal also statedthat the damages should resemble damages forbreach of warranty

bull lsquodamages in lieursquo can it seems be awarded even if one ofthe bars to recision apply (Thomas Witter Ltd v TBPIndustries (1996))

bull where the misrepresentation has become a term of thecontract the misrepresentee can sue for damages forbreach of contract as an alternative to damages formisrepresentation

Duress

A common law doctrine

Duress to the person

This requires actual or threatened violence to the personOriginally it was the only form of duress recognised by thelaw

CA

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86

Duress involves coercion

Duress to goods

bull Threat of damage to goods ndash traditionally this has notbeen recognised by the law but in view of thedevelopment of economic duress it is assumed thatduress to goods would today be a ground for relief

Economic duress

Requires

Economic duress led to rescission of a contract in UniverseTankships of Monrovia v ITWF (1983) where a union hadlsquoblackedrsquo a tanker and refused to let it leave port untilcertain moneys had been paid The House of Lordsconsidered that this amounted to economic duress andordered return of the money

It has been stated that economic duress requires

Compulsion or coercion of the will

In Pau On v Lau Yiu Long (1980) Lord Scarman listed thefollowing indications of compulsion or coercion of the will

bull did the party coerced have an alternative course open tohim

bull did the party coerced protest

bull did the party coerced have independent advice

bull did the party coerced take steps to avoid the contract

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W87

Compulsion of the will An illegitimate threat

Illegitimate pressure

There must be some element of illegitimacy in the pressureexerted for example a threatened breach of contract Theillegitimacy will normally arise from the fact that what isthreatened is unlawful In CTN Cash and Carry v Gallaher(1994) however the Court of Appeal accepted obiter that anoutrageous but technically lawful threat could amount toduress This possibility has not so far been developed in anylater cases

Economic duress is often pleaded together with lack ofconsideration in cases where a breach of contract isthreatened by the promisor unless he receives additionalpayment

bull In Atlas Express v Kafco (1989) Kafco a small companywhich imported and distributed basketware had acontract to supply Woolworths They contracted withAtlas for delivery of the basketware to Woolworths Thecontract commenced then Atlas discovered they hadunderpriced the contract and told Kafco that unless theypaid a minimum sum for each consignment they wouldcease to deliver Kafco were heavily dependent on theWoolworths contract and knew that a failure to deliverwould lead both to the loss of the contract and an actionfor damages At that time of the year they could not findan alternative carrier and agreed under protest to makethe extra payments Atlas sued for Kafkorsquos non-paymentHeld ndash the agreement was invalid for economic duressand also for lack of consideration

bull Cf Williams v Roffey Bros (1989) ndash Chapter 2

The following threats are probably not illegitimate (subjectto the possibility raised by CTN Cash and Carry v Gallaher(1994) discussed above)

CA

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88

bull a threat not to enter into a contract

bull a threat to institute civil proceedings

bull a threat to call the police

Note ndash not all threatened breaches of contract will amount toeconomic duress It will only do so when the threatenedparty has no reasonable alternative open to him The normalresponse to a breach of contract is to sue for damages

Remedies

bull In North Ocean Shipping Co v Hyundai Construction Co TheAtlantic Baron (1979) the court found economic duressbut refused rescission on the ground that the plaintiff hadaffirmed the contract

Undue influence

An equitable doctrine

bull Undue influence is based on the misuse of a relationshipof trust or confidence between the parties Where foundit renders a contract voidable The innocent party willneed to apply to the court for rescission of the contract(see above)

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W89

Pressure not amounting to duress at common lawwhereby a party is excluded from the exercise of

free and independent judgment

Duress renders a contract voidable Rescission willnormally be sought from the courts See above

Contracts where undue influence is presumed

For example

bull Contracts between certain relationships

parent and child

trustee and beneficiary

solicitor and client

doctor and patient

religious adviser and disciple

bull Where there has been a long relationship of confidenceand trust between the parties

For example between husband and wife or where oneparty had been accustomed to rely for guidance andadvice on the other In Lloyds Bank v Bundy (1975) MrBundy an elderly west country farmer on the advice ofthe local Lloyds Bank assistant manager granted a chargeto the bank over the family farm to guarantee his sonrsquos

CA

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90

Contracts where undue influence

is presumed

Contracts where actual undue

influence must be proved

Contracts induced by undue influence are of two kinds

The contract must be manifestly disadvantageous

to the weaker party

Contracts need not be manifestly disadvantageous

to the weaker party

indebtedness to the bank Mr Bundy had all his liferelied on Lloyds Bank for financial advice the court setaside the charge on the ground of undue influence on thepart of the bank

Note ndash a bank will not be presumed to exert undueinfluence in normal circumstances

In Credit Lyonnais Bank Nederland NV v Burch (1997) therelationship between an employer and a junior employee(who was persuaded to put up her own house as securityfor the businessrsquos overdraft) was held to be one of undueinfluence

The stronger party can disprove undue influence byshowing that

bull full disclosure of all material facts was made

bull the consideration was adequate

bull the weaker party was in receipt of independent legaladvice

Contracts where actual undue influence is proved

The burden of proof lies on the claimant to show that suchinfluence did exist and was exerted

Effect of undue influence on a third party

In Barclays Bank v OrsquoBrien (1993) Mrs OrsquoBrien had signed aguarantee which used the jointly owned matrimonial homeas security for a loan made to her husbandrsquos business Herhusband had told her it was for a maximum of pound60000 butin fact it was for pound130000 Mrs OrsquoBrien had not been advisedby the bank to consult an independent solicitor The Houseof Lords held that there was no undue influence in this casebut there was misrepresentation on the part of the husband

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W91

They further held that where there was undue influence ormisrepresentation or other legal wrong then the injuredpartyrsquos right to have the transaction set aside would beenforceable also against the third party provided the thirdparty had actual or constructive notice of the wrong Suchnotice would arise where

bull the parties were in an emotional relationship forexample co-habitees (heterosexual or homosexual) orchild and aged parents

bull one party was undertaking a financial liability on behalfof the other which was not to her or his advantage

The court also held that in the above situation the third partycould discharge his duty by making clear to the partyconcerned the full nature of the risk he or she is taking onfor example

bull by conducting a personal interview or

bull urging independent advice

Note ndash this doctrine of constructive notice applies to sureties(guarantors) but does not apply where a bank makes a jointloan to both parties as the facts in that situation do not meetthe requirements set out in Barclays Bank v OrsquoBrien See CIBCMortgages v Pitt (1993)

Note

bull A failure by a solicitor to give proper advice cannot beheld against a bank (even if the bank knows that thesolicitor is acting for both the borrower (for example thehusband) and the guarantorsurety (for example thewife)) ndash see Royal Bank of Scotland v Etridge (No 2) (1998)

CA

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92

bull Once undue influence or misrepresentation has beenfound the whole contract is avoided it cannot be upheldin part ndash TSB Bank plc v Camfield (1995)

bull Damages are not available as a remedy for duress orundue influence

CO

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W93

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W95

6 Mistake

There is much disagreement concerning the effect ofmistake on a contract There are many reasons for thisconfusion as to which terms to use a large number of caseswhich can be interpreted in different ways no recentdecisive House of Lords decisions on the subject theintervention of equity

Terminology

Different terms are used by Cheshire and Anson to describethe same kind of mistake and you should ascertain whichterms are used in your textbook

The terms used by Cheshire are used in this LawCard

CHESHIRE ANSON Effect

Same mistake Common Mutual May nullifymade by both mistake mistake agreementparties

Parties at Mutual Unilateral Negativescross-purposes mistake mistake agreement

Parties atcross-purposesbut one party Unilateral Unilateral Negativesknows that mistake mistake agreementthe other is mistaken

Effect of a mistake

If the contract is rendered void then the parties will bereturned to their original positions and this may defeat therights of innocent third parties who may have acquired aninterest in the contract

The reluctance of the courts to develop the common lawdoctrine of mistake is probably due to the unfortunateconsequences for third parties that can result from holdinga contract void Equity has however intervened to producemore flexibility as noted below

CA

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96

In common mistakes the parties are agreed but both are mistaken

In mutual and unilateral mistakes the parties may not have reached agreement and these mistakes are sometimes dealt with

under the heading of agreement

The general rule is that a mistake has no effect on a contract but certain mistakes of a fundamental nature sometimes called

operative mistakes may render a contract void at common law

Operative mistakes

Common mistakes

bull At common law this may render the contract void thatis the contract has no legal effect it is unenforcable byeither party and title to property cannot pass under it

bull In equity a more flexible approach has developedcontracts containing certain common mistakes have beentreated as voidable In setting aside such contracts thecourts have a much wider control over the terms it canimpose on the parties

In Bell v Lever Bros (1932) it was stated that to nullify theagreement the lsquomistake must go to the root of the contractrsquo

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W97

Commonmistakes

re a fundamentalmatter for

example resextincta res sua

the quality of the subject matter

Mutualmistakes

re identity ofsubject matter

of contract

Unilateralmistakes

re terms ofcontract re

identity of otherparty to contract

The parties are agreed but they are both under the same misapprehension If this

misapprehension is sufficiently fundamentalit may nullify the agreement

Lever Bros agreed to pay two directors of a subsidiarycompany substantial sums of money in compensation forloss of office while unaware of the fact that they hadengaged in irregular conduct which would have allowedthem to be dismissed without compensation Lever Brosasked the court to order the return the compensation paid onthe ground that it had been paid as a result of a commonmistake The House of Lords held that the common mistakeconcerning the need to pay compensation was notlsquosufficiently fundamentalrsquo to render the contract void

Common mistakes lsquosufficiently fundamentalrsquo to render a

contract void

A common mistake as to the existence of the subject matter(res extincta)bull In Galloway v Galloway (1914) the parties believing they

were married entered into a separation agreement Laterthey discovered that they were not validly married Held ndashthe separation agreement was void for a common mistake

bull In Strickland v Turner (1852) the court declared void onthe grounds of a common mistake a contract to purchasean annuity on the life of a person who had already died

bull In Couturier v Hastie (1856) a buyer bought a cargo ofcorn which both parties believed to be at sea the cargohad however already been disposed of Held ndash thecontract was void

bull Section 6 of the Sale of Goods Act 1979 declares thatlsquoWhere there is a contract for the sale of specific goodsand the goods without the knowledge of the seller haveperished when the contract is made the contract is voidrsquo

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98

However in McRae v Commonwealth Disposals Commission(1951) the commission sold to McRae the right to salvagea tanker lying on a specified reef There was no such reefof that name nor was there any tanker The court foundthat there was a valid contract and that the commissionhad impliedly guaranteed the existence of the tanker Thecase could be distinguished from the Australianequivalent of s 6 on the ground that there never had beena tanker and it had therefore not perished

Whether a contract is void or valid depends on theconstruction of the contract that is even if the subjectmatter does not exist the contract will be valid

if performance was guaranteed or

if it was the purchase of a lsquochancersquo

Otherwise the contract would be void

Mistake as to title ndash res sua ndash that is the thing sold alreadybelongs to the buyerbull In Cooper v Phibbs (1867) Cooper not realising that a

fishery already belonged to him agreed to lease it fromPhibbs Held ndash the contract was void

Mistake as to the possibility of performing the contractbull In Sheik Bros Ltd v Ochsner (1957) a contract was held

void as the land was not capable of growing the cropcontracted for

bull In Griffith v Brymer (1903) a contract to hire a room toview the coronation of Edward VII which was madeafter the procession had been cancelled was held void(Commercial impossibility) C

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99

Mistake as to the quality of the subject matterLords Atkin and Thankerton both insisted in Bell v Lever Brosthat to render a contract void the mistake must go to thelsquoroot of the contractrsquo

bull It has been argued that if the mistake in Bell was notsufficiently fundamental to render a contract void then itis highly unlikely that any mistake concerning qualitywould do so

bull Similarly in Leaf v International Galleries (1950) whereboth parties mistakenly believed that a painting was byConstable the Court of Appeal stated that the contractwas not void for common mistake

bull In Solle v Butcher (1950) the Court of Appeal declined todeclare void a lease which both parties believed was notsubject to the Rent Acts A similar decision was reachedin Grist v Bailey (1967) where the parties both believedthat a house was subject to a protected tenancy

However Lord Justice Steyn in Associated Japanese Bank vCredit du Nord (1988) stated that not enough attention hadbeen paid to speeches in Bell v Lever Bros which did indicatethat a narrow range of mistakes in quality could render acontract void for example Lord Atkinrsquos statement that lsquoacontract may be void if the mistake is as to the existence ofsome quality which makes the thing without that qualityessentially different from the thing it was believed to bersquo Hegave as an example ndash if a horse believed to be sound turnsout to be unsound then the contract remains valid but if ahorse believed to be a racehorse turns out to be a carthorsethen the contract is void

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100

Equity

The role of equity according to this view is supplementarydesigned to relieve the limitations of the common law

bull Rescission on terms was granted by the Court of Appealin Solle v Butcher (1950) (see above) The court rescindedthe lease but gave the tenant the option of staying thereon terms of his paying the extra rent which the landlordcould have charged in view of the improvements

bull Rescission on terms was also granted in Grist v Bailey(1967) where a house was sold in the mistaken belief thatit had a protected tenancy and in Laurence v LexcourtHoldings (1978) where there was a common mistake withregard to planning permission

bull Rescission without terms was granted in Magee v PennineInsurance Co (1969) where an agreement by an insurancecompany to meet a claim was rescinded because theparties were unaware that it was based on a policy whichwas voidable due to a misrepresentation by the assured

bull In William Sindall plc v Cambridgeshire CC (1994) Evans LJsuggested that whereas the common law only recognisedmistakes as to the subject matter of the contract equitywould recognise a lsquowider and perhaps unlimitedcategory of common mistakersquo In Clarion Ltd v NationalProvident Institution (2000) however Rimer J held that

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W101

Lord Justice Steyn in Associated Japanese Bank v Credit du Nord (1988) stated that a court will first examine whether a

contract is void at common law if it is not then itwill examine whether equity will grant rescission

equity would only intervene where the mistake was as tothe terms of the contract or its subject matter Equity didnot provide relief for a lsquobad bargainrsquo

Mutual and unilateral mistakes

The courts adopt an objective test in deciding whetheragreement has been reached It is not enough for one of theparties to allege that he was mistaken

Mistake can negate consent in the following cases

Mutual mistakes concerning the identity of the subject matter

bull In Raffles v Wichelhaus (1864) a consignment of cotton wasbought to arrive lsquoex Peerless from Bombayrsquo Two shipsboth called Peerless were due to leave Bombay at aroundthe same time Held ndash no agreement as the buyer wasthinking of one ship and the seller was referring to theother ship

bull Similarly there was no agreement in Scriven Bros vHindley amp Co Ltd (1913) where the seller sold lsquotowrsquo andthe buyer bought lsquohemprsquo Again there was an ambiguityas both lots were delivered under the same shippingmark and the catalogue was vague

CA

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102

In these cases the parties are at cross-purposesbut there must have been some ambiguity

in the situation before the courts willdeclare the contract void

These mistakes negate consentthat is they prevent the formation of an agreement

bull But in Smith v Hughes (1871) the court refused to declarevoid an agreement whereby the buyer had thought hewas buying old oats when in fact they were new oats asthe contract was for the sale of lsquooatsrsquo The mistake relatedto the quality not the identity of the subject matter

Unilateral mistake concerning the terms of the contract

bull In Hartog v Colin and Shields (1939) the sellers mistakenlyoffered to sell goods at a given price per pound whenthey intended to offer them per piece All the preliminarynegotiations had been on the basis of per piece Thebuyers must have realised that the sellers had made amistake The contract was declared void

bull In Smith v Hughes however the contract was for the saleof lsquooatsrsquo not lsquoold oatsrsquo it would only have been void iflsquoold oatsrsquo had been a term of the contract

Unilateral mistake as to the identity of other parties to the

contract

There are a number of contradictory cases and theoriesunder this heading

Traditionally a distinction is made between mistakes as toidentity and mistakes as to attributes (for example creditworthiness)

bull In Cundy v Lindsay (1878) a Mr Blenkarn ordered goodsfrom Lindsay signing the letter to give the impressionthat the order came from Blenkiron amp Co a firm knownto Lindsay amp Co Held ndash the contract was void Lindsay

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W103

Here one party has taken advantage of the other partyrsquos error

amp Co had only intended to do business with Blenkiron ampCo There was therefore a mistake concerning the identityof the other party to the contract

bull In Kingrsquos Norton Metal Co v Edridge Merrett amp Co Ltd(1872) on the other hand a Mr Wallis ordered goods onimpressive stationery which indicated that the order hadcome from Hallam amp Co an old established firm withbranches all over the country Held ndash the contractbetween Kingrsquos Norton Metal Co and Wallis was notvoid The sellers intended to do business with the writerof the letter they were merely mistaken as to hisattributes that is the size and credit worthiness of hisbusiness

bull In Boulton v Jones (1857) the defendant sent an order forsome goods to a Mr Brocklehurst unaware that he hadsold the business to his foreman the plaintiff Theplaintiff supplied the goods but the defendant refused topay for them as he had only intended to do business withBrocklehurst against whom he had a set off Held ndash therewas a mistake concerning the identity of the other partyand the contract was therefore void

However the cases all concerned contracts negotiated at adistance

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104

From the above three cases it would seem that acontract is void if the mistaken party intended to do

business with another specific person and the identity of that other person was important to him

bull In Phillips v Brooks (1919) a jeweller sold a gold ring anddelivered it on credit to a customer who had come intohis shop and had falsely claimed to be Sir GeorgeBullough a well known and wealthy man Held ndash thecontract was valid The jeweller had intended to dobusiness with the person in his shop

bull In Lewis v Averay (1972) a rogue claimed to be RichardGreene the film actor and produced a pass to Pinewoodstudios to verify this He was allowed to drive away a carin return for a cheque and subsequently resold the car forcash to Averay The cheque bounced and the sellerclaimed the return of the car on the ground that he wasmistaken as to the identity of the buyer Held ndash thecontract was valid The seller must be presumed to haveintended to deal with the person physically in the roomwith him Averay kept the car

There are two cases however where the plaintiffs were ableto establish a mistake as to the identity of a person in theirpresence

bull In Ingram v Little (1961) two sisters sold a car and handedit over against a worthless cheque to a person whoclaimed to be a Mr Hutchinson of Stanstead HouseCaterham They only did so after one of them hadchecked that there was a man of that name who lived atthat address The Court of Appeal held the contract void C

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105

Where the parties negotiate in person the samerules apply but there is a presumption that the inno-cent party intended to do business with the person

physically in his presence

They considered that the sisters had done enough toestablish that they only intended to deal with MrHutchinson

This case has been greatly criticised as it is difficult toreconcile with Phillips v Brooks and Lewis v Averay

bull In Sowler v Potter (1940) the lease of a cafeacute was granted toPotter who had previously been convicted of keeping adisorderly cafe under the name of Robinson The courtheld that the contract was void because of the lessorrsquosmistaken belief that Potter was not Robinson This casehas also been much criticised and doubted as it did notseem that Sowler had intended to do business with anyother identifiable person The contract could in any casehave been set aside for misrepresentation

The contract would in most cases be voidable in any case formisrepresentation where one party has misled the otherwith regard to his identity The advantage of having the contract declared void for mistake is to avoid the bars torescission

See Chapter 5 pp 75ndash76

Mistake as to the nature of the document signed

Defence of non est factum

bull The scope of this defence has been limited since thedecision in Saunders v Anglia Building Society (Gallie v Lee)(1971) where an old lady was persuaded by her nephewto sign a document conveying her house to her nephewrsquosfriend She had believed that she was signing a deed ofgift to her nephew She had not read the documentbecause her glasses were broken It was held that thedocument was valid It was stated that

CA

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106

It is also thought that it will only protect a person who isunder some disability The defence did succeed in LloydsBank v Waterhouse (1990) where the defendant who wasilliterate signed a guarantee of his sonrsquos debt to the bankThe father thought that the guarantee covered the purchaseprice of a farm but in fact it covered all his sonrsquosindebtedness to the bank It was held that the effect of thedocument was fundamentally different from what it wasbelieved to be There was no negligence and the contractwas therefore void

In UDT Ltd v Western (1976) it was held that these samerules applied to cases where a person had signed a formbefore all the details required by the form had been entered

Mistake in equity

The narrow approach taken by the common law towardsremedies for mistake (that is that it renders the contractvoid) is supplemented by the more flexible approach ofequity The following remedies may be available in equity

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W107

Rescission RectificationRefusal of

specificperformance

The signed document must be fundamentally different in effect from what it was thought to be

The signatory must prove that he had not been negligent in signing the document

Rescission

See common mistake (above)

Rectification

Where there has been a mistake not in the actual agreementbut in reducing it to writing equity will order rectification ofthe document so that it coincides with the true agreement ofthe parties

Necessary conditionsbull The document does not represent the intention of both

parties or

bull one party mistakenly believed a term was included in thedocument and the other party knew of this error InRoberts amp Co Ltd v Leicestershire CC (1961) the completiondate of a contract was rectified at the request of one partybecause it was clear that the other party was aware of theerror when the contract was signed

If the document fails to mention a term which one partybut not the other had intended to be a term of thecontract there is no case for rectification

bull There must have been a concluded agreement but notnecessarily a legally enforceable contract In Joscelyne vNissen (1970) a father and daughter agreed that thedaughter should take over the car hire business Inreturn the father would continue to live in the house andthe daughter would pay all the household expenses Thislast provision was not included in the written contractHeld ndash the contract should be rectified to include it

Note ndash a document which accurately records a prioragreement cannot be rectified because the agreement wasmade under some mistake (Rose v Pym above) Equityrectifies documents not agreements

CA

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108

Rectification is an equitable remedy and is available at thediscretion of the court Lapse of time or conflict with thirdparty rights may prevent rectification

Refusal of specific performance

bull In Webster v Cecil (1861) the defendant having previouslyrefused the plaintiffrsquos offer of pound2000 for his land wrote tothe plaintiff offering to sell it to him for pound1250 instead ofpound2250 as he had intended The plaintiff accepted theoffer Specific performance was refused as the plaintiffmust have been aware of the error (unilateral mistake)

bull Where there is no blame on the claimant the situation ismore difficult In Malins v Freeman (1837) the defendanthad mistakenly bought the wrong property at an auctionSpecific performance was refused In Tamplin v James(1879) however the court ordered specific performancewhere the defendant had bid for a property under anerror as to its true extent Presumably being forced to buya totally different property from the one he intendedwould have caused greater hardship than being forced tobuy a property whose dimensions differed from hisexpectations

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W109

Specific performance will be refused when the contract is void at common law Equity may also

refuse specific performance where a contract is validat law but only lsquowhere a hardship amounting toinjustice would have been inflicted upon him by

holding him to his bargainrsquo (Tamplin v James (1879))

7 Illegality and capacity

Illegal contracts are classified in different ways by differentauthorities In this chapter a distinction is drawn betweencontracts which involve the commission of a common lawor statutory offence and those which are void as beingcontrary to public policy

Illegality

The main issue with regard to illegal contracts is the effectof illegality on a contract The most often examined topicwith regard to contracts which are declared void ongrounds of public policy is contracts in restraint of trade

Illegal contracts

Contracts illegal by statute

bull Statute may declare a contract illegal for example theCompetition Act 1998

bull Statute may prohibit an act but declare that it shall noteffect validity of contract for example the ConsumerProtection Act 1987

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W111

Illegal contracts Contracts void

against public policy

Contracts prohibited by statute

Contracts illegal at common law

bull Statute may prohibit an act but not stipulate its effect onthe contract The status of the contract will in this casebe a matter of interpretation for the court In ReMahmoud and Ispahani (1921) the court decided that astatement that lsquoa person shall not buy or otherwise dealin linseed oil without a licencersquo was a prohibition and acontract entered into by a person without a licence wastherefore void

bull The courts are reluctant to imply a prohibition when thisis not clearly indicated in the statute In Hughes v AssetManagers (1995) the court held a contract valid despitethe fact that a document had not been signed by a personauthorised to do so as required by statute

Contracts illegal at common law

bull An agreement to commit a crime a tort or a fraud forexample defraud the rating authority (Allen v Roscous(1676)) to publish a libel (Clay v Yates)

bull An agreement to defraud the Inland Revenue (Napier vBusiness Associates (1951))

bull Contracts damaging to the countryrsquos safety or foreignrelations

bull Contracts interfering with the course of justice forexample contracts to give false evidence

bull Contracts leading to corruption in public life (Parkinson vRoyal College of Ambulance (1925))

bull Contracts tending to promote sexual immorality (Pearcev Brooks (1866))

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112

Effects of illegality

Contracts illegal as formed

In Pearce v Brooks (1866) the owner of a coach of unusualdesign was unable to recover the cost of hire from aprostitute who to his knowledge had hired it in order toattract clients

In Parkinson v Royal College of Ambulance (1925) Parkinsonwas unable to recover the money he had donated to thedefendants on the understanding that they would obtain aknighthood for him

Exceptionsbull Where the parties are not in pari delicto (that is not

equally at fault) for example where one party isunaware of the illegal nature of the contract or has beeninduced to enter into it by fraudulent misrepresentationor is the party the law was attempting to protect forexample a tenant who has paid an illegal premium(Kiriri Cotton Co v Dewani (1960))

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Contracts illegal as formed

Contracts illegal in their performance

Such contracts are void ab initio there can be no action for breach of contract

Money paid or property transferred under the contract cannot be recovered

bull Where the transferor genuinely repents and repudiatesthe contract before performance In Tribe v Tribe (1995)money was transferred to a son in order to avoid thefatherrsquos creditors At the end of the day the creditorswere all paid in full and the father was allowed to cite theoriginal reason for the transfer in order to rebut thepresumption of advancement (which would have meantthat his son could keep the shares) He had withdrawnfrom the illegal purpose before performance

In Bigos v Boustead (1951) however the court was notconvinced that the plaintiff had genuinely repented

bull Where the transferor can frame his claim without relyingon the contract In Bowmakers v Barnet Instruments (1945)the plaintiffs were able to rely on an action in the tort ofconversion to recover goods delivered under an illegalhire purchase contract

Similarly in Tinsley v Milligan (1993) both parties hadcontributed money towards the purchase of a house putin the name of Tinsley alone in order to allow Milligan tomake various social security claims When Milligan suedfor the return of the money it was argued that theagreement had been entered into for an illegal purposeand that the public conscience lsquowould be affronted byrecognising rights created by illegal transactionsrsquo TheHouse of Lords held however that a resulting trust hadbeen created in favour of Milligan by the contribution tothe purchase price Milligan therefore could rely on theresulting trust and had no need to rely on the illegalagreement

This case shows (a) that the rule applies to equity as wellas to common law (b) the test of lsquoaffront to the publicconsciencersquo previously used by the Court of Appeal is nolonger good law

CA

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114

bull Where part of the contract is lawful the court will notsever the good from the bad In Napier v National BusinessAgency (1951) certain payments were described aslsquoexpensesrsquo in order to defraud the Inland Revenue Thecourt refused to enforce payment of the accompanyingsalary as the whole contract was tainted with the illegality

Note ndash property can pass under an illegal contract as in Singv Ali (1960)

Contracts illegal in their performance

A claim by the innocent party to enforce the contract in thesecases is strong

bull In Marles v Philip Trant (1954) the defendant sold winterwheat described as spring wheat without anaccompanying invoice as required by statute Held ndash theplaintiff could sue for damages for breach of contractThe contract was illegal in its performance but not in itsinception

bull In Strongman v Sincock (1955) Sincock failed to getlicences which were needed to modernise some houseswhich belonged to him and refused to pay for the workon the basis that the contracts were illegal Held ndashStrongman could not sue on the illegal contracts butcould sue Sincock on his collateral promise to obtain thelicences

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W115

The illegality may only arise during the performance of a contract for example

a carrier may break the law by exceeding the speed limit whilst delivering goods

belonging to a client He will be punished but the contract will not necessarily be void

bull In Archbolds v Spanglett (1961) Spanglett contracted tocarry Archbolds whisky in a van which was not licensedto carry any goods other than his own Archbold wasunaware of this and could therefore recover damages forbreach of contract

But in Ashmore Benson Pease amp Co v Dawson Ltd (1973)the other party knew of the overloading of the lorry andcould not therefore recover damages He hadparticipated in the illegality

bull Even the guilty party may enforce the contract if theillegality is incidental

In Shaw v Groom (1970) a landlord failed to give histenant a rent book as required by law Held ndash he could suefor the rent The purpose of the statute was to punish thelandlordrsquos failure to provide a rent book not to render thecontract void

In St John Shipping v Rank (1957) a ship owner who hadoverloaded his ship in contravention of a statute was ableto recover freight

Contracts void at common law on grounds of publicpolicy

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116

Contracts damaging to theinstitution of marriage

For example contracts inrestraint of marriage

marriage brokerage contractscontracts for future separation

(pre-nuptial agreements)

Contracts made after orimmediately beforeseparation are valid

Contracts to oust thejurisdiction of the courts

However arbitrationagreements are valid

In Esso Petroleum v Harpers Garage (1968) it was stated thatthe court will consider

bull whether the contract is in restraint of trade A contract isin restraint of trade if it restricts a personrsquos liberty tocarry on his trade or profession Certain restraints havebecome acceptable over the years for example lsquotiedhousesrsquo restrictive covenants in leases sole agency orsole distributorship agreements

bull whether it should nevertheless be enforced because itprotects a legitimate interest and is reasonable Theonus of proving reasonability is on the promisee Arestraint to be permissible must be no wider than isnecessary to protect the relevant interest of thepromisee

Categories of contracts in restraint of trade

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W117

Restraints onemployees

Restraints on thevendors of a business

Exclusive dealingagreements

A contract in restraint of trade is prima facie void but thecourts will now uphold the restriction if it is shown that

bull the restraint protects a legitimate interest

bull the restraint is reasonable between the parties

bull the restraint is reasonable as regards the interest of thepublic

Contracts in restraint of trade

Restraints on employeesThe restraint is void unless the employer can show

bull That it is necessary to protect a proprietary interest forexample the trade secrets of a works manager in Foster vSuggett (1918) the trade connections of a solicitorrsquosmanaging clerk in Fitch v Dewes (1921)

A restraint merely to prevent competition will not beenforced

In Eastham v Newcastle United FC (1964) the courtaccepted that the proper organisation of football was avalid matter for clubs to protect but found the lsquoretainand transfer systemrsquo unreasonable

bull That the restraint is no greater than is necessary toprotect the employerrsquos interest in terms of time andarea

In Scorer v Seymore-Jones (1966) the court upheld arestriction of 10 miles within branch A at which theemployee had worked but held that a similar restraintcovering branch B at which the employee had notworked was unreasonable and void

bull Problems with area can be overcome by using lsquonon-solicitationrsquo clauses instead

In Home Counties Dairies v Skilton (1970) a milkmanagreed that for one year after leaving his present job hewould not sell milk to his employerrsquos customers Held ndashrestraint valid It was necessary to protect the employeragainst loss of customers

bull The validity of the duration of the restraint depends onthe nature of the business to be protected and on thestatus of the employee

CA

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118

In Briggs v Oates (1991) a restriction of five miles for fiveyears on an assistant solicitor was upheld as reasonable

bull A restraint imposed by indirect means for example byloss of pension rights (Bull v Pitney Bowes (1966)) orwhere two companies agreed not to take on the otherrsquosemployees (Kores v Kolok (1959)) will be judged by thesame criteria

Restraints on the vendor of a business

bull In Vancouver Malt and Sake Brewing Co v VancouverBreweries Ltd (1934) a company which was licensed tobrew beer but which had not at any time brewed beerwas sold and agreed not to brew any beer for 15 yearsHeld ndash the restraint was void since there was no goodwillof a beer brewing business to be transferred

bull In British Concrete v Schelff (1921) S sold his localisedbusiness to B who had branches all over the UK andagreed not to open any business within 10 miles of any ofBrsquos branches Held ndash the restriction was void B wasentitled only to protect the business he had bought notthe business which he already owned

bull In Nordenfelt v Maxim Nordenfelt (1894) N a worldwidesupplier of guns sold his worldwide business to M andagreed not to manufacture guns anywhere in the worldfor 25 years Held ndash the restriction was valid C

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Such a restraint is valid if it is intended to protectthe purchaserrsquos interest in the goodwill of the

business bought and is reasonable

Exclusive dealing agreements

bull In Esso Petroleum v Harpers Garage (1968) a solusagreement for four years was held reasonable but asolus agreement for 21 years was held unreasonable andtherefore void

bull Solus agreements were distinguished from restrictivecovenants in a lease When an oil company leases afilling station to X inserting a clause that X should buyall its requirements from the company this is not subjectto restraint of trade rules because the tenant is notgiving up a previously held freedom

bull But in Amoco v Rocca Bros (1975) the court held thatrestraint of trade rules did apply to lease and lease backagreements

bull In Alec Lobb (Garages) v Total Oil (1985) in a similar leaseback arrangement a solus agreement for between sevenand 21 years was held reasonable on the ground that thearrangement was a rescue operation benefiting theplaintiffs and there were lsquobreakrsquo clauses in theunderlease

bull In Schroeder Music Publishing Co v Macaulay (1974) itwas held that a contract by which an unknown songwriter undertook to give his exclusive services to apublisher who made no promise to publish his work

CA

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120

Solus agreements whereby A agrees to buy all his re-quirements of a particular commodity from B

Most exclusive services contracts are found in professional sport or entertainment

was subject to the restraint of trade doctrine as it waslsquocapable of enforcement in an oppressive mannerrsquo

bull In Greig v Insole (1978) the MCC banned any cricketerwho played for a cricketing lsquocircusrsquo from playing forEngland The court held that the ban was void as beingin restraint of trade

It has been suggested that the courts will hold exclusivedealing and service contracts to be within the restraint oftrade doctrine if they contain unusual or novel features orif there is disparity in the bargaining power and theagreement is likely to cause hardship to the weaker party

Cartel agreementsThese are now covered by statute for example the FairTrading Act 1973 and the Competition Act 1998 This mayalso fall within Article 81 of the Treaty of the EuropeanCommunities

Effect of a restraint

Two tests must be satisfied

bull The lsquoblue pencilrsquo test It must be possible to sever theillegal part simply by deleting words in the contract Thecourt will not add words substitute one word foranother rearrange words or in any way redraft the

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W121

A void restraint is severable Severance can be operated intwo ways

bull severance of the whole of the objectionable promiseleaving the rest of the contract to be enforced

bull severance of the objectionable part of the promise

contract In Mason v Provident Clothing Co Ltd (1913) theHouse of Lords refused to redraft a promise not to workwithin 25 miles of London But in Goldsoll v Goldman(1915) a dealer in imitation jewellery promised not todeal in real or imitation jewellery either in the UK orabroad Dealing in real jewellery and dealing abroadwere severed

bull Severance of the objectionable part of the contract mustnot alter the nature (as distinct from the extent) of theoriginal contract The illegal restraint will not be severedif it is the the main purpose of the restraint or if to severit would alter entirely the scope and intention of theagreement In Attwood v Lamont (1920) the court refusedto sever restrictions on a tailor from competing with anydepartment of the department store which had employedhim The court stated that this was a covenant lsquowhichmust stand or fall in its unaltered formrsquo

Capacity

Minors

The law pursues two conflicting policies in the case ofminors On the one hand it tries to protect minors from theirown inexperience on the other it tries to ensure that personsdealing with minors are not dealt with in a harsh manner

CA

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122

Minorspersons under 18

Persons of unsound mindand drunken persons

Contracts with minors can be divided into three categories

Valid contracts ndash contracts which can be enforced

against a minor

Necessaries

bull In Nash v Inman (1908) a student purchased 11 silkwaistcoats while still a minor The court held that silkwaistcoats were suitable to the conditions of life of aCambridge undergraduate at that time but they were notsuitable to his actual needs as he already had a sufficientsupply of waistcoats

It is important to distinguish between luxurious goods ofutility and goods of pure luxury The status of the minor canmake the former into necessaries but the latter can never beclassified as necessaries

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W123

Contracts fornecessaries

Beneficial contracts of service

Valid contracts Voidable contracts Other contracts

Necessary goods are defined in the Sale of GoodsAct 1979 as lsquogoods suitable to his conditionin life and to his actual requirements at the

time of sale and deliveryrsquo

The burden of proving that the goods are necessaries is onthe seller

They must satisfy the same tests as necessary goods

Professor Treitel considers that both executed andunexecuted contracts for necessaries can be enforced Hecites Roberts v Gray (1913) Roberts agreed to take Gray aminor on a billiard tour to instruct him in the profession ofbilliard player Gray repudiated the contract The court heldthat Roberts could recover damages despite the fact that thecontract was executory

Cheshire Fifoot and Furmston agree that executorycontracts for necessary services are enforceable as in Robertsv Gray but deny that executory contracts for necessary goodscan be enforced

They cite

bull the actual wording of the Sale of Goods Act which refersto time of lsquosale and deliveryrsquo

bull the minor has to pay a reasonable price for the goods notthe contractual price

These indicate it is argued that liability is based onacceptance of the goods not on agreement

Beneficial contracts of service

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124 These must be for the benefit of the minor

Necessary services include education medical and legal services

bull In De Francesco v Barnum (1890) a contract whose termswere burdensome and harsh on the minor was held void

bull But in White City Stadium v Doyle (1935) where a minorhad forfeited his payment for a fight because ofdisqualification the contract was neverthelessenforceable against him Where a contract is on the wholefor the benefit of a minor it will not be invalidatedbecause one term has operated in a way which is not tohis advantage

bull In Chaplin v Leslie Frewin (Publishers) Ltd (1966) the courtenforced a contract by a minor to publish his memoirs asthis would train him in becoming an author and enablehim to earn a living

bull But trading contracts (involving the minorrsquos capital) willnot be enforced even if it does help the minor earn aliving In Mercantile Union Guarantee Co Ltd v Ball (1937)the court refused to enforce a hire purchase contract for alorry which would enable a minor to trade as a haulagecontractor

Voidable contracts

These comprise contracts of continuing obligation such ascontracts to acquire an interest in land or partly paid sharesor partnership agreements

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W125

They must be contracts of service or similar to a contract of service

Contracts which can be avoided by the minor beforemajority or within a short time afterwards

The minor can free himself from obligations for the futurefor example an obligation to pay rent under a lease but willhave to pay for benefits already received He cannot recovermoney already paid under the contract unless there has beena total failure of consideration (Steinberg v Scala (Leeds) Ltd(1923))

Other contracts

But

bull The minor himself may enforce such contracts

bull Property can pass under such contracts

bull Where the contract has been carried out by the minor hecannot recover any property unless there has been atotal failure of consideration or some other failingwhich would equally apply to an adult

bull The Minors Contracts Act 1987 provides that

a minor may ratify such a contract on majority and itcan thereafter be enforced against him

a guarantee of a minorrsquos debt will not be voidbecause a minorrsquos debt is unenforceable against him

a court may if it considers it is just and equitable to doso order a minor to return property he has receivedunder a void contract or any property representing itIt is not clear whether property transferred under thecontract covers money for example in money lendingcontracts It is argued that as lsquoproperty representing itrsquo

CA

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126

These cannot be enforced against a minor

must cover money it would therefore be illogical toexclude money acquired directly but there is as yet nodecision on this point Property cannot presumably berecovered under this section where the minor hasgiven away the contract property

bull Equity will order restitution of property acquired byfraud But there can be no restitution of money (Leslie vSheill (1914)) and no restitution if the minor has resold theproperty

bull An action may be brought in tort if it does not in any wayrely on the contract But although a minor is fully liablefor all his torts he may not be sued in tort if this is just anindirect way of enforcing a contract In Leslie v Sheill(1914) a minor obtained a loan by fraudulentlymisrepresenting his age Held ndash he could not be sued inthe tort of deceit as this would be an indirect way ofenforcing a contract which was void

Persons of unsound mind and drunken persons

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W127

A person who has been declared a lsquopatientrsquo under the MentalHealth Act 1983 by the Court of Protection is incapable ofentering into a valid contract

Other mentally disordered persons and drunken personswill be bound by their contracts unless

bull they were so disordered or drunk that they did notunderstand the nature of what they were doing and

bull the other party was aware of this

Such contracts may be affirmed during a sober or lucidmoment The Sale of Goods Act requires that wherelsquonecessaries are sold and delivered to a person who byreason of mental incapacity or drunkenness is incompetentto contract he must pay a reasonable price for themrsquo

CA

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128

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W129

8 Discharge

A contract may be discharged by

Performance

Precision of performance

bull In Cutter v Powell (1795) a shiprsquos engineer undertook tosail a ship from Jamaica to Liverpool but died before thevoyage was complete Held ndash nothing could berecovered in respect of his service he had not fulfilled hisobligation

bull In Bolton v Mahadeva (1972) a central heating systemgave out less heat than it should and there were fumesin one room Held the contractor could not claimpayment although the boiler and pipes had beeninstalled they did not fulfill the primary purpose ofheating the house

A contract is lsquodischargedrsquo when there are noobligations outstanding under it

Performance Agreement Breach Frustration

Precision ofperformance

Time ofperformance

Tender ofperformance

To discharge his obligations under a contract aparty must perform exactly what he promised

These are examples of lsquoentirersquo contracts which consist ofone unseverable obligation

bull Where the contract is divisible payment can berecovered for the completed part for example goodsdelivered by instalments

bull Where the promisee accepts partial performance InSumpter v Hedges (1898) however payment for partialperformance was refused as Hedges had been left with ahalf-built house and had been put in a position where hehad no choice but to accept partial performance

bull Where the promisee prevents complete performance forexample in Plancheacute v Colburn (1831) a writer wasallowed payment for the work he had already donewhen the publisher abandoned the series

bull Where the promisor has performed a substantial part ofthe contract In Hoenig v Isaacs (1952) the plaintiffdecorated the defendantrsquos flat but because of faultyworkmanship the defendant had to pay pound50 to anotherfirm to finish the job Held ndash the plaintiff was entitled topound150 (the contract price) minus the pound50 paid to the otherfirm cf Bolton v Mahadeva (1972) where the courtdeclined to find substantial performance

This has become known as the doctrine of substantialperformance In order for the claimant to rely on thisdoctrine the failure to perform must amount only to a

CA

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130

Despite the rule that performance must be exact the law will allow payment to be made on a

quantum meruit basis for incomplete performance in the following circumstances

breach of warranty or a non-fundamental breach of aninnominate term It will not apply to a fundamentalbreach or to a breach of condition

Time of performance

bull It is stipulated in the contract see Lombard North Centralv Butterworth (1987)

bull One party has given reasonable notice during thecurrency of the contract that performance must takeplace within a certain time In Rickards v Oppenheim(1950) a car body which had been ordered from theplaintiffs was late The defendants gave final notice to theplaintiff that unless it was delivered within three monthsthey would cancel the order Held ndash time had been madeof the essence the defendants could cancel the order

bull The nature of the contract makes it imperative thatstipulations as to time should be observed for examplecontracts for the sale of perishable goods

The Law of Property Act 1925 stipulated that terms as tothe time of performance should be interpreted in thesame way at common law as in equity In Rainieri v Miles(1981) the House of Lords held that that meant that lateperformance would not give rise to a right to terminatebut would give rise to damages

Tender of performance

If one party tenders performance which is refused he maysue for breach of contract

CO

NT

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W131

Equity considers that time is not lsquoof the essence of a contractrsquo that is a condition

except in the following circumstances

If payment is tendered and rejected the obligation to tenderpayment is discharged but the obligation to pay remains

Agreement

bull If the contract is wholly executory there is no problemwith consideration as both parties surrender their rightsunder the contract

bull If the contract is partly executed one party hascompleted his performance under the contract ndash to makethe agreement binding there must either be a deed (alsquoreleasersquo) or new consideration (lsquoaccord and satisfactionrsquo)or the doctrine of equitable estoppel or waiver mustapply See Chapter 2

CA

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132

A term in the originalcontract for example acondition subsequent

or method for terminating the contract

A new agreement

A contract may be discharged by

As contracts are created by agreement so they may be discharged by agreement Consideration is

necessary to make the agreement binding

Breach

See classification of terms p 45 above

There are special problems where a party repudiates acontract under a wrong assumption that he has a right to doso

bull In Federal Commerce and Navigation v Molena Alpha (1979)the owners of a ship gave instructions not to issue bills oflading without which the charterers could not operatethe ship They wrongly believed that they had the rightto do so Held ndash their conduct constituted a wrongfulrepudiation of the contract which allowed the other partyto treat the contract as discharged

bull In Woodar Investment Development v Wimpey Construction(1980) the purchaser wrongly repudiated a contract forthe sale of land wrongly believing that he had a right todo so Held ndash a wrongful repudiation made in good faithwould not necessarily allow the other party to treat thecontract as discharged

CO

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W133

A breach of condition

A fundamentalbreach of an

innominate term

A breach does not of itself discharge a contract It may allowthe other other party an option to treat the contract as discharged that is to terminate the contract if the breach is sufficiently serious that is if it is

A repudiatory breach

It is difficult to distinguish these decisions The general viewis that the approach in Molena Alpha is to be preferred so thateven a good faith lsquorepudiatoryrsquo response to a non-repudiatory breach will amount to a breach of contract

Effect of treating the contract as discharged

The obligation of both parties to perform (that is theprimary obligation) is discharged from the date of thetermination

However the party in breach may have to pay damages forany losses past and future caused to the innocent party as aresult of the breach (Lombard North Central v Butterworth ndashChapter 3)

The discharge does not operate retrospectively In PhotoProduction v Securicor (1980) Securicor was able to rely on anexclusion clause in the contract despite the fact that thecontract had been discharged

Note ndash it was held by the House of Lords in Vitol v Norelf(1996) that the defendantrsquos failure to perform his ownobligation could constitute acceptance of the plaintiffrsquos repudiation

The decision to terminate cannot be retracted

Anticipatory breach of contract

CA

VE

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134

Explicit

Hochter v La Tour (1853) atravel courier announced

in advance that he would not be fulfilling

his contract

Implicit

Frost v Knight (1872) aparty disabled himself

from carrying out apromise to marry by

marrying another person

Effect of anticipatory breach

bull The other party may sue for damages immediately Hedoes not have to await the date of performance (Hochsterv De La Tour (1853))

bull The innocent party may refuse to accept the repudiationHe may affirm the contract and continue to perform hisobligations under the contract In White and Carter Ltd vMcGregor (1962) the defendants cancelled a contractshortly after it had been signed The plaintiffs refused toaccept the cancellation carried on with the contract andthen sued for the full contract price Held ndash the plaintiffswere entitled to succeed a repudiation does notautomatically bring a contract to an end the innocentparty has an option either to affirm the contract or toterminate the contract unless

the innocent party needs the co-operation of the other party In Hounslow BC v Twickenham GardenDevelopments Ltd (1971) Hounslow council cancelled acontract to lay out a park It was held that thedefendants could not rely on White and Carter vMcGregor because the work was to be performed oncouncil property

the innocent party had no legitimate interestfinancial or otherwise in performing the contractrather than in claiming damages In The AlaskanTrader (1984) a ship chartered to the defendantsrequired extensive repairs at the end of the first yearwhereupon the defendants repudiated the contractThe plaintiffs however refused to accept therepudiation repaired the ship and kept it fullycrewed ready for the defendantrsquos use Held ndash theplaintiffs had no special interest in keeping the

CO

NT

RA

CT

LA

W135

contract alive They should have accepted therepudiation and sued for damages

Where a party has affirmed the contract

bull He will have to pay damages for any subsequent breachwhich he commits he cannot argue that the other partyrsquosanticipatory breach excuses him (Fercometal SARL vMediterranean Shipping Co (1988))

bull There is a danger that a supervening event may frustratethe contract and deprive the innocent party of his right todamages as in Avery v Bowden (1855) (below)

Frustration

The doctrine has been kept to narrow limits

The basis of the doctrine and the tests

bull Until the 19th century the courts adhered to a theory oflsquoabsolute contractsrsquo as in Paradine v Jane (1647) It wassaid that if the parties wished to evade liability because of

CA

VE

ND

ISH

LA

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136

By the courts whohave insisted that the

supervening event mustdestroy a fundamental

assumption

By business persons who have lsquodrafted outrsquo

the doctrine byforce majeure clauses

Frustration occurs where it is established that due to a subsequent change in circumstances the

contract has become impossible to perform or it hasbeen deprived of its commercial purpose

some supervening event then they should provide forthis in the contract However in Taylor v Caldwell (1863)the courts relented and held that if the contract becameimpossible to perform due to some extraneous cause forwhich neither party was responsible then the contactwould be discharged

bull The modern test was enunciated by Lord Simon inNational Carriers v Panalpina (1981) frustration ariseswhere lsquothere supervenes an event (without default ofeither party and for which the contract makes nosufficient provision) which so significantly changes thenature (not merely the expense or onerousness) of theoutstanding contractual rights andor obligations fromwhat the parties could reasonably have contemplated atthe time of its execution that it would be unjust to holdthem to the literal sense of its stipulations in the newcircumstancesrsquo

bull In Davis Contractors v Fareham UDC (1956) Lord Radcliffstated that frustration occurs where to requireperformance would be to render the obligationsomething lsquoradically differentrsquo from what wasundertaken by the contract

Circumstances in which frustration may occur

bull The subject matter of the contract has been destroyed oris otherwise unavailable

In Taylor v Caldwell (1863) a contract to hire a music hallwas held to be frustrated by the destruction of the musichall by fire (see also s 7 of the Sale of Goods Act 1979)

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W137

Note ndash it is not the circumstances but the nature ofthe obligation which must have changed

bull But the unavailable or destroyed object must have beenintended by both parties to be the subject of the contract

In Blackburn Bobbin Co v Allen (1918) the contract was forthe sale of lsquobirch timberrsquo which the seller intended toobtain from Finland Held ndash the contract was not frustratedwhen it became impossible to obtain timber from FinlandThe subject matter of the contract was birch timber notFinnish birch timber

bull Death or incapacity of a party to a contract of personalservice or a contract where the personality of one partyis important

In Condor v The Baron Knights (1966) a contract between apop group and its drummer was held frustrated whenthe drummer became ill and was unable to fulfill theterms of the contract A claim for unfair dismissal can alsosometimes be defeated by the defence of frustrationwhere an employee has become permanentlyincapacitated or imprisoned for a long period

bull The contract has become illegal to perform eitherbecause of a change in the law or the outbreak of war

In Avery v Bowden (1855) a contract to supply goods toRussia was frustrated when the Crimean War broke out Ithad become an illegal contract ndash trading with the enemy

Note the outbreak of war between two foreign States willnot render a contract illegal but may make it impossibleto perform In Finelvet v Vinava Shipping Co (1983) acontract to deliver goods to Basra did not become illegalon the outbreak of the Iraq-Iran war but was frustratedwhen it became too dangerous to sail to Basra

bull The commercial purpose of the contract has failedCA

VE

ND

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138

Establishing whether a contract is impossible or illegal toperform is relatively straightforward but it is more difficultto decide whether the commercial purpose of the contracthas failed

It may happen in the following circumstances

bull Failure of an event upon which the contract was based

In Krell v Henry (1903) the court held that a contract tohire a room overlooking the proposed route of thecoronation procession was frustrated when thecoronation was postponed The purpose of the contractwas to view the coronation not merely to hire a room Ithas been argued that the fact that the hire of the roomwas a lsquoone offrsquo transaction was important The judge inthe case contrasted it with the hire of a taxi to take theclient to Epsom on Derby day This would be a normalcontractual transaction for the taxi driver thecancellation of the Derby would not therefore frustratethe contract

In the case of Herne Bay Steamboat Co v Hutton (1903) thecourt refused to hold that a contract to hire a boat to seethe king review the fleet was frustrated when the reviewwas cancelled the fleet was still there and could beviewed ndash there was therefore no overall failure of thepurpose of the contract

bull Government interference or delay

In Metropolitan Water Board v Dick Kerr (1918) a contracthad been formed in 1913 to build a reservoir within sixyears In 1915 the government ordered the work to bestopped and the plant sold Held ndash the contract wasfrustrated C

ON

TR

AC

TL

AW

139

In Jackson v Union Marine Insurance Co (1874) a ship waschartered in November to proceed with all dispatch toNewport The ship did not reach Newport until thefollowing August Held ndash the contract was frustratedsince the ship was not available for the voyage for whichshe had been chartered

In The Nema (1982) a charter party was frustrated when along strike closed the port at which the ship was due toload so that of the six or seven voyages contracted to bemade between April and December only two could bemade

Similar difficult problems arise in the case of contracts ofemployment (illness or imprisonment) and leases

It has been suggested that where the contract is of a fixedduration and the unavailability of the subject matter isonly temporary the court should consider the ratio of thelikely interruption to the duration of the contract

LeasesIt had long been thought that the doctrine of frustration didnot apply to leases (see Paradine v Jane (1647) and CricklewoodInvestments v Leightonrsquos Investments (1945))

bull However in National Carriers v Panalpina (1981) theHouse of Lords declared that in principle a lease couldbe frustrated In that case a street which gave the onlyaccess to a warehouse was closed for 18 months Thelease for the warehouse was for 10 years Held ndash the leasewas not frustrated

bull The House of Lords did state however that where therewas only one purpose for the property leased and thispurpose became impossible then the lease would be

CA

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140

frustrated for example a short term holiday lease It isstill true that it will be very rare for a lease to befrustrated

Limits to the doctrine of frustration

It will not be applied

bull In Davis Contractors LTD v Fareham UDC (1956) thecontractors had agreed to build a council estate at a fixedprice Due to strikes bad weather and shortages oflabour and materials there were considerable delays andthe houses could only be built at a substantial loss Heldndash the contract was not frustrated

bull See also the Suez cases where the courts refused to holdshipping contracts frustrated as a result of the closing ofthe Suez Canal unless the contracts specified a routethrough the canal

But a force majeure clause will be interpreted narrowly asin Metropolitan Water Board v Dick Kerr amp Co (1918) wherea reference to lsquodelaysrsquo was held to refer only to ordinarydelays and not to a delay caused by government decree

CO

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W141

lsquoDoctrine must be kept within narrow limitsrsquo

on the grounds of inconvenience increase in expense loss of profit

Where there is an express provision in thecontract covering the intervening event

(that is a force majeure clause)

A force majeure clause will not in any case be applied to covertrading with an enemy

A contract will not be frustrated if the event makingperformance impossible was the voluntary action of oneof the parties If the party concerned had a choice open tohim and chose to act in such a way as to makeperformance impossible then the frustration will be self-induced and the court will refuse to treat the contract asdischarged

bull In The Superservant Two (1990) one of two barges ownedby the defendants and used to transport oil rigs wassunk They were therefore unable to fulfill their contractto transport an oil rig belonging to the plaintiff as theirother barge (Superservant One) was already allocated toother contracts The court held that the contract was notfrustrated The plaintiffs had another barge available butchose not to allocate it to the contract with the plaintiffs

This case illustrates both the courts reluctance to applythe doctrine of frustration and the advantage of using aforce majeure clause

If by reason of special knowledge the event wasforeseeable by one party then he cannot claimfrustration

bull In Amalgamated Investment and Property Co v John Walker ampSons Ltd (1976) the possibility that a building could belisted was foreseen by the plaintiff who had inquiredabout the matter beforehand A failure to obtain planning

CA

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142

Where the frustration is self-induced

Where the event was foreseeable

permission was also foreseeable and was a normal riskfor property developers The contract was therefore notfrustrated

The effect of frustration

This rule could be very unfair in its operation as in Chandlerv Webster (1904) where the hirer had to pay all the sum duefor the hire of a room to view the coronation despite thecourt holding the contract frustrated by the cancellation ofthe coronation

This rule however would only apply in the event of a totalfailure of consideration and could itself in any case causehardship if the other party had expended a considerableamount of money in connection with the contract

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W143

At common law the loss lay where it fell that isthe date of the frustrating event was all important

Anything paid or payable before that datewould have to be paid Anything payable

after that date need not be paid

In the Fibrosa case (1943) the House of Lordsdid move away from this rule and held that

where there was a total failure of considerationthen any money paid or payable in advance

would have to be returned

Note these two sections are to be applied independently Theexpenses in s 1(2) can only be recovered from lsquosums paid orpayable before the frustrating eventrsquo

Section 1(3) was applied in BP Exploration v Hunt (1982)where it was held that the court must

bull identify and value the lsquobenefit obtainedrsquo

bull assess the lsquojust sumrsquo which it is proper to award

The court also stated that

bull the section was designed to prevent unjust enrichmentnot to apportion the loss or to place the parties in theposition they would be in had the contract beenperformed or to restore them to their pre-contractposition

CA

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144

The Law Reform (Frustrated Contracts) Act 1943was therefore passed to remedy these deficiencies

It provided

s 1(2) ndash all sums paid or payable before the frustratingevent shall be recoverable or cease to be payable but

the court has a discretionary power to allow the payeeto set off against the sum so paid expenses he has

incurred before the frustrating event

s 1(3) ndash where one party has obtained a valuablebenefit before the time of discharge the other

party may recover from him such sums asthe court considers just

bull in assessing the valuable benefit the section requiredreference to the end benefit received by a party not thecost of performance In assessing the end benefit theeffect of the frustrating event had to be taken intoaccount

bull the cost of performance can be taken into account inassessing the just sum

In BP v Hunt (1982) BP were to do the exploration andprovide the necessary finance on an oil concession ownedby Mr Hunt in Libya They were also to provide certainlsquofarm-inrsquo payments in cash and oil In return they were toget a half-share in the concession and 5 of theirexpenditure in reimbursement oil A large field wasdiscovered the oil began to flow then in 1971 the LibyanGovernment nationalised the field

The court held

bull the valuable benefit to Hunt was the net amount of oilreceived plus the compensation payable by the LibyanGovernment which amounted to pound85000000

bull the just sum would cover the work done by BP less thevalue of the reimbursement oil already received Thiswas assessed at pound34000000 As the valuable benefitexceeded the just sum BP recovered their expenses infull The position would have been very differenthowever if the field had been nationalised at an earlierstage and no compensation had been paid

CO

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W145

The Law Reform (Frustrated Contracts) Act 1943 does notapply to

CA

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146

Charter parties Contracts of insurance

Contracts for the sale of specificgoods which have perished

CO

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W147

9 Remedies for breach of contract and restitution

not

If no loss has been suffered then nominal damages onlywill be awarded

bull In Surrey CC v Bredero Homes (1993) the court refused toaward damages against a defendant who had notcomplied with planning permission as there was no lossto the council

Unliquidated damages (that is damages assessed by

the court)

The purpose of unliquidated damages is to compensate the claimant for the loss he has

suffered as a result of a breach

Unliquidateddamages

Equitableremedies

Liquidateddamages

Restitutionor

quasi-contract

to punish the defendantPunitive damages are

not awarded for breachof contract

generally to recoup again made by the

defendant (but cf AG vBlake (2000) below)

bull However in Chaplin v Hicks (1911) damages wereawarded for the loss of a chance to win a competitionalthough there was no certainty that the plaintiff wouldhave been one of the winners

Reliance damages rather than expectation damages may beappropriate where the benefits which would have beenobtained by successful performance are difficult to assess asin

bull McRae v Commonwealth Disposals Commission (1951)where the plaintiff recovered the expenses incurred insearching for a wreck which did not exist

bull Anglia Television v Reed (1972) where the leading actor ina film project withdrew at the last moment The plaintiffswere able to recover all their wasted expenditure on theprogramme including even those incurred before thecontract had been signed

CA

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148

Methods of compensating the claimant

Expectation that is loss ofbargain is the traditional

basis for assessing damagesin contract It aims to putthe claimant in the sameposition as far as money

can do it as if the contracthad been performed

Reliance that is out of pocketor wasted expenditure This

is the normal way ofassessing damages in tort

but can be used in contractas illustrated below

bull But cf Regalian Properties v London Dockland Development(1995) where expenses incurred while negotiations wereexpressly lsquosubject to contractrsquo were not recoverable

It has been held that a claimant may freely choose betweenexpectation and reliance damages unless the difficulty inidentifying profits is because he has made a lsquobad bargainrsquo

bull In C and P Haulage v Middleton (1983) the plaintiff hired agarage for six months on the basis that anyimprovements would become the property of thelandlord He was ejected in breach of contract and suedfor the cost of the improvements Held ndash expenditurewould have been wasted even if the contract had beenperformed

bull It is for the defendant to prove that the claimant hadmade a bad bargain as in CCC Films v Impact QuadrantFilms (1985) where the defendant failed to prove that theplaintiff would not have made a profit from distributingthe films had they been delivered in accordance with thecontract

bull In normal circumstances the claimant will ask fordamages on an expectation basis as this is moreprofitable for him

Restitutionary measure

In Attorney General v Blake (2000) the House of Lords for thefirst time recognised that in some circumstances alsquorestitutionaryrsquo measure of damages requiring thedefendant to pay over the profit made as a result of thebreach of contract may be appropriate The case was anunusual one involving a book published by a member ofthe security services who had spied for Russia The House ofLords regarded the defendant as having been under

CO

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W149

something lsquoakin to a fiduciary obligationrsquo and it is not yetclear how far the principle adopted in this case is likely to beapplied in other situations

Contributory negligence

This is only relevant where the liability in contract isidentical with the liability on tort that is the breach is of acontractual duty to take care (Barclays Bank v FaircloughBuilding (1994))

Quantification of damage

Where lsquoloss of bargainrsquo damages are claimed there are twopossible methods of quantification

The court will normally adopt the most appropriate (RuxleyElectronics and Construction v Forsyth (1995))

Prima facie rules

CA

VE

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150

Sale of goods ndash difference in value

Failure to repair (lease) ndash difference in value

Building contracts ndash cost of cure

Difference in value Cost of cure

Failure to deliver goods

bull In Williams Bros v Agius (1914) the profit which wouldhave been earned on a resale was ignored damagesrepresented the difference between the contract price andthe market price (which was higher than the resale price)

Failure to accept delivery and pay

bull If the seller is a dealer in mass produced goods then thedamage to him will be the loss of profit on onetransaction The claimant had sold one item less than heotherwise would have during the year (Thomson vRobinson (1955))

bull However if the mass produced item is in short supplyand the number of sales is governed by supply not bydemand then there is no loss of profit and damageswould not be awarded (Charter v Sullivan (1957))

bull The damages revert to the difference between thecontract price and market price in the case of secondhand goods even if the seller is a dealer (Lazenby Garagesv Wright (1976))

CO

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W151

The Sale of Goods Act 1979 states thatdamages will represent the difference between

the contract price and the market price

The Sale of Goods Act 1979 states that damages willagain represent the difference between the contract

price and the market price

Limitations on principle of expectation

Although the stated aim of the expectation basis of assessingdamages is to put the claimant in the position he would havebeen in had the contract been performed there are a numberof rules which militate against this result

Remoteness of damage

bull In Hadley v Baxendale (1854) a mill was closed because ofthe delay of a carrier in returning a mill shaft The courtheld that the carrier was not liable for damages for theclosure of the mill as he was not aware that the absenceof a mill shaft would lead to this conclusion

The following damages were said to be recoverable

those arising naturally out of the breach

those which because of special knowledge wouldhave been within the contemplation of the parties

bull In Victoria Laundry v Newman Industries (1949) the rulewas restated and based on knowledge The laundry wasable to recover damages for normal loss of profitC

AV

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DIS

HL

AW

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RD

S152

Damages cannot be recovered for losses that are tooremote The losses must be lsquowithin the reasonable

contemplationrsquo of the parties

Kind ofloss

CausationDuty of

mitigationRemotenessof damage

following a delay in the delivery of a boiler but not forspecially lucrative dyeing contracts they were offeredduring this time

Damages were said to be recoverable for losses whichwere within the reasonable contemplation of the partiesat the time of the contract either from

imputed knowledge or

actual knowledge

bull In The Heron II (1969) the House of Lords confirmed thata higher degree of foreseeability is required in contractthan in tort Damages were awarded to cover lossesarising from the late delivery of sugar to Basra Theparties must have been aware that the price of sugar inBasra might fluctuate For a loss not to be too remotethere must be

lsquoa real dangerrsquo

lsquoa serious possibilityrsquo

or the loss must be

lsquonot unlikelyrsquo

lsquoliable to resultrsquo

The difference between the tests of remoteness in contractand tort has been criticised but justified on the ground thata contracting party can protect himself against unusual risksby drawing them to the attention of the other party to thecontract

CO

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W153

Application of remoteness rules

bull Imputed knowledge

Hadley v Baxendale (1854) Victoria Laundry v Newman Industries (1949)The Heron II (1967)

bull Actual knowledge

Defendantrsquos knowledge of special circumstances must beprecise This encourages contracting parties to discloseclearly any likely exceptional losses in advance

In Simpson v L amp NWR (1876) the defendant was liable forloss caused to the plaintiff by delivering goods toNewcastle Show Ground the day after the show had finished

In Horne v Midland Railway (1873) defendants were heldnot liable for exceptionally high profit lost by plaintiffthrough late delivery They knew that shoes would haveto be taken back if not delivered on 3 February but notthat the plaintiff would lose an exceptionally high profit

bull In Wroth v Tyler (1974) the defendant was liable for thefull difference between the contract price and the marketprice although the rise in the market price wasexceptional and could not have been foreseen

bull In Parsons (Livestock) Ltd v Uttley Ingham Co Ltd (1978) thedefendants who had supplied inadequately ventilatedhoppers for pig food were held liable for the loss of theplaintiffrsquos pigs even though the disease from which they

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Note the test of remoteness determinesentitlement not quantum

died was not foreseeable It was enough that they couldhave contemplated any illness of the pigs (But cf VictoriaLaundry v Newman Industries (1849))

Lord Denning in this case argued that so far as physicaldamage was concerned (not loss of profit) all directlosses should be recoverable as in tort

Lord Scarman has also stated that it would be ridiculousif the amount of damages depended on whether anaction was framed in contract or tort A House of Lordsrsquodecision on these issues is awaited

It is sometimes disputed that the decisions since Hadley vBaxendale have not in any way clarified the rule

Types of loss recognised

This is the normal ground for the award of damages forbreach of contract

However damages for non-pecuniary loss will be awardedin specific cases for example

bull Pain and suffering consequent on physical injury

bull Physical inconvenience

In Watts v Morrow (1991) damages were awarded tocover the inconvenience of living in a house whilst it wasbeing repaired C

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Pecuniary loss

Non-pecuniary loss

bull Damage to commercial reputation

In Gibbons v Westminster Bank (1939) damages wereawarded to cover the losses caused by the wrongfulreferring of a cheque

Cf Malik v BCCI (1997) where the House of Lords heldthat compensation was payable for the stigma of havingworked for an organisation which had been run corruptly

bull Distress to claimant

Traditionally damages for injured feelings were notawarded for breach of contract Addis v Gramaphone Co(1909) This general principle has recently been confirmedby the House of Lords in Johnson v Unisys Ltd (2001)

However some limited exceptions to this rule have beenrecognised

Damages for disappointment were awarded againsta holiday company in Jarvis v Swan Tours (1973)where the holiday was not as described

In Hayes v Dodd (1990) the Court of Appealconfirmed that damages for distress are notrecoverable in normal commercial contracts butcould be recovered in contracts

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156

to provide pleasure See Jarvis v Swan Tours Ltd

(1973)

to prevent distress Heywood v Wellers (1976) ndashsolicitorrsquos failure to obtain

an injunction

It has been suggested that damages for distress areparticularly appropriate in lsquoconsumer contractsrsquo

The duty of mitigation

In Payzu v Saunders (1919) the plaintiff had refused the offerof goods at below market price In Brace v Calder (1895) anemployee dismissed by a partnership turned down an offerof similar employment by one of the partners In both casesthe plaintiff was penalised for his failure to mitigate

bull He need not however take lsquounreasonablersquo steps inmitigation

In Pilkington v Wood (1953) it was stated that the plaintiffdid not need to embark on hazardous legal action inmitigation of his loss He should not take unreasonablesteps which would increase losses

bull The claimant cannot recover damages for losses he hasavoided

In British Westinghouse v Underground Electric Railways Co(1912) the plaintiff replaced a defective turbine with anew turbine which was so much more efficient that thesavings exceeded the losses on the defective turbineHeld ndash no loss ndash no damages

bull Note ndash the duty to mitigate does not arise until there hasbeen an actual breach of contract or an anticipatorybreach has been accepted by the other party (see Whiteand Carter v McGregor (above))

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The claimant has a duty to take reasonablesteps to mitigate his loss

Causation (losses which the defendant did not cause)

bull The action of a third party may break the chain ofcausation if it is not foreseeable

In Lambert v Lewis (1981) a farmer continued to use acoupling even though he knew it was broken Held ndash thefarmer was responsible for losses caused by the failure ofthe coupling the manufacturer could not have foreseenthat he would continue to use it knowing it was faulty

bull However where the action is foreseeable the chain ofcausation will not be broken

In Stansbie v Troman (1948) a painter who in breach ofcontract had left a door unlocked was held liable forgoods taken by thieves since this was the kind of loss hehad undertaken to guard against by locking the doors

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158

The breach must have caused the loss as well ashaving preceded the loss

Liquidated damages

Damages set by the parties themselves

The following guidelines for distinguishing between thetwo were suggested in Dunlop Pneumatic Tyre Ltd v NewGarage and Motor Co (1915)

bull a penalty ndash if the sum is extravagant and unconscionable

bull a penalty ndash if a larger sum is payable on the failure to paya smaller sum

bull a penalty ndash if the same sum is payable on major andminor breaches

bull it is no obstacle to the sum being liquidated damages thata precise pre-estimate is almost impossible

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Penalty clauses will not be enforced by the courtInstead the court will award unliquidated damages

The parties may stipulate that a certain sum mustbe paid on a breach of contract

If the sum represents a genuine pre-estimatethen it will be enforced by the court

as liquidated damages

If the sum is not genuine but is an attemptto frighten the other party into performing

then it is a penalty A penalty will not beenforced by the court

The rule against penalties does not apply to

bull Acceleration clauses

Here the whole of a debt becomes payable immediatelyif certain conditions are not observed

bull Deposits

Money paid otherwise than on a breach of contract

Alder v Moore (1961)

Bridge v Campbell Discount Co Ltd (1962)

bull clauses declaring a term to be a condition

Lombard North Central v Butterworth (1987)

Equitable remedies

Specific performance

Traditionally specific performance will only be awardedwhere damages are not an adequate remedy that is

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160

An order of the court directing the defendant to fulfill his obligations under the contract

Specific performance Injunctions

All equitable remedies are discretionary

The following will be taken into account

bull Mutuality Negative ndash a minor cannot get it because it isnot available against a minor Positive ndash a vendor of landmay obtain it although damages would be an adequateremedy because it is also available to a purchaser of land

bull Supervision The need for constant supervisionprevented the appointment of a resident porter beingordered in Ryan v Mutual Tontine Association (1893) but inPosner v Scott Lewis (1986) a similar order was madebecause the terms of the contract were sufficientlyprecise

bull Impossibility ndash Watts v Spence (1976) ndash land belonged to athird party C

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161

Where damages are difficult to assessfor example annuities

Where there is no alternative remedy available(Beswick v Beswick (1968)) see above

Where the claimant cannot get a satisfactory substitute for example

contracts for the sale of land or contracts for the sale of goods which cannot be

obtained elsewhere for example antiquesvaluable paintings ndash unless bought as an

investment as in Cohen v Roche (1927)

bull Hardship ndash Patel v Ali (1984) ndash defendant would lose thehelp of supportive neighbours

bull Conduct of the claimant ndash Shell (UK) Ltd v Lostock Garages(1977) ndash Shellrsquos behaviour was unreasonable

bull Vagueness ndash Tito v Waddell (1977) ndash see above

bull Mistake ndash Webster v Cecil (1861) ndash see above

Special problems

bull Contracts of personal service

These are considered to involve personal relationshipsand are therefore not thought suitable for an order of specific performance

However such orders were exceptionally made in Hill vCA Parsons Ltd (1972) and Irani v Southampton AHA(1985) on the ground that in the very unusualcircumstances of those cases the mutual trust betweenthe employer and employee had not been destroyed

bull Building contracts

The courts are reluctant to enforce building contracts onthe grounds that damages are generally an adequateremedy the terms are often vague there are difficultieswith supervision

But it was held in Wolverhampton Corpn v Emmons (1901)that provided the terms were clear the problem ofsupervision would not be an absolute barrier

Injunctions

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162

These are orders directing the defendant not to do a certain act

Types of injunction

Injunctions are also discretionary remedies and are subject to the similar constraints to orders of specific performance However an injunction will be granted toenforce a negative stipulation in a contract of employmentas long as this is not an indirect way of enforcing thecontract

bull Warner Bros v Nelson (1937)

bull cf Page One Records v Britton (1968)

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Interim injunction

This is designed to regulatethe position of the parties

pending trial

Prohibitory injunction

This is an ordercommanding the

defendant not to dosomething

Mandatory injunction

This orders thedefendant to undosomething he had

agreed not to

A comparison of the remedies for misrepresentation

and for breach of contract

Setting aside contracts

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164

DamagesDamages available as of right Normally assessedon expectation basis Losses must be within thecontemplation of the parties See above

Damages available in tort of deceit negligentstatements and under s 2(1) of the 1967 ActDamages assessed on reliance basis All lossesflowing directly from misrepresentation will becovered whether or not foreseeable in actions indeceit and under s 2(1) of the 1967 Act (Royscot vRogerson (1991)) Losses must be foreseeable inthe tort of negligence No right to damages forinnocent misrepresentation but may be awardedin lieu of rescission at the discretion of the court

Breach

Misrep

Termination or rescission for breach

Available only for breaches of conditionsfundamental breaches of innominate terms and repudiations

Contract discharged from time of breachdischarge not retrospective Innocent party canalso sue for damages (see Chapter 8)

Rescission

Available for all misrepresentations but atdiscretion of court and subject to certain barsContract cancelled prospectively and retrospectivelyparties returned to the position they were in beforethe contract was entered into (see Chapter 6)

Breach

Misrep

Exclusion clauses

See ss 3 6 7 of UCTA

All clauses must be reasonable

Restitution or quasi-contract (based on unjust

enrichment)

It covers

Money may be recovered

bull Where there is a total failure of consideration (see Fibrosacase (frustration))

In Rowland v Divall (1923) the plaintiff had bought a carwhich turned out to be stolen property and which wasrecovered by the owner Despite the fact that the plaintiffhad had the use of the car for a considerable time and ithad fallen in value during this time the plaintiff was ableto recover the full purchase price of the car from thedefendant There had been a total failure of consideration

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Breach

Misrep

recovery of money payment for work done

Restitution may be available where parties arenot in a contractual relationship

It is based on the principle of unjust enrichment it allows the injured party to

recover money paid or the value of benefitsconferred where it would be unjust to allow the

other party to retain the benefit

bull Money paid under a mistake of fact is recoverableprovided the mistake is as to a fact which if true wouldhave legally or morally obliged the claimant to pay themoney or is sufficiently serious to require payment forexample

In Kleinwort Benson Ltd v Lincoln City Council (1998) theHouse of Lords held that in certain circumstances moneypaid under a mistake of law could also be recovered if itwould be unjust to allow the recipient to retain the money(See also Nurdin and Peacock plc v DB Ramsden amp Co Ltd(1999))

bull Money paid under a void contract

For example contracts void

bull In Westdeutche Landesbank v Islington LBC (1994) thecouncil had entered into a rate swapping arrangementwith the bank under which the bank had paid pound2500000to the council in advance The council had paidapproximately pound1200000 to the bank by instalment andargued that since there was not a total failure ofconsideration it should not have to pay the bank theremaining pound1300000 The Court of Appeal held that theprinciple upon which money must be repaid under a

CA

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166

because ultra vires

as against public policy

for a commonmistake

Mistaken payments underinsurance policies

Mistaken payments intoa bank account

void contract is different from that on a total failure ofconsideration Recovery of money under a void contractis allowed if there is no legal basis for such a payment

bull Note ndash money paid under contract which is void forillegality cannot be recovered unless the action can beframed without relying on the contract

Parkinson v Royal College of Ambulance (1925)Bowmakers v Barnet Instruments (1945) Tinsley v Milligan (1993)

bull Note ndash recovery under these heads will not be possible if

In Lipkin Gorman v Karpnale Ltd (1992) a partner in a firmof solicitors was a compulsive gambler who regularlygambled at a casino run by the defendants In order tofinance his gambling he had drawn cheques on clientaccounts where he was the sole signatory He had spentat least pound154000 of this money at the defendantrsquos casinoand the plaintiff sued for the return of the money as ithad been received under a contract which was void(declared void by statute) Held ndash where the true ownerof stolen money sought to recover it from an innocentthird party the recipient was under an obligation toreturn it where he had given no consideration for itunless he could show that he had altered his position ingood faith In this case the plaintiff was able to recoverthe pound154000 less the winnings paid to the partner The

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W167

the payer hadintended the

payee tobenefit in any

event

there is goodconsiderationfor exampledischarge of

a debt

the payee haschanged

position as aresult of the

payment

casino had altered their position on each gamble in thatthey had become vulnerable to a loss

However in South Tyneside Metropolitan Borough Council vSvenska International (1994) the House of Lords allowedthe council to recover approximately pound200000 it had paidto a bank under a rate swap agreement which had beendeclared ultra vires and void The court rejected thebankrsquos claim that it had changed its position in that it hadentered into financial arrangements with otherorganisations in order to hedge its losses

bull Money paid to a third party for the benefit of thedefendant provided the claimant was not acting as avolunteer (for example a mother paying off a sonrsquos debt)but was acting under some constraint

In Macclesfield Corpn v Great Central Railway (1911) theplaintiffs carried out repairs to a bridge which thedefendants were legally obliged (but had refused) tomaintain They were regarded as purely volunteers andcould not therefore recover the money However in Exallv Partridge (1799) the plaintiff paid off arrears of rentowed by the defendant in order to avoid seizure of theplaintiffrsquos carriage which was kept on the defendantrsquospremises The plaintiff was acting under a constraint andcould therefore recover the money

Payment for work done

bull Where the claimant has prevented performance of thecontract (see Plancheacute v Colburn (1831))

CA

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168

Here the claimant is seeking compensationon a quantum meruit basis (cf s 1(3) of the

Law Reform (Frustrated Contracts) Act 1943)

bull Where work has been carried out under a void contractIn Craven Ellis v Canons Ltd (1936) the plaintiff hadcarried out a great deal of work on behalf of a companyon the understanding that he had been appointedmanaging director It was later discovered that he hadnot properly been appointed managing director Thecourt held that he should be paid on a quantum meruitbasis for the work he had done

bull Where agreement has not been reached and

the work was requested by the defendants InWilliam Lacey v Davis (1957) the plaintiffs hadsubmitted the lowest tender for a building contractand had been led to believe that they would beawarded it At the defendantsrsquo request they thenprepared various plans and estimates Thedefendants then decided not to proceed The courtordered the defendants to pay a reasonable sum on aquantum meruit basis for the work that had beendone on analogy with Craven Ellis v Cannons or

the work had been freely accepted In British SteelCorpn v Cleveland Bridge Engineering Co (1984) a letterof intent was issued by the defendants indicating thatthey intended to enter into a contract with theplaintiffs for the construction and delivery of cast-steel lsquonodesrsquo However it proved impossible to reachagreement on a number of major items Despite this anumber of lsquonodesrsquo were eventually constructed andaccepted by the defendants It was held by the courtthat the defendants should pay for the nodes they hadaccepted

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W169

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W171

10 Privity of contract

Introduction

The traditional approach to the doctrine of privity is that

Privity of contract is closely associated with the rule thatconsideration must move from the promisee See Dunlop vSelfridge (above)

Only a party to a contractcan sue on a contract

Only a party to a contractcan be sued on a contract

In Tweddle v Atkinson(1861) the plaintiff had

married Mr Guyrsquosdaughter The plaintiffrsquosfather and Mr Guy had

agreed together that theywould each pay a sum ofmoney to the plaintiff Mr

Guy died before themoney was paid and the

plaintiff sued hisexecutors The action wasdismissed ndash the plaintiffwas not a party to thecontract which wasmade between the

two fathersSee also

Beswick v Beswick (1968)

In Dunlop v Selfridge(1915) Dew amp Co at the

instigation of Dunlophad placed a minimum

resale price in theircontract with Selfridge

Held ndash Dunlop could notsue Selfridge for breach of contract they were

not parties to the contract nor had they

given consideration to Selfridge

Matters relevant to the doctrine of privity

One part of the traditional approach that is that relating toconferring benefits has recently been significantly changedby legislation which is discussed below In addition thereare a number of situations which fall outside the scope ofthe doctrine

Matters outside the doctrine

It has been argued that it is only because English law hasdeclared many transactions not to be subject to the doctrineof privity that the doctrine itself has survived so long

CA

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172

AssignmentRights can be assignedprovided that certain

formalities are followed

AgencyA principal can sue and

be sued on contractsmade by an agent

on his behalf

TrustsWhere a trust has beencreated the beneficiaryunder the trust can suethe trustees even if hewas not a party to the

original agreement

Multi-partite agreementsIn Clarke v Dunraven(1897) entrants in a

yacht race were allowedto sue each other TheCompanies Act 1985allows shareholders

to sue each other

Land law recognises a number of exceptions

Statutory exceptions

bull Price maintenance agreements

bull Various insurance contracts

bull For example Married Womanrsquos Property Act

bull Law of Property Act 1925 s 56

bull Negotiable instruments

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W173

Collateral contractsIn limited cases the court will find a separate

(collateral) contract between the promisor and the third party

(Shanklin Pier v Detel Products (1951))

LeasesThe benefits and

obligations under a lease can be transferred

to third parties

Law of Property Act 1925 s 56

See below

Restrictive covenantsThese can bind a third party under the rule in

Tulk v Moxhay (1848)

Conferring benefits on a third party

Statutory intervention

The common law rule preventing a third party fromenforcing a contract was much criticised and has now beenreformed by legislation that is the Contracts (Rights ofThird Parties) Act 1999 based on recommendations from theLaw Commission

Main effectA third party will be able to enforce a contractual provisionpurporting to confer a benefit on him or her if both of twoconditions are satisfied (s 1)

Right to vary the contract

Unless they have provided otherwise the contractingparties will lose the right to vary or cancel the provisionbenefiting the third party if (s 2)

bull the third party has communicated his assent or

bull the third party has relied on the term and the promisor isaware of this or

bull the third party has relied on the term and the promisorcould be reasonably expected to have foreseen this

on its proper constructionthe contract is intended to

give the third party a legallyenforceable right

the contract expresslyprovides that the third party

may benefit

CA

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174

DefencesThe promisor can raise against the third party any defencesthat could have been raised against the promisee (forexample misrepresentation duress) (s 3)

The promisor can also rely on defences set-offs orcounterclaims arising from prior dealings with the thirdparty

ExceptionsThere cannot be double liability that is as against thepromisee and the third party (s 5)

Some contracts are excluded from the Act (s 6)

bull contracts on a bill of exchange or promissory note

bull terms of a contract of employment as against anemployee

bull contracts for the carriage of goods by sea or if subject toan international transport convention by road rail or air

The exception for carriage of goods by sea does not apply toreliance on an exclusion clause (as in The Eurymedon (1975)for example)

Note also that the main contracting parties are in control ndashthey can decide that the provisions of the new Act shouldnot apply and there will be nothing that the third party cando about it

The Act does not affect the other part of the privity doctrinendash relating to the imposition of obligations on third parties ndashwhich remains governed by the common law

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The common law approach

The common law developed a number of devices to allow athird party to receive the benefit of contract by

These devices will be of much less importance now that theContracts (Rights of Third Parties) Act 1999 is in force Theymay still be used however particularly in situations wherefor one reason or another the 1999 Act does not apply

Attempts to allow the third party to sue

bull Attempts to extend the use of lsquotrustsrsquo

In Walfordrsquos case (1919) under a charterparty theship owner promised the charterer to pay a broker acommission Held ndash the charterer was trustee of thispromise for the broker who could thus enforce itagainst the ship owner

However in Re Schebsman (1944) a contract betweenSchebsman and X Ltd that in certain circumstanceshis wife and daughter should be paid a lump sumwas held not to create a trust

The trust as a device to outflank privity was limited bythe courts presumably because of concern that theirrevocable nature of the trust may prevent thecontracting parties from changing their minds Thecourts no longer go out of their way to find that theparties intended to create a trust

CA

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176

Allowing the thirdparty to sue

Allowing the promiseeto sue on behalf of the

third party

bull Lord Denning launched a campaign against privity andargued that s 56 of the Law of Property Act 1925 intendedto destroy doctrine altogether This was finally rejected bythe House of Lords in Beswick v Beswick (1968) theyacknowledged that the wording was wide enough tosupport Lord Denningrsquos view but insisted neverthelessthat it must be restricted to contracts concerning land asthe purpose of the Act was to consolidate the law relatingto real property

bull Agency

Agency has been used to allow a third party to takeadvantage of an exclusion clause in a contract to whichhe was not a party

The House of Lords refused to allow stevedores torely on an exclusion clause in a contract between thecarriers and the cargo owner in Scruttons v MidlandSilicones (1962) on the basis that only a party to thecontract could claim the benefit of the contract that isthe exclusion clause

However in The Eurymedon (1975) the Privy Councilon similar facts held that the carriers had negotiateda second contract (a collateral contract) as agents ofthe stevedores and the stevedores could claim thebenefit of the exclusion clause in this contract

But in Southern Water Authority v Carey (1985) sub-contractors sought to rely on a limitation of liabilityclause in a main contract Held ndash they must havespecific authority to negotiate on behalf of a thirdparty before this device could work

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W177

In Norwich City Council v Harvey (1989) instead ofusing an exclusion clause the contract placed the riskof loss or damage by fire on the owner and thisprotected both main contractor and sub-contractor

Attempts to allow the promisee to enforce the contract onbehalf of the third party

bull Specific performance

In Beswick v Beswick (1968) Peter Beswick had transferredhis business to his nephew in return for his nephewrsquospromise to pay his uncle a pension and after his deathan annuity to his widow The nephew paid his uncle thepension but only one payment of the annuity was madeThe widow as administratrix of her husbandrsquos estatesuccessfully sued her nephew for specific performance ofthe contract to pay the annuity although the House ofLords implied that she would not have succeeded if shehad been suing in her own right

bull Injunction

Similarly an injunction may be awarded to restrain abreach of a negative promise on a suit brought by thepromisee for example A promised B not to compete withC or by a stay of proceedings

In Snelling v Snelling Ltd (1973) three brothers lent moneyto a family company and agreed not to reclaim themoney for a certain period A stay of proceedings wasgranted to one of the brothers to stop another brotherfrom breaking his promise and suing the company for thereturn of his money

CA

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178

bull Damages

Damages to cover the disappointment of a third partywas sanctioned by Lord Denning in Jackson v HorizonHolidays Ltd (1975) where the plaintiff entered into acontract with a holiday firm for a holiday for his familyand himself in Ceylon The holiday was a disaster Theplaintiff recovered damages for pound500 for lsquomental stressrsquoOn appeal the court confirmed the amount on theground that witnessing the distress of his family hadincreased the plaintiffrsquos own distress Lord Denninghowever stated that the sum was excessive for theplaintiffrsquos own distress but upheld the award on theground that the plaintiff had made the contract on behalfof himself and of his wife and children and that he couldrecover in respect of their loss as well as their own

This statement by Lord Denning was disapproved by theHouse of Lords in Woodar Investment Development Ltd vWimpey Construction (UK) Ltd (1980) They stated thatdamages should not generally be recovered on behalf ofa third party

Lord Wilberforce however did suggest that there was aspecial category of contracts which called for specialtreatment That is where one party contracted for abenefit to be shared equally between a group forexample family holidays ordering meals in restaurantsfor a party hiring taxis for a group The decision inJackson could therefore be supported on this ground Afurther exception was identified by the House of Lords inLinden Gardens Trust v Lenesta Sludge Disposals Ltd (1993)where in a construction contract the original propertyowner may be able to sue the contractor for damagesresulting from defects in the work even though theproperty has been transferred to a third party The

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W179

damages would be held in trust for the third party Thisexception was again confirmed by the House of Lords inAlfred McAlpine Construction Ltd v Panatown Ltd (2000) inorder to avoid the situation where otherwise no onewould be able to sue the contractor although on the factsthe exception did not apply (because a separatearrangement had been made under which the contractorwas directly liable to the third party)

Attempts to impose obligations on third parties

bull Restrictive covenants inserted into a contract for the saleof land may bind subsequent purchasers provided

they are negative in nature the subsequent purchaser has notice of the covenants

the person claiming the benefit has land capable ofbenefiting from its enforcement (Tulk v Moxhay (1848))

bull The courts extended the rule in Tulk v Moxhay to personalproperty for example a ship in The Strathcona (1926)where the plaintiffs had chartered The Strathcona forcertain months each year The ship was sold to thedefendant who refused to allow the plaintiffs to use theship The plaintiffs sought an injunction on the groundthat the doctrine in Tulk v Moxhay should be extendedfrom land to ships The court granted an injunction

This decision was criticised in Port Line Ltd v Ben Line Ltd(1958) where a ship chartered to the plaintiffs was sold tothe defendants The ship was requisitioned during theSuez war and compensation was paid to the defendantsThis compensation was claimed by the plaintiffs Held ndasheven if The Strathcona case was rightly decided it couldC

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S180

not be applied in this case as (a) the defendants were notin breach of any duty and (b) the plaintiffs had notsought an injunction but financial compensation whichwas outside Tulk v Moxhay

The decision in The Strathcona has been widely criticisedbecause

a contract of hire creates personal not proprietaryrights in the hired object

the retention of land which can benefit from thecovenant is a necessary condition of the doctrine inTulk v Moxhay

bull However in Swiss Bank Corpn v Lloyds Bank (1979)Browne-Wilkinson J considered that the decision in TheStrathcona was correct He suggested however that thetort of inducing a breach of contract or knowinglyinterfering with a contract would be a more suitable basisfor the decision than Tulk v Moxhay He stated that in hisjudgment a person proposing to deal with property insuch a way as to cause a breach of a contract affecting thatproperty will be restrained by injunction from doing so ifwhen he acquired that property he had actualknowledge of the contract

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• Book Cover
• Title
• Copyright
• Contents
• 1 Agreement
• 2 Consideration and intention
• 3 Contents of a contract
• 4 Exemption (exclusion or
• 5 Vitiating elements which render
• 6 Mistake
• 7 Illegality and capacity
• 8 Discharge
• 9 Remedies for breach of contract
• 10 Privity of contract

Unilateral and bilateral agreements

The distinction is important with regard to

bull advertisements

bull revocation of offers

bull communication of acceptance

Offer

A valid offer

bull must be communicated so that the offeree may accept orreject it

bull may be communicated in writing orally or by conduct

CA

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2

A bilateral agreementconsists of an exchange of

promises for example

Offer ndash I will sell my carfor pound500

Acceptance ndash I will giveyou pound500 for your car

In a unilateral agreementthe offeror alone makes a

promise The offer is accepted by doing what is

set out in the offer forexample

Offer ndash I will pay pound500 toanyone who returns my

lost kitten

Acceptance ndash The lost kitten is returned

A definite promise to be bound provided that certain specified terms are accepted

(There is no general requirement that an agreement must bein writing Important exceptions include contracts relatingto interests in land (Law of Property (MiscellaneousProvisions) Act 1989 s 2(1)) and consumer credit(Consumer Credit Act 1974))

bull May be made to a particular person to a group ofpersons or to the whole world In Carlill v Carbolic SmokeBall Co Ltd (1893) the defendants issued anadvertisement in which they offered to pay pound100 to anyperson who used their smoke balls and then succumbedto influenza Mrs Carlill saw the advertisement and usedthe smoke ball but then immediately caught influenzaShe sued for the pound100 The defendants argued that it wasnot possible in English law to make an offer to the wholeworld Held ndash an offer can be made to the whole world

bull Must be definite in substance (see certainty of terms p 16below)

bull Must be distinguished from an invitation to treat

Invitations to treat

In Gibson v Manchester City Council (1979) the councilrsquos letterstated lsquowe may be prepared to sell you rsquo The House ofLords did not regard this as an lsquoofferrsquo

A response to an invitation to treat does not lead to anagreement The response may however be an offer CO

NT

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LA

W3

An indication that the invitor is willing to enter into negotiations but is not prepared to be

bound immediately

The distinction between an offer and an invitation to treatdepends on the reasonable expectations of the parties

The courts have established that there is no intention to bebound in the following cases

Display of goods for sale

bull In a shop In Pharmaceutical Society of GB v Boots CashChemists Ltd (1952) the Court of Appeal held that in aself-service shop the sale takes place when the assistantaccepts the customerrsquos offer to buy the goods Thedisplay of goods is a mere invitation to treat

bull In a shop window In Fisher v Bell (1961) it was held thatthe display of a lsquoflick knifersquo in a shop window with aprice attached was an invitation to treat

However it was suggested by Lord Denning in Thorntonv Shoe Lane Parking (1971) (see below) that vendingmachines and automatic ticket machines are makingoffers since once the money has been inserted thetransaction is irrevocable

bull In an advertisement In Partridge v Crittenden (1968) anadvertisement which said lsquoBramblefinch cocks and hensndash 25srsquo was held to be an invitation to treat The courtpointed out that if the advertisement was treated as anoffer this could lead to many actions for breach ofcontract against the advertiser as his stock of birds waslimited He could not have intended the advertisement tobe an offer

However if the advertisement is unilateral in nature andthere is no problem of limited stock then it may be an offerSee Carlill v Carbolic Smoke Ball Co Ltd (above) Advertising areward may also be a unilateral offer

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4

Auctions

bull An auctioneerrsquos request for bids in Payne v Cave (1789)was held to be an invitation to treat The offer was madeby the bidder (cf Sale of Goods Act 1979 s 57(2))

bull A notice of an auction In Harris v Nickerson (1873) it washeld that a notice that an auction would be held on acertain date was not an offer which then could beaccepted by turning up at the stated time It was astatement of intention

If the auction is stated to be lsquowithout reserversquo then there isstill no necessity to hold an auction but if the auction isheld lots must be sold to the highest bidder (Barry vHeathcote Ball (2001) confirming obiter dicta in Warlow vHarrison (1859)) The phrase lsquowithout reserversquo constitutes aunilateral offer which can be accepted by turning up andsubmitting the highest bid

Tenders

A request for tenders is normally an invitation to treat

bull However it was held in Harvela Ltd v Royal Trust ofCanada (1985) that if the request is made to specifiedparties and it is stated that the contract will be awardedto the lowest or the highest bidder then this will bebinding as an implied unilateral offer It was also held inthat case that a referential bid for example lsquothe highestother bid plus 10rsquo was not a valid bid

bull It was also held in Blackpool and Fylde Aero Club v BlackpoolBC (1990) that if the request is addressed to specifiedparties this amounts to a unilateral offer thatconsideration will be given to each tender which isproperly submitted C

ON

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AC

TL

AW

5

Subject to contract

The words lsquosubject to contractrsquo may be placed on top of a letter in order to indicate that an offer is not to be legallybinding (Walford v Miles (1992))

Termination of the offer

Revocation (termination by the offeror)

An offeror may withdraw an offer at any time before it hasbeen accepted

bull The revocation must be communicated to the offereebefore acceptance In Byrne v van Tienhoven (1880) thewithdrawal of an offer sent by telegram was held to becommunicated only when the telegram was received

bull Communication need not be made by the offerorcommunication through a third party will suffice InDickinson v Dodds (1876) the plaintiff was told by aneighbour that a property which had been offered to himhad been sold to a third party Held ndash the offer had beenvalidly revoked

bull An offer to keep an offer open for a certain length of timecan be withdrawn like any other unless an option hasbeen purchased for example consideration has beengiven to keep the offer open (Routledge v Grant (1828))

Unilateral offersbull Communication of the revocation is difficult if the offer

was to the whole world It was suggested however inthe American case of Shuey v USA (1875) that

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6

Revocation Lapse Rejection

communication will be assumed if the offeror takesreasonable steps to inform the public for example placesan advertisement in the same newspaper

bull It now seems established that revocation cannot takeplace if the offeree has started to perform In Errington vErrington (1952) a father promised his daughter and son-in-law that if they paid off the mortgage on a house heowned he would give it to them The young couple dulypaid the instalments but the offer was withdrawnshortly before the whole debt was paid Held ndash there wasan implied term in the offer that it was irrevocable onceperformance had begun This is also supported by dictain Daulia v Four Millbank Nominees (1978)

Lapse (termination by operation of law)

An offer may lapse and thus be incapable of being acceptedbecause of

bull Passage of time

at the end of a stipulated time (if any) or

if no time is stipulated after a reasonable time InRamsgate Victoria Hotel Co v Montefiore (1866) anattempt to accept an offer to buy shares after fivemonths failed as the offer had clearly lapsed

bull Death

of the offeror if the offer was of a personal nature

of the offeree

bull Failure of a condition

an express condition or CO

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W7

an implied condition In Financings Ltd v Stimson(1962) it was held that an offer to buy a car lapsedwhen the car was badly damaged on the ground thatthe offer contained an implied term that the carwould remain in the same condition as when the offer was made

Rejection (termination by the offeree)

A rejection may be

bull express

bull implied

A counter offer is an implied rejectionbull Traditionally an acceptance must be a mirror image of

the offer If any alteration is made or anything addedthen this will be a counter offer and will terminate theoffer In Hyde v Wrench (1840) the defendant offered tosell a farm for pound1000 The plaintiff said he would givepound950 for it Held ndash this was a counter offer whichterminated the original offer which was therefore nolonger open for acceptance In Brogden v MetropolitanRailway (1877) the defendant sent to the plaintiff forsignature a written agreement which they hadnegotiated The plaintiff signed the agreement andentered in the name of an arbitrator on a space which hadbeen left empty for this purpose Held ndash the returneddocument was not an acceptance but a counter offer

bull This is particularly important for businesses whocontract by means of sales forms and purchase forms forexample if an order placed by the buyerrsquos purchase formis lsquoacceptedrsquo on the sellerrsquos sales form and the conditionson the back of the two forms are not identical (which theyare very unlikely to be) then the lsquoacceptancersquo is a counter

CA

VE

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8

offer and an implied rejection In Butler Machine Tool CoLtd v Ex-Cell-O Corpn Ltd (1979) the sellers offered to sella machine tool to the buyers for pound75535 on their ownconditions of sale which were stated to prevail over anyconditions in the buyersrsquo order form and whichcontained a price variation clause The buyers lsquoacceptedrsquothe offer on their own order form which stated that theprice was a fixed price and which contained a tear offslip which said lsquowe accept your order on the terms andconditions stated thereonrsquo This was in effect a lsquocounterofferrsquo The sellers signed and returned the slip togetherwith a letter which stated that they were carrying out theorder in accordance with their original offer When theydelivered the machine they claimed the price hadincreased by pound2892 The buyers refused to pay the extrasum Held ndash the contract was concluded on the buyersrsquoterms the signing and returning of the tear-off slip wasconclusive that the sellers had accepted the buyersrsquocounter offer The court analysed the transaction bylooking for matching offer and acceptance

Note ndash a request for further information is not a counteroffer In Stevenson v McLean (1880) the defendant offered tosell to the plaintiff iron at 40s a ton The plaintiff telegraphedto inquire whether he could pay by instalments Held ndash thiswas a mere inquiry for information not a counter offer andso the original offer was not rejected

A conditional acceptance

A conditional acceptance may be a counter offer capable ofacceptance for example I will pay pound500 for your car if youpaint it red If the owner agrees to this condition a contractwill be formed CO

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W9

A valid acceptance must

bull be made while the offer is still in force (see termination ofoffer above)

bull be made by the offeree

bull exactly match the terms of the offer (see counter offersabove)

bull be written oral or implied from conduct In Brogden vMetropolitan Railway (1877) (above) the returneddocument was held to be a counter offer which thedefendants then accepted either by ordering coal fromBrogden or by accepting delivery of the coal (see alsolsquoThe Battle of the Formsrsquo)

However the offeror may require the acceptance to be madein a certain way If the requirement is mandatory it must befollowed

If the requirement is not mandatory then another equallyeffective method will suffice In Manchester Diocesan Councilfor Education v Commercial and General Investments Ltd (1969)an invitation to tender stated that the person whose bid was

CA

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10

The fact of acceptance

An acceptance is a final and unqualified assent to all the terms of the offer

The fact of acceptance

Acceptance

Communication ofacceptance

accepted would be informed by a letter to the address givenin the tender The acceptance was eventually sent not to thisaddress but to the defendantrsquos surveyor Held ndash thestatement in the tender was not mandatory the tender hadtherefore been validly accepted

bull Where the offer is made in alternative terms theacceptance must make it clear to which set of terms itrelates

bull A person cannot accept an offer of which he has noknowledge (Clarke (1927) (Australia))

But a personrsquos motive in accepting the offer is irrelevantIn Williams v Carwardine (1833) (Australia) the plaintiffknew of the offer of a reward in exchange forinformation but her motive was to salve her conscienceHeld ndash she was entitled to the reward

bull lsquoCross-offersrsquo do not constitute an agreement (Tinn vHoffman amp Co (1873))

Communication of acceptance

Acceptance must be communicated by the offeree or hisagent In Powell v Lee (1908) an unauthorised communicationby one of the managers that the Board of Managers hadselected a particular candidate for a headship was held notto be a valid acceptance

Silence as communication

An offeror may not stipulate that silence of the offeree is toamount to acceptance In Felthouse v Bindley (1862) the

CO

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W11

Acceptance must be communicated

plaintiff wrote to his nephew offering to buy a horse andadding lsquoIf I hear no more I will take it that the horse isminersquo The nephew did not reply to this letter Held ndash nocontract Acceptance had not been communicated to theofferor

It has been suggested that this does not mean that silencecan never amount to acceptance for example if in Felthousev Bindley the offeree had relied on the offerorrsquos statementthat he need not communicate his acceptance and wished toclaim acceptance on that basis the court could decide thatthe need for acceptance had been waived by the offeror (seebelow)

Exceptions to the rule that acceptance must be

communicated

bull In a unilateral contract where communication isexpressly or impliedly waived (see Carlill v CarbolicSmoke Ball Co Ltd (above))

bull Possibly where failure of communication is the fault ofthe offeror This was suggested by Lord Denning inEntores Ltd v Miles Far East Corpn (1955)

bull Where the post is deemed to be the proper method ofcommunication In Adams v Lindsell (1818) thedefendants wrote to the plaintiffs offering to sell them aquantity of wool and requiring acceptance by post Theplaintiffs immediately posted an acceptance on 5December Held ndash the contract was completed on 5December

CA

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12

The postal rule

bull Adams v Lindsell (1818) above

bull Acceptance is effective on posting even when the letter islost in the post In Household Fire Insurance Co Ltd v Grant(1879) the defendant offered to buy shares in theplaintiffrsquos company A letter of allotment was posted tothe defendant but it never reached him Held ndash thecontract was completed when the letter was posted

bull Note the difference between acceptance and revocationof an offer by post

Acceptance of an offer takes place when a letter isposted

Revocation of an offer takes place when the letter isreceived

bull Byrne v van Tienhoven (1880) above

Limitations to the postal rule

bull It only applies to acceptances and not to any other typeof communication (for example an offer or a revocation)

bull It only applies to letters and telegrams It does not applyto instantaneous methods of communication such astelex or probably fax or email

bull It must be reasonable to use the post as the means ofcommunication (for example an offer by telephone or byfax might indicate that a rapid method of response wasrequired)

CO

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W13

Acceptance takes place when a letter is postednot when it is received

bull Letters of acceptance must be properly addressed andstamped

bull The rule is easily displaced for example it may beexcluded by the offeror either expressly or impliedly InHolwell Securities Ltd v Hughes (1974) it was excluded bythe offeror requiring lsquonotice in writingrsquo It was alsosuggested by the court that the postal rule would not beused where it would lead to manifest inconvenience

There is no direct English authority on this point

CA

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14

Arguments againstLogic ndash once a letter is posted the offer is accepted there isno provision in law for revoking an acceptance

bull The lsquologicalrsquo view is supported by the New Zealand caseof Wenckheim v Arndt (1878) and the South African case ofA to Z Bazaars (Pty) Ltd v Minister of Agriculture (1974)

Fairness ndash

bull Cheshire argues that it would be unfair to the offeror whowould be bound as soon as the letter was posted whereasthe offeree could keep his options open

Query ndash can a letter of acceptance be cancelled byactual communication before the letter is delivered

Communication by instantaneouselectronic means

bull The rules on telephones and telex were laid down inEntores v Miles (above) and confirmed in Brinkibon Ltd vStahag Stahl (1983) where it was suggested that duringnormal office hours acceptance takes place when themessage is printed out not when it is read The House ofLords however accepted that communication by telexmay not always be instantaneous for example whenreceived at night or when the office is closed

bull Lord Wilberforce stated

lsquoNo universal rule could cover all such cases theymust be resolved by reference to the intention of theparties by sound business practice and in some casesby a judgment of where the risk should liersquo

CO

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W15

Arguments forThere is some support for allowing recall in the Scottishcase of Countess of Dunmore v Alexander (1830)

bull It is argued that actual prior communication of rejectionwould not necessarily prejudice the offeror who bydefinition will be unaware of the lsquoacceptancersquo

bull It is also argued that it would be absurd to insist onenforcing a contract when both parties have acted on therecall This however could be interpreted as anagreement to discharge

Acceptance takes place when and where the message is received

bull It has been suggested that a message sent outsidebusiness hours should be lsquocommunicatedrsquo when it isexpected that it would be read for example at the nextopening of business It is generally accepted that thesame rules should apply to faxes and email as to telex

bull There is no direct authority on telephone answeringmachines It might well be argued that the presence of ananswering machine indicates that communication is notinstantaneous there is a delay between sending andreceiving messages It would then follow that the basicrule should apply that is that acceptance must becommunicated Acceptance therefore would take placewhen the message is actually heard by the offeror

Certainty of terms

The courts will not enforce

CA

VE

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16

Vague agreementsfor example

Scammell v Ouston (1941)

The courts refused toenforce a sale stated to bemade lsquoon hire purchase

termsrsquo neither the rate ofinterest nor the period of

repayment nor the numberof instalments were stated

Incomplete agreementsfor example

lsquoan agreement to make anagreementrsquo will be void

In Walford v Miles (1992) thecourt refused to enforce anlsquoagreement to negotiate in

good faithrsquo

See also May and Butcher v R (1934)

It is for the parties to make their intentions clear

But the uncertainty may be cured by

bull a trade custom where a word has a specific meaning

bull previous dealings between the parties whereby a word orphrase has acquired a specific meaning for exampletimber of lsquofair specificationrsquo in Hillas v Arcos (1932)

bull the contract itself which provides a method for resolvingan uncertainty In Foley v Classique Coaches (1934) therewas an executed contract where the vagueness of lsquoat aprice to be agreedrsquo was cured by a provision in thecontract referring disputes to arbitration Cf May andButcher v R an unexecuted contract where the courtrefused to allow a similar arbitration clause to cure theuncertainty

The courts will strive to find a contract valid where it hasbeen executed

bull The Sale of Goods Act 1979 provides that if no price ormechanism for fixing the price is provided then thebuyer must pay a lsquoreasonable pricersquo but this provisionwill not apply where the contract states that the price islsquoto be agreed between the partiesrsquo

bull Note a lsquolock-out agreementrsquo for example an agreementnot to negotiate with any one else is valid provided it isclearly stated and for a specific length of time This wasapplied by the Court of Appeal in Pitt v PHH AssetManagement (1993) where a promise not to negotiate withany third party for two weeks was enforced

CO

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W17

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W19

2 Consideration and intention

Consideration

Most legal systems will only enforce promises where thereis something to indicate that the promisor intended to bebound that is there is some

Consideration is the normal lsquobadge of enforceabilityrsquo inEnglish law

ReciprocityConsideration

RelianceLord Denning tried to

introduce reliance as basisfor enforcing promisesthrough the doctrine of

promissory estoppel

FormFor example writing English

law will enforce promiseswhich are contained in a

deed (A deed is a document which

is signed and attested andindicates on its face

that it is a deed)

lsquoBadge of

enforceabilityrsquo

Definitions of consideration

Shorter version

Limitation of the definition

bull It makes no mention of why the promisee incurs adetriment or confers a benefit or that the element of abargain is central to the classical notion of considerationFor example in Combe v Combe (1951) it was held thatthere was no consideration for the defendantrsquos promiseto pay his ex-wife pound100 per year even though in relianceon that promise she had not applied to the divorce courtfor maintenance and in that sense she had suffered adetriment The reason why the detriment did notconstitute consideration was that there was no request bythe husband express or implied that she should forbearfrom applying for maintenance There was nolsquoexchangersquo

bull Some writers have preferred to emphasise this elementof bargain and have defined consideration as

CA

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20

A valuable consideration in the eyes of the law mayconsist of (Currie v Misa (1875))

bull either some right interest profit or benefit to oneparty or

bull some forbearance detriment loss orresponsibility given suffered or undertaken bythe other

A benefit to one party or a detriment to the other

lsquothe element of exchange in a contractrsquoor

lsquothe price paid for a promisersquo

bull These definitions however are vague and despite itslimitation the benefitdetriment definition is mostcommonly used

Consideration and condition

Consideration must be distinguished from the fulfilment ofa condition If A says to B lsquoI will give you pound500 if you shouldbreak a legrsquo there is no contract but simply a gratuitouspromise subject to a condition In Carlill v Carbolic Smoke BallCo (1893) the plaintiff provided consideration for thedefendantrsquos promise by using the smoke ball Catchinginfluenza was only a condition of her entitlement to enforcethe promise

Kinds of consideration

bull In Roscorla v Thomas (1842) the defendant promised theplaintiff that a horse which had been bought by him wassound and free from vice It was held that since thispromise was made after the sale had been completedthere was no consideration for it and it could not beenforced In Re McArdle (1951) a promise made lsquoin

CO

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W21

Past consideration that is something already completed before the promise is made cannot

generally amount to consideration

Executed considerationAn act wholly

performed as part of a contract

Executory ConsiderationA promise to do something

in the future

consideration of your carrying out certain improvementsto the propertyrsquo was held by the Court of Appeal to beunenforceable as all the work had been done before thepromise was made

Exceptions to this rule

bull The modern requirements were laid down by LordScarman in Pao On v Lau Yiu Long (1980) Where a serviceis rendered

at the request of the promisor (as in Lampleigh vBraithwait (1615))

on the understanding that a payment will be made (asin Re Caseyrsquos Patents (1892)) and

if the payment would have been legally enforceableif it had been promised in advance

then a subsequent promise to pay a certain sum will beenforced

Note ndash the lsquoinferredrsquo intention to pay makes this a veryflexible exception

Consideration must move from the promisee

bull See Chapter 10 ndash Privity of contract

Consideration need not be adequate

CA

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22

Only a person who has provided consideration for a promise can enforce that promise

The consideration provided by one party need not equal in value the

consideration provided by the other party

It is for the parties themselves to make their own bargainThe consideration need only have lsquosome value in the eyes ofthe lawrsquo (See lsquoConsideration must be sufficientrsquo p 24below)

bull The value may be slight In Chappell Co Ltd v Nestleacute Co Ltd(1960) three wrappers from the defendantrsquos chocolatebars were held to be part of the consideration InMountford v Scott (1975) pound1 was held to be goodconsideration for an option to buy a house

bull Withdrawal of threatened legal proceedings will amountto consideration even if the claim is found to have nolegal basis provided that the parties themselves believethat the claim is valid (Callisher v Bischoffstein (1870))

bull In Pitt v PHH Asset Management (1993) the defendantagreed to a lock-out agreement in return for Pittdropping his claim for an injunction against them Theclaim for an injunction had no merit but had a nuisancevalue and dropping it was therefore good consideration

bull In Alliance Bank v Broome (1964) the bankrsquos forbearance tosue was held to be consideration for the defendantrsquospromise to provide security for a loan

bull In Edmonds v Lawson (2000) it was held that the generalbenefits to chambers of operating a pupillage system wassufficient to provide consideration for contracts withindividual pupils

There is no consideration however where the promises arevague for example lsquoto stop being a nuisance to his fatherrsquo(White v Bluett (1853) but cf Ward v Byham (1956) below) orillusory for example to do something impossible or merelygood for example to show love or affection or gratitude CO

NT

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W23

It has been argued that because the latter are invalidconsideration must have some economic value Buteconomic value is extremely difficult to discern in the othercases cited above Since consideration is a lsquobadge ofenforceabilityrsquo it is argued that nominal consideration isadequate it is only designed to show that the promise isintended to be legally enforceable ndash whether it creates anyeconomic advantage is therefore irrelevant

Consideration must be sufficient

Traditionally the following have no value in the eyes of thelaw

Performing a duty imposed by law

bull For example promising not to commit a crime orpromising to appear in court after being subpoenaed InCollins v Godefroy (1831) a promise to pay a fee to awitness who has been properly subpoenaed to attend a

CA

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24

The consideration must have some value in the eyes of the law

Consideration therefore is found when a person receives whatever he requests

in return for a promise whether or not it has aneconomic value provided it is not too vague

Performing a duty imposed

by law

Performing an existingcontractual duty owed

to the other party

trial was held to have been made without considerationThe witness had a public duty to attend

bull But if a person does or promises to do more than he isrequired to do by law then he is providing considerationIn Glasbrook Bros v Glamorgan CC (1925) the council aspolice authority on the insistence of a colliery owner andin return for a promise of payment provided protectionover and above that required by law Held ndash they hadprovided consideration for the promise to pay

bull In Ward v Byham (1956) the father of an illegitimate childpromised to pay the mother an allowance of pound1 per weekif she proved that the child was lsquowell looked after andhappyrsquo Held ndash the mother was entitled to enforce thepromise because in undertaking to see that the child waslsquowell looked after and happyrsquo she was doing more thanher legal obligation Lord Denning however based hisdecision on the ground that the mother providedconsideration by performing her legal duty to maintainthe child

Treitel agreed with Denning that performance of a dutyimposed by the law can be consideration for a promise Heargues that it is public policy which accounts for the refusalof the law in certain circumstances to enforce promises toperform existing duties Where there are no grounds ofpublic policy involved then a promise given inconsideration of a public duty can be enforced

He cites

bull promises to pay rewards for information leading to thearrest of a felon See Sykes v DPP (1961)

bull Ward v Byham (above) CO

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W25

In most cases it would make no difference whether the courtproceeded on the basis that the matter was one of publicpolicy or a lack of consideration But the former ground doesallow a greater degree of flexibility

Performing an existing contractual duty

Where the duty is owed to the other party this cannot beconsideration for

A request for extra payment

bull In Stilk v Myrick (1809) the captain promised the rest ofcrew extra wages if they would sail the ship back homeafter two sailors had deserted Held ndash the crew werealready bound by their contract to meet the normalemergencies of the voyage and were doing no more thantheir original contractual duty in working the ship home

bull Where the promisor however performs more than hehad originally promised then there can be considerationIn Hartley v Ponsonby (1857) nearly half the crewdeserted This discharged the contracts of the remainingsailors as it was dangerous to sail the ship home withonly half the crew The sailors were therefore free to makea new bargain so the captainrsquos promise to pay themadditional wages was enforceable

Exceptions to the rule in Stilk v Myrick

Factual advantages obtained by the promisorIn Williams v Roffey Bros (1991) the defendants (the maincontractors) were refurbishing a block of flats They sub-

CA

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26

A request for extra payment

A request to avoid part of a debt

contracted the carpentry work to the plaintiff The plaintiffran into financial difficulties whereupon the defendantsagreed to pay the plaintiff an additional sum if theycompleted the work on time Held ndash where a party to anexisting contract later agrees to pay an lsquoextra bonusrsquo in orderthat the other party performs his obligations under theoriginal contract then the new agreement is binding if theparty agreeing to pay the bonus has thereby obtained somenew practical advantage or avoided a disadvantage In thisparticular case the advantage was the avoidance of apenalty clause and the expense of finding new carpenters

bull Note ndash Stilk v Myrick (above) recognises as considerationonly those acts which the promisee was not under a legalobligation to perform Williams v Roffey Bros (above) addsto these factual advantages obtained by the promisor

bull This decision pushes to the fore the principles ofeconomic duress as a means of distinguishing enforceableand unenforceable modifications to a contract (seeChapter 5 on economic duress p 87)

Duties owed to third partyWhere a duty is owed to a third party its performance canalso be consideration for a promise by another It is clear thatthe third party is getting something more than he is entitledto

bull In Shadwell v Shadwell (1860) an uncle promised to pay anannual sum to his nephew on hearing of his intendedmarriage The fact of the marriage providedconsideration although the nephew was already legallycontracted to marry his fianceacutee

bull In Scotson v Pegg (1861) A agreed to deliver coal to Brsquosorder B ordered A to deliver coal to C who promised A to

CO

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W27

unload it Held ndash A could enforce Crsquos promise as Arsquosdelivery of the coal was good considerationnotwithstanding that he was already bound to do so byhis contract with B

bull In New Zealand Shipping Co v Satterthwaite amp Co Ltd TheEurymedon (1975) it was held by the Privy Council thatwhere a stevedore at the request of the consignee ofcertain goods removed the goods from a ship this wasconsideration for the promise by the consignee to give thestevedore the benefit of an exclusion clause although thestevedore in removing the goods was only performingcontractual duties he owed to the carrier

A request to avoid part of a debt

If a creditor is owed pound100 and agrees to accept pound90 in fullsettlement he can later insist on the remaining pound10 beingpaid as there is no consideration for his promise to waive thepound10 (the rule in Pinnelrsquos Case (1602))

bull This rule was confirmed by the House of Lords in Foakesv Beer (1884) Dr Foakes was indebted to Mrs Beer on ajudgment sum of pound2090 It was agreed by Mrs Beer thatif Foakes paid her pound500 in cash and the balance of pound1590in instalments she would not take lsquoany proceedingswhatsoeverrsquo on the judgment Foakes paid the moneyexactly as requested but Mrs Beer then proceeded toclaim an additional pound360 as interest on the judgment debtFoakes refused and when sued pleaded that his duty topay interest had been discharged by the promise not tosue Their Lordships deferred as to whether on its trueconstruction the agreement merely gave Foakes time to

CA

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28

Basic rule payment of a smaller sum will not discharge the duty to pay a higher sum

pay or was intended to cover interest as well But theyheld even on the latter construction there was noconsideration for the promise and that Foakes was stillbound to pay the additional sum

There are situations however where payment of a smallersum will discharge the liability for the higher sum

bull where the promise to accept a smaller sum in fullsettlement is made by deed or in return forconsideration

bull where the original claim was not for a fixed sum or theamount is disputed in good faith

bull where the debtor does something different for examplewhere payment is made at the creditorrsquos request

at an earlier time

at a different place

by a different method (it was held in D amp C BuildersLtd v Rees (1966) that payment by cheque is notpayment by a different method)

bull where payment is accompanied by a benefit of somekind

bull in a composition agreement with creditors

bull where payment is made by a third party (see HirachandPunachand v Temple (1911))

It has been argued that to allow the creditor to sue for theremaining debt would be a fraud on the third parties in thelast two cases above

Note ndash the doctrine of promissory estoppel under certaincircumstances may allow payment of smaller sum todischarge liability for the larger sum

CO

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W29

In Re Selectmove (1995) the Court of Appeal refused toextend the principle laid down in Williams v Roffey Bros topart payment of a debt The company had offered to pay itsarrears by instalments to the Inland Revenue who said thatthey would let them know if this was acceptable They heardnothing further but paid some instalments and thenreceived a threat of being wound up if the full arrears werenot paid immediately The court was not prepared to allowWilliams v Roffey Bros to overturn a rule laid down by theHouse of Lords in Foakes v Beer

Promissory estoppel

There are problems with regard to

Origins

bull It was introduced (obiter) by Lord Denning in the CentralLondon Property Trust Ltd v High Trees House Ltd (1947)where owners of a block of flats had promised to acceptreduced rents in 1939 There was no consideration fortheir promise but Lord Denning nevertheless stated thathe would estop them from recovering any arrears Hebased his statement on the decision in Hughes vMetropolitan Railway (1877)

CA

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30

If a promise intended to be binding andintended to be acted upon is acted upon then the court will not allow the promisor

to go back on his promise

the origins ofthe doctrine

the scope ofthe doctrine

the effect of the doctrine

bull It would however seem to conflict with the House ofLordsrsquo decision in Jorden v Money (1854) where it wasstated that estoppel applied only to statements of fact andnot to promises and also with the decision in Foakes vBeer (1884) where the House of Lords confirmed thatpayment of a smaller sum will not discharge the liabilityfor a larger sum

Scope

bull It only applies to the modification or discharge of anexisting contractual obligation It cannot create a newcontract See Combe v Combe (1951) above (However itwas used to create a new right of action in the Australiancase of Waltons v Maher (1988))

bull It can be used only as a lsquoshield and not a swordrsquo

bull The promise not to enforce rights must be clear andunequivocal In The Scaptrade (1983) the mere fact of nothaving enforced onersquos full rights in the past was notsufficient

bull It must be inequitable for the promisor to go back on hispromise In D amp C Builders v Rees (1966) Mrs Rees had forced the builders to accept her cheque by inequitable means and so could not rely on promissory estoppel

bull The promisee must have acted in reliance on the promisealthough not necessarily to his detriment (Alan amp Co Ltdv El-Nasr Export and Import Co (1972))

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W31

The exact scope of the doctrine is a matter ofdebate but certain requirements must be met

Effect of the doctrine

bull In Tool Metal Manufacturing Co v Tungsten Electric Co(1955) the owner of a patent promised to suspendperiodic payments during the war It was held by theCourt of Appeal that the promise was binding for theduration of the war but the owners could on givingreasonable notice at he end of the war revert to theiroriginal legal entitlements

bull In Ajayi v Briscoe (1964) the Privy Council stated that thepromisee could resile from his promise on givingreasonable notice which allowed the promisee areasonable opportunity of resuming his position but thatthe promise would become final if the promisee could notresume his former position

On one interpretation these cases show that as regardsexisting or past obligations it is extinctive but as regardsfuture obligations it is suspensory

On another interpretation the correct approach is to look atthe nature of the promise If it was intended to bepermanent then the promiseersquos liability will beextinguished

Lord Denning consistently asserted that promissoryestoppel can extinguish debts However this view iscontrary to Foakes v Beer

The view that promissory estoppel is suspensory onlywould reconcile it with the decisions in Jorden v Money

CA

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32

It is not clear whether the doctrine extinguishesrights or merely suspends them

Foakes v Beer and Pinnelrsquos Case but it would deprive it of mostof its usefulness

The question of whether the doctrine is suspensory orextinctive is particularly important with regard to singlepayments

Intention to be legally bound

This presumption may be rebutted but the onus of proof ison the party seeking to exclude legal relations In EssoPetroleum Co Ltd v Commissioners of Customs and Excise (1976)Esso promised to give one world cup coin with every fourgallons of petrol sold A majority of the House of Lordsbelieved that the presumption in favour of legal relationshad not been rebutted

Examples of rebuttals

bull lsquoThis arrangement is not entered into as a formal orlegal agreement and shall not be subject to legaljurisdiction in the law courtsrsquo (Rose and Frank v CromptonBros (1925))

bull Agreement to be binding lsquoin honour onlyrsquo (Jones v VernonPools (1939))

CO

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W33

Commercial andbusiness

agreements

Social anddomestic

agreements

In commercial and business agreements there is a presumption that the parties

intend to create legal relations

bull Letters of comfort for example statements to encouragelending to an associated company It was held inKleinwort Benson Ltd v Malaysia Mining Corpn (1989) thatthe defendantrsquos statement that lsquoit is our policy to ensurethat the business is at all times in a position to meet itsliabilities to yoursquo was a statement of present fact and nota promise for the future As such it was not intended tocreate legal relations

bull Collective agreements are declared not to be legallybinding by the Trade Unions and Labour Relations(Consolidation) Act 1992 unless expressly stated inwriting to be so

This can be rebutted by evidence to the contrary forexample

bull Agreements between husband and wife In Balfour vBalfour (1919) the court refused to enforce a promise bythe husband to give his wife pound50 per month whilst he wasworking abroad However the court will enforce a clearagreement where the parties are separating or separated(Merritt v Merritt (1970))

bull Agreements between members of a family In Jones vPadavatton (1969) Mrs Jones offered a monthly allowanceto her daughter if she would come to England to read forthe Bar Her daughter agreed but was not very successfulMrs Jones stopped paying the monthly allowance butallowed her daughter to live in her house and receive therents from other tenants Mrs Jones later sued forpossession The daughter counterclaimed for breach of

CA

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34

In social and domestic agreements there is a presumption against legal relations

the agreement to pay the monthly allowance andor for accommodation Held (a) the first agreement may havebeen made with the intention of creating legal relationsbut was for a reasonable time and would in any case havelapsed (b) the second agreement was a familyarrangement without an intention to create legalrelations It was very vague and uncertain

bull An intention to be legally bound may be inferred where

one party has acted to his detriment on theagreement (Parker v Clark (1960)) or

a business arrangement is involved (Snelling vSnelling (1973)) or

there is mutuality (Simpkins v Pays (1955))

But in all such cases the agreement must be clear

CO

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W35

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W37

3 Contents of a contract

Once a contract has been formed it is necessary to explorethe scope of the obligations which each party incurs

(Incorporation of terms is covered in Chapter 4)

The distinction between terms and mere

representations

Is a statement part of the contract Statements made duringnegotiations leading to a contract may be either

bull Terms

that is statements which form the express terms of thecontract As such they constitute promises as to thepresent truth of the statement or as to future action Ifsuch a promise is broken (for example because thestatement is untrue) this will involve a breach of contractor

Different weighting may be given to different terms

Distinction between termsand mere representations

Interpretation of expressterms

Identification of impliedterms

This involves

bull Mere representations

that is statements which do not form part of the contractbut which helped to induce the contract If these areuntrue they are lsquomisrepresentationsrsquo

Now that damages can be awarded for negligent misrepresentation the distinction has lost much of itsformer significance but there are still some importantconsequences

In trying to ascertain such intention the court may take intoaccount the following factors

The importance of the statement to the parties

bull In Bannerman v White (1861) the buyer stated lsquoif sulphurhas been used I do not want to know the pricersquo Held ndasha term Similarly in Couchman v Hill (1947) the buyerasked if the cow was in calf stating that if she was hewould not bid The auctioneerrsquos reply that she was not incalf was held to be a term overriding the printedconditions which stated that no warranty was given

The respective knowledge of the parties

bull In Oscar Chess Ltd v Williams (1957) it was held that astatement by a member of the public (a non expert) to agarage (an expert) with regard to the age of a car was amere representation not a term On the other hand astatement made by a garage (an expert) to a member ofthe public (a non-expert) concerning the mileage of a carwas held to be a term (Dick Bentley Productions Ltd vHarold Smith (Motors) Ltd (1965))

CA

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38

Whether a statement has become a term of thecontract depends on the intention of the parties

The manner of the statement

bull For example if it suggests verification (Ecay v Godfrey(1947)) it is unlikely to be a term If it discouragesverification lsquoIf there was anything wrong with the horseI would tell yoursquo (Schawel v Reade (1913)) it is more likelyto be a term

Where a contract has been reduced to writing

The terms will normally be the statements incorporated intothe written contract (Routledge v McKay (1954))

bull But a contract may be partly oral and partly written (seeCouchman v Hill (1947) above) In Evans amp Sons Ltd vAndrea Merzario Ltd (1976) an oral assurance thatmachinery would be stowed under not on the deck washeld to be a term of a contract although it was notincorporated into the written terms The court held thatthe contract was partly oral and partly written and insuch hybrid circumstances the court was entitled to lookat all the circumstances

bull Note ndash the discovery of a collateral contract mayovercome the difficulties of oral warranties in writtencontracts In City of Westminster Properties v Mudd (1959)a tenant signed a lease containing a covenant to use thepremises for business premises only He was induced tosign by a statement that this clause did not apply to himand that he could continue to sleep on the premises Thecourt found that his signing the contract was con-sideration for this promise thus creating a collateralcontract In Evans amp Son Ltd v Andrea Merzario Ltd (1976)Lord Denning considered the oral statement to be acollateral contract In Esso Petroleum Co v Mardon (1976)the court held that the statement by a representative of C

ON

TR

AC

TL

AW

39

Esso with regard to the throughput of a petrol station wascovered by an implied collateral warranty that thestatement had been made with due care and skill

bull The use of a collateral contract will not be possiblehowever if the main contract contains an appropriatelyworded lsquoentire agreementrsquo clause (The Inntrepreneur PubCo (GL) v East Crown Ltd (2000))

Identification of express terms

bull See incorporation of terms in Chapter 4 p 54

Interpretation of express terms of a contract

Oral contracts

The contents is a matter of evidence for the judge Theinterpretation will be undertaken by applying an objectivetest that is what would a reasonable person haveunderstood to have been meant by the words used (Thake vMaurice (1986))

Written contracts

If a contract is reduced to writing then under the lsquoparolevidencersquo rule oral or other evidence extrinsic to thedocument is not normally admissible to lsquoadd to vary orcontradictrsquo (Jacobs v Batavia and General Plantations Trust(1924)) the terms of the written agreement

Exceptions to the parol evidence rule

bull to show that the contract is not legally binding forexample because of mistake or misrepresentation

bull to show that the contract is subject to a lsquoconditionprecedentrsquo In Pym v Campbell (1856) oral evidence was

CA

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40

admitted to show that a contract was not to come intooperation unless a patent was approved by a third party

bull to establish a custom or trade usage (Hutton v Warren(1836) see below)

bull to establish that the written contract is not the wholecontract It is presumed that lsquoa document which lookslike a contract is the whole contractrsquo but this isrebuttable See Couchman v Hill (1947) and Evans v AndreaMerzario (above)

bull a contract may be contained in more than one document(Jacobs v Batavia Plantation Trust Ltd (1924))

bull to establish a collateral contract (City of WestminsterProperties Ltd v Mudd (1959) Evans amp Son Ltd v AndreaMerzario Ltd (1976))

The Law Commission recommended in 1976 that the lsquoparolevidencersquo rule be abolished However in view of the wideexceptions to the rule it recommended in 1986 that no actionneed be taken

Identification of implied terms

In addition to the terms which the parties have expresslyagreed a court may be prepared to hold that other termsmust be implied into the contract Such terms may beimplied by

CO

NT

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W41

Custom Statute The courts

Custom

A contract may be deemed to incorporate any relevantcustom of the market trade or locality in which the contractis made In Hutton v Warren (1836) a tenant established aright to fair allowance for improvements to the land througha local custom

Statute

Parliament as a matter of public policy has in variousinstances seen fit to imply terms into contracts for example

Terms implied into all sales

bull that the seller has the right to sell the goods

bull that goods sold by description correspond with thedescription

Terms implied only into sales by way of business

bull that the goods are of satisfactory quality

Goods are of a satisfactory quality if they meet thestandard that a reasonable person would regard assatisfactory taking account of any description of thegoods the price if relevant and all other relevantcircumstances In particular it will be necessary toconsider their

fitness for all purposes for which goods of that kindare commonly supplied

appearance and finish

CA

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42

The Sale of Goods Act 1979 which impliesthe following terms into contracts

for the sale of goods

freedom from minor defects

safety and

durability

This term does not apply to matters specifically drawn tothe buyerrsquos attention before the contract is made orwhere the buyer examines the goods defects which thatexamination should have revealed

bull that the goods are fit for any special purpose madeknown to the seller

bull that goods sold by sample correspond with the sample

bull In contracts of service there is an implied term that theservice will be carried out with reasonable care and skillwithin a reasonable time and for a reasonable price

In Wilson v Best (1993) it was held that the duty of a travelagent under this provision extended to checking that thelocal safety regulations had been complied with It did notrequire them to ensure that they complied with UKregulations

The courts

CO

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W43

Terms implied in fact Terms implied in law

The Supply of Goods and Services Act 1982implies similar terms into contracts of hire contracts for work and materials and other

contracts not covered by the Sale of Goods Act

Terms implied in fact

When interpreting terms implied in fact the court seeks togive effect to the unexpressed intention of the parties Thereare two tests A term may be implied because

bull It is necessary to give business efficacy to the contract InThe Moorcock (1889) a term was implied that the riverbedwas in a condition that would not damage a shipunloading at the jetty

bull It satisfies the lsquoofficious bystanderrsquo test that is if abystander suggested a term the parties would respondwith a common lsquoof coursersquo In Spring v NASDS (1956) theunion tried to imply the lsquoBridlington Agreementrsquo Thecourt refused on the basis that if an lsquoofficious bystanderhad suggested this the plaintiff would have repliedldquoWhatrsquos thatrdquorsquo

The Moorcock doctrine is used in order to make the contractworkable or where it was so obvious that the parties musthave intended it to apply to the agreement It will not beused merely because it was reasonable or because it wouldimprove the contract

It was suggested in Shell UK Ltd v Lostock Garages Ltd (1977)that the courts will be reluctant to imply a term where theparties have entered into a detailed and carefully draftedwritten agreement

Terms implied in law

bull When terms are implied in law they are implied into allcontracts of a particular kind Here the court is not tryingto put into effect the parties intention but is imposing anobligation on one party often as a matter of public policyFor example the court implies into all contracts ofC

AV

EN

DIS

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RD

S44

employment a term that the employee will carry out hiswork with reasonable care and skill and will indemnifyhis employer against any loss caused by his negligence(Lister v Romford Ice Cold Storage Co (1957))

bull In these cases the implication is not based on thepresumed intention of the parties but on the courtrsquosperception of the nature of the relationship between theparties and whether such an implied term wasreasonable

bull In Liverpool CC v Irwin (1977) the tenants of a block ofcouncil flats failed to persuade the court to imply a termthat the council should be responsible for the commonparts of the building on the Moorcock or lsquoofficiousbystanderrsquo test but succeeded on the basis of the Listertest that is the term should be implied in law in that theagreement was incomplete it involved the relationshipof landlord and tenant and it would be reasonable toexpect the landlord to be responsible for the commonparts of the building

Classification of terms

There is a very important distinction between those terms ofa contract which entitle an innocent party to terminate(rescind or treat as discharged) a contract in the event of a

CO

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W45

Conditions Warranties Innominate terms

breach and those which merely enable a person to claimdamages

Traditionally a distinction has been made in English lawbetween

Conditions

bull The Sale of Goods Act 1979 designates certain impliedterms for example re satisfactory quality as conditions ndashthe breach of which entitles the buyer to terminate (ortreat as discharged) the contract

bull In Poussard v Spiers and Pond (1876) a singer failed to takeup a role in an opera until a week after the season hadstarted Held ndash her promise to perform as from the firstperformance was a condition ndash and its breach entitled themanagement to treat the contract as discharged

Warranties

CA

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46

Contractual terms concerning the less importantor subsidiary statements of facts or promisesIf a warranty is broken this does not entitle

the other party to terminate (or treat asdischarged) the contract it merely entitles

him to sue for damages

Statements of fact or promises which form theessential terms of the contract If the statement is not true or the promise is not fulfilled the

injured party may terminate (or treat as discharged) the contract and claim damages

bull The Sale of Goods Act 1979 designates certain terms aswarranties breach of which do not allow the buyer totreat the contract as discharged but merely to sue fordamages for example the right to quiet enjoyment

bull In Bettini v Gye (1876) a singer was engaged to sing for awhole season and to arrive six days in advance to takepart in rehearsals He only arrived three days in advanceHeld ndash the rehearsal clause was subsidiary to the mainclause It was only a warranty The management wastherefore not entitled to treat the contract as dischargedThey should have kept to the original contract andsought damages for the three daysrsquo delay

Innominate or intermediate terms

bull In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha(1962) it was suggested by the Court of Appeal that itwas not enough to classify terms into conditions andwarranties Regard should also be had to the characterand nature of the breach which has occurred In HongKong Fir the defendants chartered the vessel Hong KongFir to the plaintiffs for 24 months the charter partyprovided that the ship was lsquofitted in every way forordinary cargo servicersquo The vessel spent less than nineweeks of the first seven months at sea because ofbreakdowns and the consequent repairs which werenecessary

CO

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W47

On the facts this was not the case because the charter partystill had a substantial time to run

After the Hong Kong Fir case in 1962 there was someconfusion as to whether the breach based test which appliedto innominate terms had replaced the term based test whichrelied on the distinction between conditions and warrantiesor merely added to it an alternative in certain circumstances

bull In the Mihalis Angelos (1970) the Court of Appeal revertedto the term based test The owners of a vessel stated thatthe vessel was lsquoexpected ready to loadrsquo on or about 1 JulyIt was discovered that this was not so Held ndash the termwas a condition ndash the charterers could treat the contract as discharged

In 1976 two cases were decided on the breach based principle

bull In Cehave v Bremer Handelsgesellshaft MBH The Hansa Nord(1976) the seller had sold a cargo of citrus pellets with aterm in the contract that the shipment be made in goodcondition The buyer rejected the cargo on the basis thatthis term had been broken The defect however was notserious and the court held that although the Sale ofGoods Act had classified some terms as conditions andwarranties it did not follow that all the terms had to be soclassified Accordingly the court could consider the effect

CA

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48

Held ndash the term was neither a condition nor awarranty and in determining whether the

defendants could terminate the contract it wasnecessary to look at the consequences of the

breach to see if it deprived the innocent party ofsubstantially the whole benefit he should

have received under the contract

of the breach since this was not serious the buyer hadnot been entitled to reject

bull In Reardon Smith v Hansen Tangen (1976) an oil tanker wasdescribed as lsquoOsaka No 354rsquo where in fact it was lsquoOshimaNo 004rsquo but was otherwise exactly as specified Becausethe market for oil tankers had collapsed the chartererssought to argue that the number was a condition whichwould enable them to repudiate the contract The Houseof Lords rejected this argument Held ndash the statement wasan innominate term not a condition since the effect ofthe breach was trivial it did not justify termination of thecontract

bull Note ndash the time for determining whether a clause was acondition or an innominate term is at the time ofcontracting ndash not after the breach

Traditionally a term is a condition if it has been establishedas such

bull By statute ndash for example the Sale of Goods Act 1979

bull By precedent after a judicial decision In The MihalisAngelos (1970) the Court of Appeal held that thelsquoexpected readinessrsquo clause in a charter party is acondition

bull By the intention of the parties The court must ascertainthe intention of the parties If the wording clearly revealsthat the parties intended that breach of a particular termshould give rise to a right to rescind that term will beregarded as a condition In Lombard North Central vButterworth (1987) the Court of Appeal held thatcontracting parties can provide expressly in the contractthat lsquospecific breaches could terminate the contractrsquo Inthat case the contract included an express clause that the

CO

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W49

time for payment of instalments was lsquoof the essence of thecontractrsquo An accountant had contracted to hire acomputer for five years agreeing to make an initialpayment and 19 quarterly rental payments He was latein paying some instalments and the owners terminatedthe agreement recovered possession of the computerand claimed damages not only for the arrears but also forloss of future instalments The claim succeeded becausethe contract specifically stated that the time of paymentof each instalment was to be of the essence of the contract

Note the mere use of the word lsquoconditionrsquo is not conclusive

In Schuler v Wickman Tool Sales Ltd (1974) the House of Lordsheld that breach of a lsquoconditionrsquo that a distributor shouldvisit six customers every week could not have been intendedto allow rescission The word lsquoconditionrsquo had not been usedin this particular sense There was in the contract a separateclause which indicated when and how the contract could beterminated

bull By the court ndash deciding according to the subject matter ofthe contract (see Poussard v Spiers (1876) and Bettini v Gye(1876) above)

CA

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50

If a term is not a condition then the lsquowait and seersquotechnique can be used to decide if the gravity of

the breach is such that it deprivedthe innocent party of substantially the whole

benefit of the contract If so ndash then the innocentparty can terminate the contract

(innominate or intermediate term)

Certainty and flexibility

Certainty

bull The term based test is alleged to have the advantage ofpredictability and certainty It is important for the partiesto know their legal rights and liabilities as regards theavailability of termination The character of all terms isascertainable at the moment the contract is concludedNothing that happens after its formation can change thestatus of a term If the term is a condition then the partieswill know that its breach allows the other party toterminate But there can still be uncertainty where theparties have to await the courtrsquos decision on the nature ofthe term

bull The advantage of certainty is however balanced by thefact that it is possible to terminate a contract on atechnicality for sometimes a very minor breach

Flexibility

bull The breach based test is stated to bring flexibility to thelaw Instead of saying that the innocent party can in thecase of a condition always terminate or in the case of awarranty never terminate innominate terms allow thecourts to permit termination where the circumstancesjustify it and the consequences are sufficiently serious

bull It is however more difficult for the innocent party toknow when he has the right to terminate or for the partyin breach to realise in advance the consequence of hisaction

CO

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W51

Note the distinction between the different types of contract terms remains of

considerable importance

CO

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W53

4 Exemption (exclusion or limitation) clauses

A total exclusion is referred to as an exclusion clause apartial exclusion is known as a limitation clause

Exemption clauses are most commonly found in standardform contracts

To be valid an exemption clause must satisfy the tests set bythe

Common law requirements

A clause which purports to exclude wholly or inpart liability for a breach of contract or a tort

Common lawUnfair Contract

Terms Act (UCTA)1977

Regulations onUnfair Terms in ConsumerContracts 1999

The term must be incorporated into the

contract

The wording mustcover what actually

happened

Incorporation

bull This requirement applies to all terms but has beeninterpreted strictly in the case of exemption clauses

A term may be incorporated into a contract by being

Contained in a signed document

In LrsquoEacutestrange v Graucob Ltd (1934) the plaintiff had signed acontract of sale without reading it Held ndash she was bound bythe terms which contained an exemption clause

ExceptionsWhere the offeree has been induced to sign as a result ofmisrepresentation

bull In Curtis v Chemical Cleaning Co (1951) the plaintiffsigned a lsquoreceiptrsquo when she took a dress to be cleaned onbeing told that it was to protect the cleaners in case ofdamage to the sequins In fact the clause excludedliability for all damage Held ndash the cleaners were notprotected for damage to the dress the extent of theclause had been misrepresented and therefore thecleaners could not rely on it

bull lsquoNon est factumrsquo (see p 106 below)

Contained in an unsigned document (ticket cases)

bull This must be seen to be a contractual document

In Chapelton v Barry UDC (1940) on hiring a deckchair the plaintiff was given a ticket with only alarge black 3d on the face of the ticket and exclusionclauses on the back Held ndash the defendants could notrely on the exclusion clauses as it was not apparenton the face of it that the ticket was a contractualdocument rather than just a receipt

CA

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ND

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54

bull Reasonable notice of the term must be given

In Parker v South Eastern Railway Co (1877) theplaintiff received a ticket which stated on the facelsquosee backrsquo Held ndash as long as the railway companyhad given reasonable notice of the exemptionclausersquos existence it did not matter that the plaintiffhad not read the clause

In Thompson v London Midland and Scottish Railway(1930) the ticket indicated that the conditions of thecontract could be seen at the station masterrsquos office oron the timetable The exemption clause was in clause552 of the timetable which cost sixpence ndash the ticketitself only cost two and sixpence In the circumstancesnevertheless reasonable notice had been given

The test is objective and it is irrelevant that the partyaffected by the exemption clause is blind or illiterateor otherwise unable to understand it (Thompson vLMS above)

But in Geir v Kujawa (1970) a notice in English wasstuck on the windscreen of a car stating thatpassengers travelled at their own risk A Germanpassenger who was known to speak no English washeld not to be bound by the clause as reasonable carehad not been taken to bring it to his attention

bull Attention must be drawn to any unusual clause

In Thornton v Shoe Lane Parking (1971) it was statedthat a person who drives his car into a car park mightexpect to find in his contract a clause excludingliability for loss or damage to the car but specialnotice should have been given of a clause purportingto exclude liability for personal injury

CO

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W55

In Interfoto Picture Library v Stiletto Visual Programmes(1989) the Court of Appeal confirmed that onerousconditions required special measures to bring them tothe attention of the defendant The clause in that casewas not an exemption clause but a clause imposingcharges 10 times higher than normal The Court ofAppeal stated that the more unusual the clause thegreater the notice required

bull Notice of the term must be communicated to the otherparty before or at the time that the contract is enteredinto

In Thornton v Shoe Lane Parking Ltd (1971) the plaintiffmade his contract with the car company when heinserted a coin in the ticket machine The ticket wasissued afterwards and in any case referred toconditions displayed inside the car park which hecould see only after entry Notice therefore came toolate

bull The rules of offer and acceptance and the distinctionsbetween offers and invitations to treat must be consultedin order to ascertain when the contract was madeProblems with regard to incorporation can arise in atypical lsquoBattle of the Formsrsquo problem See Butler MachineTool Ltd v Ex-Cell-O Corpn (Chapter 1)

Notice by display

Notices exhibited in premises seeking to exclude liability forloss or damage are common for example lsquocar parked atownerrsquos riskrsquo and must be seen before or at the time of entryinto contract

bull In Olley v Marlborough Court Hotel (1949) Mr and MrsOlley saw a notice on the hotel bedroom wall which

CA

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56

stated lsquothe proprietors will not hold themselvesresponsible for articles lost or stolen unless handed tothe manageress for safe keepingrsquo The contract had beenentered into on registration and the clause was thereforenot incorporated into the contract and could not protectthe proprietors

Notice by a lsquocourse of dealingrsquo

bull If there has been a course of dealing between the partiesthe usual terms may be incorporated into the contractalthough not specifically drawn to the attention of theparties each time a contract is made

In Spurling v Bradshaw (1956) Bradshaw deposited someorange juice in Spurlingrsquos warehouse The contractualdocument excluding liability for loss or damage was notsent to Spurling until several days after the contract Held ndashthe exclusion clauses were valid as the parties had alwaysdone business with each other on this basis

bull Note ndash the transactions must be sufficiently numerous toconstitute a course of dealings The established course ofdealings must be consistent The established course ofdealings must not have been deviated from on the occasion in question

In Hollier v Rambler Motors (1972) the Court of Appeal heldthat bringing a car to be serviced or repaired at a garage onthree or four occasions over a period of five years did notestablish a course of dealings

Notice through patent knowledge

bull In British Crane Hire Corpn v Ipswich Plant Hire (1975) theowner of a crane hired it out to a contractor who was alsoengaged in the same business It was held that the hirer

CO

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W57

was bound by the ownerrsquos usual terms though they werenot actually communicated at the time of the contractThey were however based on a model supplied by atrade association to which both parties belonged It wasstated that they were reasonable and were well known inthe trade

Oral contracts

bull Whether a clause has been incorporated into an oralcontract is a matter of evidence for the court (McCutcheonv MacBrayne (1964))

On a proper construction the clause covers the loss

in question

bull An exclusion clause is interpreted contra proferentem thatis any ambiguity in the clause will be interpreted againstthe party seeking to rely on it

in Houghton v Trafalgar Insurance Co Ltd (1954) it washeld that the word lsquoloadrsquo could not refer to people

in Andrews Bros v Singer amp Co Ltd (1934) an exclusionreferring to implied terms was not allowed to cover aterm that the car was new as this was an express term

It was however suggested by the House of Lords inPhoto Production Ltd v Securicor Ltd (1980) that any needfor a strained and distorted interpretation of contracts inorder to control the effect of exemption clauses had beenreduced by the UCTA

bull Especially clear words must be used in order to excludeliability for negligence for example the use of the wordlsquonegligencersquo or the phrase lsquohowsoever causedrsquo (Smith vSouth Wales Switchgear Ltd (1978))

CA

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58

But if these words are not used provided the wording iswide enough to cover negligence and there is no otherliability to which they can apply then it is assumed thatthey must have been intended to cover negligence(Canada Steamship Lines v The King (1952))

bull It was stated in Ailsa Craig Fishing Co v Malvern Fishing Co(1983) that limitation clauses may be interpreted lessrigidly than exclusion clauses

bull Only a party to a contract can rely on an exclusion clause(See Chapter 10)

bull Especially clear words are required when the breach is ofa fundamental nature In the past Lord Denning andothers argued that it was not possible to exclude breachesof contract which were deemed to be fundamental byany exclusion clause however widely and clearlydrafted

However the House of Lords confirmed in Photo ProductionLtd v Securicor Ltd (1980) that the doctrine of fundamentalbreach was a rule of construction not a rule of law that isliability for a fundamental breach could be excluded if thewords were sufficiently clear and precise

The House also stated that

bull the decision in Harbuttrsquos Plasticine Ltd v Wayne Tank andPump Co (1970) was not good law In that case the Courtof Appeal had held that as a fundamental breach broughta contract to an end there was no exclusion clause left toprotect the perpetrator of the breach

bull there is no difference between a lsquofundamental termrsquo anda lsquoconditionrsquo C

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59

bull a strained construction should not be put on words in anexclusion clause which are clearly and fairly susceptibleof only one meaning

bull where the parties are bargaining on equal terms theyshould be free to apportion risks as they wish

bull the courts should be wary of interfering with the settledpractices of business people as an exclusion clause oftenserves to identify who should insure against a particularloss

Unfair Contract Terms Act 1977

Note ndash the title is misleading

bull The Act does not cover all unfair contract terms onlyexemption clauses

bull The Act covers certain tortious liability as well ascontractual liability The following must be examined

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60

Clauses whichare void

Clauses which are valid only if reasonable

The meaning of lsquoreasonablersquo

Scope of the Act

Scope of the Act

bull s 1 ndash the Act applies to contracts made after 1 February1978 which arise in the course of business lsquoBusinessrsquoincludes a profession and the activities of anygovernment department andor public or localauthority

bull s 5 ndash contracts specifically excluded include contracts ofinsurance contracts for the transfer of land andinternational commercial contracts

bull s 13 ndash the Act limits the effectiveness of clauses thatexclude or restrict liability It also covers clauses whichmake it difficult to enforce a contract for example byimposing restrictive time limits or which excludeparticular remedies In Stewart Gill v Horatio Myer and Co(1992) it was held that a clause restricting a right of set-off or counterclaim was subject to the Act It was alsoheld in Smith v Bush (1990) that it covered lsquodisclaimerswhich restrictively defined a partyrsquos obligation under acontractrsquo In that case a valuation was stated to be givenlsquowithout any acceptance of liability for its accuracyrsquo

Negligence

bull The Act covers contractual tortious and statutory (that isunder the Occupiersrsquo Liability Act 1957) negligence

bull The difference between excluding liability for negligenceand transferring liability for negligence is seen in PhillipsProducts v Hyland Bros (1987) where the contracttransferred liability for the negligence of the driver of ahired excavator to the hirer The driver negligentlydamaged property belonging to the hirer Held ndash theclause was an exclusion clause and was subject to UCTA

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W61

bull In Thompson v Lohan (Plant Hire) (1987) on the otherhand an excavator and driver were hired under the sameconditions The driver negligently killed a third partyHeld ndash the clause transferring liability to the hirer was notan exclusion clause in this case as the third party was ableto sue the hirer It was merely a clause transferring liability

Misrepresentation

bull The difference between excluding liability formisrepresentation and defining the powers of an agent isseen in Cremdean Properties v Nash (1977) where a clausein the special conditions of sale stating that thelsquoparticulars were believed to be correct but theiraccuracy is not guaranteedrsquo was held to be an exclusionclause

bull In Collins v Howell Jones (1980) however the Court ofAppeal held a statement that the lsquovendor does not makeor give any representation or warranty and neither theestate agent or any person in their employment has anyauthority to make or give a representation or warrantywhatsoever in relation to the propertyrsquo had the effect ofdefining or limiting the scope of the agentrsquos authority

Effect of the Act

Clauses which are void

Exclusions of liability

bull for death or personal injury caused by negligence (s 2)

bull in a manufacturerrsquos guarantee for loss or damage causedby negligence (s 5)

bull for the statutory guarantee of title in contracts for the saleof goods or hire purchase (s 6)

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62

bull for the other statutory guarantees in consumer contractsfor the sale of goods or hire purchase (descriptionsatisfactory quality fitness for purpose) (s 6)

bull for similar statutory guarantees in other consumercontracts for the supply of goods for example contractsof hire (s 7)

Clauses which are valid only if reasonable

Clauses excluding liability

bull for loss or damage to property caused by negligence (s 2)

bull for breach of contract in a consumer or standard formcontract (s 3) This includes clauses in such contractsclaiming to render a substantially different performancefrom that reasonably expected or to render noperformance at all (s 3)

bull for statutory guarantees (other than those concerningtitle) in inter-business contracts for the sale of goods andhire purchase (description satisfactory quality andfitness for purpose) (s 6)

bull for statutory guarantees concerning title or possession inother contracts for the supply of goods (for examplehire) (s 7)

bull for other statutory guarantees (description satisfactoryquality fitness for purpose) in other inter-businesscontracts for the supply of goods (s 7)

bull for misrepresentation in all contracts

Note

lsquoConsumer transactionrsquo ndash a person is a lsquoconsumerrsquo where hedoes not make or hold himself out as making the contract in

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W63

the course of business and the other party does make thecontract in the course of business In contracts for the sale ofgoods the goods must also be of a type normally sold forprivate use

bull A controversial interpretation of a lsquoconsumerrsquo was madeby the Court of Appeal in R and B Customs v UnitedDominion Trust (1988) where a car was bought by aprivate company for the business and private use of itsdirectors It was held by the Court of Appeal that it wasnot bought lsquoin the course of a businessrsquo Buying cars wasincidental not central to the business of the company If itis incidental only then the purchase would only be lsquoin thecourse of a businessrsquo if it was one made with sufficientregularity

Note however that in Stevenson v Rogers (1999) the Courtof Appeal refused to apply the R and B Customs Brokersapproach to the question of whether a sale was in the courseof a business for the purpose of s 14(12) of the Sale of GoodsAct 1979

A lsquostandard form contractrsquo occurs when the parties deal onthe basis of a standard form provided by one of them

Reasonableness

In assessing reasonableness the following matters should beconsidered

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64

It is for the person relying on the clause to prove that the clause is reasonable

Section 11 of UCTA 1977

bull Contract terms are to be adjudged reasonable or notaccording to the circumstances which were or oughtreasonably to have been known to the parties when thecontract was made

bull Where a person seeks to restrict liability to a specifiedsum of money regard should be had to the resourceswhich he could expect to be available to him for thepurpose of meeting the liability and as to how far it wasopen to him to cover himself by insurance

bull In determining for the purpose of s 6 or s 7 whether acontract term satisfies the requirement of reasonablenessregard shall be had to

the strength of the bargaining position of the partiesrelative to each other

whether the customer received an inducement toagree to the term and had an opportunity of enteringinto a similar contract with other persons butwithout having to accept similar terms

whether the customer knew or ought reasonably tohave known of the existence and extent of the term

where the exclusion is conditional whether it wasreasonable to expect that compliance with thatcondition would be practicable

whether the goods were manufactured processed oradapted to the special order of the customer(Sched 2)

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W65

Decisions of the courts

In Smith v Bush (1990) and Harris v Wyre Forest DC (1989) theHouse of Lords dealt with two cases involving the validity ofan exclusion clause protecting surveyors who had carriedout valuations of a house The House of Lords decided thatthe clauses were exclusion clauses designed to protect thesurveyors against claims for negligence Lord Griffithsdeclared that there were four matters which should alwaysbe considered

bull were the parties of equal bargaining power

bull in the case of advice would it have been reasonable toobtain advice from another source

bull was the task being undertaken a difficult one for whichthe protection of an exclusion clause was necessary

bull what would be the practical consequences for the partiesof the decision on reasonableness For example wouldthe defendant normally be insured Would the plaintiffhave to bear the cost himself

In inter-business contracts the practices of business peopleare considered

bull In Photo Production v Securicor (1980) the House of Lordsstated that the courts should be reluctant to interfere withthe settled practices of businesses They pointed out thatthe function of an exclusion clause was often to indicatewho should insure against a particular risk

bull In Green v Cade Bros (1983) it was decided that a clauserequiring notice of rejection within three days of deliveryof seed potatoes was unreasonable as a defect could nothave been discovered by inspection within this time buta clause limiting damages to the contract price was

CA

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66

upheld ndash as it had been negotiated by organisationsrepresenting the buyers and sellers and lsquocertifiedrsquopotatoes had been available for a small extra charge (thatis Sched 2 was applied)

bull However in George Mitchell v Finney Lock Seeds Ltd (1983)the buyers suffered losses of pound61000 due to the supply ofthe wrong variety of cabbage seeds The contract limitedthe liability of the seller to a refund of the price paid(pound192) Held ndash the clause was not reasonable Matterstaken into consideration

the clause was inserted unilaterally ndash there was nonegotiation

loss was caused by the negligence of the seller

the seller could have insured against his liability

the sellers implied that they themselves consideredthe clause unreasonable by accepting liability inprevious cases

bull In Overland Shoes Ltd v Schenkers Ltd (1998) the Court ofAppeal upheld a judgersquos ruling that a clause preventingreliance on a lsquoset-offrsquo was not unreasonable on the basisthat it formed part of a set of standard trading conditionsused widely in the shipping industry They had arisenfrom careful negotiation and were generally recognisedin the industry as lsquofair and reasonablersquo

bull In Overseas Medical Supplies Ltd v Orient Transport ServicesLtd (1999) the Court of Appeal summarised the variousfactors which should be looked at in considering the testof reasonableness It confirmed that the lsquoGuidelinesrsquocontained in Sched 2 to UCTA although specificallyintended for consumer contracts for the sale of goods

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W67

should be regarded as relevant wherever the test ofreasonableness is applied

In many of the cases the appeal courts have emphasised thatthe decision on lsquoreasonablenessrsquo is best made by the trialjudge and that the appeal courts should be reluctant tointerfere with the conclusion arrived at at first instance

Unfair Terms in Consumer Contracts Regulations 1999

Based on EU Directive on Unfair Terms in ConsumerContracts The 1999 regulations replaced earlier regulationsmade in 1994

Coverage

The regulations apply to

This will be so even if some other parts of the contract havenot been drafted in advance

bull The regulations do not apply to contracts which relate toemployment family law or succession rights companiesor partnerships terms included in order to comply withlegislation or an international convention

CA

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68

Coverage Fairness Remedies

lsquoany term in a contract between a seller or supplier and a consumer where

the term has not been individually negotiatedrsquo thatis it has been drafted in advance

bull They do however cover insurance policies and contractsrelating to land

bull A lsquobusinessrsquo is defined to include a trade or professionand the activities of any government department or localor public authority

bull A lsquo consumerrsquo means a natural person who is acting for apurpose outside his business

Note ndash they are wider than UCTA in that they cover allterms not only exclusion clauses for example harsh termsconcerning unauthorised overdrafts The regulations arenarrower than UCTA in that they only cover clauses inconsumer contracts which have not been individuallynegotiated The definition of a consumer is also narrower cfR and B Customs v UDT (1988)

Unfairness

Regard must be had to the nature of the goods and servicesprovided the other terms of the contract and all thecircumstances relating to its conclusion

The definition of the main subject matter and the adequacyof the price or remuneration are not subject to the test offairness

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W69

The clause is unfair if contrary to the requirementsof good faith it creates a significant imbalance

in the partiesrsquo rights and obligations to thedetriment of the consumer

lsquoGood faithrsquo is not defined and unlike the earlier (1994)regulations the 1999 regulations do not spell out anyrelevant factors

In Director General of Fair Trading v First National Bank plc(2000) the Court of Appeal emphasised the need foropenness and information which will enable the consumerto make a properly informed choice about entering into thecontract In this case a clause imposing a lsquosurprisingrsquorequirement as to the payment of interest on a loan whichhad been the subject of a court order did not meet therequirement of good faith

The regulations contain a long indicative list of clauses likelyto be unfair These include not only exemption clauses butalso clauses which give the sellersupplier rights withoutcompensating rights for the consumer for example

bull enabling the sellersupplier to raise the price withoutgiving the buyer a chance to back out if the price rise istoo high

bull enabling the sellersupplier to cancel the agreementwithout penalty without also allowing the customer asimilar right

bull automatically extending the duration of the contractunless the customer indicates otherwise within an unreasonably brief period of time

Note also that all terms (including those defining thesubject matter or the price) should be expressed in plainEnglish and any ambiguity should be interpreted in theconsumerrsquos favour

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70

Effect of an unfair term

bull The term itself shall not be binding on the consumer butthe rest of the contract may be enforced

bull The Director General of Fair Trading has a duty toconsider any complaint made to him that a term is unfairHe is empowered to bring proceedings for an injunctionagainst any business using an unfair term It was thispower that was used in the first reported case on theregulations Director General of Fair Trading v FirstNational Bank plc (2000) discussed above For the firsttime a similar power to apply for such an injunction isgiven to certain other lsquoqualifying bodiesrsquo including theData Protection Registrar various Directors General (ofgas supply electricity supply telecommunicationswater services) and the Consumersrsquo Association

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W71

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W73

5 Vitiating elements which render a contract voidable

Significance of a contract being voidable

Thus

bull The innocent party may if he wishes affirm the contract

bull Where the innocent party has not performed thecontract he may refuse to perform and rely on themisrepresentation as a defence

bull The misled party may rescind the contract by

informing the other party or

where a fraudulent party cannot be traced byinforming the police (Car and Universal Finance Co vCaldwell (1965)) or

bringing legal proceedings

The innocent party may set the contractaside if he so wishes

Misrepresentation Duress Undue influence

Certain mistakes (see Chapter 6)

bull It was stated in TSB v Camfield (1995) that the right torescind is that of the representee not the court All thecourt can do is decide whether the representee haslawfully exercised the right to rescind It is not thereforean exercise of equitable relief by the court

Rescission

bull But in Cheese v Thomas (1993) the court declared that thecourt must look at all the circumstances to do what waslsquofair and justrsquo In that case a house which had beenjointly bought had to be sold afterwards at aconsiderable loss The agreement between the twoparties for the purchase of the house was rescinded butthe court held that it was not necessary for the guiltyparty to bear the whole of the loss It was fair and justthat the proceeds should be divided according to thepartiesrsquo respective contributions

bull This contrasts with the normal situation where aproperty has diminished in value and the misled partywould get all his money returned (Erlanger v NewSombrero Phosphate Co (1878))

bull As part of this restoration equity may order a sum ofmoney to be paid to the misled person to indemnify himagainst any obligations necessarily created by the contract

In Whittington v Seale-Hayne (1900) the plaintiffsbreeders of prize poultry were induced to take a lease ofthe defendants premises by his innocent

CA

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74

Restoring the parties as far as is possible to the position they were in before they

entered into the contract

misrepresentation that the premises were in a sanitarycondition Under the lease the plaintiffs covenanted toexecute all works required by any local or publicauthority Owing to the insanitary conditions of thepremises the water supply was poisoned the plaintiffsrsquomanager and his family became very ill and the poultrybecame valueless for breeding purposes or died Inaddition the local authority required the drains to berenewed The plaintiffs sought an indemnity for all theirlosses The court rescinded the lease and held that theplaintiffs could recover an indemnity for what they hadspent on rates rent and repairs under the covenants inthe lease because these expenses arose necessarily out ofthe contract It refused to award compensation for otherlosses since to do so would be to award damages not anindemnity there being no obligation created by thecontract to carry on a poultry farm on the premises or toemploy a manager etc

bull Note ndash rescission even if enforced by the court is alwaysthe act of the defrauded party It is effective from the dateit is communicated to the representor or the police (seeabove) and not from the date of any judgment insubsequent litigation

Rescission is subject to certain barsC

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75

Affirmation of the contract

Lapse of time

Restitution mustbe possible

Third party rights

Affirmation of the contractThe representee may not rescind if he has affirmed thecontract after learning of the misrepresentation either bydeclaring his intention to proceed with the contract or byperforming some act from which such an intention can beinferred In Long v Lloyd (1958) the buyer of a lorryundertook a long journey after discovering serious defects inthe lorry Held ndash he had affirmed the contract

Lapse of timeThis can provide evidence of affirmation where themisrepresentee fails to rescind for a considerable time afterdiscovering the falsity

In cases of innocent misrepresentation lapse of time canoperate as a separate bar to rescission In Leaf v InternationalGalleries (1950) the plaintiff bought a picture which the sellerhad innocently misrepresented to be by Constable Fiveyears later the plaintiff discovered it was not by Constableand immediately sought to rescind the contract Held ndashbarred by lapse of time

Restitution must be possibleA person seeking to rescind the contract must be able andwilling to restore what he has received under it Howeverrescission is an equitable remedy and the court will notallow minor failures in the restoration to the originalposition to stand in the way In Erlanger v New SombreroPhosphate Co (1878) the purchaser had worked phosphatemines briefly Held ndash he could rescind by restoring propertyand accounting for any profit derived from it

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76

Third party rightsThere can be no rescission if third parties have acquiredrights in the subject matter of the contract See Phillips vBrooks (1919) and Lewis v Averay (1972) ndash Chapter 6

Misrepresentation

Representations and terms of a contract

Material statements made during negotiations leading to acontact may be either

bull terms of the contract If these are untrue the untruthconstitutes a breach of contract

bull statements which helped to induce the contractthat is lsquomere representationsrsquo If untrue ndash they arelsquomisrepresentationsrsquo

(For distinctions between terms and lsquomere representationsrsquosee Chapter 3)

Requirements of misrepresentation

It must be

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W77

An untrue statement of fact made by one party tothe contract (representor) to the other (representee)which induces the other to enter into the contract

The requirements ofmisrepresentation

Remedies formisrepresentation

A statement of fact

bull Not a lsquomere puffrsquo that is a statement so vague as to bewithout effect for example describing a house as alsquodesirable residencersquo

bull Not a promise A promise to do something in the futureis only actionable if the promise amounts to a bindingcontract (Kleinwort Benson Ltd v Malaysian Mining CorpnBhd (1989))

bull Not a statement of opinion for example in Bisset vWilkinson (1927) the vendor of a farm which had neverbeen used as a sheep farm stated that in his judgment thefarm would support 2000 sheep Held ndash a statement ofopinion

But a statement expressed as an opinion may be treatedas a statement of fact if the person making the statementwas in a position to know the true facts In Smith v Landand House Prop Corpn (1884) the vendor of a hoteldescribed it as lsquolet to a most desirable tenantrsquo when thetenant had for a long time been in arrears with the rentThe Court of Appeal held there was a misrepresentationof fact

bull Not a statement of intention But if the representor didnot have that intention then it is a misstatement of fact asin Edgington v Fitzmaurice (1885) where the directorsissued a prospectus claiming that the money raised was tobe used to improve the companyrsquos buildings and toexpand its business Their real intention was to pay off thecompanyrsquos debts Held ndash fraudulent misrepresentation

bull Not a statement of law

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78

An active representation

bull The statement will normally be in words but other formsof communication which misrepresent the facts willsuffice as in Horsfall v Thomas (1862) (below)

bull Failure to make a statement however or the non-disclosure of facts will not generally qualify asmisrepresentation

Exceptionsbull Where facts have been selected to give a misleading

impression as in Dimmock v Hallett (1866) where avendor of land stated that farms were let but omitted tosay that the tenants had given notice to quit

bull Where circumstances have changed since arepresentation was made then the representor has a dutyto correct the statement In With v OrsquoFlanagan (1936) itwas stated correctly that a medical practice was worthpound2000 a year but by the time the practice changedhands it was practically worthless Held ndash there was aduty to disclose the changed circumstances

bull Contracts uberrimae fidei (lsquoof the utmost good faithrsquo) forexample

Contract of insurance Material facts must bedisclosed that is facts which would influence aninsurer in deciding whether to accept the proposalor to fix the amount of the premium for example apolicy of life insurance has been avoided because itwas not disclosed that the proposer had already beenturned down by other insurers

Family arrangements In Gordon v Gordon (1816ndash19)a division of property based on the proposition thatthe elder son was illegitimate was set aside upon

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W79

proof that the younger son had concealed hisknowledge of a private marriage ceremonysolemnised before the birth of this brother

Analogous contracts Where there is a duty todisclose not material but unusual facts for examplecontracts of suretyship

It must have been a material inducement

A statement likely to induce a person to contract willnormally be assumed to have done so Moreover if theclaimant can show that he was in fact induced it is nodefence to argue that a reasonable person would have beeninfluenced by the misrepresentation (Museprime PropertiesLtd v Adhill (1990)) There is no inducement however where

bull the misrepresentee or his agent actually knew the truth

bull the misrepresentee was ignorant of the misrepresentationwhen the contract was made In Horsfall v Thomas (1862)the vendor of a gun concealed a defect in the gun(misrepresentation by conduct) The buyer howeverbought the gun without examining it Held ndash theattempted misrepresentation had not induced thecontract

bull the misrepresentee did not allow the representation toaffect his judgment In Attwood v Small (1838) a buyerappointed an agent to check the statement made by theseller as to the reserves in a mine Held ndash not actionablemisrepresentation The buyer had relied on his ownagentrsquos statements not that of the vendor

Note however that

bull provided that the representation was one of theinducements it need not be the sole inducement

CA

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80

bull the fact that the representee did not take advantage of anopportunity to check the statement is no bar to an actionfor misrepresentation

In Redgrave v Hurd (1881) a solicitor was induced topurchase a house and practice by the innocentmisrepresentation of the seller Held ndash he was entitled torescission although he did not examine the documentswhich were available to him and which would haveindicated to him the true state of affairs

bull neither is it contributory negligence not to check astatement made by a vendor (Gran Gelato v Richcliff(1992))

Remedies for misrepresentation

Rescission

Misrepresentation renders a contract voidable ndash see aboveThe Misrepresentation Act 1967 provides that rescission isavailable in relation to

bull lsquoexecutedrsquo contracts for the sale of goods andconveyances of property

bull representations which have been incorporated as a termof the contract

Rescission was not available in these circumstances before1967

Damages

bull There are five ways in which damages may be claimedfor misrepresentation It seems likely that in future thenormal ground for damages will be the

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W81

Misrepresentation Act 1967 but there are still cases wheredamages can only be claimed at common law if at all

bull Note ndash rescission and damages are alternative remediesin many cases but if the victim of fraudulent ornegligent misrepresentation has suffered consequentialloss he may rescind and sue for damages

bull Damages can be claimed on different bases according tothe kind of misrepresentation that was committed

Damages in the tort of deceit for fraudulent misrepresentationIt is up to the misled party to prove that themisrepresentation was made fraudulently that isknowingly without belief in its truth or recklessly as towhether it be true or false (Derry v Peek (1889))

The burden of proof on the misled party is a heavy one

Damages in the tort of negligence Victims of negligent misrepresentation may be able to sueunder Hedley Byrne v Heller amp Partners (1963) Themisrepresentee must prove (1) that the misrepresentorowed him a duty to take reasonable care in making therepresentation that is there must be a lsquospecial relationshiprsquo(2) that the statement had been made negligently

Damages under s 2(1) of the Misrepresentation Act 1967Section 2(1) of the Misrepresentation Act 1967 provides thatwhere a person has entered into a contract after amisrepresentation has been made to him by another partythereto and as a result of it has suffered loss lsquothen if themisrepresentor would be liable for damages if it had beenmade fraudulently he will be so liable notwithstanding thatthe misrepresentation was not made fraudulently unless heproves that he had reasonable grounds to believe and did

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82

believe up to the time the contract was made that the factsrepresented were truersquo

Note that this is a more beneficial remedy for themisrepresentee as he only need prove that the statement isuntrue It is for the misrepresentor to prove that he had goodgrounds for making the statement and the burden of proofis a heavy one In Howard Marine and Dredging Co Ltd vOgden (1978) the owner of two barges told the hirer that thecapacity of the barges was 1600 tons He obtained thesefigures from the Lloydrsquos list but in this case the Lloydrsquos listwas incorrect The court held that he did not have goodgrounds for this statement he should have consulted themanufacturerrsquos specifications which should have been in hispossession

Assessment of damages

The Court of Appeal confirmed in Royscot Trust v Rogerson(1991) that damages under s 2(1) of the MisrepresentationAct should also be awarded on the reliance basis because ofthe lsquofiction of fraudrsquo in the wording of the Act

Remoteness of damage

The Court of Appeal also held in that case because of thelsquofiction of fraudrsquo that the rules of remoteness whichnormally apply only to the tort of deceit should be appliedunder s 2(1)

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W83

Damages in the tort of deceit and the tortof negligence are assessed on the tortious basis of reliance that is the claimant is entitled to be

put in the position he was in before the tort was committed

(In contract and in all torts other than deceit the losses mustbe lsquoreasonably foreseeablersquo)

bull In Royscot Trust v Rogerson (1991) a customer arranged toacquire a car on hire purchase from a car dealer Thefinance was to be provided by a finance company theRoyscot Trust which insisted on a deposit of 20 Thedealer falsified the figures in order to indicate a deposit of20 as required Some months later the customerwrongfully sold the car thus depriving the financecompany of its property The finance company sued thedealer under s 2(1) of the Misrepresentation Act It washeld by the Court of Appeal that the finance companycould recover damages from the car dealer to cover theloss of the car since the loss followed themisrepresentation The remoteness rules applicable to thetort of deceit would be applied and the loss did not needto be foreseeable

Controversy has followed this decision as the tort ofdeceit to which this rule only previously applied isdifficult to establish and involves moral culpability onthe part of the defendant It has now been extended to anaction which is relatively easy to establish (see HowardMarine and Dredging v Ogden) and may only involvecarelessness Some doubts as to whether this was thecorrect approach were expressed obiter by the House ofLords in Smith New Court Securities Ltd v ScrimgeourVickers (Asset Management) Ltd (1996) but for the timebeing Royscot v Rogerson remains good law

CA

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84

That is damages would be awarded to coverall losses which flow directly from the

untrue statement whether or not those losses were foreseeable

bull Further problems are caused by the decision of the Courtof Appeal in East v Maurer (1991) a case in the tort ofdeceit where it was held that lsquoall damages flowingdirectly from the fraudrsquo would cover damages for somedegree of loss of profit ndash a heading previously consideredto be appropriate only to expectation damages incontract It is a matter for speculation whether the courtswill apply this decision to cases under theMisrepresentation Act and bring loss of profit under theheading of reliance loss on the basis that all losses whichflow directly from the misrepresentation should berecoverable

bull A generous interpretation of s 2(1) of the 1967 Act hadalso been applied by the court in Naughton v OrsquoCallaghan(1990) where reliance damages had been awarded tocover not only the difference between the value of the coltand the value it would have had if the statements madeabout it were correct (the quantification rule for breach ofcontract) but also the cost of its maintenance since thesale

It has been alleged that these three cases swell the amount ofdamages which can be awarded under the MisrepresentationAct to a greater extent than intended by Parliament and thatthe damages available for misrepresentation can nowexceed those available for breach of contract

Damages for wholly innocent misrepresentationDamages cannot be claimed for a misrepresentation whichis not fraudulent or negligent but

bull an indemnity may be awarded (see above)

bull damages in lieu of rescission may be awarded under s 2(2) of the Misrepresentation Act 1967 C

ON

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85

In William Sindall v Cambridgeshire CC (1994) the Court ofAppeal stated (obiter) that where the court is consideringwhether to award damages in lieu of rescission threematters should be taken into consideration

the nature of the misrepresentation

the loss which would be caused to the representee ifthe contract were upheld

the hardship caused to the misrepresentor if the con-tract were rescinded The Court of Appeal also statedthat the damages should resemble damages forbreach of warranty

bull lsquodamages in lieursquo can it seems be awarded even if one ofthe bars to recision apply (Thomas Witter Ltd v TBPIndustries (1996))

bull where the misrepresentation has become a term of thecontract the misrepresentee can sue for damages forbreach of contract as an alternative to damages formisrepresentation

Duress

A common law doctrine

Duress to the person

This requires actual or threatened violence to the personOriginally it was the only form of duress recognised by thelaw

CA

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86

Duress involves coercion

Duress to goods

bull Threat of damage to goods ndash traditionally this has notbeen recognised by the law but in view of thedevelopment of economic duress it is assumed thatduress to goods would today be a ground for relief

Economic duress

Requires

Economic duress led to rescission of a contract in UniverseTankships of Monrovia v ITWF (1983) where a union hadlsquoblackedrsquo a tanker and refused to let it leave port untilcertain moneys had been paid The House of Lordsconsidered that this amounted to economic duress andordered return of the money

It has been stated that economic duress requires

Compulsion or coercion of the will

In Pau On v Lau Yiu Long (1980) Lord Scarman listed thefollowing indications of compulsion or coercion of the will

bull did the party coerced have an alternative course open tohim

bull did the party coerced protest

bull did the party coerced have independent advice

bull did the party coerced take steps to avoid the contract

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W87

Compulsion of the will An illegitimate threat

Illegitimate pressure

There must be some element of illegitimacy in the pressureexerted for example a threatened breach of contract Theillegitimacy will normally arise from the fact that what isthreatened is unlawful In CTN Cash and Carry v Gallaher(1994) however the Court of Appeal accepted obiter that anoutrageous but technically lawful threat could amount toduress This possibility has not so far been developed in anylater cases

Economic duress is often pleaded together with lack ofconsideration in cases where a breach of contract isthreatened by the promisor unless he receives additionalpayment

bull In Atlas Express v Kafco (1989) Kafco a small companywhich imported and distributed basketware had acontract to supply Woolworths They contracted withAtlas for delivery of the basketware to Woolworths Thecontract commenced then Atlas discovered they hadunderpriced the contract and told Kafco that unless theypaid a minimum sum for each consignment they wouldcease to deliver Kafco were heavily dependent on theWoolworths contract and knew that a failure to deliverwould lead both to the loss of the contract and an actionfor damages At that time of the year they could not findan alternative carrier and agreed under protest to makethe extra payments Atlas sued for Kafkorsquos non-paymentHeld ndash the agreement was invalid for economic duressand also for lack of consideration

bull Cf Williams v Roffey Bros (1989) ndash Chapter 2

The following threats are probably not illegitimate (subjectto the possibility raised by CTN Cash and Carry v Gallaher(1994) discussed above)

CA

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88

bull a threat not to enter into a contract

bull a threat to institute civil proceedings

bull a threat to call the police

Note ndash not all threatened breaches of contract will amount toeconomic duress It will only do so when the threatenedparty has no reasonable alternative open to him The normalresponse to a breach of contract is to sue for damages

Remedies

bull In North Ocean Shipping Co v Hyundai Construction Co TheAtlantic Baron (1979) the court found economic duressbut refused rescission on the ground that the plaintiff hadaffirmed the contract

Undue influence

An equitable doctrine

bull Undue influence is based on the misuse of a relationshipof trust or confidence between the parties Where foundit renders a contract voidable The innocent party willneed to apply to the court for rescission of the contract(see above)

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W89

Pressure not amounting to duress at common lawwhereby a party is excluded from the exercise of

free and independent judgment

Duress renders a contract voidable Rescission willnormally be sought from the courts See above

Contracts where undue influence is presumed

For example

bull Contracts between certain relationships

parent and child

trustee and beneficiary

solicitor and client

doctor and patient

religious adviser and disciple

bull Where there has been a long relationship of confidenceand trust between the parties

For example between husband and wife or where oneparty had been accustomed to rely for guidance andadvice on the other In Lloyds Bank v Bundy (1975) MrBundy an elderly west country farmer on the advice ofthe local Lloyds Bank assistant manager granted a chargeto the bank over the family farm to guarantee his sonrsquos

CA

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ND

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AR

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90

Contracts where undue influence

is presumed

Contracts where actual undue

influence must be proved

Contracts induced by undue influence are of two kinds

The contract must be manifestly disadvantageous

to the weaker party

Contracts need not be manifestly disadvantageous

to the weaker party

indebtedness to the bank Mr Bundy had all his liferelied on Lloyds Bank for financial advice the court setaside the charge on the ground of undue influence on thepart of the bank

Note ndash a bank will not be presumed to exert undueinfluence in normal circumstances

In Credit Lyonnais Bank Nederland NV v Burch (1997) therelationship between an employer and a junior employee(who was persuaded to put up her own house as securityfor the businessrsquos overdraft) was held to be one of undueinfluence

The stronger party can disprove undue influence byshowing that

bull full disclosure of all material facts was made

bull the consideration was adequate

bull the weaker party was in receipt of independent legaladvice

Contracts where actual undue influence is proved

The burden of proof lies on the claimant to show that suchinfluence did exist and was exerted

Effect of undue influence on a third party

In Barclays Bank v OrsquoBrien (1993) Mrs OrsquoBrien had signed aguarantee which used the jointly owned matrimonial homeas security for a loan made to her husbandrsquos business Herhusband had told her it was for a maximum of pound60000 butin fact it was for pound130000 Mrs OrsquoBrien had not been advisedby the bank to consult an independent solicitor The Houseof Lords held that there was no undue influence in this casebut there was misrepresentation on the part of the husband

CO

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CT

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W91

They further held that where there was undue influence ormisrepresentation or other legal wrong then the injuredpartyrsquos right to have the transaction set aside would beenforceable also against the third party provided the thirdparty had actual or constructive notice of the wrong Suchnotice would arise where

bull the parties were in an emotional relationship forexample co-habitees (heterosexual or homosexual) orchild and aged parents

bull one party was undertaking a financial liability on behalfof the other which was not to her or his advantage

The court also held that in the above situation the third partycould discharge his duty by making clear to the partyconcerned the full nature of the risk he or she is taking onfor example

bull by conducting a personal interview or

bull urging independent advice

Note ndash this doctrine of constructive notice applies to sureties(guarantors) but does not apply where a bank makes a jointloan to both parties as the facts in that situation do not meetthe requirements set out in Barclays Bank v OrsquoBrien See CIBCMortgages v Pitt (1993)

Note

bull A failure by a solicitor to give proper advice cannot beheld against a bank (even if the bank knows that thesolicitor is acting for both the borrower (for example thehusband) and the guarantorsurety (for example thewife)) ndash see Royal Bank of Scotland v Etridge (No 2) (1998)

CA

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92

bull Once undue influence or misrepresentation has beenfound the whole contract is avoided it cannot be upheldin part ndash TSB Bank plc v Camfield (1995)

bull Damages are not available as a remedy for duress orundue influence

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CT

LA

W93

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W95

6 Mistake

There is much disagreement concerning the effect ofmistake on a contract There are many reasons for thisconfusion as to which terms to use a large number of caseswhich can be interpreted in different ways no recentdecisive House of Lords decisions on the subject theintervention of equity

Terminology

Different terms are used by Cheshire and Anson to describethe same kind of mistake and you should ascertain whichterms are used in your textbook

The terms used by Cheshire are used in this LawCard

CHESHIRE ANSON Effect

Same mistake Common Mutual May nullifymade by both mistake mistake agreementparties

Parties at Mutual Unilateral Negativescross-purposes mistake mistake agreement

Parties atcross-purposesbut one party Unilateral Unilateral Negativesknows that mistake mistake agreementthe other is mistaken

Effect of a mistake

If the contract is rendered void then the parties will bereturned to their original positions and this may defeat therights of innocent third parties who may have acquired aninterest in the contract

The reluctance of the courts to develop the common lawdoctrine of mistake is probably due to the unfortunateconsequences for third parties that can result from holdinga contract void Equity has however intervened to producemore flexibility as noted below

CA

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96

In common mistakes the parties are agreed but both are mistaken

In mutual and unilateral mistakes the parties may not have reached agreement and these mistakes are sometimes dealt with

under the heading of agreement

The general rule is that a mistake has no effect on a contract but certain mistakes of a fundamental nature sometimes called

operative mistakes may render a contract void at common law

Operative mistakes

Common mistakes

bull At common law this may render the contract void thatis the contract has no legal effect it is unenforcable byeither party and title to property cannot pass under it

bull In equity a more flexible approach has developedcontracts containing certain common mistakes have beentreated as voidable In setting aside such contracts thecourts have a much wider control over the terms it canimpose on the parties

In Bell v Lever Bros (1932) it was stated that to nullify theagreement the lsquomistake must go to the root of the contractrsquo

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W97

Commonmistakes

re a fundamentalmatter for

example resextincta res sua

the quality of the subject matter

Mutualmistakes

re identity ofsubject matter

of contract

Unilateralmistakes

re terms ofcontract re

identity of otherparty to contract

The parties are agreed but they are both under the same misapprehension If this

misapprehension is sufficiently fundamentalit may nullify the agreement

Lever Bros agreed to pay two directors of a subsidiarycompany substantial sums of money in compensation forloss of office while unaware of the fact that they hadengaged in irregular conduct which would have allowedthem to be dismissed without compensation Lever Brosasked the court to order the return the compensation paid onthe ground that it had been paid as a result of a commonmistake The House of Lords held that the common mistakeconcerning the need to pay compensation was notlsquosufficiently fundamentalrsquo to render the contract void

Common mistakes lsquosufficiently fundamentalrsquo to render a

contract void

A common mistake as to the existence of the subject matter(res extincta)bull In Galloway v Galloway (1914) the parties believing they

were married entered into a separation agreement Laterthey discovered that they were not validly married Held ndashthe separation agreement was void for a common mistake

bull In Strickland v Turner (1852) the court declared void onthe grounds of a common mistake a contract to purchasean annuity on the life of a person who had already died

bull In Couturier v Hastie (1856) a buyer bought a cargo ofcorn which both parties believed to be at sea the cargohad however already been disposed of Held ndash thecontract was void

bull Section 6 of the Sale of Goods Act 1979 declares thatlsquoWhere there is a contract for the sale of specific goodsand the goods without the knowledge of the seller haveperished when the contract is made the contract is voidrsquo

CA

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98

However in McRae v Commonwealth Disposals Commission(1951) the commission sold to McRae the right to salvagea tanker lying on a specified reef There was no such reefof that name nor was there any tanker The court foundthat there was a valid contract and that the commissionhad impliedly guaranteed the existence of the tanker Thecase could be distinguished from the Australianequivalent of s 6 on the ground that there never had beena tanker and it had therefore not perished

Whether a contract is void or valid depends on theconstruction of the contract that is even if the subjectmatter does not exist the contract will be valid

if performance was guaranteed or

if it was the purchase of a lsquochancersquo

Otherwise the contract would be void

Mistake as to title ndash res sua ndash that is the thing sold alreadybelongs to the buyerbull In Cooper v Phibbs (1867) Cooper not realising that a

fishery already belonged to him agreed to lease it fromPhibbs Held ndash the contract was void

Mistake as to the possibility of performing the contractbull In Sheik Bros Ltd v Ochsner (1957) a contract was held

void as the land was not capable of growing the cropcontracted for

bull In Griffith v Brymer (1903) a contract to hire a room toview the coronation of Edward VII which was madeafter the procession had been cancelled was held void(Commercial impossibility) C

ON

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99

Mistake as to the quality of the subject matterLords Atkin and Thankerton both insisted in Bell v Lever Brosthat to render a contract void the mistake must go to thelsquoroot of the contractrsquo

bull It has been argued that if the mistake in Bell was notsufficiently fundamental to render a contract void then itis highly unlikely that any mistake concerning qualitywould do so

bull Similarly in Leaf v International Galleries (1950) whereboth parties mistakenly believed that a painting was byConstable the Court of Appeal stated that the contractwas not void for common mistake

bull In Solle v Butcher (1950) the Court of Appeal declined todeclare void a lease which both parties believed was notsubject to the Rent Acts A similar decision was reachedin Grist v Bailey (1967) where the parties both believedthat a house was subject to a protected tenancy

However Lord Justice Steyn in Associated Japanese Bank vCredit du Nord (1988) stated that not enough attention hadbeen paid to speeches in Bell v Lever Bros which did indicatethat a narrow range of mistakes in quality could render acontract void for example Lord Atkinrsquos statement that lsquoacontract may be void if the mistake is as to the existence ofsome quality which makes the thing without that qualityessentially different from the thing it was believed to bersquo Hegave as an example ndash if a horse believed to be sound turnsout to be unsound then the contract remains valid but if ahorse believed to be a racehorse turns out to be a carthorsethen the contract is void

CA

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100

Equity

The role of equity according to this view is supplementarydesigned to relieve the limitations of the common law

bull Rescission on terms was granted by the Court of Appealin Solle v Butcher (1950) (see above) The court rescindedthe lease but gave the tenant the option of staying thereon terms of his paying the extra rent which the landlordcould have charged in view of the improvements

bull Rescission on terms was also granted in Grist v Bailey(1967) where a house was sold in the mistaken belief thatit had a protected tenancy and in Laurence v LexcourtHoldings (1978) where there was a common mistake withregard to planning permission

bull Rescission without terms was granted in Magee v PennineInsurance Co (1969) where an agreement by an insurancecompany to meet a claim was rescinded because theparties were unaware that it was based on a policy whichwas voidable due to a misrepresentation by the assured

bull In William Sindall plc v Cambridgeshire CC (1994) Evans LJsuggested that whereas the common law only recognisedmistakes as to the subject matter of the contract equitywould recognise a lsquowider and perhaps unlimitedcategory of common mistakersquo In Clarion Ltd v NationalProvident Institution (2000) however Rimer J held that

CO

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LA

W101

Lord Justice Steyn in Associated Japanese Bank v Credit du Nord (1988) stated that a court will first examine whether a

contract is void at common law if it is not then itwill examine whether equity will grant rescission

equity would only intervene where the mistake was as tothe terms of the contract or its subject matter Equity didnot provide relief for a lsquobad bargainrsquo

Mutual and unilateral mistakes

The courts adopt an objective test in deciding whetheragreement has been reached It is not enough for one of theparties to allege that he was mistaken

Mistake can negate consent in the following cases

Mutual mistakes concerning the identity of the subject matter

bull In Raffles v Wichelhaus (1864) a consignment of cotton wasbought to arrive lsquoex Peerless from Bombayrsquo Two shipsboth called Peerless were due to leave Bombay at aroundthe same time Held ndash no agreement as the buyer wasthinking of one ship and the seller was referring to theother ship

bull Similarly there was no agreement in Scriven Bros vHindley amp Co Ltd (1913) where the seller sold lsquotowrsquo andthe buyer bought lsquohemprsquo Again there was an ambiguityas both lots were delivered under the same shippingmark and the catalogue was vague

CA

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102

In these cases the parties are at cross-purposesbut there must have been some ambiguity

in the situation before the courts willdeclare the contract void

These mistakes negate consentthat is they prevent the formation of an agreement

bull But in Smith v Hughes (1871) the court refused to declarevoid an agreement whereby the buyer had thought hewas buying old oats when in fact they were new oats asthe contract was for the sale of lsquooatsrsquo The mistake relatedto the quality not the identity of the subject matter

Unilateral mistake concerning the terms of the contract

bull In Hartog v Colin and Shields (1939) the sellers mistakenlyoffered to sell goods at a given price per pound whenthey intended to offer them per piece All the preliminarynegotiations had been on the basis of per piece Thebuyers must have realised that the sellers had made amistake The contract was declared void

bull In Smith v Hughes however the contract was for the saleof lsquooatsrsquo not lsquoold oatsrsquo it would only have been void iflsquoold oatsrsquo had been a term of the contract

Unilateral mistake as to the identity of other parties to the

contract

There are a number of contradictory cases and theoriesunder this heading

Traditionally a distinction is made between mistakes as toidentity and mistakes as to attributes (for example creditworthiness)

bull In Cundy v Lindsay (1878) a Mr Blenkarn ordered goodsfrom Lindsay signing the letter to give the impressionthat the order came from Blenkiron amp Co a firm knownto Lindsay amp Co Held ndash the contract was void Lindsay

CO

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W103

Here one party has taken advantage of the other partyrsquos error

amp Co had only intended to do business with Blenkiron ampCo There was therefore a mistake concerning the identityof the other party to the contract

bull In Kingrsquos Norton Metal Co v Edridge Merrett amp Co Ltd(1872) on the other hand a Mr Wallis ordered goods onimpressive stationery which indicated that the order hadcome from Hallam amp Co an old established firm withbranches all over the country Held ndash the contractbetween Kingrsquos Norton Metal Co and Wallis was notvoid The sellers intended to do business with the writerof the letter they were merely mistaken as to hisattributes that is the size and credit worthiness of hisbusiness

bull In Boulton v Jones (1857) the defendant sent an order forsome goods to a Mr Brocklehurst unaware that he hadsold the business to his foreman the plaintiff Theplaintiff supplied the goods but the defendant refused topay for them as he had only intended to do business withBrocklehurst against whom he had a set off Held ndash therewas a mistake concerning the identity of the other partyand the contract was therefore void

However the cases all concerned contracts negotiated at adistance

CA

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104

From the above three cases it would seem that acontract is void if the mistaken party intended to do

business with another specific person and the identity of that other person was important to him

bull In Phillips v Brooks (1919) a jeweller sold a gold ring anddelivered it on credit to a customer who had come intohis shop and had falsely claimed to be Sir GeorgeBullough a well known and wealthy man Held ndash thecontract was valid The jeweller had intended to dobusiness with the person in his shop

bull In Lewis v Averay (1972) a rogue claimed to be RichardGreene the film actor and produced a pass to Pinewoodstudios to verify this He was allowed to drive away a carin return for a cheque and subsequently resold the car forcash to Averay The cheque bounced and the sellerclaimed the return of the car on the ground that he wasmistaken as to the identity of the buyer Held ndash thecontract was valid The seller must be presumed to haveintended to deal with the person physically in the roomwith him Averay kept the car

There are two cases however where the plaintiffs were ableto establish a mistake as to the identity of a person in theirpresence

bull In Ingram v Little (1961) two sisters sold a car and handedit over against a worthless cheque to a person whoclaimed to be a Mr Hutchinson of Stanstead HouseCaterham They only did so after one of them hadchecked that there was a man of that name who lived atthat address The Court of Appeal held the contract void C

ON

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105

Where the parties negotiate in person the samerules apply but there is a presumption that the inno-cent party intended to do business with the person

physically in his presence

They considered that the sisters had done enough toestablish that they only intended to deal with MrHutchinson

This case has been greatly criticised as it is difficult toreconcile with Phillips v Brooks and Lewis v Averay

bull In Sowler v Potter (1940) the lease of a cafeacute was granted toPotter who had previously been convicted of keeping adisorderly cafe under the name of Robinson The courtheld that the contract was void because of the lessorrsquosmistaken belief that Potter was not Robinson This casehas also been much criticised and doubted as it did notseem that Sowler had intended to do business with anyother identifiable person The contract could in any casehave been set aside for misrepresentation

The contract would in most cases be voidable in any case formisrepresentation where one party has misled the otherwith regard to his identity The advantage of having the contract declared void for mistake is to avoid the bars torescission

See Chapter 5 pp 75ndash76

Mistake as to the nature of the document signed

Defence of non est factum

bull The scope of this defence has been limited since thedecision in Saunders v Anglia Building Society (Gallie v Lee)(1971) where an old lady was persuaded by her nephewto sign a document conveying her house to her nephewrsquosfriend She had believed that she was signing a deed ofgift to her nephew She had not read the documentbecause her glasses were broken It was held that thedocument was valid It was stated that

CA

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106

It is also thought that it will only protect a person who isunder some disability The defence did succeed in LloydsBank v Waterhouse (1990) where the defendant who wasilliterate signed a guarantee of his sonrsquos debt to the bankThe father thought that the guarantee covered the purchaseprice of a farm but in fact it covered all his sonrsquosindebtedness to the bank It was held that the effect of thedocument was fundamentally different from what it wasbelieved to be There was no negligence and the contractwas therefore void

In UDT Ltd v Western (1976) it was held that these samerules applied to cases where a person had signed a formbefore all the details required by the form had been entered

Mistake in equity

The narrow approach taken by the common law towardsremedies for mistake (that is that it renders the contractvoid) is supplemented by the more flexible approach ofequity The following remedies may be available in equity

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W107

Rescission RectificationRefusal of

specificperformance

The signed document must be fundamentally different in effect from what it was thought to be

The signatory must prove that he had not been negligent in signing the document

Rescission

See common mistake (above)

Rectification

Where there has been a mistake not in the actual agreementbut in reducing it to writing equity will order rectification ofthe document so that it coincides with the true agreement ofthe parties

Necessary conditionsbull The document does not represent the intention of both

parties or

bull one party mistakenly believed a term was included in thedocument and the other party knew of this error InRoberts amp Co Ltd v Leicestershire CC (1961) the completiondate of a contract was rectified at the request of one partybecause it was clear that the other party was aware of theerror when the contract was signed

If the document fails to mention a term which one partybut not the other had intended to be a term of thecontract there is no case for rectification

bull There must have been a concluded agreement but notnecessarily a legally enforceable contract In Joscelyne vNissen (1970) a father and daughter agreed that thedaughter should take over the car hire business Inreturn the father would continue to live in the house andthe daughter would pay all the household expenses Thislast provision was not included in the written contractHeld ndash the contract should be rectified to include it

Note ndash a document which accurately records a prioragreement cannot be rectified because the agreement wasmade under some mistake (Rose v Pym above) Equityrectifies documents not agreements

CA

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108

Rectification is an equitable remedy and is available at thediscretion of the court Lapse of time or conflict with thirdparty rights may prevent rectification

Refusal of specific performance

bull In Webster v Cecil (1861) the defendant having previouslyrefused the plaintiffrsquos offer of pound2000 for his land wrote tothe plaintiff offering to sell it to him for pound1250 instead ofpound2250 as he had intended The plaintiff accepted theoffer Specific performance was refused as the plaintiffmust have been aware of the error (unilateral mistake)

bull Where there is no blame on the claimant the situation ismore difficult In Malins v Freeman (1837) the defendanthad mistakenly bought the wrong property at an auctionSpecific performance was refused In Tamplin v James(1879) however the court ordered specific performancewhere the defendant had bid for a property under anerror as to its true extent Presumably being forced to buya totally different property from the one he intendedwould have caused greater hardship than being forced tobuy a property whose dimensions differed from hisexpectations

CO

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W109

Specific performance will be refused when the contract is void at common law Equity may also

refuse specific performance where a contract is validat law but only lsquowhere a hardship amounting toinjustice would have been inflicted upon him by

holding him to his bargainrsquo (Tamplin v James (1879))

7 Illegality and capacity

Illegal contracts are classified in different ways by differentauthorities In this chapter a distinction is drawn betweencontracts which involve the commission of a common lawor statutory offence and those which are void as beingcontrary to public policy

Illegality

The main issue with regard to illegal contracts is the effectof illegality on a contract The most often examined topicwith regard to contracts which are declared void ongrounds of public policy is contracts in restraint of trade

Illegal contracts

Contracts illegal by statute

bull Statute may declare a contract illegal for example theCompetition Act 1998

bull Statute may prohibit an act but declare that it shall noteffect validity of contract for example the ConsumerProtection Act 1987

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W111

Illegal contracts Contracts void

against public policy

Contracts prohibited by statute

Contracts illegal at common law

bull Statute may prohibit an act but not stipulate its effect onthe contract The status of the contract will in this casebe a matter of interpretation for the court In ReMahmoud and Ispahani (1921) the court decided that astatement that lsquoa person shall not buy or otherwise dealin linseed oil without a licencersquo was a prohibition and acontract entered into by a person without a licence wastherefore void

bull The courts are reluctant to imply a prohibition when thisis not clearly indicated in the statute In Hughes v AssetManagers (1995) the court held a contract valid despitethe fact that a document had not been signed by a personauthorised to do so as required by statute

Contracts illegal at common law

bull An agreement to commit a crime a tort or a fraud forexample defraud the rating authority (Allen v Roscous(1676)) to publish a libel (Clay v Yates)

bull An agreement to defraud the Inland Revenue (Napier vBusiness Associates (1951))

bull Contracts damaging to the countryrsquos safety or foreignrelations

bull Contracts interfering with the course of justice forexample contracts to give false evidence

bull Contracts leading to corruption in public life (Parkinson vRoyal College of Ambulance (1925))

bull Contracts tending to promote sexual immorality (Pearcev Brooks (1866))

CA

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112

Effects of illegality

Contracts illegal as formed

In Pearce v Brooks (1866) the owner of a coach of unusualdesign was unable to recover the cost of hire from aprostitute who to his knowledge had hired it in order toattract clients

In Parkinson v Royal College of Ambulance (1925) Parkinsonwas unable to recover the money he had donated to thedefendants on the understanding that they would obtain aknighthood for him

Exceptionsbull Where the parties are not in pari delicto (that is not

equally at fault) for example where one party isunaware of the illegal nature of the contract or has beeninduced to enter into it by fraudulent misrepresentationor is the party the law was attempting to protect forexample a tenant who has paid an illegal premium(Kiriri Cotton Co v Dewani (1960))

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W113

Contracts illegal as formed

Contracts illegal in their performance

Such contracts are void ab initio there can be no action for breach of contract

Money paid or property transferred under the contract cannot be recovered

bull Where the transferor genuinely repents and repudiatesthe contract before performance In Tribe v Tribe (1995)money was transferred to a son in order to avoid thefatherrsquos creditors At the end of the day the creditorswere all paid in full and the father was allowed to cite theoriginal reason for the transfer in order to rebut thepresumption of advancement (which would have meantthat his son could keep the shares) He had withdrawnfrom the illegal purpose before performance

In Bigos v Boustead (1951) however the court was notconvinced that the plaintiff had genuinely repented

bull Where the transferor can frame his claim without relyingon the contract In Bowmakers v Barnet Instruments (1945)the plaintiffs were able to rely on an action in the tort ofconversion to recover goods delivered under an illegalhire purchase contract

Similarly in Tinsley v Milligan (1993) both parties hadcontributed money towards the purchase of a house putin the name of Tinsley alone in order to allow Milligan tomake various social security claims When Milligan suedfor the return of the money it was argued that theagreement had been entered into for an illegal purposeand that the public conscience lsquowould be affronted byrecognising rights created by illegal transactionsrsquo TheHouse of Lords held however that a resulting trust hadbeen created in favour of Milligan by the contribution tothe purchase price Milligan therefore could rely on theresulting trust and had no need to rely on the illegalagreement

This case shows (a) that the rule applies to equity as wellas to common law (b) the test of lsquoaffront to the publicconsciencersquo previously used by the Court of Appeal is nolonger good law

CA

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114

bull Where part of the contract is lawful the court will notsever the good from the bad In Napier v National BusinessAgency (1951) certain payments were described aslsquoexpensesrsquo in order to defraud the Inland Revenue Thecourt refused to enforce payment of the accompanyingsalary as the whole contract was tainted with the illegality

Note ndash property can pass under an illegal contract as in Singv Ali (1960)

Contracts illegal in their performance

A claim by the innocent party to enforce the contract in thesecases is strong

bull In Marles v Philip Trant (1954) the defendant sold winterwheat described as spring wheat without anaccompanying invoice as required by statute Held ndash theplaintiff could sue for damages for breach of contractThe contract was illegal in its performance but not in itsinception

bull In Strongman v Sincock (1955) Sincock failed to getlicences which were needed to modernise some houseswhich belonged to him and refused to pay for the workon the basis that the contracts were illegal Held ndashStrongman could not sue on the illegal contracts butcould sue Sincock on his collateral promise to obtain thelicences

CO

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W115

The illegality may only arise during the performance of a contract for example

a carrier may break the law by exceeding the speed limit whilst delivering goods

belonging to a client He will be punished but the contract will not necessarily be void

bull In Archbolds v Spanglett (1961) Spanglett contracted tocarry Archbolds whisky in a van which was not licensedto carry any goods other than his own Archbold wasunaware of this and could therefore recover damages forbreach of contract

But in Ashmore Benson Pease amp Co v Dawson Ltd (1973)the other party knew of the overloading of the lorry andcould not therefore recover damages He hadparticipated in the illegality

bull Even the guilty party may enforce the contract if theillegality is incidental

In Shaw v Groom (1970) a landlord failed to give histenant a rent book as required by law Held ndash he could suefor the rent The purpose of the statute was to punish thelandlordrsquos failure to provide a rent book not to render thecontract void

In St John Shipping v Rank (1957) a ship owner who hadoverloaded his ship in contravention of a statute was ableto recover freight

Contracts void at common law on grounds of publicpolicy

CA

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116

Contracts damaging to theinstitution of marriage

For example contracts inrestraint of marriage

marriage brokerage contractscontracts for future separation

(pre-nuptial agreements)

Contracts made after orimmediately beforeseparation are valid

Contracts to oust thejurisdiction of the courts

However arbitrationagreements are valid

In Esso Petroleum v Harpers Garage (1968) it was stated thatthe court will consider

bull whether the contract is in restraint of trade A contract isin restraint of trade if it restricts a personrsquos liberty tocarry on his trade or profession Certain restraints havebecome acceptable over the years for example lsquotiedhousesrsquo restrictive covenants in leases sole agency orsole distributorship agreements

bull whether it should nevertheless be enforced because itprotects a legitimate interest and is reasonable Theonus of proving reasonability is on the promisee Arestraint to be permissible must be no wider than isnecessary to protect the relevant interest of thepromisee

Categories of contracts in restraint of trade

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Restraints onemployees

Restraints on thevendors of a business

Exclusive dealingagreements

A contract in restraint of trade is prima facie void but thecourts will now uphold the restriction if it is shown that

bull the restraint protects a legitimate interest

bull the restraint is reasonable between the parties

bull the restraint is reasonable as regards the interest of thepublic

Contracts in restraint of trade

Restraints on employeesThe restraint is void unless the employer can show

bull That it is necessary to protect a proprietary interest forexample the trade secrets of a works manager in Foster vSuggett (1918) the trade connections of a solicitorrsquosmanaging clerk in Fitch v Dewes (1921)

A restraint merely to prevent competition will not beenforced

In Eastham v Newcastle United FC (1964) the courtaccepted that the proper organisation of football was avalid matter for clubs to protect but found the lsquoretainand transfer systemrsquo unreasonable

bull That the restraint is no greater than is necessary toprotect the employerrsquos interest in terms of time andarea

In Scorer v Seymore-Jones (1966) the court upheld arestriction of 10 miles within branch A at which theemployee had worked but held that a similar restraintcovering branch B at which the employee had notworked was unreasonable and void

bull Problems with area can be overcome by using lsquonon-solicitationrsquo clauses instead

In Home Counties Dairies v Skilton (1970) a milkmanagreed that for one year after leaving his present job hewould not sell milk to his employerrsquos customers Held ndashrestraint valid It was necessary to protect the employeragainst loss of customers

bull The validity of the duration of the restraint depends onthe nature of the business to be protected and on thestatus of the employee

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118

In Briggs v Oates (1991) a restriction of five miles for fiveyears on an assistant solicitor was upheld as reasonable

bull A restraint imposed by indirect means for example byloss of pension rights (Bull v Pitney Bowes (1966)) orwhere two companies agreed not to take on the otherrsquosemployees (Kores v Kolok (1959)) will be judged by thesame criteria

Restraints on the vendor of a business

bull In Vancouver Malt and Sake Brewing Co v VancouverBreweries Ltd (1934) a company which was licensed tobrew beer but which had not at any time brewed beerwas sold and agreed not to brew any beer for 15 yearsHeld ndash the restraint was void since there was no goodwillof a beer brewing business to be transferred

bull In British Concrete v Schelff (1921) S sold his localisedbusiness to B who had branches all over the UK andagreed not to open any business within 10 miles of any ofBrsquos branches Held ndash the restriction was void B wasentitled only to protect the business he had bought notthe business which he already owned

bull In Nordenfelt v Maxim Nordenfelt (1894) N a worldwidesupplier of guns sold his worldwide business to M andagreed not to manufacture guns anywhere in the worldfor 25 years Held ndash the restriction was valid C

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119

Such a restraint is valid if it is intended to protectthe purchaserrsquos interest in the goodwill of the

business bought and is reasonable

Exclusive dealing agreements

bull In Esso Petroleum v Harpers Garage (1968) a solusagreement for four years was held reasonable but asolus agreement for 21 years was held unreasonable andtherefore void

bull Solus agreements were distinguished from restrictivecovenants in a lease When an oil company leases afilling station to X inserting a clause that X should buyall its requirements from the company this is not subjectto restraint of trade rules because the tenant is notgiving up a previously held freedom

bull But in Amoco v Rocca Bros (1975) the court held thatrestraint of trade rules did apply to lease and lease backagreements

bull In Alec Lobb (Garages) v Total Oil (1985) in a similar leaseback arrangement a solus agreement for between sevenand 21 years was held reasonable on the ground that thearrangement was a rescue operation benefiting theplaintiffs and there were lsquobreakrsquo clauses in theunderlease

bull In Schroeder Music Publishing Co v Macaulay (1974) itwas held that a contract by which an unknown songwriter undertook to give his exclusive services to apublisher who made no promise to publish his work

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120

Solus agreements whereby A agrees to buy all his re-quirements of a particular commodity from B

Most exclusive services contracts are found in professional sport or entertainment

was subject to the restraint of trade doctrine as it waslsquocapable of enforcement in an oppressive mannerrsquo

bull In Greig v Insole (1978) the MCC banned any cricketerwho played for a cricketing lsquocircusrsquo from playing forEngland The court held that the ban was void as beingin restraint of trade

It has been suggested that the courts will hold exclusivedealing and service contracts to be within the restraint oftrade doctrine if they contain unusual or novel features orif there is disparity in the bargaining power and theagreement is likely to cause hardship to the weaker party

Cartel agreementsThese are now covered by statute for example the FairTrading Act 1973 and the Competition Act 1998 This mayalso fall within Article 81 of the Treaty of the EuropeanCommunities

Effect of a restraint

Two tests must be satisfied

bull The lsquoblue pencilrsquo test It must be possible to sever theillegal part simply by deleting words in the contract Thecourt will not add words substitute one word foranother rearrange words or in any way redraft the

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W121

A void restraint is severable Severance can be operated intwo ways

bull severance of the whole of the objectionable promiseleaving the rest of the contract to be enforced

bull severance of the objectionable part of the promise

contract In Mason v Provident Clothing Co Ltd (1913) theHouse of Lords refused to redraft a promise not to workwithin 25 miles of London But in Goldsoll v Goldman(1915) a dealer in imitation jewellery promised not todeal in real or imitation jewellery either in the UK orabroad Dealing in real jewellery and dealing abroadwere severed

bull Severance of the objectionable part of the contract mustnot alter the nature (as distinct from the extent) of theoriginal contract The illegal restraint will not be severedif it is the the main purpose of the restraint or if to severit would alter entirely the scope and intention of theagreement In Attwood v Lamont (1920) the court refusedto sever restrictions on a tailor from competing with anydepartment of the department store which had employedhim The court stated that this was a covenant lsquowhichmust stand or fall in its unaltered formrsquo

Capacity

Minors

The law pursues two conflicting policies in the case ofminors On the one hand it tries to protect minors from theirown inexperience on the other it tries to ensure that personsdealing with minors are not dealt with in a harsh manner

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122

Minorspersons under 18

Persons of unsound mindand drunken persons

Contracts with minors can be divided into three categories

Valid contracts ndash contracts which can be enforced

against a minor

Necessaries

bull In Nash v Inman (1908) a student purchased 11 silkwaistcoats while still a minor The court held that silkwaistcoats were suitable to the conditions of life of aCambridge undergraduate at that time but they were notsuitable to his actual needs as he already had a sufficientsupply of waistcoats

It is important to distinguish between luxurious goods ofutility and goods of pure luxury The status of the minor canmake the former into necessaries but the latter can never beclassified as necessaries

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W123

Contracts fornecessaries

Beneficial contracts of service

Valid contracts Voidable contracts Other contracts

Necessary goods are defined in the Sale of GoodsAct 1979 as lsquogoods suitable to his conditionin life and to his actual requirements at the

time of sale and deliveryrsquo

The burden of proving that the goods are necessaries is onthe seller

They must satisfy the same tests as necessary goods

Professor Treitel considers that both executed andunexecuted contracts for necessaries can be enforced Hecites Roberts v Gray (1913) Roberts agreed to take Gray aminor on a billiard tour to instruct him in the profession ofbilliard player Gray repudiated the contract The court heldthat Roberts could recover damages despite the fact that thecontract was executory

Cheshire Fifoot and Furmston agree that executorycontracts for necessary services are enforceable as in Robertsv Gray but deny that executory contracts for necessary goodscan be enforced

They cite

bull the actual wording of the Sale of Goods Act which refersto time of lsquosale and deliveryrsquo

bull the minor has to pay a reasonable price for the goods notthe contractual price

These indicate it is argued that liability is based onacceptance of the goods not on agreement

Beneficial contracts of service

CA

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124 These must be for the benefit of the minor

Necessary services include education medical and legal services

bull In De Francesco v Barnum (1890) a contract whose termswere burdensome and harsh on the minor was held void

bull But in White City Stadium v Doyle (1935) where a minorhad forfeited his payment for a fight because ofdisqualification the contract was neverthelessenforceable against him Where a contract is on the wholefor the benefit of a minor it will not be invalidatedbecause one term has operated in a way which is not tohis advantage

bull In Chaplin v Leslie Frewin (Publishers) Ltd (1966) the courtenforced a contract by a minor to publish his memoirs asthis would train him in becoming an author and enablehim to earn a living

bull But trading contracts (involving the minorrsquos capital) willnot be enforced even if it does help the minor earn aliving In Mercantile Union Guarantee Co Ltd v Ball (1937)the court refused to enforce a hire purchase contract for alorry which would enable a minor to trade as a haulagecontractor

Voidable contracts

These comprise contracts of continuing obligation such ascontracts to acquire an interest in land or partly paid sharesor partnership agreements

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W125

They must be contracts of service or similar to a contract of service

Contracts which can be avoided by the minor beforemajority or within a short time afterwards

The minor can free himself from obligations for the futurefor example an obligation to pay rent under a lease but willhave to pay for benefits already received He cannot recovermoney already paid under the contract unless there has beena total failure of consideration (Steinberg v Scala (Leeds) Ltd(1923))

Other contracts

But

bull The minor himself may enforce such contracts

bull Property can pass under such contracts

bull Where the contract has been carried out by the minor hecannot recover any property unless there has been atotal failure of consideration or some other failingwhich would equally apply to an adult

bull The Minors Contracts Act 1987 provides that

a minor may ratify such a contract on majority and itcan thereafter be enforced against him

a guarantee of a minorrsquos debt will not be voidbecause a minorrsquos debt is unenforceable against him

a court may if it considers it is just and equitable to doso order a minor to return property he has receivedunder a void contract or any property representing itIt is not clear whether property transferred under thecontract covers money for example in money lendingcontracts It is argued that as lsquoproperty representing itrsquo

CA

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126

These cannot be enforced against a minor

must cover money it would therefore be illogical toexclude money acquired directly but there is as yet nodecision on this point Property cannot presumably berecovered under this section where the minor hasgiven away the contract property

bull Equity will order restitution of property acquired byfraud But there can be no restitution of money (Leslie vSheill (1914)) and no restitution if the minor has resold theproperty

bull An action may be brought in tort if it does not in any wayrely on the contract But although a minor is fully liablefor all his torts he may not be sued in tort if this is just anindirect way of enforcing a contract In Leslie v Sheill(1914) a minor obtained a loan by fraudulentlymisrepresenting his age Held ndash he could not be sued inthe tort of deceit as this would be an indirect way ofenforcing a contract which was void

Persons of unsound mind and drunken persons

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W127

A person who has been declared a lsquopatientrsquo under the MentalHealth Act 1983 by the Court of Protection is incapable ofentering into a valid contract

Other mentally disordered persons and drunken personswill be bound by their contracts unless

bull they were so disordered or drunk that they did notunderstand the nature of what they were doing and

bull the other party was aware of this

Such contracts may be affirmed during a sober or lucidmoment The Sale of Goods Act requires that wherelsquonecessaries are sold and delivered to a person who byreason of mental incapacity or drunkenness is incompetentto contract he must pay a reasonable price for themrsquo

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128

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W129

8 Discharge

A contract may be discharged by

Performance

Precision of performance

bull In Cutter v Powell (1795) a shiprsquos engineer undertook tosail a ship from Jamaica to Liverpool but died before thevoyage was complete Held ndash nothing could berecovered in respect of his service he had not fulfilled hisobligation

bull In Bolton v Mahadeva (1972) a central heating systemgave out less heat than it should and there were fumesin one room Held the contractor could not claimpayment although the boiler and pipes had beeninstalled they did not fulfill the primary purpose ofheating the house

A contract is lsquodischargedrsquo when there are noobligations outstanding under it

Performance Agreement Breach Frustration

Precision ofperformance

Time ofperformance

Tender ofperformance

To discharge his obligations under a contract aparty must perform exactly what he promised

These are examples of lsquoentirersquo contracts which consist ofone unseverable obligation

bull Where the contract is divisible payment can berecovered for the completed part for example goodsdelivered by instalments

bull Where the promisee accepts partial performance InSumpter v Hedges (1898) however payment for partialperformance was refused as Hedges had been left with ahalf-built house and had been put in a position where hehad no choice but to accept partial performance

bull Where the promisee prevents complete performance forexample in Plancheacute v Colburn (1831) a writer wasallowed payment for the work he had already donewhen the publisher abandoned the series

bull Where the promisor has performed a substantial part ofthe contract In Hoenig v Isaacs (1952) the plaintiffdecorated the defendantrsquos flat but because of faultyworkmanship the defendant had to pay pound50 to anotherfirm to finish the job Held ndash the plaintiff was entitled topound150 (the contract price) minus the pound50 paid to the otherfirm cf Bolton v Mahadeva (1972) where the courtdeclined to find substantial performance

This has become known as the doctrine of substantialperformance In order for the claimant to rely on thisdoctrine the failure to perform must amount only to a

CA

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130

Despite the rule that performance must be exact the law will allow payment to be made on a

quantum meruit basis for incomplete performance in the following circumstances

breach of warranty or a non-fundamental breach of aninnominate term It will not apply to a fundamentalbreach or to a breach of condition

Time of performance

bull It is stipulated in the contract see Lombard North Centralv Butterworth (1987)

bull One party has given reasonable notice during thecurrency of the contract that performance must takeplace within a certain time In Rickards v Oppenheim(1950) a car body which had been ordered from theplaintiffs was late The defendants gave final notice to theplaintiff that unless it was delivered within three monthsthey would cancel the order Held ndash time had been madeof the essence the defendants could cancel the order

bull The nature of the contract makes it imperative thatstipulations as to time should be observed for examplecontracts for the sale of perishable goods

The Law of Property Act 1925 stipulated that terms as tothe time of performance should be interpreted in thesame way at common law as in equity In Rainieri v Miles(1981) the House of Lords held that that meant that lateperformance would not give rise to a right to terminatebut would give rise to damages

Tender of performance

If one party tenders performance which is refused he maysue for breach of contract

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NT

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W131

Equity considers that time is not lsquoof the essence of a contractrsquo that is a condition

except in the following circumstances

If payment is tendered and rejected the obligation to tenderpayment is discharged but the obligation to pay remains

Agreement

bull If the contract is wholly executory there is no problemwith consideration as both parties surrender their rightsunder the contract

bull If the contract is partly executed one party hascompleted his performance under the contract ndash to makethe agreement binding there must either be a deed (alsquoreleasersquo) or new consideration (lsquoaccord and satisfactionrsquo)or the doctrine of equitable estoppel or waiver mustapply See Chapter 2

CA

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132

A term in the originalcontract for example acondition subsequent

or method for terminating the contract

A new agreement

A contract may be discharged by

As contracts are created by agreement so they may be discharged by agreement Consideration is

necessary to make the agreement binding

Breach

See classification of terms p 45 above

There are special problems where a party repudiates acontract under a wrong assumption that he has a right to doso

bull In Federal Commerce and Navigation v Molena Alpha (1979)the owners of a ship gave instructions not to issue bills oflading without which the charterers could not operatethe ship They wrongly believed that they had the rightto do so Held ndash their conduct constituted a wrongfulrepudiation of the contract which allowed the other partyto treat the contract as discharged

bull In Woodar Investment Development v Wimpey Construction(1980) the purchaser wrongly repudiated a contract forthe sale of land wrongly believing that he had a right todo so Held ndash a wrongful repudiation made in good faithwould not necessarily allow the other party to treat thecontract as discharged

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W133

A breach of condition

A fundamentalbreach of an

innominate term

A breach does not of itself discharge a contract It may allowthe other other party an option to treat the contract as discharged that is to terminate the contract if the breach is sufficiently serious that is if it is

A repudiatory breach

It is difficult to distinguish these decisions The general viewis that the approach in Molena Alpha is to be preferred so thateven a good faith lsquorepudiatoryrsquo response to a non-repudiatory breach will amount to a breach of contract

Effect of treating the contract as discharged

The obligation of both parties to perform (that is theprimary obligation) is discharged from the date of thetermination

However the party in breach may have to pay damages forany losses past and future caused to the innocent party as aresult of the breach (Lombard North Central v Butterworth ndashChapter 3)

The discharge does not operate retrospectively In PhotoProduction v Securicor (1980) Securicor was able to rely on anexclusion clause in the contract despite the fact that thecontract had been discharged

Note ndash it was held by the House of Lords in Vitol v Norelf(1996) that the defendantrsquos failure to perform his ownobligation could constitute acceptance of the plaintiffrsquos repudiation

The decision to terminate cannot be retracted

Anticipatory breach of contract

CA

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134

Explicit

Hochter v La Tour (1853) atravel courier announced

in advance that he would not be fulfilling

his contract

Implicit

Frost v Knight (1872) aparty disabled himself

from carrying out apromise to marry by

marrying another person

Effect of anticipatory breach

bull The other party may sue for damages immediately Hedoes not have to await the date of performance (Hochsterv De La Tour (1853))

bull The innocent party may refuse to accept the repudiationHe may affirm the contract and continue to perform hisobligations under the contract In White and Carter Ltd vMcGregor (1962) the defendants cancelled a contractshortly after it had been signed The plaintiffs refused toaccept the cancellation carried on with the contract andthen sued for the full contract price Held ndash the plaintiffswere entitled to succeed a repudiation does notautomatically bring a contract to an end the innocentparty has an option either to affirm the contract or toterminate the contract unless

the innocent party needs the co-operation of the other party In Hounslow BC v Twickenham GardenDevelopments Ltd (1971) Hounslow council cancelled acontract to lay out a park It was held that thedefendants could not rely on White and Carter vMcGregor because the work was to be performed oncouncil property

the innocent party had no legitimate interestfinancial or otherwise in performing the contractrather than in claiming damages In The AlaskanTrader (1984) a ship chartered to the defendantsrequired extensive repairs at the end of the first yearwhereupon the defendants repudiated the contractThe plaintiffs however refused to accept therepudiation repaired the ship and kept it fullycrewed ready for the defendantrsquos use Held ndash theplaintiffs had no special interest in keeping the

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W135

contract alive They should have accepted therepudiation and sued for damages

Where a party has affirmed the contract

bull He will have to pay damages for any subsequent breachwhich he commits he cannot argue that the other partyrsquosanticipatory breach excuses him (Fercometal SARL vMediterranean Shipping Co (1988))

bull There is a danger that a supervening event may frustratethe contract and deprive the innocent party of his right todamages as in Avery v Bowden (1855) (below)

Frustration

The doctrine has been kept to narrow limits

The basis of the doctrine and the tests

bull Until the 19th century the courts adhered to a theory oflsquoabsolute contractsrsquo as in Paradine v Jane (1647) It wassaid that if the parties wished to evade liability because of

CA

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136

By the courts whohave insisted that the

supervening event mustdestroy a fundamental

assumption

By business persons who have lsquodrafted outrsquo

the doctrine byforce majeure clauses

Frustration occurs where it is established that due to a subsequent change in circumstances the

contract has become impossible to perform or it hasbeen deprived of its commercial purpose

some supervening event then they should provide forthis in the contract However in Taylor v Caldwell (1863)the courts relented and held that if the contract becameimpossible to perform due to some extraneous cause forwhich neither party was responsible then the contactwould be discharged

bull The modern test was enunciated by Lord Simon inNational Carriers v Panalpina (1981) frustration ariseswhere lsquothere supervenes an event (without default ofeither party and for which the contract makes nosufficient provision) which so significantly changes thenature (not merely the expense or onerousness) of theoutstanding contractual rights andor obligations fromwhat the parties could reasonably have contemplated atthe time of its execution that it would be unjust to holdthem to the literal sense of its stipulations in the newcircumstancesrsquo

bull In Davis Contractors v Fareham UDC (1956) Lord Radcliffstated that frustration occurs where to requireperformance would be to render the obligationsomething lsquoradically differentrsquo from what wasundertaken by the contract

Circumstances in which frustration may occur

bull The subject matter of the contract has been destroyed oris otherwise unavailable

In Taylor v Caldwell (1863) a contract to hire a music hallwas held to be frustrated by the destruction of the musichall by fire (see also s 7 of the Sale of Goods Act 1979)

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W137

Note ndash it is not the circumstances but the nature ofthe obligation which must have changed

bull But the unavailable or destroyed object must have beenintended by both parties to be the subject of the contract

In Blackburn Bobbin Co v Allen (1918) the contract was forthe sale of lsquobirch timberrsquo which the seller intended toobtain from Finland Held ndash the contract was not frustratedwhen it became impossible to obtain timber from FinlandThe subject matter of the contract was birch timber notFinnish birch timber

bull Death or incapacity of a party to a contract of personalservice or a contract where the personality of one partyis important

In Condor v The Baron Knights (1966) a contract between apop group and its drummer was held frustrated whenthe drummer became ill and was unable to fulfill theterms of the contract A claim for unfair dismissal can alsosometimes be defeated by the defence of frustrationwhere an employee has become permanentlyincapacitated or imprisoned for a long period

bull The contract has become illegal to perform eitherbecause of a change in the law or the outbreak of war

In Avery v Bowden (1855) a contract to supply goods toRussia was frustrated when the Crimean War broke out Ithad become an illegal contract ndash trading with the enemy

Note the outbreak of war between two foreign States willnot render a contract illegal but may make it impossibleto perform In Finelvet v Vinava Shipping Co (1983) acontract to deliver goods to Basra did not become illegalon the outbreak of the Iraq-Iran war but was frustratedwhen it became too dangerous to sail to Basra

bull The commercial purpose of the contract has failedCA

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138

Establishing whether a contract is impossible or illegal toperform is relatively straightforward but it is more difficultto decide whether the commercial purpose of the contracthas failed

It may happen in the following circumstances

bull Failure of an event upon which the contract was based

In Krell v Henry (1903) the court held that a contract tohire a room overlooking the proposed route of thecoronation procession was frustrated when thecoronation was postponed The purpose of the contractwas to view the coronation not merely to hire a room Ithas been argued that the fact that the hire of the roomwas a lsquoone offrsquo transaction was important The judge inthe case contrasted it with the hire of a taxi to take theclient to Epsom on Derby day This would be a normalcontractual transaction for the taxi driver thecancellation of the Derby would not therefore frustratethe contract

In the case of Herne Bay Steamboat Co v Hutton (1903) thecourt refused to hold that a contract to hire a boat to seethe king review the fleet was frustrated when the reviewwas cancelled the fleet was still there and could beviewed ndash there was therefore no overall failure of thepurpose of the contract

bull Government interference or delay

In Metropolitan Water Board v Dick Kerr (1918) a contracthad been formed in 1913 to build a reservoir within sixyears In 1915 the government ordered the work to bestopped and the plant sold Held ndash the contract wasfrustrated C

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139

In Jackson v Union Marine Insurance Co (1874) a ship waschartered in November to proceed with all dispatch toNewport The ship did not reach Newport until thefollowing August Held ndash the contract was frustratedsince the ship was not available for the voyage for whichshe had been chartered

In The Nema (1982) a charter party was frustrated when along strike closed the port at which the ship was due toload so that of the six or seven voyages contracted to bemade between April and December only two could bemade

Similar difficult problems arise in the case of contracts ofemployment (illness or imprisonment) and leases

It has been suggested that where the contract is of a fixedduration and the unavailability of the subject matter isonly temporary the court should consider the ratio of thelikely interruption to the duration of the contract

LeasesIt had long been thought that the doctrine of frustration didnot apply to leases (see Paradine v Jane (1647) and CricklewoodInvestments v Leightonrsquos Investments (1945))

bull However in National Carriers v Panalpina (1981) theHouse of Lords declared that in principle a lease couldbe frustrated In that case a street which gave the onlyaccess to a warehouse was closed for 18 months Thelease for the warehouse was for 10 years Held ndash the leasewas not frustrated

bull The House of Lords did state however that where therewas only one purpose for the property leased and thispurpose became impossible then the lease would be

CA

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140

frustrated for example a short term holiday lease It isstill true that it will be very rare for a lease to befrustrated

Limits to the doctrine of frustration

It will not be applied

bull In Davis Contractors LTD v Fareham UDC (1956) thecontractors had agreed to build a council estate at a fixedprice Due to strikes bad weather and shortages oflabour and materials there were considerable delays andthe houses could only be built at a substantial loss Heldndash the contract was not frustrated

bull See also the Suez cases where the courts refused to holdshipping contracts frustrated as a result of the closing ofthe Suez Canal unless the contracts specified a routethrough the canal

But a force majeure clause will be interpreted narrowly asin Metropolitan Water Board v Dick Kerr amp Co (1918) wherea reference to lsquodelaysrsquo was held to refer only to ordinarydelays and not to a delay caused by government decree

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W141

lsquoDoctrine must be kept within narrow limitsrsquo

on the grounds of inconvenience increase in expense loss of profit

Where there is an express provision in thecontract covering the intervening event

(that is a force majeure clause)

A force majeure clause will not in any case be applied to covertrading with an enemy

A contract will not be frustrated if the event makingperformance impossible was the voluntary action of oneof the parties If the party concerned had a choice open tohim and chose to act in such a way as to makeperformance impossible then the frustration will be self-induced and the court will refuse to treat the contract asdischarged

bull In The Superservant Two (1990) one of two barges ownedby the defendants and used to transport oil rigs wassunk They were therefore unable to fulfill their contractto transport an oil rig belonging to the plaintiff as theirother barge (Superservant One) was already allocated toother contracts The court held that the contract was notfrustrated The plaintiffs had another barge available butchose not to allocate it to the contract with the plaintiffs

This case illustrates both the courts reluctance to applythe doctrine of frustration and the advantage of using aforce majeure clause

If by reason of special knowledge the event wasforeseeable by one party then he cannot claimfrustration

bull In Amalgamated Investment and Property Co v John Walker ampSons Ltd (1976) the possibility that a building could belisted was foreseen by the plaintiff who had inquiredabout the matter beforehand A failure to obtain planning

CA

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142

Where the frustration is self-induced

Where the event was foreseeable

permission was also foreseeable and was a normal riskfor property developers The contract was therefore notfrustrated

The effect of frustration

This rule could be very unfair in its operation as in Chandlerv Webster (1904) where the hirer had to pay all the sum duefor the hire of a room to view the coronation despite thecourt holding the contract frustrated by the cancellation ofthe coronation

This rule however would only apply in the event of a totalfailure of consideration and could itself in any case causehardship if the other party had expended a considerableamount of money in connection with the contract

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W143

At common law the loss lay where it fell that isthe date of the frustrating event was all important

Anything paid or payable before that datewould have to be paid Anything payable

after that date need not be paid

In the Fibrosa case (1943) the House of Lordsdid move away from this rule and held that

where there was a total failure of considerationthen any money paid or payable in advance

would have to be returned

Note these two sections are to be applied independently Theexpenses in s 1(2) can only be recovered from lsquosums paid orpayable before the frustrating eventrsquo

Section 1(3) was applied in BP Exploration v Hunt (1982)where it was held that the court must

bull identify and value the lsquobenefit obtainedrsquo

bull assess the lsquojust sumrsquo which it is proper to award

The court also stated that

bull the section was designed to prevent unjust enrichmentnot to apportion the loss or to place the parties in theposition they would be in had the contract beenperformed or to restore them to their pre-contractposition

CA

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144

The Law Reform (Frustrated Contracts) Act 1943was therefore passed to remedy these deficiencies

It provided

s 1(2) ndash all sums paid or payable before the frustratingevent shall be recoverable or cease to be payable but

the court has a discretionary power to allow the payeeto set off against the sum so paid expenses he has

incurred before the frustrating event

s 1(3) ndash where one party has obtained a valuablebenefit before the time of discharge the other

party may recover from him such sums asthe court considers just

bull in assessing the valuable benefit the section requiredreference to the end benefit received by a party not thecost of performance In assessing the end benefit theeffect of the frustrating event had to be taken intoaccount

bull the cost of performance can be taken into account inassessing the just sum

In BP v Hunt (1982) BP were to do the exploration andprovide the necessary finance on an oil concession ownedby Mr Hunt in Libya They were also to provide certainlsquofarm-inrsquo payments in cash and oil In return they were toget a half-share in the concession and 5 of theirexpenditure in reimbursement oil A large field wasdiscovered the oil began to flow then in 1971 the LibyanGovernment nationalised the field

The court held

bull the valuable benefit to Hunt was the net amount of oilreceived plus the compensation payable by the LibyanGovernment which amounted to pound85000000

bull the just sum would cover the work done by BP less thevalue of the reimbursement oil already received Thiswas assessed at pound34000000 As the valuable benefitexceeded the just sum BP recovered their expenses infull The position would have been very differenthowever if the field had been nationalised at an earlierstage and no compensation had been paid

CO

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W145

The Law Reform (Frustrated Contracts) Act 1943 does notapply to

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146

Charter parties Contracts of insurance

Contracts for the sale of specificgoods which have perished

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W147

9 Remedies for breach of contract and restitution

not

If no loss has been suffered then nominal damages onlywill be awarded

bull In Surrey CC v Bredero Homes (1993) the court refused toaward damages against a defendant who had notcomplied with planning permission as there was no lossto the council

Unliquidated damages (that is damages assessed by

the court)

The purpose of unliquidated damages is to compensate the claimant for the loss he has

suffered as a result of a breach

Unliquidateddamages

Equitableremedies

Liquidateddamages

Restitutionor

quasi-contract

to punish the defendantPunitive damages are

not awarded for breachof contract

generally to recoup again made by the

defendant (but cf AG vBlake (2000) below)

bull However in Chaplin v Hicks (1911) damages wereawarded for the loss of a chance to win a competitionalthough there was no certainty that the plaintiff wouldhave been one of the winners

Reliance damages rather than expectation damages may beappropriate where the benefits which would have beenobtained by successful performance are difficult to assess asin

bull McRae v Commonwealth Disposals Commission (1951)where the plaintiff recovered the expenses incurred insearching for a wreck which did not exist

bull Anglia Television v Reed (1972) where the leading actor ina film project withdrew at the last moment The plaintiffswere able to recover all their wasted expenditure on theprogramme including even those incurred before thecontract had been signed

CA

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148

Methods of compensating the claimant

Expectation that is loss ofbargain is the traditional

basis for assessing damagesin contract It aims to putthe claimant in the sameposition as far as money

can do it as if the contracthad been performed

Reliance that is out of pocketor wasted expenditure This

is the normal way ofassessing damages in tort

but can be used in contractas illustrated below

bull But cf Regalian Properties v London Dockland Development(1995) where expenses incurred while negotiations wereexpressly lsquosubject to contractrsquo were not recoverable

It has been held that a claimant may freely choose betweenexpectation and reliance damages unless the difficulty inidentifying profits is because he has made a lsquobad bargainrsquo

bull In C and P Haulage v Middleton (1983) the plaintiff hired agarage for six months on the basis that anyimprovements would become the property of thelandlord He was ejected in breach of contract and suedfor the cost of the improvements Held ndash expenditurewould have been wasted even if the contract had beenperformed

bull It is for the defendant to prove that the claimant hadmade a bad bargain as in CCC Films v Impact QuadrantFilms (1985) where the defendant failed to prove that theplaintiff would not have made a profit from distributingthe films had they been delivered in accordance with thecontract

bull In normal circumstances the claimant will ask fordamages on an expectation basis as this is moreprofitable for him

Restitutionary measure

In Attorney General v Blake (2000) the House of Lords for thefirst time recognised that in some circumstances alsquorestitutionaryrsquo measure of damages requiring thedefendant to pay over the profit made as a result of thebreach of contract may be appropriate The case was anunusual one involving a book published by a member ofthe security services who had spied for Russia The House ofLords regarded the defendant as having been under

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W149

something lsquoakin to a fiduciary obligationrsquo and it is not yetclear how far the principle adopted in this case is likely to beapplied in other situations

Contributory negligence

This is only relevant where the liability in contract isidentical with the liability on tort that is the breach is of acontractual duty to take care (Barclays Bank v FaircloughBuilding (1994))

Quantification of damage

Where lsquoloss of bargainrsquo damages are claimed there are twopossible methods of quantification

The court will normally adopt the most appropriate (RuxleyElectronics and Construction v Forsyth (1995))

Prima facie rules

CA

VE

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150

Sale of goods ndash difference in value

Failure to repair (lease) ndash difference in value

Building contracts ndash cost of cure

Difference in value Cost of cure

Failure to deliver goods

bull In Williams Bros v Agius (1914) the profit which wouldhave been earned on a resale was ignored damagesrepresented the difference between the contract price andthe market price (which was higher than the resale price)

Failure to accept delivery and pay

bull If the seller is a dealer in mass produced goods then thedamage to him will be the loss of profit on onetransaction The claimant had sold one item less than heotherwise would have during the year (Thomson vRobinson (1955))

bull However if the mass produced item is in short supplyand the number of sales is governed by supply not bydemand then there is no loss of profit and damageswould not be awarded (Charter v Sullivan (1957))

bull The damages revert to the difference between thecontract price and market price in the case of secondhand goods even if the seller is a dealer (Lazenby Garagesv Wright (1976))

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W151

The Sale of Goods Act 1979 states thatdamages will represent the difference between

the contract price and the market price

The Sale of Goods Act 1979 states that damages willagain represent the difference between the contract

price and the market price

Limitations on principle of expectation

Although the stated aim of the expectation basis of assessingdamages is to put the claimant in the position he would havebeen in had the contract been performed there are a numberof rules which militate against this result

Remoteness of damage

bull In Hadley v Baxendale (1854) a mill was closed because ofthe delay of a carrier in returning a mill shaft The courtheld that the carrier was not liable for damages for theclosure of the mill as he was not aware that the absenceof a mill shaft would lead to this conclusion

The following damages were said to be recoverable

those arising naturally out of the breach

those which because of special knowledge wouldhave been within the contemplation of the parties

bull In Victoria Laundry v Newman Industries (1949) the rulewas restated and based on knowledge The laundry wasable to recover damages for normal loss of profitC

AV

EN

DIS

HL

AW

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RD

S152

Damages cannot be recovered for losses that are tooremote The losses must be lsquowithin the reasonable

contemplationrsquo of the parties

Kind ofloss

CausationDuty of

mitigationRemotenessof damage

following a delay in the delivery of a boiler but not forspecially lucrative dyeing contracts they were offeredduring this time

Damages were said to be recoverable for losses whichwere within the reasonable contemplation of the partiesat the time of the contract either from

imputed knowledge or

actual knowledge

bull In The Heron II (1969) the House of Lords confirmed thata higher degree of foreseeability is required in contractthan in tort Damages were awarded to cover lossesarising from the late delivery of sugar to Basra Theparties must have been aware that the price of sugar inBasra might fluctuate For a loss not to be too remotethere must be

lsquoa real dangerrsquo

lsquoa serious possibilityrsquo

or the loss must be

lsquonot unlikelyrsquo

lsquoliable to resultrsquo

The difference between the tests of remoteness in contractand tort has been criticised but justified on the ground thata contracting party can protect himself against unusual risksby drawing them to the attention of the other party to thecontract

CO

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W153

Application of remoteness rules

bull Imputed knowledge

Hadley v Baxendale (1854) Victoria Laundry v Newman Industries (1949)The Heron II (1967)

bull Actual knowledge

Defendantrsquos knowledge of special circumstances must beprecise This encourages contracting parties to discloseclearly any likely exceptional losses in advance

In Simpson v L amp NWR (1876) the defendant was liable forloss caused to the plaintiff by delivering goods toNewcastle Show Ground the day after the show had finished

In Horne v Midland Railway (1873) defendants were heldnot liable for exceptionally high profit lost by plaintiffthrough late delivery They knew that shoes would haveto be taken back if not delivered on 3 February but notthat the plaintiff would lose an exceptionally high profit

bull In Wroth v Tyler (1974) the defendant was liable for thefull difference between the contract price and the marketprice although the rise in the market price wasexceptional and could not have been foreseen

bull In Parsons (Livestock) Ltd v Uttley Ingham Co Ltd (1978) thedefendants who had supplied inadequately ventilatedhoppers for pig food were held liable for the loss of theplaintiffrsquos pigs even though the disease from which they

CA

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154

Note the test of remoteness determinesentitlement not quantum

died was not foreseeable It was enough that they couldhave contemplated any illness of the pigs (But cf VictoriaLaundry v Newman Industries (1849))

Lord Denning in this case argued that so far as physicaldamage was concerned (not loss of profit) all directlosses should be recoverable as in tort

Lord Scarman has also stated that it would be ridiculousif the amount of damages depended on whether anaction was framed in contract or tort A House of Lordsrsquodecision on these issues is awaited

It is sometimes disputed that the decisions since Hadley vBaxendale have not in any way clarified the rule

Types of loss recognised

This is the normal ground for the award of damages forbreach of contract

However damages for non-pecuniary loss will be awardedin specific cases for example

bull Pain and suffering consequent on physical injury

bull Physical inconvenience

In Watts v Morrow (1991) damages were awarded tocover the inconvenience of living in a house whilst it wasbeing repaired C

ON

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155

Pecuniary loss

Non-pecuniary loss

bull Damage to commercial reputation

In Gibbons v Westminster Bank (1939) damages wereawarded to cover the losses caused by the wrongfulreferring of a cheque

Cf Malik v BCCI (1997) where the House of Lords heldthat compensation was payable for the stigma of havingworked for an organisation which had been run corruptly

bull Distress to claimant

Traditionally damages for injured feelings were notawarded for breach of contract Addis v Gramaphone Co(1909) This general principle has recently been confirmedby the House of Lords in Johnson v Unisys Ltd (2001)

However some limited exceptions to this rule have beenrecognised

Damages for disappointment were awarded againsta holiday company in Jarvis v Swan Tours (1973)where the holiday was not as described

In Hayes v Dodd (1990) the Court of Appealconfirmed that damages for distress are notrecoverable in normal commercial contracts butcould be recovered in contracts

CA

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156

to provide pleasure See Jarvis v Swan Tours Ltd

(1973)

to prevent distress Heywood v Wellers (1976) ndashsolicitorrsquos failure to obtain

an injunction

It has been suggested that damages for distress areparticularly appropriate in lsquoconsumer contractsrsquo

The duty of mitigation

In Payzu v Saunders (1919) the plaintiff had refused the offerof goods at below market price In Brace v Calder (1895) anemployee dismissed by a partnership turned down an offerof similar employment by one of the partners In both casesthe plaintiff was penalised for his failure to mitigate

bull He need not however take lsquounreasonablersquo steps inmitigation

In Pilkington v Wood (1953) it was stated that the plaintiffdid not need to embark on hazardous legal action inmitigation of his loss He should not take unreasonablesteps which would increase losses

bull The claimant cannot recover damages for losses he hasavoided

In British Westinghouse v Underground Electric Railways Co(1912) the plaintiff replaced a defective turbine with anew turbine which was so much more efficient that thesavings exceeded the losses on the defective turbineHeld ndash no loss ndash no damages

bull Note ndash the duty to mitigate does not arise until there hasbeen an actual breach of contract or an anticipatorybreach has been accepted by the other party (see Whiteand Carter v McGregor (above))

CO

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W157

The claimant has a duty to take reasonablesteps to mitigate his loss

Causation (losses which the defendant did not cause)

bull The action of a third party may break the chain ofcausation if it is not foreseeable

In Lambert v Lewis (1981) a farmer continued to use acoupling even though he knew it was broken Held ndash thefarmer was responsible for losses caused by the failure ofthe coupling the manufacturer could not have foreseenthat he would continue to use it knowing it was faulty

bull However where the action is foreseeable the chain ofcausation will not be broken

In Stansbie v Troman (1948) a painter who in breach ofcontract had left a door unlocked was held liable forgoods taken by thieves since this was the kind of loss hehad undertaken to guard against by locking the doors

CA

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158

The breach must have caused the loss as well ashaving preceded the loss

Liquidated damages

Damages set by the parties themselves

The following guidelines for distinguishing between thetwo were suggested in Dunlop Pneumatic Tyre Ltd v NewGarage and Motor Co (1915)

bull a penalty ndash if the sum is extravagant and unconscionable

bull a penalty ndash if a larger sum is payable on the failure to paya smaller sum

bull a penalty ndash if the same sum is payable on major andminor breaches

bull it is no obstacle to the sum being liquidated damages thata precise pre-estimate is almost impossible

CO

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W159

Penalty clauses will not be enforced by the courtInstead the court will award unliquidated damages

The parties may stipulate that a certain sum mustbe paid on a breach of contract

If the sum represents a genuine pre-estimatethen it will be enforced by the court

as liquidated damages

If the sum is not genuine but is an attemptto frighten the other party into performing

then it is a penalty A penalty will not beenforced by the court

The rule against penalties does not apply to

bull Acceleration clauses

Here the whole of a debt becomes payable immediatelyif certain conditions are not observed

bull Deposits

Money paid otherwise than on a breach of contract

Alder v Moore (1961)

Bridge v Campbell Discount Co Ltd (1962)

bull clauses declaring a term to be a condition

Lombard North Central v Butterworth (1987)

Equitable remedies

Specific performance

Traditionally specific performance will only be awardedwhere damages are not an adequate remedy that is

CA

VE

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160

An order of the court directing the defendant to fulfill his obligations under the contract

Specific performance Injunctions

All equitable remedies are discretionary

The following will be taken into account

bull Mutuality Negative ndash a minor cannot get it because it isnot available against a minor Positive ndash a vendor of landmay obtain it although damages would be an adequateremedy because it is also available to a purchaser of land

bull Supervision The need for constant supervisionprevented the appointment of a resident porter beingordered in Ryan v Mutual Tontine Association (1893) but inPosner v Scott Lewis (1986) a similar order was madebecause the terms of the contract were sufficientlyprecise

bull Impossibility ndash Watts v Spence (1976) ndash land belonged to athird party C

ON

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TL

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161

Where damages are difficult to assessfor example annuities

Where there is no alternative remedy available(Beswick v Beswick (1968)) see above

Where the claimant cannot get a satisfactory substitute for example

contracts for the sale of land or contracts for the sale of goods which cannot be

obtained elsewhere for example antiquesvaluable paintings ndash unless bought as an

investment as in Cohen v Roche (1927)

bull Hardship ndash Patel v Ali (1984) ndash defendant would lose thehelp of supportive neighbours

bull Conduct of the claimant ndash Shell (UK) Ltd v Lostock Garages(1977) ndash Shellrsquos behaviour was unreasonable

bull Vagueness ndash Tito v Waddell (1977) ndash see above

bull Mistake ndash Webster v Cecil (1861) ndash see above

Special problems

bull Contracts of personal service

These are considered to involve personal relationshipsand are therefore not thought suitable for an order of specific performance

However such orders were exceptionally made in Hill vCA Parsons Ltd (1972) and Irani v Southampton AHA(1985) on the ground that in the very unusualcircumstances of those cases the mutual trust betweenthe employer and employee had not been destroyed

bull Building contracts

The courts are reluctant to enforce building contracts onthe grounds that damages are generally an adequateremedy the terms are often vague there are difficultieswith supervision

But it was held in Wolverhampton Corpn v Emmons (1901)that provided the terms were clear the problem ofsupervision would not be an absolute barrier

Injunctions

CA

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162

These are orders directing the defendant not to do a certain act

Types of injunction

Injunctions are also discretionary remedies and are subject to the similar constraints to orders of specific performance However an injunction will be granted toenforce a negative stipulation in a contract of employmentas long as this is not an indirect way of enforcing thecontract

bull Warner Bros v Nelson (1937)

bull cf Page One Records v Britton (1968)

CO

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W163

Interim injunction

This is designed to regulatethe position of the parties

pending trial

Prohibitory injunction

This is an ordercommanding the

defendant not to dosomething

Mandatory injunction

This orders thedefendant to undosomething he had

agreed not to

A comparison of the remedies for misrepresentation

and for breach of contract

Setting aside contracts

CA

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164

DamagesDamages available as of right Normally assessedon expectation basis Losses must be within thecontemplation of the parties See above

Damages available in tort of deceit negligentstatements and under s 2(1) of the 1967 ActDamages assessed on reliance basis All lossesflowing directly from misrepresentation will becovered whether or not foreseeable in actions indeceit and under s 2(1) of the 1967 Act (Royscot vRogerson (1991)) Losses must be foreseeable inthe tort of negligence No right to damages forinnocent misrepresentation but may be awardedin lieu of rescission at the discretion of the court

Breach

Misrep

Termination or rescission for breach

Available only for breaches of conditionsfundamental breaches of innominate terms and repudiations

Contract discharged from time of breachdischarge not retrospective Innocent party canalso sue for damages (see Chapter 8)

Rescission

Available for all misrepresentations but atdiscretion of court and subject to certain barsContract cancelled prospectively and retrospectivelyparties returned to the position they were in beforethe contract was entered into (see Chapter 6)

Breach

Misrep

Exclusion clauses

See ss 3 6 7 of UCTA

All clauses must be reasonable

Restitution or quasi-contract (based on unjust

enrichment)

It covers

Money may be recovered

bull Where there is a total failure of consideration (see Fibrosacase (frustration))

In Rowland v Divall (1923) the plaintiff had bought a carwhich turned out to be stolen property and which wasrecovered by the owner Despite the fact that the plaintiffhad had the use of the car for a considerable time and ithad fallen in value during this time the plaintiff was ableto recover the full purchase price of the car from thedefendant There had been a total failure of consideration

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W165

Breach

Misrep

recovery of money payment for work done

Restitution may be available where parties arenot in a contractual relationship

It is based on the principle of unjust enrichment it allows the injured party to

recover money paid or the value of benefitsconferred where it would be unjust to allow the

other party to retain the benefit

bull Money paid under a mistake of fact is recoverableprovided the mistake is as to a fact which if true wouldhave legally or morally obliged the claimant to pay themoney or is sufficiently serious to require payment forexample

In Kleinwort Benson Ltd v Lincoln City Council (1998) theHouse of Lords held that in certain circumstances moneypaid under a mistake of law could also be recovered if itwould be unjust to allow the recipient to retain the money(See also Nurdin and Peacock plc v DB Ramsden amp Co Ltd(1999))

bull Money paid under a void contract

For example contracts void

bull In Westdeutche Landesbank v Islington LBC (1994) thecouncil had entered into a rate swapping arrangementwith the bank under which the bank had paid pound2500000to the council in advance The council had paidapproximately pound1200000 to the bank by instalment andargued that since there was not a total failure ofconsideration it should not have to pay the bank theremaining pound1300000 The Court of Appeal held that theprinciple upon which money must be repaid under a

CA

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166

because ultra vires

as against public policy

for a commonmistake

Mistaken payments underinsurance policies

Mistaken payments intoa bank account

void contract is different from that on a total failure ofconsideration Recovery of money under a void contractis allowed if there is no legal basis for such a payment

bull Note ndash money paid under contract which is void forillegality cannot be recovered unless the action can beframed without relying on the contract

Parkinson v Royal College of Ambulance (1925)Bowmakers v Barnet Instruments (1945) Tinsley v Milligan (1993)

bull Note ndash recovery under these heads will not be possible if

In Lipkin Gorman v Karpnale Ltd (1992) a partner in a firmof solicitors was a compulsive gambler who regularlygambled at a casino run by the defendants In order tofinance his gambling he had drawn cheques on clientaccounts where he was the sole signatory He had spentat least pound154000 of this money at the defendantrsquos casinoand the plaintiff sued for the return of the money as ithad been received under a contract which was void(declared void by statute) Held ndash where the true ownerof stolen money sought to recover it from an innocentthird party the recipient was under an obligation toreturn it where he had given no consideration for itunless he could show that he had altered his position ingood faith In this case the plaintiff was able to recoverthe pound154000 less the winnings paid to the partner The

CO

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W167

the payer hadintended the

payee tobenefit in any

event

there is goodconsiderationfor exampledischarge of

a debt

the payee haschanged

position as aresult of the

payment

casino had altered their position on each gamble in thatthey had become vulnerable to a loss

However in South Tyneside Metropolitan Borough Council vSvenska International (1994) the House of Lords allowedthe council to recover approximately pound200000 it had paidto a bank under a rate swap agreement which had beendeclared ultra vires and void The court rejected thebankrsquos claim that it had changed its position in that it hadentered into financial arrangements with otherorganisations in order to hedge its losses

bull Money paid to a third party for the benefit of thedefendant provided the claimant was not acting as avolunteer (for example a mother paying off a sonrsquos debt)but was acting under some constraint

In Macclesfield Corpn v Great Central Railway (1911) theplaintiffs carried out repairs to a bridge which thedefendants were legally obliged (but had refused) tomaintain They were regarded as purely volunteers andcould not therefore recover the money However in Exallv Partridge (1799) the plaintiff paid off arrears of rentowed by the defendant in order to avoid seizure of theplaintiffrsquos carriage which was kept on the defendantrsquospremises The plaintiff was acting under a constraint andcould therefore recover the money

Payment for work done

bull Where the claimant has prevented performance of thecontract (see Plancheacute v Colburn (1831))

CA

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168

Here the claimant is seeking compensationon a quantum meruit basis (cf s 1(3) of the

Law Reform (Frustrated Contracts) Act 1943)

bull Where work has been carried out under a void contractIn Craven Ellis v Canons Ltd (1936) the plaintiff hadcarried out a great deal of work on behalf of a companyon the understanding that he had been appointedmanaging director It was later discovered that he hadnot properly been appointed managing director Thecourt held that he should be paid on a quantum meruitbasis for the work he had done

bull Where agreement has not been reached and

the work was requested by the defendants InWilliam Lacey v Davis (1957) the plaintiffs hadsubmitted the lowest tender for a building contractand had been led to believe that they would beawarded it At the defendantsrsquo request they thenprepared various plans and estimates Thedefendants then decided not to proceed The courtordered the defendants to pay a reasonable sum on aquantum meruit basis for the work that had beendone on analogy with Craven Ellis v Cannons or

the work had been freely accepted In British SteelCorpn v Cleveland Bridge Engineering Co (1984) a letterof intent was issued by the defendants indicating thatthey intended to enter into a contract with theplaintiffs for the construction and delivery of cast-steel lsquonodesrsquo However it proved impossible to reachagreement on a number of major items Despite this anumber of lsquonodesrsquo were eventually constructed andaccepted by the defendants It was held by the courtthat the defendants should pay for the nodes they hadaccepted

CO

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W169

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W171

10 Privity of contract

Introduction

The traditional approach to the doctrine of privity is that

Privity of contract is closely associated with the rule thatconsideration must move from the promisee See Dunlop vSelfridge (above)

Only a party to a contractcan sue on a contract

Only a party to a contractcan be sued on a contract

In Tweddle v Atkinson(1861) the plaintiff had

married Mr Guyrsquosdaughter The plaintiffrsquosfather and Mr Guy had

agreed together that theywould each pay a sum ofmoney to the plaintiff Mr

Guy died before themoney was paid and the

plaintiff sued hisexecutors The action wasdismissed ndash the plaintiffwas not a party to thecontract which wasmade between the

two fathersSee also

Beswick v Beswick (1968)

In Dunlop v Selfridge(1915) Dew amp Co at the

instigation of Dunlophad placed a minimum

resale price in theircontract with Selfridge

Held ndash Dunlop could notsue Selfridge for breach of contract they were

not parties to the contract nor had they

given consideration to Selfridge

Matters relevant to the doctrine of privity

One part of the traditional approach that is that relating toconferring benefits has recently been significantly changedby legislation which is discussed below In addition thereare a number of situations which fall outside the scope ofthe doctrine

Matters outside the doctrine

It has been argued that it is only because English law hasdeclared many transactions not to be subject to the doctrineof privity that the doctrine itself has survived so long

CA

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172

AssignmentRights can be assignedprovided that certain

formalities are followed

AgencyA principal can sue and

be sued on contractsmade by an agent

on his behalf

TrustsWhere a trust has beencreated the beneficiaryunder the trust can suethe trustees even if hewas not a party to the

original agreement

Multi-partite agreementsIn Clarke v Dunraven(1897) entrants in a

yacht race were allowedto sue each other TheCompanies Act 1985allows shareholders

to sue each other

Land law recognises a number of exceptions

Statutory exceptions

bull Price maintenance agreements

bull Various insurance contracts

bull For example Married Womanrsquos Property Act

bull Law of Property Act 1925 s 56

bull Negotiable instruments

CO

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W173

Collateral contractsIn limited cases the court will find a separate

(collateral) contract between the promisor and the third party

(Shanklin Pier v Detel Products (1951))

LeasesThe benefits and

obligations under a lease can be transferred

to third parties

Law of Property Act 1925 s 56

See below

Restrictive covenantsThese can bind a third party under the rule in

Tulk v Moxhay (1848)

Conferring benefits on a third party

Statutory intervention

The common law rule preventing a third party fromenforcing a contract was much criticised and has now beenreformed by legislation that is the Contracts (Rights ofThird Parties) Act 1999 based on recommendations from theLaw Commission

Main effectA third party will be able to enforce a contractual provisionpurporting to confer a benefit on him or her if both of twoconditions are satisfied (s 1)

Right to vary the contract

Unless they have provided otherwise the contractingparties will lose the right to vary or cancel the provisionbenefiting the third party if (s 2)

bull the third party has communicated his assent or

bull the third party has relied on the term and the promisor isaware of this or

bull the third party has relied on the term and the promisorcould be reasonably expected to have foreseen this

on its proper constructionthe contract is intended to

give the third party a legallyenforceable right

the contract expresslyprovides that the third party

may benefit

CA

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174

DefencesThe promisor can raise against the third party any defencesthat could have been raised against the promisee (forexample misrepresentation duress) (s 3)

The promisor can also rely on defences set-offs orcounterclaims arising from prior dealings with the thirdparty

ExceptionsThere cannot be double liability that is as against thepromisee and the third party (s 5)

Some contracts are excluded from the Act (s 6)

bull contracts on a bill of exchange or promissory note

bull terms of a contract of employment as against anemployee

bull contracts for the carriage of goods by sea or if subject toan international transport convention by road rail or air

The exception for carriage of goods by sea does not apply toreliance on an exclusion clause (as in The Eurymedon (1975)for example)

Note also that the main contracting parties are in control ndashthey can decide that the provisions of the new Act shouldnot apply and there will be nothing that the third party cando about it

The Act does not affect the other part of the privity doctrinendash relating to the imposition of obligations on third parties ndashwhich remains governed by the common law

CO

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W175

The common law approach

The common law developed a number of devices to allow athird party to receive the benefit of contract by

These devices will be of much less importance now that theContracts (Rights of Third Parties) Act 1999 is in force Theymay still be used however particularly in situations wherefor one reason or another the 1999 Act does not apply

Attempts to allow the third party to sue

bull Attempts to extend the use of lsquotrustsrsquo

In Walfordrsquos case (1919) under a charterparty theship owner promised the charterer to pay a broker acommission Held ndash the charterer was trustee of thispromise for the broker who could thus enforce itagainst the ship owner

However in Re Schebsman (1944) a contract betweenSchebsman and X Ltd that in certain circumstanceshis wife and daughter should be paid a lump sumwas held not to create a trust

The trust as a device to outflank privity was limited bythe courts presumably because of concern that theirrevocable nature of the trust may prevent thecontracting parties from changing their minds Thecourts no longer go out of their way to find that theparties intended to create a trust

CA

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176

Allowing the thirdparty to sue

Allowing the promiseeto sue on behalf of the

third party

bull Lord Denning launched a campaign against privity andargued that s 56 of the Law of Property Act 1925 intendedto destroy doctrine altogether This was finally rejected bythe House of Lords in Beswick v Beswick (1968) theyacknowledged that the wording was wide enough tosupport Lord Denningrsquos view but insisted neverthelessthat it must be restricted to contracts concerning land asthe purpose of the Act was to consolidate the law relatingto real property

bull Agency

Agency has been used to allow a third party to takeadvantage of an exclusion clause in a contract to whichhe was not a party

The House of Lords refused to allow stevedores torely on an exclusion clause in a contract between thecarriers and the cargo owner in Scruttons v MidlandSilicones (1962) on the basis that only a party to thecontract could claim the benefit of the contract that isthe exclusion clause

However in The Eurymedon (1975) the Privy Councilon similar facts held that the carriers had negotiateda second contract (a collateral contract) as agents ofthe stevedores and the stevedores could claim thebenefit of the exclusion clause in this contract

But in Southern Water Authority v Carey (1985) sub-contractors sought to rely on a limitation of liabilityclause in a main contract Held ndash they must havespecific authority to negotiate on behalf of a thirdparty before this device could work

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W177

In Norwich City Council v Harvey (1989) instead ofusing an exclusion clause the contract placed the riskof loss or damage by fire on the owner and thisprotected both main contractor and sub-contractor

Attempts to allow the promisee to enforce the contract onbehalf of the third party

bull Specific performance

In Beswick v Beswick (1968) Peter Beswick had transferredhis business to his nephew in return for his nephewrsquospromise to pay his uncle a pension and after his deathan annuity to his widow The nephew paid his uncle thepension but only one payment of the annuity was madeThe widow as administratrix of her husbandrsquos estatesuccessfully sued her nephew for specific performance ofthe contract to pay the annuity although the House ofLords implied that she would not have succeeded if shehad been suing in her own right

bull Injunction

Similarly an injunction may be awarded to restrain abreach of a negative promise on a suit brought by thepromisee for example A promised B not to compete withC or by a stay of proceedings

In Snelling v Snelling Ltd (1973) three brothers lent moneyto a family company and agreed not to reclaim themoney for a certain period A stay of proceedings wasgranted to one of the brothers to stop another brotherfrom breaking his promise and suing the company for thereturn of his money

CA

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178

bull Damages

Damages to cover the disappointment of a third partywas sanctioned by Lord Denning in Jackson v HorizonHolidays Ltd (1975) where the plaintiff entered into acontract with a holiday firm for a holiday for his familyand himself in Ceylon The holiday was a disaster Theplaintiff recovered damages for pound500 for lsquomental stressrsquoOn appeal the court confirmed the amount on theground that witnessing the distress of his family hadincreased the plaintiffrsquos own distress Lord Denninghowever stated that the sum was excessive for theplaintiffrsquos own distress but upheld the award on theground that the plaintiff had made the contract on behalfof himself and of his wife and children and that he couldrecover in respect of their loss as well as their own

This statement by Lord Denning was disapproved by theHouse of Lords in Woodar Investment Development Ltd vWimpey Construction (UK) Ltd (1980) They stated thatdamages should not generally be recovered on behalf ofa third party

Lord Wilberforce however did suggest that there was aspecial category of contracts which called for specialtreatment That is where one party contracted for abenefit to be shared equally between a group forexample family holidays ordering meals in restaurantsfor a party hiring taxis for a group The decision inJackson could therefore be supported on this ground Afurther exception was identified by the House of Lords inLinden Gardens Trust v Lenesta Sludge Disposals Ltd (1993)where in a construction contract the original propertyowner may be able to sue the contractor for damagesresulting from defects in the work even though theproperty has been transferred to a third party The

CO

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W179

damages would be held in trust for the third party Thisexception was again confirmed by the House of Lords inAlfred McAlpine Construction Ltd v Panatown Ltd (2000) inorder to avoid the situation where otherwise no onewould be able to sue the contractor although on the factsthe exception did not apply (because a separatearrangement had been made under which the contractorwas directly liable to the third party)

Attempts to impose obligations on third parties

bull Restrictive covenants inserted into a contract for the saleof land may bind subsequent purchasers provided

they are negative in nature the subsequent purchaser has notice of the covenants

the person claiming the benefit has land capable ofbenefiting from its enforcement (Tulk v Moxhay (1848))

bull The courts extended the rule in Tulk v Moxhay to personalproperty for example a ship in The Strathcona (1926)where the plaintiffs had chartered The Strathcona forcertain months each year The ship was sold to thedefendant who refused to allow the plaintiffs to use theship The plaintiffs sought an injunction on the groundthat the doctrine in Tulk v Moxhay should be extendedfrom land to ships The court granted an injunction

This decision was criticised in Port Line Ltd v Ben Line Ltd(1958) where a ship chartered to the plaintiffs was sold tothe defendants The ship was requisitioned during theSuez war and compensation was paid to the defendantsThis compensation was claimed by the plaintiffs Held ndasheven if The Strathcona case was rightly decided it couldC

AV

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DIS

HL

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RD

S180

not be applied in this case as (a) the defendants were notin breach of any duty and (b) the plaintiffs had notsought an injunction but financial compensation whichwas outside Tulk v Moxhay

The decision in The Strathcona has been widely criticisedbecause

a contract of hire creates personal not proprietaryrights in the hired object

the retention of land which can benefit from thecovenant is a necessary condition of the doctrine inTulk v Moxhay

bull However in Swiss Bank Corpn v Lloyds Bank (1979)Browne-Wilkinson J considered that the decision in TheStrathcona was correct He suggested however that thetort of inducing a breach of contract or knowinglyinterfering with a contract would be a more suitable basisfor the decision than Tulk v Moxhay He stated that in hisjudgment a person proposing to deal with property insuch a way as to cause a breach of a contract affecting thatproperty will be restrained by injunction from doing so ifwhen he acquired that property he had actualknowledge of the contract

CO

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W181

• Book Cover
• Title
• Copyright
• Contents
• 1 Agreement
• 2 Consideration and intention
• 3 Contents of a contract
• 4 Exemption (exclusion or
• 5 Vitiating elements which render
• 6 Mistake
• 7 Illegality and capacity
• 8 Discharge
• 9 Remedies for breach of contract
• 10 Privity of contract

(There is no general requirement that an agreement must bein writing Important exceptions include contracts relatingto interests in land (Law of Property (MiscellaneousProvisions) Act 1989 s 2(1)) and consumer credit(Consumer Credit Act 1974))

bull May be made to a particular person to a group ofpersons or to the whole world In Carlill v Carbolic SmokeBall Co Ltd (1893) the defendants issued anadvertisement in which they offered to pay pound100 to anyperson who used their smoke balls and then succumbedto influenza Mrs Carlill saw the advertisement and usedthe smoke ball but then immediately caught influenzaShe sued for the pound100 The defendants argued that it wasnot possible in English law to make an offer to the wholeworld Held ndash an offer can be made to the whole world

bull Must be definite in substance (see certainty of terms p 16below)

bull Must be distinguished from an invitation to treat

Invitations to treat

In Gibson v Manchester City Council (1979) the councilrsquos letterstated lsquowe may be prepared to sell you rsquo The House ofLords did not regard this as an lsquoofferrsquo

A response to an invitation to treat does not lead to anagreement The response may however be an offer CO

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W3

An indication that the invitor is willing to enter into negotiations but is not prepared to be

bound immediately

The distinction between an offer and an invitation to treatdepends on the reasonable expectations of the parties

The courts have established that there is no intention to bebound in the following cases

Display of goods for sale

bull In a shop In Pharmaceutical Society of GB v Boots CashChemists Ltd (1952) the Court of Appeal held that in aself-service shop the sale takes place when the assistantaccepts the customerrsquos offer to buy the goods Thedisplay of goods is a mere invitation to treat

bull In a shop window In Fisher v Bell (1961) it was held thatthe display of a lsquoflick knifersquo in a shop window with aprice attached was an invitation to treat

However it was suggested by Lord Denning in Thorntonv Shoe Lane Parking (1971) (see below) that vendingmachines and automatic ticket machines are makingoffers since once the money has been inserted thetransaction is irrevocable

bull In an advertisement In Partridge v Crittenden (1968) anadvertisement which said lsquoBramblefinch cocks and hensndash 25srsquo was held to be an invitation to treat The courtpointed out that if the advertisement was treated as anoffer this could lead to many actions for breach ofcontract against the advertiser as his stock of birds waslimited He could not have intended the advertisement tobe an offer

However if the advertisement is unilateral in nature andthere is no problem of limited stock then it may be an offerSee Carlill v Carbolic Smoke Ball Co Ltd (above) Advertising areward may also be a unilateral offer

CA

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4

Auctions

bull An auctioneerrsquos request for bids in Payne v Cave (1789)was held to be an invitation to treat The offer was madeby the bidder (cf Sale of Goods Act 1979 s 57(2))

bull A notice of an auction In Harris v Nickerson (1873) it washeld that a notice that an auction would be held on acertain date was not an offer which then could beaccepted by turning up at the stated time It was astatement of intention

If the auction is stated to be lsquowithout reserversquo then there isstill no necessity to hold an auction but if the auction isheld lots must be sold to the highest bidder (Barry vHeathcote Ball (2001) confirming obiter dicta in Warlow vHarrison (1859)) The phrase lsquowithout reserversquo constitutes aunilateral offer which can be accepted by turning up andsubmitting the highest bid

Tenders

A request for tenders is normally an invitation to treat

bull However it was held in Harvela Ltd v Royal Trust ofCanada (1985) that if the request is made to specifiedparties and it is stated that the contract will be awardedto the lowest or the highest bidder then this will bebinding as an implied unilateral offer It was also held inthat case that a referential bid for example lsquothe highestother bid plus 10rsquo was not a valid bid

bull It was also held in Blackpool and Fylde Aero Club v BlackpoolBC (1990) that if the request is addressed to specifiedparties this amounts to a unilateral offer thatconsideration will be given to each tender which isproperly submitted C

ON

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AC

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5

Subject to contract

The words lsquosubject to contractrsquo may be placed on top of a letter in order to indicate that an offer is not to be legallybinding (Walford v Miles (1992))

Termination of the offer

Revocation (termination by the offeror)

An offeror may withdraw an offer at any time before it hasbeen accepted

bull The revocation must be communicated to the offereebefore acceptance In Byrne v van Tienhoven (1880) thewithdrawal of an offer sent by telegram was held to becommunicated only when the telegram was received

bull Communication need not be made by the offerorcommunication through a third party will suffice InDickinson v Dodds (1876) the plaintiff was told by aneighbour that a property which had been offered to himhad been sold to a third party Held ndash the offer had beenvalidly revoked

bull An offer to keep an offer open for a certain length of timecan be withdrawn like any other unless an option hasbeen purchased for example consideration has beengiven to keep the offer open (Routledge v Grant (1828))

Unilateral offersbull Communication of the revocation is difficult if the offer

was to the whole world It was suggested however inthe American case of Shuey v USA (1875) that

CA

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6

Revocation Lapse Rejection

communication will be assumed if the offeror takesreasonable steps to inform the public for example placesan advertisement in the same newspaper

bull It now seems established that revocation cannot takeplace if the offeree has started to perform In Errington vErrington (1952) a father promised his daughter and son-in-law that if they paid off the mortgage on a house heowned he would give it to them The young couple dulypaid the instalments but the offer was withdrawnshortly before the whole debt was paid Held ndash there wasan implied term in the offer that it was irrevocable onceperformance had begun This is also supported by dictain Daulia v Four Millbank Nominees (1978)

Lapse (termination by operation of law)

An offer may lapse and thus be incapable of being acceptedbecause of

bull Passage of time

at the end of a stipulated time (if any) or

if no time is stipulated after a reasonable time InRamsgate Victoria Hotel Co v Montefiore (1866) anattempt to accept an offer to buy shares after fivemonths failed as the offer had clearly lapsed

bull Death

of the offeror if the offer was of a personal nature

of the offeree

bull Failure of a condition

an express condition or CO

NT

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LA

W7

an implied condition In Financings Ltd v Stimson(1962) it was held that an offer to buy a car lapsedwhen the car was badly damaged on the ground thatthe offer contained an implied term that the carwould remain in the same condition as when the offer was made

Rejection (termination by the offeree)

A rejection may be

bull express

bull implied

A counter offer is an implied rejectionbull Traditionally an acceptance must be a mirror image of

the offer If any alteration is made or anything addedthen this will be a counter offer and will terminate theoffer In Hyde v Wrench (1840) the defendant offered tosell a farm for pound1000 The plaintiff said he would givepound950 for it Held ndash this was a counter offer whichterminated the original offer which was therefore nolonger open for acceptance In Brogden v MetropolitanRailway (1877) the defendant sent to the plaintiff forsignature a written agreement which they hadnegotiated The plaintiff signed the agreement andentered in the name of an arbitrator on a space which hadbeen left empty for this purpose Held ndash the returneddocument was not an acceptance but a counter offer

bull This is particularly important for businesses whocontract by means of sales forms and purchase forms forexample if an order placed by the buyerrsquos purchase formis lsquoacceptedrsquo on the sellerrsquos sales form and the conditionson the back of the two forms are not identical (which theyare very unlikely to be) then the lsquoacceptancersquo is a counter

CA

VE

ND

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8

offer and an implied rejection In Butler Machine Tool CoLtd v Ex-Cell-O Corpn Ltd (1979) the sellers offered to sella machine tool to the buyers for pound75535 on their ownconditions of sale which were stated to prevail over anyconditions in the buyersrsquo order form and whichcontained a price variation clause The buyers lsquoacceptedrsquothe offer on their own order form which stated that theprice was a fixed price and which contained a tear offslip which said lsquowe accept your order on the terms andconditions stated thereonrsquo This was in effect a lsquocounterofferrsquo The sellers signed and returned the slip togetherwith a letter which stated that they were carrying out theorder in accordance with their original offer When theydelivered the machine they claimed the price hadincreased by pound2892 The buyers refused to pay the extrasum Held ndash the contract was concluded on the buyersrsquoterms the signing and returning of the tear-off slip wasconclusive that the sellers had accepted the buyersrsquocounter offer The court analysed the transaction bylooking for matching offer and acceptance

Note ndash a request for further information is not a counteroffer In Stevenson v McLean (1880) the defendant offered tosell to the plaintiff iron at 40s a ton The plaintiff telegraphedto inquire whether he could pay by instalments Held ndash thiswas a mere inquiry for information not a counter offer andso the original offer was not rejected

A conditional acceptance

A conditional acceptance may be a counter offer capable ofacceptance for example I will pay pound500 for your car if youpaint it red If the owner agrees to this condition a contractwill be formed CO

NT

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W9

A valid acceptance must

bull be made while the offer is still in force (see termination ofoffer above)

bull be made by the offeree

bull exactly match the terms of the offer (see counter offersabove)

bull be written oral or implied from conduct In Brogden vMetropolitan Railway (1877) (above) the returneddocument was held to be a counter offer which thedefendants then accepted either by ordering coal fromBrogden or by accepting delivery of the coal (see alsolsquoThe Battle of the Formsrsquo)

However the offeror may require the acceptance to be madein a certain way If the requirement is mandatory it must befollowed

If the requirement is not mandatory then another equallyeffective method will suffice In Manchester Diocesan Councilfor Education v Commercial and General Investments Ltd (1969)an invitation to tender stated that the person whose bid was

CA

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10

The fact of acceptance

An acceptance is a final and unqualified assent to all the terms of the offer

The fact of acceptance

Acceptance

Communication ofacceptance

accepted would be informed by a letter to the address givenin the tender The acceptance was eventually sent not to thisaddress but to the defendantrsquos surveyor Held ndash thestatement in the tender was not mandatory the tender hadtherefore been validly accepted

bull Where the offer is made in alternative terms theacceptance must make it clear to which set of terms itrelates

bull A person cannot accept an offer of which he has noknowledge (Clarke (1927) (Australia))

But a personrsquos motive in accepting the offer is irrelevantIn Williams v Carwardine (1833) (Australia) the plaintiffknew of the offer of a reward in exchange forinformation but her motive was to salve her conscienceHeld ndash she was entitled to the reward

bull lsquoCross-offersrsquo do not constitute an agreement (Tinn vHoffman amp Co (1873))

Communication of acceptance

Acceptance must be communicated by the offeree or hisagent In Powell v Lee (1908) an unauthorised communicationby one of the managers that the Board of Managers hadselected a particular candidate for a headship was held notto be a valid acceptance

Silence as communication

An offeror may not stipulate that silence of the offeree is toamount to acceptance In Felthouse v Bindley (1862) the

CO

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W11

Acceptance must be communicated

plaintiff wrote to his nephew offering to buy a horse andadding lsquoIf I hear no more I will take it that the horse isminersquo The nephew did not reply to this letter Held ndash nocontract Acceptance had not been communicated to theofferor

It has been suggested that this does not mean that silencecan never amount to acceptance for example if in Felthousev Bindley the offeree had relied on the offerorrsquos statementthat he need not communicate his acceptance and wished toclaim acceptance on that basis the court could decide thatthe need for acceptance had been waived by the offeror (seebelow)

Exceptions to the rule that acceptance must be

communicated

bull In a unilateral contract where communication isexpressly or impliedly waived (see Carlill v CarbolicSmoke Ball Co Ltd (above))

bull Possibly where failure of communication is the fault ofthe offeror This was suggested by Lord Denning inEntores Ltd v Miles Far East Corpn (1955)

bull Where the post is deemed to be the proper method ofcommunication In Adams v Lindsell (1818) thedefendants wrote to the plaintiffs offering to sell them aquantity of wool and requiring acceptance by post Theplaintiffs immediately posted an acceptance on 5December Held ndash the contract was completed on 5December

CA

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12

The postal rule

bull Adams v Lindsell (1818) above

bull Acceptance is effective on posting even when the letter islost in the post In Household Fire Insurance Co Ltd v Grant(1879) the defendant offered to buy shares in theplaintiffrsquos company A letter of allotment was posted tothe defendant but it never reached him Held ndash thecontract was completed when the letter was posted

bull Note the difference between acceptance and revocationof an offer by post

Acceptance of an offer takes place when a letter isposted

Revocation of an offer takes place when the letter isreceived

bull Byrne v van Tienhoven (1880) above

Limitations to the postal rule

bull It only applies to acceptances and not to any other typeof communication (for example an offer or a revocation)

bull It only applies to letters and telegrams It does not applyto instantaneous methods of communication such astelex or probably fax or email

bull It must be reasonable to use the post as the means ofcommunication (for example an offer by telephone or byfax might indicate that a rapid method of response wasrequired)

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W13

Acceptance takes place when a letter is postednot when it is received

bull Letters of acceptance must be properly addressed andstamped

bull The rule is easily displaced for example it may beexcluded by the offeror either expressly or impliedly InHolwell Securities Ltd v Hughes (1974) it was excluded bythe offeror requiring lsquonotice in writingrsquo It was alsosuggested by the court that the postal rule would not beused where it would lead to manifest inconvenience

There is no direct English authority on this point

CA

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14

Arguments againstLogic ndash once a letter is posted the offer is accepted there isno provision in law for revoking an acceptance

bull The lsquologicalrsquo view is supported by the New Zealand caseof Wenckheim v Arndt (1878) and the South African case ofA to Z Bazaars (Pty) Ltd v Minister of Agriculture (1974)

Fairness ndash

bull Cheshire argues that it would be unfair to the offeror whowould be bound as soon as the letter was posted whereasthe offeree could keep his options open

Query ndash can a letter of acceptance be cancelled byactual communication before the letter is delivered

Communication by instantaneouselectronic means

bull The rules on telephones and telex were laid down inEntores v Miles (above) and confirmed in Brinkibon Ltd vStahag Stahl (1983) where it was suggested that duringnormal office hours acceptance takes place when themessage is printed out not when it is read The House ofLords however accepted that communication by telexmay not always be instantaneous for example whenreceived at night or when the office is closed

bull Lord Wilberforce stated

lsquoNo universal rule could cover all such cases theymust be resolved by reference to the intention of theparties by sound business practice and in some casesby a judgment of where the risk should liersquo

CO

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W15

Arguments forThere is some support for allowing recall in the Scottishcase of Countess of Dunmore v Alexander (1830)

bull It is argued that actual prior communication of rejectionwould not necessarily prejudice the offeror who bydefinition will be unaware of the lsquoacceptancersquo

bull It is also argued that it would be absurd to insist onenforcing a contract when both parties have acted on therecall This however could be interpreted as anagreement to discharge

Acceptance takes place when and where the message is received

bull It has been suggested that a message sent outsidebusiness hours should be lsquocommunicatedrsquo when it isexpected that it would be read for example at the nextopening of business It is generally accepted that thesame rules should apply to faxes and email as to telex

bull There is no direct authority on telephone answeringmachines It might well be argued that the presence of ananswering machine indicates that communication is notinstantaneous there is a delay between sending andreceiving messages It would then follow that the basicrule should apply that is that acceptance must becommunicated Acceptance therefore would take placewhen the message is actually heard by the offeror

Certainty of terms

The courts will not enforce

CA

VE

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16

Vague agreementsfor example

Scammell v Ouston (1941)

The courts refused toenforce a sale stated to bemade lsquoon hire purchase

termsrsquo neither the rate ofinterest nor the period of

repayment nor the numberof instalments were stated

Incomplete agreementsfor example

lsquoan agreement to make anagreementrsquo will be void

In Walford v Miles (1992) thecourt refused to enforce anlsquoagreement to negotiate in

good faithrsquo

See also May and Butcher v R (1934)

It is for the parties to make their intentions clear

But the uncertainty may be cured by

bull a trade custom where a word has a specific meaning

bull previous dealings between the parties whereby a word orphrase has acquired a specific meaning for exampletimber of lsquofair specificationrsquo in Hillas v Arcos (1932)

bull the contract itself which provides a method for resolvingan uncertainty In Foley v Classique Coaches (1934) therewas an executed contract where the vagueness of lsquoat aprice to be agreedrsquo was cured by a provision in thecontract referring disputes to arbitration Cf May andButcher v R an unexecuted contract where the courtrefused to allow a similar arbitration clause to cure theuncertainty

The courts will strive to find a contract valid where it hasbeen executed

bull The Sale of Goods Act 1979 provides that if no price ormechanism for fixing the price is provided then thebuyer must pay a lsquoreasonable pricersquo but this provisionwill not apply where the contract states that the price islsquoto be agreed between the partiesrsquo

bull Note a lsquolock-out agreementrsquo for example an agreementnot to negotiate with any one else is valid provided it isclearly stated and for a specific length of time This wasapplied by the Court of Appeal in Pitt v PHH AssetManagement (1993) where a promise not to negotiate withany third party for two weeks was enforced

CO

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W17

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W19

2 Consideration and intention

Consideration

Most legal systems will only enforce promises where thereis something to indicate that the promisor intended to bebound that is there is some

Consideration is the normal lsquobadge of enforceabilityrsquo inEnglish law

ReciprocityConsideration

RelianceLord Denning tried to

introduce reliance as basisfor enforcing promisesthrough the doctrine of

promissory estoppel

FormFor example writing English

law will enforce promiseswhich are contained in a

deed (A deed is a document which

is signed and attested andindicates on its face

that it is a deed)

lsquoBadge of

enforceabilityrsquo

Definitions of consideration

Shorter version

Limitation of the definition

bull It makes no mention of why the promisee incurs adetriment or confers a benefit or that the element of abargain is central to the classical notion of considerationFor example in Combe v Combe (1951) it was held thatthere was no consideration for the defendantrsquos promiseto pay his ex-wife pound100 per year even though in relianceon that promise she had not applied to the divorce courtfor maintenance and in that sense she had suffered adetriment The reason why the detriment did notconstitute consideration was that there was no request bythe husband express or implied that she should forbearfrom applying for maintenance There was nolsquoexchangersquo

bull Some writers have preferred to emphasise this elementof bargain and have defined consideration as

CA

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20

A valuable consideration in the eyes of the law mayconsist of (Currie v Misa (1875))

bull either some right interest profit or benefit to oneparty or

bull some forbearance detriment loss orresponsibility given suffered or undertaken bythe other

A benefit to one party or a detriment to the other

lsquothe element of exchange in a contractrsquoor

lsquothe price paid for a promisersquo

bull These definitions however are vague and despite itslimitation the benefitdetriment definition is mostcommonly used

Consideration and condition

Consideration must be distinguished from the fulfilment ofa condition If A says to B lsquoI will give you pound500 if you shouldbreak a legrsquo there is no contract but simply a gratuitouspromise subject to a condition In Carlill v Carbolic Smoke BallCo (1893) the plaintiff provided consideration for thedefendantrsquos promise by using the smoke ball Catchinginfluenza was only a condition of her entitlement to enforcethe promise

Kinds of consideration

bull In Roscorla v Thomas (1842) the defendant promised theplaintiff that a horse which had been bought by him wassound and free from vice It was held that since thispromise was made after the sale had been completedthere was no consideration for it and it could not beenforced In Re McArdle (1951) a promise made lsquoin

CO

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W21

Past consideration that is something already completed before the promise is made cannot

generally amount to consideration

Executed considerationAn act wholly

performed as part of a contract

Executory ConsiderationA promise to do something

in the future

consideration of your carrying out certain improvementsto the propertyrsquo was held by the Court of Appeal to beunenforceable as all the work had been done before thepromise was made

Exceptions to this rule

bull The modern requirements were laid down by LordScarman in Pao On v Lau Yiu Long (1980) Where a serviceis rendered

at the request of the promisor (as in Lampleigh vBraithwait (1615))

on the understanding that a payment will be made (asin Re Caseyrsquos Patents (1892)) and

if the payment would have been legally enforceableif it had been promised in advance

then a subsequent promise to pay a certain sum will beenforced

Note ndash the lsquoinferredrsquo intention to pay makes this a veryflexible exception

Consideration must move from the promisee

bull See Chapter 10 ndash Privity of contract

Consideration need not be adequate

CA

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22

Only a person who has provided consideration for a promise can enforce that promise

The consideration provided by one party need not equal in value the

consideration provided by the other party

It is for the parties themselves to make their own bargainThe consideration need only have lsquosome value in the eyes ofthe lawrsquo (See lsquoConsideration must be sufficientrsquo p 24below)

bull The value may be slight In Chappell Co Ltd v Nestleacute Co Ltd(1960) three wrappers from the defendantrsquos chocolatebars were held to be part of the consideration InMountford v Scott (1975) pound1 was held to be goodconsideration for an option to buy a house

bull Withdrawal of threatened legal proceedings will amountto consideration even if the claim is found to have nolegal basis provided that the parties themselves believethat the claim is valid (Callisher v Bischoffstein (1870))

bull In Pitt v PHH Asset Management (1993) the defendantagreed to a lock-out agreement in return for Pittdropping his claim for an injunction against them Theclaim for an injunction had no merit but had a nuisancevalue and dropping it was therefore good consideration

bull In Alliance Bank v Broome (1964) the bankrsquos forbearance tosue was held to be consideration for the defendantrsquospromise to provide security for a loan

bull In Edmonds v Lawson (2000) it was held that the generalbenefits to chambers of operating a pupillage system wassufficient to provide consideration for contracts withindividual pupils

There is no consideration however where the promises arevague for example lsquoto stop being a nuisance to his fatherrsquo(White v Bluett (1853) but cf Ward v Byham (1956) below) orillusory for example to do something impossible or merelygood for example to show love or affection or gratitude CO

NT

RA

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LA

W23

It has been argued that because the latter are invalidconsideration must have some economic value Buteconomic value is extremely difficult to discern in the othercases cited above Since consideration is a lsquobadge ofenforceabilityrsquo it is argued that nominal consideration isadequate it is only designed to show that the promise isintended to be legally enforceable ndash whether it creates anyeconomic advantage is therefore irrelevant

Consideration must be sufficient

Traditionally the following have no value in the eyes of thelaw

Performing a duty imposed by law

bull For example promising not to commit a crime orpromising to appear in court after being subpoenaed InCollins v Godefroy (1831) a promise to pay a fee to awitness who has been properly subpoenaed to attend a

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24

The consideration must have some value in the eyes of the law

Consideration therefore is found when a person receives whatever he requests

in return for a promise whether or not it has aneconomic value provided it is not too vague

Performing a duty imposed

by law

Performing an existingcontractual duty owed

to the other party

trial was held to have been made without considerationThe witness had a public duty to attend

bull But if a person does or promises to do more than he isrequired to do by law then he is providing considerationIn Glasbrook Bros v Glamorgan CC (1925) the council aspolice authority on the insistence of a colliery owner andin return for a promise of payment provided protectionover and above that required by law Held ndash they hadprovided consideration for the promise to pay

bull In Ward v Byham (1956) the father of an illegitimate childpromised to pay the mother an allowance of pound1 per weekif she proved that the child was lsquowell looked after andhappyrsquo Held ndash the mother was entitled to enforce thepromise because in undertaking to see that the child waslsquowell looked after and happyrsquo she was doing more thanher legal obligation Lord Denning however based hisdecision on the ground that the mother providedconsideration by performing her legal duty to maintainthe child

Treitel agreed with Denning that performance of a dutyimposed by the law can be consideration for a promise Heargues that it is public policy which accounts for the refusalof the law in certain circumstances to enforce promises toperform existing duties Where there are no grounds ofpublic policy involved then a promise given inconsideration of a public duty can be enforced

He cites

bull promises to pay rewards for information leading to thearrest of a felon See Sykes v DPP (1961)

bull Ward v Byham (above) CO

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W25

In most cases it would make no difference whether the courtproceeded on the basis that the matter was one of publicpolicy or a lack of consideration But the former ground doesallow a greater degree of flexibility

Performing an existing contractual duty

Where the duty is owed to the other party this cannot beconsideration for

A request for extra payment

bull In Stilk v Myrick (1809) the captain promised the rest ofcrew extra wages if they would sail the ship back homeafter two sailors had deserted Held ndash the crew werealready bound by their contract to meet the normalemergencies of the voyage and were doing no more thantheir original contractual duty in working the ship home

bull Where the promisor however performs more than hehad originally promised then there can be considerationIn Hartley v Ponsonby (1857) nearly half the crewdeserted This discharged the contracts of the remainingsailors as it was dangerous to sail the ship home withonly half the crew The sailors were therefore free to makea new bargain so the captainrsquos promise to pay themadditional wages was enforceable

Exceptions to the rule in Stilk v Myrick

Factual advantages obtained by the promisorIn Williams v Roffey Bros (1991) the defendants (the maincontractors) were refurbishing a block of flats They sub-

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26

A request for extra payment

A request to avoid part of a debt

contracted the carpentry work to the plaintiff The plaintiffran into financial difficulties whereupon the defendantsagreed to pay the plaintiff an additional sum if theycompleted the work on time Held ndash where a party to anexisting contract later agrees to pay an lsquoextra bonusrsquo in orderthat the other party performs his obligations under theoriginal contract then the new agreement is binding if theparty agreeing to pay the bonus has thereby obtained somenew practical advantage or avoided a disadvantage In thisparticular case the advantage was the avoidance of apenalty clause and the expense of finding new carpenters

bull Note ndash Stilk v Myrick (above) recognises as considerationonly those acts which the promisee was not under a legalobligation to perform Williams v Roffey Bros (above) addsto these factual advantages obtained by the promisor

bull This decision pushes to the fore the principles ofeconomic duress as a means of distinguishing enforceableand unenforceable modifications to a contract (seeChapter 5 on economic duress p 87)

Duties owed to third partyWhere a duty is owed to a third party its performance canalso be consideration for a promise by another It is clear thatthe third party is getting something more than he is entitledto

bull In Shadwell v Shadwell (1860) an uncle promised to pay anannual sum to his nephew on hearing of his intendedmarriage The fact of the marriage providedconsideration although the nephew was already legallycontracted to marry his fianceacutee

bull In Scotson v Pegg (1861) A agreed to deliver coal to Brsquosorder B ordered A to deliver coal to C who promised A to

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W27

unload it Held ndash A could enforce Crsquos promise as Arsquosdelivery of the coal was good considerationnotwithstanding that he was already bound to do so byhis contract with B

bull In New Zealand Shipping Co v Satterthwaite amp Co Ltd TheEurymedon (1975) it was held by the Privy Council thatwhere a stevedore at the request of the consignee ofcertain goods removed the goods from a ship this wasconsideration for the promise by the consignee to give thestevedore the benefit of an exclusion clause although thestevedore in removing the goods was only performingcontractual duties he owed to the carrier

A request to avoid part of a debt

If a creditor is owed pound100 and agrees to accept pound90 in fullsettlement he can later insist on the remaining pound10 beingpaid as there is no consideration for his promise to waive thepound10 (the rule in Pinnelrsquos Case (1602))

bull This rule was confirmed by the House of Lords in Foakesv Beer (1884) Dr Foakes was indebted to Mrs Beer on ajudgment sum of pound2090 It was agreed by Mrs Beer thatif Foakes paid her pound500 in cash and the balance of pound1590in instalments she would not take lsquoany proceedingswhatsoeverrsquo on the judgment Foakes paid the moneyexactly as requested but Mrs Beer then proceeded toclaim an additional pound360 as interest on the judgment debtFoakes refused and when sued pleaded that his duty topay interest had been discharged by the promise not tosue Their Lordships deferred as to whether on its trueconstruction the agreement merely gave Foakes time to

CA

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28

Basic rule payment of a smaller sum will not discharge the duty to pay a higher sum

pay or was intended to cover interest as well But theyheld even on the latter construction there was noconsideration for the promise and that Foakes was stillbound to pay the additional sum

There are situations however where payment of a smallersum will discharge the liability for the higher sum

bull where the promise to accept a smaller sum in fullsettlement is made by deed or in return forconsideration

bull where the original claim was not for a fixed sum or theamount is disputed in good faith

bull where the debtor does something different for examplewhere payment is made at the creditorrsquos request

at an earlier time

at a different place

by a different method (it was held in D amp C BuildersLtd v Rees (1966) that payment by cheque is notpayment by a different method)

bull where payment is accompanied by a benefit of somekind

bull in a composition agreement with creditors

bull where payment is made by a third party (see HirachandPunachand v Temple (1911))

It has been argued that to allow the creditor to sue for theremaining debt would be a fraud on the third parties in thelast two cases above

Note ndash the doctrine of promissory estoppel under certaincircumstances may allow payment of smaller sum todischarge liability for the larger sum

CO

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W29

In Re Selectmove (1995) the Court of Appeal refused toextend the principle laid down in Williams v Roffey Bros topart payment of a debt The company had offered to pay itsarrears by instalments to the Inland Revenue who said thatthey would let them know if this was acceptable They heardnothing further but paid some instalments and thenreceived a threat of being wound up if the full arrears werenot paid immediately The court was not prepared to allowWilliams v Roffey Bros to overturn a rule laid down by theHouse of Lords in Foakes v Beer

Promissory estoppel

There are problems with regard to

Origins

bull It was introduced (obiter) by Lord Denning in the CentralLondon Property Trust Ltd v High Trees House Ltd (1947)where owners of a block of flats had promised to acceptreduced rents in 1939 There was no consideration fortheir promise but Lord Denning nevertheless stated thathe would estop them from recovering any arrears Hebased his statement on the decision in Hughes vMetropolitan Railway (1877)

CA

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30

If a promise intended to be binding andintended to be acted upon is acted upon then the court will not allow the promisor

to go back on his promise

the origins ofthe doctrine

the scope ofthe doctrine

the effect of the doctrine

bull It would however seem to conflict with the House ofLordsrsquo decision in Jorden v Money (1854) where it wasstated that estoppel applied only to statements of fact andnot to promises and also with the decision in Foakes vBeer (1884) where the House of Lords confirmed thatpayment of a smaller sum will not discharge the liabilityfor a larger sum

Scope

bull It only applies to the modification or discharge of anexisting contractual obligation It cannot create a newcontract See Combe v Combe (1951) above (However itwas used to create a new right of action in the Australiancase of Waltons v Maher (1988))

bull It can be used only as a lsquoshield and not a swordrsquo

bull The promise not to enforce rights must be clear andunequivocal In The Scaptrade (1983) the mere fact of nothaving enforced onersquos full rights in the past was notsufficient

bull It must be inequitable for the promisor to go back on hispromise In D amp C Builders v Rees (1966) Mrs Rees had forced the builders to accept her cheque by inequitable means and so could not rely on promissory estoppel

bull The promisee must have acted in reliance on the promisealthough not necessarily to his detriment (Alan amp Co Ltdv El-Nasr Export and Import Co (1972))

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W31

The exact scope of the doctrine is a matter ofdebate but certain requirements must be met

Effect of the doctrine

bull In Tool Metal Manufacturing Co v Tungsten Electric Co(1955) the owner of a patent promised to suspendperiodic payments during the war It was held by theCourt of Appeal that the promise was binding for theduration of the war but the owners could on givingreasonable notice at he end of the war revert to theiroriginal legal entitlements

bull In Ajayi v Briscoe (1964) the Privy Council stated that thepromisee could resile from his promise on givingreasonable notice which allowed the promisee areasonable opportunity of resuming his position but thatthe promise would become final if the promisee could notresume his former position

On one interpretation these cases show that as regardsexisting or past obligations it is extinctive but as regardsfuture obligations it is suspensory

On another interpretation the correct approach is to look atthe nature of the promise If it was intended to bepermanent then the promiseersquos liability will beextinguished

Lord Denning consistently asserted that promissoryestoppel can extinguish debts However this view iscontrary to Foakes v Beer

The view that promissory estoppel is suspensory onlywould reconcile it with the decisions in Jorden v Money

CA

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32

It is not clear whether the doctrine extinguishesrights or merely suspends them

Foakes v Beer and Pinnelrsquos Case but it would deprive it of mostof its usefulness

The question of whether the doctrine is suspensory orextinctive is particularly important with regard to singlepayments

Intention to be legally bound

This presumption may be rebutted but the onus of proof ison the party seeking to exclude legal relations In EssoPetroleum Co Ltd v Commissioners of Customs and Excise (1976)Esso promised to give one world cup coin with every fourgallons of petrol sold A majority of the House of Lordsbelieved that the presumption in favour of legal relationshad not been rebutted

Examples of rebuttals

bull lsquoThis arrangement is not entered into as a formal orlegal agreement and shall not be subject to legaljurisdiction in the law courtsrsquo (Rose and Frank v CromptonBros (1925))

bull Agreement to be binding lsquoin honour onlyrsquo (Jones v VernonPools (1939))

CO

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W33

Commercial andbusiness

agreements

Social anddomestic

agreements

In commercial and business agreements there is a presumption that the parties

intend to create legal relations

bull Letters of comfort for example statements to encouragelending to an associated company It was held inKleinwort Benson Ltd v Malaysia Mining Corpn (1989) thatthe defendantrsquos statement that lsquoit is our policy to ensurethat the business is at all times in a position to meet itsliabilities to yoursquo was a statement of present fact and nota promise for the future As such it was not intended tocreate legal relations

bull Collective agreements are declared not to be legallybinding by the Trade Unions and Labour Relations(Consolidation) Act 1992 unless expressly stated inwriting to be so

This can be rebutted by evidence to the contrary forexample

bull Agreements between husband and wife In Balfour vBalfour (1919) the court refused to enforce a promise bythe husband to give his wife pound50 per month whilst he wasworking abroad However the court will enforce a clearagreement where the parties are separating or separated(Merritt v Merritt (1970))

bull Agreements between members of a family In Jones vPadavatton (1969) Mrs Jones offered a monthly allowanceto her daughter if she would come to England to read forthe Bar Her daughter agreed but was not very successfulMrs Jones stopped paying the monthly allowance butallowed her daughter to live in her house and receive therents from other tenants Mrs Jones later sued forpossession The daughter counterclaimed for breach of

CA

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34

In social and domestic agreements there is a presumption against legal relations

the agreement to pay the monthly allowance andor for accommodation Held (a) the first agreement may havebeen made with the intention of creating legal relationsbut was for a reasonable time and would in any case havelapsed (b) the second agreement was a familyarrangement without an intention to create legalrelations It was very vague and uncertain

bull An intention to be legally bound may be inferred where

one party has acted to his detriment on theagreement (Parker v Clark (1960)) or

a business arrangement is involved (Snelling vSnelling (1973)) or

there is mutuality (Simpkins v Pays (1955))

But in all such cases the agreement must be clear

CO

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W35

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W37

3 Contents of a contract

Once a contract has been formed it is necessary to explorethe scope of the obligations which each party incurs

(Incorporation of terms is covered in Chapter 4)

The distinction between terms and mere

representations

Is a statement part of the contract Statements made duringnegotiations leading to a contract may be either

bull Terms

that is statements which form the express terms of thecontract As such they constitute promises as to thepresent truth of the statement or as to future action Ifsuch a promise is broken (for example because thestatement is untrue) this will involve a breach of contractor

Different weighting may be given to different terms

Distinction between termsand mere representations

Interpretation of expressterms

Identification of impliedterms

This involves

bull Mere representations

that is statements which do not form part of the contractbut which helped to induce the contract If these areuntrue they are lsquomisrepresentationsrsquo

Now that damages can be awarded for negligent misrepresentation the distinction has lost much of itsformer significance but there are still some importantconsequences

In trying to ascertain such intention the court may take intoaccount the following factors

The importance of the statement to the parties

bull In Bannerman v White (1861) the buyer stated lsquoif sulphurhas been used I do not want to know the pricersquo Held ndasha term Similarly in Couchman v Hill (1947) the buyerasked if the cow was in calf stating that if she was hewould not bid The auctioneerrsquos reply that she was not incalf was held to be a term overriding the printedconditions which stated that no warranty was given

The respective knowledge of the parties

bull In Oscar Chess Ltd v Williams (1957) it was held that astatement by a member of the public (a non expert) to agarage (an expert) with regard to the age of a car was amere representation not a term On the other hand astatement made by a garage (an expert) to a member ofthe public (a non-expert) concerning the mileage of a carwas held to be a term (Dick Bentley Productions Ltd vHarold Smith (Motors) Ltd (1965))

CA

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38

Whether a statement has become a term of thecontract depends on the intention of the parties

The manner of the statement

bull For example if it suggests verification (Ecay v Godfrey(1947)) it is unlikely to be a term If it discouragesverification lsquoIf there was anything wrong with the horseI would tell yoursquo (Schawel v Reade (1913)) it is more likelyto be a term

Where a contract has been reduced to writing

The terms will normally be the statements incorporated intothe written contract (Routledge v McKay (1954))

bull But a contract may be partly oral and partly written (seeCouchman v Hill (1947) above) In Evans amp Sons Ltd vAndrea Merzario Ltd (1976) an oral assurance thatmachinery would be stowed under not on the deck washeld to be a term of a contract although it was notincorporated into the written terms The court held thatthe contract was partly oral and partly written and insuch hybrid circumstances the court was entitled to lookat all the circumstances

bull Note ndash the discovery of a collateral contract mayovercome the difficulties of oral warranties in writtencontracts In City of Westminster Properties v Mudd (1959)a tenant signed a lease containing a covenant to use thepremises for business premises only He was induced tosign by a statement that this clause did not apply to himand that he could continue to sleep on the premises Thecourt found that his signing the contract was con-sideration for this promise thus creating a collateralcontract In Evans amp Son Ltd v Andrea Merzario Ltd (1976)Lord Denning considered the oral statement to be acollateral contract In Esso Petroleum Co v Mardon (1976)the court held that the statement by a representative of C

ON

TR

AC

TL

AW

39

Esso with regard to the throughput of a petrol station wascovered by an implied collateral warranty that thestatement had been made with due care and skill

bull The use of a collateral contract will not be possiblehowever if the main contract contains an appropriatelyworded lsquoentire agreementrsquo clause (The Inntrepreneur PubCo (GL) v East Crown Ltd (2000))

Identification of express terms

bull See incorporation of terms in Chapter 4 p 54

Interpretation of express terms of a contract

Oral contracts

The contents is a matter of evidence for the judge Theinterpretation will be undertaken by applying an objectivetest that is what would a reasonable person haveunderstood to have been meant by the words used (Thake vMaurice (1986))

Written contracts

If a contract is reduced to writing then under the lsquoparolevidencersquo rule oral or other evidence extrinsic to thedocument is not normally admissible to lsquoadd to vary orcontradictrsquo (Jacobs v Batavia and General Plantations Trust(1924)) the terms of the written agreement

Exceptions to the parol evidence rule

bull to show that the contract is not legally binding forexample because of mistake or misrepresentation

bull to show that the contract is subject to a lsquoconditionprecedentrsquo In Pym v Campbell (1856) oral evidence was

CA

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40

admitted to show that a contract was not to come intooperation unless a patent was approved by a third party

bull to establish a custom or trade usage (Hutton v Warren(1836) see below)

bull to establish that the written contract is not the wholecontract It is presumed that lsquoa document which lookslike a contract is the whole contractrsquo but this isrebuttable See Couchman v Hill (1947) and Evans v AndreaMerzario (above)

bull a contract may be contained in more than one document(Jacobs v Batavia Plantation Trust Ltd (1924))

bull to establish a collateral contract (City of WestminsterProperties Ltd v Mudd (1959) Evans amp Son Ltd v AndreaMerzario Ltd (1976))

The Law Commission recommended in 1976 that the lsquoparolevidencersquo rule be abolished However in view of the wideexceptions to the rule it recommended in 1986 that no actionneed be taken

Identification of implied terms

In addition to the terms which the parties have expresslyagreed a court may be prepared to hold that other termsmust be implied into the contract Such terms may beimplied by

CO

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W41

Custom Statute The courts

Custom

A contract may be deemed to incorporate any relevantcustom of the market trade or locality in which the contractis made In Hutton v Warren (1836) a tenant established aright to fair allowance for improvements to the land througha local custom

Statute

Parliament as a matter of public policy has in variousinstances seen fit to imply terms into contracts for example

Terms implied into all sales

bull that the seller has the right to sell the goods

bull that goods sold by description correspond with thedescription

Terms implied only into sales by way of business

bull that the goods are of satisfactory quality

Goods are of a satisfactory quality if they meet thestandard that a reasonable person would regard assatisfactory taking account of any description of thegoods the price if relevant and all other relevantcircumstances In particular it will be necessary toconsider their

fitness for all purposes for which goods of that kindare commonly supplied

appearance and finish

CA

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42

The Sale of Goods Act 1979 which impliesthe following terms into contracts

for the sale of goods

freedom from minor defects

safety and

durability

This term does not apply to matters specifically drawn tothe buyerrsquos attention before the contract is made orwhere the buyer examines the goods defects which thatexamination should have revealed

bull that the goods are fit for any special purpose madeknown to the seller

bull that goods sold by sample correspond with the sample

bull In contracts of service there is an implied term that theservice will be carried out with reasonable care and skillwithin a reasonable time and for a reasonable price

In Wilson v Best (1993) it was held that the duty of a travelagent under this provision extended to checking that thelocal safety regulations had been complied with It did notrequire them to ensure that they complied with UKregulations

The courts

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W43

Terms implied in fact Terms implied in law

The Supply of Goods and Services Act 1982implies similar terms into contracts of hire contracts for work and materials and other

contracts not covered by the Sale of Goods Act

Terms implied in fact

When interpreting terms implied in fact the court seeks togive effect to the unexpressed intention of the parties Thereare two tests A term may be implied because

bull It is necessary to give business efficacy to the contract InThe Moorcock (1889) a term was implied that the riverbedwas in a condition that would not damage a shipunloading at the jetty

bull It satisfies the lsquoofficious bystanderrsquo test that is if abystander suggested a term the parties would respondwith a common lsquoof coursersquo In Spring v NASDS (1956) theunion tried to imply the lsquoBridlington Agreementrsquo Thecourt refused on the basis that if an lsquoofficious bystanderhad suggested this the plaintiff would have repliedldquoWhatrsquos thatrdquorsquo

The Moorcock doctrine is used in order to make the contractworkable or where it was so obvious that the parties musthave intended it to apply to the agreement It will not beused merely because it was reasonable or because it wouldimprove the contract

It was suggested in Shell UK Ltd v Lostock Garages Ltd (1977)that the courts will be reluctant to imply a term where theparties have entered into a detailed and carefully draftedwritten agreement

Terms implied in law

bull When terms are implied in law they are implied into allcontracts of a particular kind Here the court is not tryingto put into effect the parties intention but is imposing anobligation on one party often as a matter of public policyFor example the court implies into all contracts ofC

AV

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DIS

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AW

CA

RD

S44

employment a term that the employee will carry out hiswork with reasonable care and skill and will indemnifyhis employer against any loss caused by his negligence(Lister v Romford Ice Cold Storage Co (1957))

bull In these cases the implication is not based on thepresumed intention of the parties but on the courtrsquosperception of the nature of the relationship between theparties and whether such an implied term wasreasonable

bull In Liverpool CC v Irwin (1977) the tenants of a block ofcouncil flats failed to persuade the court to imply a termthat the council should be responsible for the commonparts of the building on the Moorcock or lsquoofficiousbystanderrsquo test but succeeded on the basis of the Listertest that is the term should be implied in law in that theagreement was incomplete it involved the relationshipof landlord and tenant and it would be reasonable toexpect the landlord to be responsible for the commonparts of the building

Classification of terms

There is a very important distinction between those terms ofa contract which entitle an innocent party to terminate(rescind or treat as discharged) a contract in the event of a

CO

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W45

Conditions Warranties Innominate terms

breach and those which merely enable a person to claimdamages

Traditionally a distinction has been made in English lawbetween

Conditions

bull The Sale of Goods Act 1979 designates certain impliedterms for example re satisfactory quality as conditions ndashthe breach of which entitles the buyer to terminate (ortreat as discharged) the contract

bull In Poussard v Spiers and Pond (1876) a singer failed to takeup a role in an opera until a week after the season hadstarted Held ndash her promise to perform as from the firstperformance was a condition ndash and its breach entitled themanagement to treat the contract as discharged

Warranties

CA

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46

Contractual terms concerning the less importantor subsidiary statements of facts or promisesIf a warranty is broken this does not entitle

the other party to terminate (or treat asdischarged) the contract it merely entitles

him to sue for damages

Statements of fact or promises which form theessential terms of the contract If the statement is not true or the promise is not fulfilled the

injured party may terminate (or treat as discharged) the contract and claim damages

bull The Sale of Goods Act 1979 designates certain terms aswarranties breach of which do not allow the buyer totreat the contract as discharged but merely to sue fordamages for example the right to quiet enjoyment

bull In Bettini v Gye (1876) a singer was engaged to sing for awhole season and to arrive six days in advance to takepart in rehearsals He only arrived three days in advanceHeld ndash the rehearsal clause was subsidiary to the mainclause It was only a warranty The management wastherefore not entitled to treat the contract as dischargedThey should have kept to the original contract andsought damages for the three daysrsquo delay

Innominate or intermediate terms

bull In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha(1962) it was suggested by the Court of Appeal that itwas not enough to classify terms into conditions andwarranties Regard should also be had to the characterand nature of the breach which has occurred In HongKong Fir the defendants chartered the vessel Hong KongFir to the plaintiffs for 24 months the charter partyprovided that the ship was lsquofitted in every way forordinary cargo servicersquo The vessel spent less than nineweeks of the first seven months at sea because ofbreakdowns and the consequent repairs which werenecessary

CO

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W47

On the facts this was not the case because the charter partystill had a substantial time to run

After the Hong Kong Fir case in 1962 there was someconfusion as to whether the breach based test which appliedto innominate terms had replaced the term based test whichrelied on the distinction between conditions and warrantiesor merely added to it an alternative in certain circumstances

bull In the Mihalis Angelos (1970) the Court of Appeal revertedto the term based test The owners of a vessel stated thatthe vessel was lsquoexpected ready to loadrsquo on or about 1 JulyIt was discovered that this was not so Held ndash the termwas a condition ndash the charterers could treat the contract as discharged

In 1976 two cases were decided on the breach based principle

bull In Cehave v Bremer Handelsgesellshaft MBH The Hansa Nord(1976) the seller had sold a cargo of citrus pellets with aterm in the contract that the shipment be made in goodcondition The buyer rejected the cargo on the basis thatthis term had been broken The defect however was notserious and the court held that although the Sale ofGoods Act had classified some terms as conditions andwarranties it did not follow that all the terms had to be soclassified Accordingly the court could consider the effect

CA

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48

Held ndash the term was neither a condition nor awarranty and in determining whether the

defendants could terminate the contract it wasnecessary to look at the consequences of the

breach to see if it deprived the innocent party ofsubstantially the whole benefit he should

have received under the contract

of the breach since this was not serious the buyer hadnot been entitled to reject

bull In Reardon Smith v Hansen Tangen (1976) an oil tanker wasdescribed as lsquoOsaka No 354rsquo where in fact it was lsquoOshimaNo 004rsquo but was otherwise exactly as specified Becausethe market for oil tankers had collapsed the chartererssought to argue that the number was a condition whichwould enable them to repudiate the contract The Houseof Lords rejected this argument Held ndash the statement wasan innominate term not a condition since the effect ofthe breach was trivial it did not justify termination of thecontract

bull Note ndash the time for determining whether a clause was acondition or an innominate term is at the time ofcontracting ndash not after the breach

Traditionally a term is a condition if it has been establishedas such

bull By statute ndash for example the Sale of Goods Act 1979

bull By precedent after a judicial decision In The MihalisAngelos (1970) the Court of Appeal held that thelsquoexpected readinessrsquo clause in a charter party is acondition

bull By the intention of the parties The court must ascertainthe intention of the parties If the wording clearly revealsthat the parties intended that breach of a particular termshould give rise to a right to rescind that term will beregarded as a condition In Lombard North Central vButterworth (1987) the Court of Appeal held thatcontracting parties can provide expressly in the contractthat lsquospecific breaches could terminate the contractrsquo Inthat case the contract included an express clause that the

CO

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W49

time for payment of instalments was lsquoof the essence of thecontractrsquo An accountant had contracted to hire acomputer for five years agreeing to make an initialpayment and 19 quarterly rental payments He was latein paying some instalments and the owners terminatedthe agreement recovered possession of the computerand claimed damages not only for the arrears but also forloss of future instalments The claim succeeded becausethe contract specifically stated that the time of paymentof each instalment was to be of the essence of the contract

Note the mere use of the word lsquoconditionrsquo is not conclusive

In Schuler v Wickman Tool Sales Ltd (1974) the House of Lordsheld that breach of a lsquoconditionrsquo that a distributor shouldvisit six customers every week could not have been intendedto allow rescission The word lsquoconditionrsquo had not been usedin this particular sense There was in the contract a separateclause which indicated when and how the contract could beterminated

bull By the court ndash deciding according to the subject matter ofthe contract (see Poussard v Spiers (1876) and Bettini v Gye(1876) above)

CA

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50

If a term is not a condition then the lsquowait and seersquotechnique can be used to decide if the gravity of

the breach is such that it deprivedthe innocent party of substantially the whole

benefit of the contract If so ndash then the innocentparty can terminate the contract

(innominate or intermediate term)

Certainty and flexibility

Certainty

bull The term based test is alleged to have the advantage ofpredictability and certainty It is important for the partiesto know their legal rights and liabilities as regards theavailability of termination The character of all terms isascertainable at the moment the contract is concludedNothing that happens after its formation can change thestatus of a term If the term is a condition then the partieswill know that its breach allows the other party toterminate But there can still be uncertainty where theparties have to await the courtrsquos decision on the nature ofthe term

bull The advantage of certainty is however balanced by thefact that it is possible to terminate a contract on atechnicality for sometimes a very minor breach

Flexibility

bull The breach based test is stated to bring flexibility to thelaw Instead of saying that the innocent party can in thecase of a condition always terminate or in the case of awarranty never terminate innominate terms allow thecourts to permit termination where the circumstancesjustify it and the consequences are sufficiently serious

bull It is however more difficult for the innocent party toknow when he has the right to terminate or for the partyin breach to realise in advance the consequence of hisaction

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W51

Note the distinction between the different types of contract terms remains of

considerable importance

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W53

4 Exemption (exclusion or limitation) clauses

A total exclusion is referred to as an exclusion clause apartial exclusion is known as a limitation clause

Exemption clauses are most commonly found in standardform contracts

To be valid an exemption clause must satisfy the tests set bythe

Common law requirements

A clause which purports to exclude wholly or inpart liability for a breach of contract or a tort

Common lawUnfair Contract

Terms Act (UCTA)1977

Regulations onUnfair Terms in ConsumerContracts 1999

The term must be incorporated into the

contract

The wording mustcover what actually

happened

Incorporation

bull This requirement applies to all terms but has beeninterpreted strictly in the case of exemption clauses

A term may be incorporated into a contract by being

Contained in a signed document

In LrsquoEacutestrange v Graucob Ltd (1934) the plaintiff had signed acontract of sale without reading it Held ndash she was bound bythe terms which contained an exemption clause

ExceptionsWhere the offeree has been induced to sign as a result ofmisrepresentation

bull In Curtis v Chemical Cleaning Co (1951) the plaintiffsigned a lsquoreceiptrsquo when she took a dress to be cleaned onbeing told that it was to protect the cleaners in case ofdamage to the sequins In fact the clause excludedliability for all damage Held ndash the cleaners were notprotected for damage to the dress the extent of theclause had been misrepresented and therefore thecleaners could not rely on it

bull lsquoNon est factumrsquo (see p 106 below)

Contained in an unsigned document (ticket cases)

bull This must be seen to be a contractual document

In Chapelton v Barry UDC (1940) on hiring a deckchair the plaintiff was given a ticket with only alarge black 3d on the face of the ticket and exclusionclauses on the back Held ndash the defendants could notrely on the exclusion clauses as it was not apparenton the face of it that the ticket was a contractualdocument rather than just a receipt

CA

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54

bull Reasonable notice of the term must be given

In Parker v South Eastern Railway Co (1877) theplaintiff received a ticket which stated on the facelsquosee backrsquo Held ndash as long as the railway companyhad given reasonable notice of the exemptionclausersquos existence it did not matter that the plaintiffhad not read the clause

In Thompson v London Midland and Scottish Railway(1930) the ticket indicated that the conditions of thecontract could be seen at the station masterrsquos office oron the timetable The exemption clause was in clause552 of the timetable which cost sixpence ndash the ticketitself only cost two and sixpence In the circumstancesnevertheless reasonable notice had been given

The test is objective and it is irrelevant that the partyaffected by the exemption clause is blind or illiterateor otherwise unable to understand it (Thompson vLMS above)

But in Geir v Kujawa (1970) a notice in English wasstuck on the windscreen of a car stating thatpassengers travelled at their own risk A Germanpassenger who was known to speak no English washeld not to be bound by the clause as reasonable carehad not been taken to bring it to his attention

bull Attention must be drawn to any unusual clause

In Thornton v Shoe Lane Parking (1971) it was statedthat a person who drives his car into a car park mightexpect to find in his contract a clause excludingliability for loss or damage to the car but specialnotice should have been given of a clause purportingto exclude liability for personal injury

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W55

In Interfoto Picture Library v Stiletto Visual Programmes(1989) the Court of Appeal confirmed that onerousconditions required special measures to bring them tothe attention of the defendant The clause in that casewas not an exemption clause but a clause imposingcharges 10 times higher than normal The Court ofAppeal stated that the more unusual the clause thegreater the notice required

bull Notice of the term must be communicated to the otherparty before or at the time that the contract is enteredinto

In Thornton v Shoe Lane Parking Ltd (1971) the plaintiffmade his contract with the car company when heinserted a coin in the ticket machine The ticket wasissued afterwards and in any case referred toconditions displayed inside the car park which hecould see only after entry Notice therefore came toolate

bull The rules of offer and acceptance and the distinctionsbetween offers and invitations to treat must be consultedin order to ascertain when the contract was madeProblems with regard to incorporation can arise in atypical lsquoBattle of the Formsrsquo problem See Butler MachineTool Ltd v Ex-Cell-O Corpn (Chapter 1)

Notice by display

Notices exhibited in premises seeking to exclude liability forloss or damage are common for example lsquocar parked atownerrsquos riskrsquo and must be seen before or at the time of entryinto contract

bull In Olley v Marlborough Court Hotel (1949) Mr and MrsOlley saw a notice on the hotel bedroom wall which

CA

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56

stated lsquothe proprietors will not hold themselvesresponsible for articles lost or stolen unless handed tothe manageress for safe keepingrsquo The contract had beenentered into on registration and the clause was thereforenot incorporated into the contract and could not protectthe proprietors

Notice by a lsquocourse of dealingrsquo

bull If there has been a course of dealing between the partiesthe usual terms may be incorporated into the contractalthough not specifically drawn to the attention of theparties each time a contract is made

In Spurling v Bradshaw (1956) Bradshaw deposited someorange juice in Spurlingrsquos warehouse The contractualdocument excluding liability for loss or damage was notsent to Spurling until several days after the contract Held ndashthe exclusion clauses were valid as the parties had alwaysdone business with each other on this basis

bull Note ndash the transactions must be sufficiently numerous toconstitute a course of dealings The established course ofdealings must be consistent The established course ofdealings must not have been deviated from on the occasion in question

In Hollier v Rambler Motors (1972) the Court of Appeal heldthat bringing a car to be serviced or repaired at a garage onthree or four occasions over a period of five years did notestablish a course of dealings

Notice through patent knowledge

bull In British Crane Hire Corpn v Ipswich Plant Hire (1975) theowner of a crane hired it out to a contractor who was alsoengaged in the same business It was held that the hirer

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W57

was bound by the ownerrsquos usual terms though they werenot actually communicated at the time of the contractThey were however based on a model supplied by atrade association to which both parties belonged It wasstated that they were reasonable and were well known inthe trade

Oral contracts

bull Whether a clause has been incorporated into an oralcontract is a matter of evidence for the court (McCutcheonv MacBrayne (1964))

On a proper construction the clause covers the loss

in question

bull An exclusion clause is interpreted contra proferentem thatis any ambiguity in the clause will be interpreted againstthe party seeking to rely on it

in Houghton v Trafalgar Insurance Co Ltd (1954) it washeld that the word lsquoloadrsquo could not refer to people

in Andrews Bros v Singer amp Co Ltd (1934) an exclusionreferring to implied terms was not allowed to cover aterm that the car was new as this was an express term

It was however suggested by the House of Lords inPhoto Production Ltd v Securicor Ltd (1980) that any needfor a strained and distorted interpretation of contracts inorder to control the effect of exemption clauses had beenreduced by the UCTA

bull Especially clear words must be used in order to excludeliability for negligence for example the use of the wordlsquonegligencersquo or the phrase lsquohowsoever causedrsquo (Smith vSouth Wales Switchgear Ltd (1978))

CA

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58

But if these words are not used provided the wording iswide enough to cover negligence and there is no otherliability to which they can apply then it is assumed thatthey must have been intended to cover negligence(Canada Steamship Lines v The King (1952))

bull It was stated in Ailsa Craig Fishing Co v Malvern Fishing Co(1983) that limitation clauses may be interpreted lessrigidly than exclusion clauses

bull Only a party to a contract can rely on an exclusion clause(See Chapter 10)

bull Especially clear words are required when the breach is ofa fundamental nature In the past Lord Denning andothers argued that it was not possible to exclude breachesof contract which were deemed to be fundamental byany exclusion clause however widely and clearlydrafted

However the House of Lords confirmed in Photo ProductionLtd v Securicor Ltd (1980) that the doctrine of fundamentalbreach was a rule of construction not a rule of law that isliability for a fundamental breach could be excluded if thewords were sufficiently clear and precise

The House also stated that

bull the decision in Harbuttrsquos Plasticine Ltd v Wayne Tank andPump Co (1970) was not good law In that case the Courtof Appeal had held that as a fundamental breach broughta contract to an end there was no exclusion clause left toprotect the perpetrator of the breach

bull there is no difference between a lsquofundamental termrsquo anda lsquoconditionrsquo C

ON

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59

bull a strained construction should not be put on words in anexclusion clause which are clearly and fairly susceptibleof only one meaning

bull where the parties are bargaining on equal terms theyshould be free to apportion risks as they wish

bull the courts should be wary of interfering with the settledpractices of business people as an exclusion clause oftenserves to identify who should insure against a particularloss

Unfair Contract Terms Act 1977

Note ndash the title is misleading

bull The Act does not cover all unfair contract terms onlyexemption clauses

bull The Act covers certain tortious liability as well ascontractual liability The following must be examined

CA

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60

Clauses whichare void

Clauses which are valid only if reasonable

The meaning of lsquoreasonablersquo

Scope of the Act

Scope of the Act

bull s 1 ndash the Act applies to contracts made after 1 February1978 which arise in the course of business lsquoBusinessrsquoincludes a profession and the activities of anygovernment department andor public or localauthority

bull s 5 ndash contracts specifically excluded include contracts ofinsurance contracts for the transfer of land andinternational commercial contracts

bull s 13 ndash the Act limits the effectiveness of clauses thatexclude or restrict liability It also covers clauses whichmake it difficult to enforce a contract for example byimposing restrictive time limits or which excludeparticular remedies In Stewart Gill v Horatio Myer and Co(1992) it was held that a clause restricting a right of set-off or counterclaim was subject to the Act It was alsoheld in Smith v Bush (1990) that it covered lsquodisclaimerswhich restrictively defined a partyrsquos obligation under acontractrsquo In that case a valuation was stated to be givenlsquowithout any acceptance of liability for its accuracyrsquo

Negligence

bull The Act covers contractual tortious and statutory (that isunder the Occupiersrsquo Liability Act 1957) negligence

bull The difference between excluding liability for negligenceand transferring liability for negligence is seen in PhillipsProducts v Hyland Bros (1987) where the contracttransferred liability for the negligence of the driver of ahired excavator to the hirer The driver negligentlydamaged property belonging to the hirer Held ndash theclause was an exclusion clause and was subject to UCTA

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W61

bull In Thompson v Lohan (Plant Hire) (1987) on the otherhand an excavator and driver were hired under the sameconditions The driver negligently killed a third partyHeld ndash the clause transferring liability to the hirer was notan exclusion clause in this case as the third party was ableto sue the hirer It was merely a clause transferring liability

Misrepresentation

bull The difference between excluding liability formisrepresentation and defining the powers of an agent isseen in Cremdean Properties v Nash (1977) where a clausein the special conditions of sale stating that thelsquoparticulars were believed to be correct but theiraccuracy is not guaranteedrsquo was held to be an exclusionclause

bull In Collins v Howell Jones (1980) however the Court ofAppeal held a statement that the lsquovendor does not makeor give any representation or warranty and neither theestate agent or any person in their employment has anyauthority to make or give a representation or warrantywhatsoever in relation to the propertyrsquo had the effect ofdefining or limiting the scope of the agentrsquos authority

Effect of the Act

Clauses which are void

Exclusions of liability

bull for death or personal injury caused by negligence (s 2)

bull in a manufacturerrsquos guarantee for loss or damage causedby negligence (s 5)

bull for the statutory guarantee of title in contracts for the saleof goods or hire purchase (s 6)

CA

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62

bull for the other statutory guarantees in consumer contractsfor the sale of goods or hire purchase (descriptionsatisfactory quality fitness for purpose) (s 6)

bull for similar statutory guarantees in other consumercontracts for the supply of goods for example contractsof hire (s 7)

Clauses which are valid only if reasonable

Clauses excluding liability

bull for loss or damage to property caused by negligence (s 2)

bull for breach of contract in a consumer or standard formcontract (s 3) This includes clauses in such contractsclaiming to render a substantially different performancefrom that reasonably expected or to render noperformance at all (s 3)

bull for statutory guarantees (other than those concerningtitle) in inter-business contracts for the sale of goods andhire purchase (description satisfactory quality andfitness for purpose) (s 6)

bull for statutory guarantees concerning title or possession inother contracts for the supply of goods (for examplehire) (s 7)

bull for other statutory guarantees (description satisfactoryquality fitness for purpose) in other inter-businesscontracts for the supply of goods (s 7)

bull for misrepresentation in all contracts

Note

lsquoConsumer transactionrsquo ndash a person is a lsquoconsumerrsquo where hedoes not make or hold himself out as making the contract in

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W63

the course of business and the other party does make thecontract in the course of business In contracts for the sale ofgoods the goods must also be of a type normally sold forprivate use

bull A controversial interpretation of a lsquoconsumerrsquo was madeby the Court of Appeal in R and B Customs v UnitedDominion Trust (1988) where a car was bought by aprivate company for the business and private use of itsdirectors It was held by the Court of Appeal that it wasnot bought lsquoin the course of a businessrsquo Buying cars wasincidental not central to the business of the company If itis incidental only then the purchase would only be lsquoin thecourse of a businessrsquo if it was one made with sufficientregularity

Note however that in Stevenson v Rogers (1999) the Courtof Appeal refused to apply the R and B Customs Brokersapproach to the question of whether a sale was in the courseof a business for the purpose of s 14(12) of the Sale of GoodsAct 1979

A lsquostandard form contractrsquo occurs when the parties deal onthe basis of a standard form provided by one of them

Reasonableness

In assessing reasonableness the following matters should beconsidered

CA

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64

It is for the person relying on the clause to prove that the clause is reasonable

Section 11 of UCTA 1977

bull Contract terms are to be adjudged reasonable or notaccording to the circumstances which were or oughtreasonably to have been known to the parties when thecontract was made

bull Where a person seeks to restrict liability to a specifiedsum of money regard should be had to the resourceswhich he could expect to be available to him for thepurpose of meeting the liability and as to how far it wasopen to him to cover himself by insurance

bull In determining for the purpose of s 6 or s 7 whether acontract term satisfies the requirement of reasonablenessregard shall be had to

the strength of the bargaining position of the partiesrelative to each other

whether the customer received an inducement toagree to the term and had an opportunity of enteringinto a similar contract with other persons butwithout having to accept similar terms

whether the customer knew or ought reasonably tohave known of the existence and extent of the term

where the exclusion is conditional whether it wasreasonable to expect that compliance with thatcondition would be practicable

whether the goods were manufactured processed oradapted to the special order of the customer(Sched 2)

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W65

Decisions of the courts

In Smith v Bush (1990) and Harris v Wyre Forest DC (1989) theHouse of Lords dealt with two cases involving the validity ofan exclusion clause protecting surveyors who had carriedout valuations of a house The House of Lords decided thatthe clauses were exclusion clauses designed to protect thesurveyors against claims for negligence Lord Griffithsdeclared that there were four matters which should alwaysbe considered

bull were the parties of equal bargaining power

bull in the case of advice would it have been reasonable toobtain advice from another source

bull was the task being undertaken a difficult one for whichthe protection of an exclusion clause was necessary

bull what would be the practical consequences for the partiesof the decision on reasonableness For example wouldthe defendant normally be insured Would the plaintiffhave to bear the cost himself

In inter-business contracts the practices of business peopleare considered

bull In Photo Production v Securicor (1980) the House of Lordsstated that the courts should be reluctant to interfere withthe settled practices of businesses They pointed out thatthe function of an exclusion clause was often to indicatewho should insure against a particular risk

bull In Green v Cade Bros (1983) it was decided that a clauserequiring notice of rejection within three days of deliveryof seed potatoes was unreasonable as a defect could nothave been discovered by inspection within this time buta clause limiting damages to the contract price was

CA

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66

upheld ndash as it had been negotiated by organisationsrepresenting the buyers and sellers and lsquocertifiedrsquopotatoes had been available for a small extra charge (thatis Sched 2 was applied)

bull However in George Mitchell v Finney Lock Seeds Ltd (1983)the buyers suffered losses of pound61000 due to the supply ofthe wrong variety of cabbage seeds The contract limitedthe liability of the seller to a refund of the price paid(pound192) Held ndash the clause was not reasonable Matterstaken into consideration

the clause was inserted unilaterally ndash there was nonegotiation

loss was caused by the negligence of the seller

the seller could have insured against his liability

the sellers implied that they themselves consideredthe clause unreasonable by accepting liability inprevious cases

bull In Overland Shoes Ltd v Schenkers Ltd (1998) the Court ofAppeal upheld a judgersquos ruling that a clause preventingreliance on a lsquoset-offrsquo was not unreasonable on the basisthat it formed part of a set of standard trading conditionsused widely in the shipping industry They had arisenfrom careful negotiation and were generally recognisedin the industry as lsquofair and reasonablersquo

bull In Overseas Medical Supplies Ltd v Orient Transport ServicesLtd (1999) the Court of Appeal summarised the variousfactors which should be looked at in considering the testof reasonableness It confirmed that the lsquoGuidelinesrsquocontained in Sched 2 to UCTA although specificallyintended for consumer contracts for the sale of goods

CO

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W67

should be regarded as relevant wherever the test ofreasonableness is applied

In many of the cases the appeal courts have emphasised thatthe decision on lsquoreasonablenessrsquo is best made by the trialjudge and that the appeal courts should be reluctant tointerfere with the conclusion arrived at at first instance

Unfair Terms in Consumer Contracts Regulations 1999

Based on EU Directive on Unfair Terms in ConsumerContracts The 1999 regulations replaced earlier regulationsmade in 1994

Coverage

The regulations apply to

This will be so even if some other parts of the contract havenot been drafted in advance

bull The regulations do not apply to contracts which relate toemployment family law or succession rights companiesor partnerships terms included in order to comply withlegislation or an international convention

CA

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68

Coverage Fairness Remedies

lsquoany term in a contract between a seller or supplier and a consumer where

the term has not been individually negotiatedrsquo thatis it has been drafted in advance

bull They do however cover insurance policies and contractsrelating to land

bull A lsquobusinessrsquo is defined to include a trade or professionand the activities of any government department or localor public authority

bull A lsquo consumerrsquo means a natural person who is acting for apurpose outside his business

Note ndash they are wider than UCTA in that they cover allterms not only exclusion clauses for example harsh termsconcerning unauthorised overdrafts The regulations arenarrower than UCTA in that they only cover clauses inconsumer contracts which have not been individuallynegotiated The definition of a consumer is also narrower cfR and B Customs v UDT (1988)

Unfairness

Regard must be had to the nature of the goods and servicesprovided the other terms of the contract and all thecircumstances relating to its conclusion

The definition of the main subject matter and the adequacyof the price or remuneration are not subject to the test offairness

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W69

The clause is unfair if contrary to the requirementsof good faith it creates a significant imbalance

in the partiesrsquo rights and obligations to thedetriment of the consumer

lsquoGood faithrsquo is not defined and unlike the earlier (1994)regulations the 1999 regulations do not spell out anyrelevant factors

In Director General of Fair Trading v First National Bank plc(2000) the Court of Appeal emphasised the need foropenness and information which will enable the consumerto make a properly informed choice about entering into thecontract In this case a clause imposing a lsquosurprisingrsquorequirement as to the payment of interest on a loan whichhad been the subject of a court order did not meet therequirement of good faith

The regulations contain a long indicative list of clauses likelyto be unfair These include not only exemption clauses butalso clauses which give the sellersupplier rights withoutcompensating rights for the consumer for example

bull enabling the sellersupplier to raise the price withoutgiving the buyer a chance to back out if the price rise istoo high

bull enabling the sellersupplier to cancel the agreementwithout penalty without also allowing the customer asimilar right

bull automatically extending the duration of the contractunless the customer indicates otherwise within an unreasonably brief period of time

Note also that all terms (including those defining thesubject matter or the price) should be expressed in plainEnglish and any ambiguity should be interpreted in theconsumerrsquos favour

CA

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70

Effect of an unfair term

bull The term itself shall not be binding on the consumer butthe rest of the contract may be enforced

bull The Director General of Fair Trading has a duty toconsider any complaint made to him that a term is unfairHe is empowered to bring proceedings for an injunctionagainst any business using an unfair term It was thispower that was used in the first reported case on theregulations Director General of Fair Trading v FirstNational Bank plc (2000) discussed above For the firsttime a similar power to apply for such an injunction isgiven to certain other lsquoqualifying bodiesrsquo including theData Protection Registrar various Directors General (ofgas supply electricity supply telecommunicationswater services) and the Consumersrsquo Association

CO

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W71

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W73

5 Vitiating elements which render a contract voidable

Significance of a contract being voidable

Thus

bull The innocent party may if he wishes affirm the contract

bull Where the innocent party has not performed thecontract he may refuse to perform and rely on themisrepresentation as a defence

bull The misled party may rescind the contract by

informing the other party or

where a fraudulent party cannot be traced byinforming the police (Car and Universal Finance Co vCaldwell (1965)) or

bringing legal proceedings

The innocent party may set the contractaside if he so wishes

Misrepresentation Duress Undue influence

Certain mistakes (see Chapter 6)

bull It was stated in TSB v Camfield (1995) that the right torescind is that of the representee not the court All thecourt can do is decide whether the representee haslawfully exercised the right to rescind It is not thereforean exercise of equitable relief by the court

Rescission

bull But in Cheese v Thomas (1993) the court declared that thecourt must look at all the circumstances to do what waslsquofair and justrsquo In that case a house which had beenjointly bought had to be sold afterwards at aconsiderable loss The agreement between the twoparties for the purchase of the house was rescinded butthe court held that it was not necessary for the guiltyparty to bear the whole of the loss It was fair and justthat the proceeds should be divided according to thepartiesrsquo respective contributions

bull This contrasts with the normal situation where aproperty has diminished in value and the misled partywould get all his money returned (Erlanger v NewSombrero Phosphate Co (1878))

bull As part of this restoration equity may order a sum ofmoney to be paid to the misled person to indemnify himagainst any obligations necessarily created by the contract

In Whittington v Seale-Hayne (1900) the plaintiffsbreeders of prize poultry were induced to take a lease ofthe defendants premises by his innocent

CA

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74

Restoring the parties as far as is possible to the position they were in before they

entered into the contract

misrepresentation that the premises were in a sanitarycondition Under the lease the plaintiffs covenanted toexecute all works required by any local or publicauthority Owing to the insanitary conditions of thepremises the water supply was poisoned the plaintiffsrsquomanager and his family became very ill and the poultrybecame valueless for breeding purposes or died Inaddition the local authority required the drains to berenewed The plaintiffs sought an indemnity for all theirlosses The court rescinded the lease and held that theplaintiffs could recover an indemnity for what they hadspent on rates rent and repairs under the covenants inthe lease because these expenses arose necessarily out ofthe contract It refused to award compensation for otherlosses since to do so would be to award damages not anindemnity there being no obligation created by thecontract to carry on a poultry farm on the premises or toemploy a manager etc

bull Note ndash rescission even if enforced by the court is alwaysthe act of the defrauded party It is effective from the dateit is communicated to the representor or the police (seeabove) and not from the date of any judgment insubsequent litigation

Rescission is subject to certain barsC

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75

Affirmation of the contract

Lapse of time

Restitution mustbe possible

Third party rights

Affirmation of the contractThe representee may not rescind if he has affirmed thecontract after learning of the misrepresentation either bydeclaring his intention to proceed with the contract or byperforming some act from which such an intention can beinferred In Long v Lloyd (1958) the buyer of a lorryundertook a long journey after discovering serious defects inthe lorry Held ndash he had affirmed the contract

Lapse of timeThis can provide evidence of affirmation where themisrepresentee fails to rescind for a considerable time afterdiscovering the falsity

In cases of innocent misrepresentation lapse of time canoperate as a separate bar to rescission In Leaf v InternationalGalleries (1950) the plaintiff bought a picture which the sellerhad innocently misrepresented to be by Constable Fiveyears later the plaintiff discovered it was not by Constableand immediately sought to rescind the contract Held ndashbarred by lapse of time

Restitution must be possibleA person seeking to rescind the contract must be able andwilling to restore what he has received under it Howeverrescission is an equitable remedy and the court will notallow minor failures in the restoration to the originalposition to stand in the way In Erlanger v New SombreroPhosphate Co (1878) the purchaser had worked phosphatemines briefly Held ndash he could rescind by restoring propertyand accounting for any profit derived from it

CA

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76

Third party rightsThere can be no rescission if third parties have acquiredrights in the subject matter of the contract See Phillips vBrooks (1919) and Lewis v Averay (1972) ndash Chapter 6

Misrepresentation

Representations and terms of a contract

Material statements made during negotiations leading to acontact may be either

bull terms of the contract If these are untrue the untruthconstitutes a breach of contract

bull statements which helped to induce the contractthat is lsquomere representationsrsquo If untrue ndash they arelsquomisrepresentationsrsquo

(For distinctions between terms and lsquomere representationsrsquosee Chapter 3)

Requirements of misrepresentation

It must be

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W77

An untrue statement of fact made by one party tothe contract (representor) to the other (representee)which induces the other to enter into the contract

The requirements ofmisrepresentation

Remedies formisrepresentation

A statement of fact

bull Not a lsquomere puffrsquo that is a statement so vague as to bewithout effect for example describing a house as alsquodesirable residencersquo

bull Not a promise A promise to do something in the futureis only actionable if the promise amounts to a bindingcontract (Kleinwort Benson Ltd v Malaysian Mining CorpnBhd (1989))

bull Not a statement of opinion for example in Bisset vWilkinson (1927) the vendor of a farm which had neverbeen used as a sheep farm stated that in his judgment thefarm would support 2000 sheep Held ndash a statement ofopinion

But a statement expressed as an opinion may be treatedas a statement of fact if the person making the statementwas in a position to know the true facts In Smith v Landand House Prop Corpn (1884) the vendor of a hoteldescribed it as lsquolet to a most desirable tenantrsquo when thetenant had for a long time been in arrears with the rentThe Court of Appeal held there was a misrepresentationof fact

bull Not a statement of intention But if the representor didnot have that intention then it is a misstatement of fact asin Edgington v Fitzmaurice (1885) where the directorsissued a prospectus claiming that the money raised was tobe used to improve the companyrsquos buildings and toexpand its business Their real intention was to pay off thecompanyrsquos debts Held ndash fraudulent misrepresentation

bull Not a statement of law

CA

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78

An active representation

bull The statement will normally be in words but other formsof communication which misrepresent the facts willsuffice as in Horsfall v Thomas (1862) (below)

bull Failure to make a statement however or the non-disclosure of facts will not generally qualify asmisrepresentation

Exceptionsbull Where facts have been selected to give a misleading

impression as in Dimmock v Hallett (1866) where avendor of land stated that farms were let but omitted tosay that the tenants had given notice to quit

bull Where circumstances have changed since arepresentation was made then the representor has a dutyto correct the statement In With v OrsquoFlanagan (1936) itwas stated correctly that a medical practice was worthpound2000 a year but by the time the practice changedhands it was practically worthless Held ndash there was aduty to disclose the changed circumstances

bull Contracts uberrimae fidei (lsquoof the utmost good faithrsquo) forexample

Contract of insurance Material facts must bedisclosed that is facts which would influence aninsurer in deciding whether to accept the proposalor to fix the amount of the premium for example apolicy of life insurance has been avoided because itwas not disclosed that the proposer had already beenturned down by other insurers

Family arrangements In Gordon v Gordon (1816ndash19)a division of property based on the proposition thatthe elder son was illegitimate was set aside upon

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W79

proof that the younger son had concealed hisknowledge of a private marriage ceremonysolemnised before the birth of this brother

Analogous contracts Where there is a duty todisclose not material but unusual facts for examplecontracts of suretyship

It must have been a material inducement

A statement likely to induce a person to contract willnormally be assumed to have done so Moreover if theclaimant can show that he was in fact induced it is nodefence to argue that a reasonable person would have beeninfluenced by the misrepresentation (Museprime PropertiesLtd v Adhill (1990)) There is no inducement however where

bull the misrepresentee or his agent actually knew the truth

bull the misrepresentee was ignorant of the misrepresentationwhen the contract was made In Horsfall v Thomas (1862)the vendor of a gun concealed a defect in the gun(misrepresentation by conduct) The buyer howeverbought the gun without examining it Held ndash theattempted misrepresentation had not induced thecontract

bull the misrepresentee did not allow the representation toaffect his judgment In Attwood v Small (1838) a buyerappointed an agent to check the statement made by theseller as to the reserves in a mine Held ndash not actionablemisrepresentation The buyer had relied on his ownagentrsquos statements not that of the vendor

Note however that

bull provided that the representation was one of theinducements it need not be the sole inducement

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80

bull the fact that the representee did not take advantage of anopportunity to check the statement is no bar to an actionfor misrepresentation

In Redgrave v Hurd (1881) a solicitor was induced topurchase a house and practice by the innocentmisrepresentation of the seller Held ndash he was entitled torescission although he did not examine the documentswhich were available to him and which would haveindicated to him the true state of affairs

bull neither is it contributory negligence not to check astatement made by a vendor (Gran Gelato v Richcliff(1992))

Remedies for misrepresentation

Rescission

Misrepresentation renders a contract voidable ndash see aboveThe Misrepresentation Act 1967 provides that rescission isavailable in relation to

bull lsquoexecutedrsquo contracts for the sale of goods andconveyances of property

bull representations which have been incorporated as a termof the contract

Rescission was not available in these circumstances before1967

Damages

bull There are five ways in which damages may be claimedfor misrepresentation It seems likely that in future thenormal ground for damages will be the

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W81

Misrepresentation Act 1967 but there are still cases wheredamages can only be claimed at common law if at all

bull Note ndash rescission and damages are alternative remediesin many cases but if the victim of fraudulent ornegligent misrepresentation has suffered consequentialloss he may rescind and sue for damages

bull Damages can be claimed on different bases according tothe kind of misrepresentation that was committed

Damages in the tort of deceit for fraudulent misrepresentationIt is up to the misled party to prove that themisrepresentation was made fraudulently that isknowingly without belief in its truth or recklessly as towhether it be true or false (Derry v Peek (1889))

The burden of proof on the misled party is a heavy one

Damages in the tort of negligence Victims of negligent misrepresentation may be able to sueunder Hedley Byrne v Heller amp Partners (1963) Themisrepresentee must prove (1) that the misrepresentorowed him a duty to take reasonable care in making therepresentation that is there must be a lsquospecial relationshiprsquo(2) that the statement had been made negligently

Damages under s 2(1) of the Misrepresentation Act 1967Section 2(1) of the Misrepresentation Act 1967 provides thatwhere a person has entered into a contract after amisrepresentation has been made to him by another partythereto and as a result of it has suffered loss lsquothen if themisrepresentor would be liable for damages if it had beenmade fraudulently he will be so liable notwithstanding thatthe misrepresentation was not made fraudulently unless heproves that he had reasonable grounds to believe and did

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82

believe up to the time the contract was made that the factsrepresented were truersquo

Note that this is a more beneficial remedy for themisrepresentee as he only need prove that the statement isuntrue It is for the misrepresentor to prove that he had goodgrounds for making the statement and the burden of proofis a heavy one In Howard Marine and Dredging Co Ltd vOgden (1978) the owner of two barges told the hirer that thecapacity of the barges was 1600 tons He obtained thesefigures from the Lloydrsquos list but in this case the Lloydrsquos listwas incorrect The court held that he did not have goodgrounds for this statement he should have consulted themanufacturerrsquos specifications which should have been in hispossession

Assessment of damages

The Court of Appeal confirmed in Royscot Trust v Rogerson(1991) that damages under s 2(1) of the MisrepresentationAct should also be awarded on the reliance basis because ofthe lsquofiction of fraudrsquo in the wording of the Act

Remoteness of damage

The Court of Appeal also held in that case because of thelsquofiction of fraudrsquo that the rules of remoteness whichnormally apply only to the tort of deceit should be appliedunder s 2(1)

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W83

Damages in the tort of deceit and the tortof negligence are assessed on the tortious basis of reliance that is the claimant is entitled to be

put in the position he was in before the tort was committed

(In contract and in all torts other than deceit the losses mustbe lsquoreasonably foreseeablersquo)

bull In Royscot Trust v Rogerson (1991) a customer arranged toacquire a car on hire purchase from a car dealer Thefinance was to be provided by a finance company theRoyscot Trust which insisted on a deposit of 20 Thedealer falsified the figures in order to indicate a deposit of20 as required Some months later the customerwrongfully sold the car thus depriving the financecompany of its property The finance company sued thedealer under s 2(1) of the Misrepresentation Act It washeld by the Court of Appeal that the finance companycould recover damages from the car dealer to cover theloss of the car since the loss followed themisrepresentation The remoteness rules applicable to thetort of deceit would be applied and the loss did not needto be foreseeable

Controversy has followed this decision as the tort ofdeceit to which this rule only previously applied isdifficult to establish and involves moral culpability onthe part of the defendant It has now been extended to anaction which is relatively easy to establish (see HowardMarine and Dredging v Ogden) and may only involvecarelessness Some doubts as to whether this was thecorrect approach were expressed obiter by the House ofLords in Smith New Court Securities Ltd v ScrimgeourVickers (Asset Management) Ltd (1996) but for the timebeing Royscot v Rogerson remains good law

CA

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84

That is damages would be awarded to coverall losses which flow directly from the

untrue statement whether or not those losses were foreseeable

bull Further problems are caused by the decision of the Courtof Appeal in East v Maurer (1991) a case in the tort ofdeceit where it was held that lsquoall damages flowingdirectly from the fraudrsquo would cover damages for somedegree of loss of profit ndash a heading previously consideredto be appropriate only to expectation damages incontract It is a matter for speculation whether the courtswill apply this decision to cases under theMisrepresentation Act and bring loss of profit under theheading of reliance loss on the basis that all losses whichflow directly from the misrepresentation should berecoverable

bull A generous interpretation of s 2(1) of the 1967 Act hadalso been applied by the court in Naughton v OrsquoCallaghan(1990) where reliance damages had been awarded tocover not only the difference between the value of the coltand the value it would have had if the statements madeabout it were correct (the quantification rule for breach ofcontract) but also the cost of its maintenance since thesale

It has been alleged that these three cases swell the amount ofdamages which can be awarded under the MisrepresentationAct to a greater extent than intended by Parliament and thatthe damages available for misrepresentation can nowexceed those available for breach of contract

Damages for wholly innocent misrepresentationDamages cannot be claimed for a misrepresentation whichis not fraudulent or negligent but

bull an indemnity may be awarded (see above)

bull damages in lieu of rescission may be awarded under s 2(2) of the Misrepresentation Act 1967 C

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85

In William Sindall v Cambridgeshire CC (1994) the Court ofAppeal stated (obiter) that where the court is consideringwhether to award damages in lieu of rescission threematters should be taken into consideration

the nature of the misrepresentation

the loss which would be caused to the representee ifthe contract were upheld

the hardship caused to the misrepresentor if the con-tract were rescinded The Court of Appeal also statedthat the damages should resemble damages forbreach of warranty

bull lsquodamages in lieursquo can it seems be awarded even if one ofthe bars to recision apply (Thomas Witter Ltd v TBPIndustries (1996))

bull where the misrepresentation has become a term of thecontract the misrepresentee can sue for damages forbreach of contract as an alternative to damages formisrepresentation

Duress

A common law doctrine

Duress to the person

This requires actual or threatened violence to the personOriginally it was the only form of duress recognised by thelaw

CA

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86

Duress involves coercion

Duress to goods

bull Threat of damage to goods ndash traditionally this has notbeen recognised by the law but in view of thedevelopment of economic duress it is assumed thatduress to goods would today be a ground for relief

Economic duress

Requires

Economic duress led to rescission of a contract in UniverseTankships of Monrovia v ITWF (1983) where a union hadlsquoblackedrsquo a tanker and refused to let it leave port untilcertain moneys had been paid The House of Lordsconsidered that this amounted to economic duress andordered return of the money

It has been stated that economic duress requires

Compulsion or coercion of the will

In Pau On v Lau Yiu Long (1980) Lord Scarman listed thefollowing indications of compulsion or coercion of the will

bull did the party coerced have an alternative course open tohim

bull did the party coerced protest

bull did the party coerced have independent advice

bull did the party coerced take steps to avoid the contract

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W87

Compulsion of the will An illegitimate threat

Illegitimate pressure

There must be some element of illegitimacy in the pressureexerted for example a threatened breach of contract Theillegitimacy will normally arise from the fact that what isthreatened is unlawful In CTN Cash and Carry v Gallaher(1994) however the Court of Appeal accepted obiter that anoutrageous but technically lawful threat could amount toduress This possibility has not so far been developed in anylater cases

Economic duress is often pleaded together with lack ofconsideration in cases where a breach of contract isthreatened by the promisor unless he receives additionalpayment

bull In Atlas Express v Kafco (1989) Kafco a small companywhich imported and distributed basketware had acontract to supply Woolworths They contracted withAtlas for delivery of the basketware to Woolworths Thecontract commenced then Atlas discovered they hadunderpriced the contract and told Kafco that unless theypaid a minimum sum for each consignment they wouldcease to deliver Kafco were heavily dependent on theWoolworths contract and knew that a failure to deliverwould lead both to the loss of the contract and an actionfor damages At that time of the year they could not findan alternative carrier and agreed under protest to makethe extra payments Atlas sued for Kafkorsquos non-paymentHeld ndash the agreement was invalid for economic duressand also for lack of consideration

bull Cf Williams v Roffey Bros (1989) ndash Chapter 2

The following threats are probably not illegitimate (subjectto the possibility raised by CTN Cash and Carry v Gallaher(1994) discussed above)

CA

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88

bull a threat not to enter into a contract

bull a threat to institute civil proceedings

bull a threat to call the police

Note ndash not all threatened breaches of contract will amount toeconomic duress It will only do so when the threatenedparty has no reasonable alternative open to him The normalresponse to a breach of contract is to sue for damages

Remedies

bull In North Ocean Shipping Co v Hyundai Construction Co TheAtlantic Baron (1979) the court found economic duressbut refused rescission on the ground that the plaintiff hadaffirmed the contract

Undue influence

An equitable doctrine

bull Undue influence is based on the misuse of a relationshipof trust or confidence between the parties Where foundit renders a contract voidable The innocent party willneed to apply to the court for rescission of the contract(see above)

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W89

Pressure not amounting to duress at common lawwhereby a party is excluded from the exercise of

free and independent judgment

Duress renders a contract voidable Rescission willnormally be sought from the courts See above

Contracts where undue influence is presumed

For example

bull Contracts between certain relationships

parent and child

trustee and beneficiary

solicitor and client

doctor and patient

religious adviser and disciple

bull Where there has been a long relationship of confidenceand trust between the parties

For example between husband and wife or where oneparty had been accustomed to rely for guidance andadvice on the other In Lloyds Bank v Bundy (1975) MrBundy an elderly west country farmer on the advice ofthe local Lloyds Bank assistant manager granted a chargeto the bank over the family farm to guarantee his sonrsquos

CA

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90

Contracts where undue influence

is presumed

Contracts where actual undue

influence must be proved

Contracts induced by undue influence are of two kinds

The contract must be manifestly disadvantageous

to the weaker party

Contracts need not be manifestly disadvantageous

to the weaker party

indebtedness to the bank Mr Bundy had all his liferelied on Lloyds Bank for financial advice the court setaside the charge on the ground of undue influence on thepart of the bank

Note ndash a bank will not be presumed to exert undueinfluence in normal circumstances

In Credit Lyonnais Bank Nederland NV v Burch (1997) therelationship between an employer and a junior employee(who was persuaded to put up her own house as securityfor the businessrsquos overdraft) was held to be one of undueinfluence

The stronger party can disprove undue influence byshowing that

bull full disclosure of all material facts was made

bull the consideration was adequate

bull the weaker party was in receipt of independent legaladvice

Contracts where actual undue influence is proved

The burden of proof lies on the claimant to show that suchinfluence did exist and was exerted

Effect of undue influence on a third party

In Barclays Bank v OrsquoBrien (1993) Mrs OrsquoBrien had signed aguarantee which used the jointly owned matrimonial homeas security for a loan made to her husbandrsquos business Herhusband had told her it was for a maximum of pound60000 butin fact it was for pound130000 Mrs OrsquoBrien had not been advisedby the bank to consult an independent solicitor The Houseof Lords held that there was no undue influence in this casebut there was misrepresentation on the part of the husband

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W91

They further held that where there was undue influence ormisrepresentation or other legal wrong then the injuredpartyrsquos right to have the transaction set aside would beenforceable also against the third party provided the thirdparty had actual or constructive notice of the wrong Suchnotice would arise where

bull the parties were in an emotional relationship forexample co-habitees (heterosexual or homosexual) orchild and aged parents

bull one party was undertaking a financial liability on behalfof the other which was not to her or his advantage

The court also held that in the above situation the third partycould discharge his duty by making clear to the partyconcerned the full nature of the risk he or she is taking onfor example

bull by conducting a personal interview or

bull urging independent advice

Note ndash this doctrine of constructive notice applies to sureties(guarantors) but does not apply where a bank makes a jointloan to both parties as the facts in that situation do not meetthe requirements set out in Barclays Bank v OrsquoBrien See CIBCMortgages v Pitt (1993)

Note

bull A failure by a solicitor to give proper advice cannot beheld against a bank (even if the bank knows that thesolicitor is acting for both the borrower (for example thehusband) and the guarantorsurety (for example thewife)) ndash see Royal Bank of Scotland v Etridge (No 2) (1998)

CA

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92

bull Once undue influence or misrepresentation has beenfound the whole contract is avoided it cannot be upheldin part ndash TSB Bank plc v Camfield (1995)

bull Damages are not available as a remedy for duress orundue influence

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CT

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W93

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W95

6 Mistake

There is much disagreement concerning the effect ofmistake on a contract There are many reasons for thisconfusion as to which terms to use a large number of caseswhich can be interpreted in different ways no recentdecisive House of Lords decisions on the subject theintervention of equity

Terminology

Different terms are used by Cheshire and Anson to describethe same kind of mistake and you should ascertain whichterms are used in your textbook

The terms used by Cheshire are used in this LawCard

CHESHIRE ANSON Effect

Same mistake Common Mutual May nullifymade by both mistake mistake agreementparties

Parties at Mutual Unilateral Negativescross-purposes mistake mistake agreement

Parties atcross-purposesbut one party Unilateral Unilateral Negativesknows that mistake mistake agreementthe other is mistaken

Effect of a mistake

If the contract is rendered void then the parties will bereturned to their original positions and this may defeat therights of innocent third parties who may have acquired aninterest in the contract

The reluctance of the courts to develop the common lawdoctrine of mistake is probably due to the unfortunateconsequences for third parties that can result from holdinga contract void Equity has however intervened to producemore flexibility as noted below

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96

In common mistakes the parties are agreed but both are mistaken

In mutual and unilateral mistakes the parties may not have reached agreement and these mistakes are sometimes dealt with

under the heading of agreement

The general rule is that a mistake has no effect on a contract but certain mistakes of a fundamental nature sometimes called

operative mistakes may render a contract void at common law

Operative mistakes

Common mistakes

bull At common law this may render the contract void thatis the contract has no legal effect it is unenforcable byeither party and title to property cannot pass under it

bull In equity a more flexible approach has developedcontracts containing certain common mistakes have beentreated as voidable In setting aside such contracts thecourts have a much wider control over the terms it canimpose on the parties

In Bell v Lever Bros (1932) it was stated that to nullify theagreement the lsquomistake must go to the root of the contractrsquo

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W97

Commonmistakes

re a fundamentalmatter for

example resextincta res sua

the quality of the subject matter

Mutualmistakes

re identity ofsubject matter

of contract

Unilateralmistakes

re terms ofcontract re

identity of otherparty to contract

The parties are agreed but they are both under the same misapprehension If this

misapprehension is sufficiently fundamentalit may nullify the agreement

Lever Bros agreed to pay two directors of a subsidiarycompany substantial sums of money in compensation forloss of office while unaware of the fact that they hadengaged in irregular conduct which would have allowedthem to be dismissed without compensation Lever Brosasked the court to order the return the compensation paid onthe ground that it had been paid as a result of a commonmistake The House of Lords held that the common mistakeconcerning the need to pay compensation was notlsquosufficiently fundamentalrsquo to render the contract void

Common mistakes lsquosufficiently fundamentalrsquo to render a

contract void

A common mistake as to the existence of the subject matter(res extincta)bull In Galloway v Galloway (1914) the parties believing they

were married entered into a separation agreement Laterthey discovered that they were not validly married Held ndashthe separation agreement was void for a common mistake

bull In Strickland v Turner (1852) the court declared void onthe grounds of a common mistake a contract to purchasean annuity on the life of a person who had already died

bull In Couturier v Hastie (1856) a buyer bought a cargo ofcorn which both parties believed to be at sea the cargohad however already been disposed of Held ndash thecontract was void

bull Section 6 of the Sale of Goods Act 1979 declares thatlsquoWhere there is a contract for the sale of specific goodsand the goods without the knowledge of the seller haveperished when the contract is made the contract is voidrsquo

CA

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98

However in McRae v Commonwealth Disposals Commission(1951) the commission sold to McRae the right to salvagea tanker lying on a specified reef There was no such reefof that name nor was there any tanker The court foundthat there was a valid contract and that the commissionhad impliedly guaranteed the existence of the tanker Thecase could be distinguished from the Australianequivalent of s 6 on the ground that there never had beena tanker and it had therefore not perished

Whether a contract is void or valid depends on theconstruction of the contract that is even if the subjectmatter does not exist the contract will be valid

if performance was guaranteed or

if it was the purchase of a lsquochancersquo

Otherwise the contract would be void

Mistake as to title ndash res sua ndash that is the thing sold alreadybelongs to the buyerbull In Cooper v Phibbs (1867) Cooper not realising that a

fishery already belonged to him agreed to lease it fromPhibbs Held ndash the contract was void

Mistake as to the possibility of performing the contractbull In Sheik Bros Ltd v Ochsner (1957) a contract was held

void as the land was not capable of growing the cropcontracted for

bull In Griffith v Brymer (1903) a contract to hire a room toview the coronation of Edward VII which was madeafter the procession had been cancelled was held void(Commercial impossibility) C

ON

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99

Mistake as to the quality of the subject matterLords Atkin and Thankerton both insisted in Bell v Lever Brosthat to render a contract void the mistake must go to thelsquoroot of the contractrsquo

bull It has been argued that if the mistake in Bell was notsufficiently fundamental to render a contract void then itis highly unlikely that any mistake concerning qualitywould do so

bull Similarly in Leaf v International Galleries (1950) whereboth parties mistakenly believed that a painting was byConstable the Court of Appeal stated that the contractwas not void for common mistake

bull In Solle v Butcher (1950) the Court of Appeal declined todeclare void a lease which both parties believed was notsubject to the Rent Acts A similar decision was reachedin Grist v Bailey (1967) where the parties both believedthat a house was subject to a protected tenancy

However Lord Justice Steyn in Associated Japanese Bank vCredit du Nord (1988) stated that not enough attention hadbeen paid to speeches in Bell v Lever Bros which did indicatethat a narrow range of mistakes in quality could render acontract void for example Lord Atkinrsquos statement that lsquoacontract may be void if the mistake is as to the existence ofsome quality which makes the thing without that qualityessentially different from the thing it was believed to bersquo Hegave as an example ndash if a horse believed to be sound turnsout to be unsound then the contract remains valid but if ahorse believed to be a racehorse turns out to be a carthorsethen the contract is void

CA

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100

Equity

The role of equity according to this view is supplementarydesigned to relieve the limitations of the common law

bull Rescission on terms was granted by the Court of Appealin Solle v Butcher (1950) (see above) The court rescindedthe lease but gave the tenant the option of staying thereon terms of his paying the extra rent which the landlordcould have charged in view of the improvements

bull Rescission on terms was also granted in Grist v Bailey(1967) where a house was sold in the mistaken belief thatit had a protected tenancy and in Laurence v LexcourtHoldings (1978) where there was a common mistake withregard to planning permission

bull Rescission without terms was granted in Magee v PennineInsurance Co (1969) where an agreement by an insurancecompany to meet a claim was rescinded because theparties were unaware that it was based on a policy whichwas voidable due to a misrepresentation by the assured

bull In William Sindall plc v Cambridgeshire CC (1994) Evans LJsuggested that whereas the common law only recognisedmistakes as to the subject matter of the contract equitywould recognise a lsquowider and perhaps unlimitedcategory of common mistakersquo In Clarion Ltd v NationalProvident Institution (2000) however Rimer J held that

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W101

Lord Justice Steyn in Associated Japanese Bank v Credit du Nord (1988) stated that a court will first examine whether a

contract is void at common law if it is not then itwill examine whether equity will grant rescission

equity would only intervene where the mistake was as tothe terms of the contract or its subject matter Equity didnot provide relief for a lsquobad bargainrsquo

Mutual and unilateral mistakes

The courts adopt an objective test in deciding whetheragreement has been reached It is not enough for one of theparties to allege that he was mistaken

Mistake can negate consent in the following cases

Mutual mistakes concerning the identity of the subject matter

bull In Raffles v Wichelhaus (1864) a consignment of cotton wasbought to arrive lsquoex Peerless from Bombayrsquo Two shipsboth called Peerless were due to leave Bombay at aroundthe same time Held ndash no agreement as the buyer wasthinking of one ship and the seller was referring to theother ship

bull Similarly there was no agreement in Scriven Bros vHindley amp Co Ltd (1913) where the seller sold lsquotowrsquo andthe buyer bought lsquohemprsquo Again there was an ambiguityas both lots were delivered under the same shippingmark and the catalogue was vague

CA

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102

In these cases the parties are at cross-purposesbut there must have been some ambiguity

in the situation before the courts willdeclare the contract void

These mistakes negate consentthat is they prevent the formation of an agreement

bull But in Smith v Hughes (1871) the court refused to declarevoid an agreement whereby the buyer had thought hewas buying old oats when in fact they were new oats asthe contract was for the sale of lsquooatsrsquo The mistake relatedto the quality not the identity of the subject matter

Unilateral mistake concerning the terms of the contract

bull In Hartog v Colin and Shields (1939) the sellers mistakenlyoffered to sell goods at a given price per pound whenthey intended to offer them per piece All the preliminarynegotiations had been on the basis of per piece Thebuyers must have realised that the sellers had made amistake The contract was declared void

bull In Smith v Hughes however the contract was for the saleof lsquooatsrsquo not lsquoold oatsrsquo it would only have been void iflsquoold oatsrsquo had been a term of the contract

Unilateral mistake as to the identity of other parties to the

contract

There are a number of contradictory cases and theoriesunder this heading

Traditionally a distinction is made between mistakes as toidentity and mistakes as to attributes (for example creditworthiness)

bull In Cundy v Lindsay (1878) a Mr Blenkarn ordered goodsfrom Lindsay signing the letter to give the impressionthat the order came from Blenkiron amp Co a firm knownto Lindsay amp Co Held ndash the contract was void Lindsay

CO

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W103

Here one party has taken advantage of the other partyrsquos error

amp Co had only intended to do business with Blenkiron ampCo There was therefore a mistake concerning the identityof the other party to the contract

bull In Kingrsquos Norton Metal Co v Edridge Merrett amp Co Ltd(1872) on the other hand a Mr Wallis ordered goods onimpressive stationery which indicated that the order hadcome from Hallam amp Co an old established firm withbranches all over the country Held ndash the contractbetween Kingrsquos Norton Metal Co and Wallis was notvoid The sellers intended to do business with the writerof the letter they were merely mistaken as to hisattributes that is the size and credit worthiness of hisbusiness

bull In Boulton v Jones (1857) the defendant sent an order forsome goods to a Mr Brocklehurst unaware that he hadsold the business to his foreman the plaintiff Theplaintiff supplied the goods but the defendant refused topay for them as he had only intended to do business withBrocklehurst against whom he had a set off Held ndash therewas a mistake concerning the identity of the other partyand the contract was therefore void

However the cases all concerned contracts negotiated at adistance

CA

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104

From the above three cases it would seem that acontract is void if the mistaken party intended to do

business with another specific person and the identity of that other person was important to him

bull In Phillips v Brooks (1919) a jeweller sold a gold ring anddelivered it on credit to a customer who had come intohis shop and had falsely claimed to be Sir GeorgeBullough a well known and wealthy man Held ndash thecontract was valid The jeweller had intended to dobusiness with the person in his shop

bull In Lewis v Averay (1972) a rogue claimed to be RichardGreene the film actor and produced a pass to Pinewoodstudios to verify this He was allowed to drive away a carin return for a cheque and subsequently resold the car forcash to Averay The cheque bounced and the sellerclaimed the return of the car on the ground that he wasmistaken as to the identity of the buyer Held ndash thecontract was valid The seller must be presumed to haveintended to deal with the person physically in the roomwith him Averay kept the car

There are two cases however where the plaintiffs were ableto establish a mistake as to the identity of a person in theirpresence

bull In Ingram v Little (1961) two sisters sold a car and handedit over against a worthless cheque to a person whoclaimed to be a Mr Hutchinson of Stanstead HouseCaterham They only did so after one of them hadchecked that there was a man of that name who lived atthat address The Court of Appeal held the contract void C

ON

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105

Where the parties negotiate in person the samerules apply but there is a presumption that the inno-cent party intended to do business with the person

physically in his presence

They considered that the sisters had done enough toestablish that they only intended to deal with MrHutchinson

This case has been greatly criticised as it is difficult toreconcile with Phillips v Brooks and Lewis v Averay

bull In Sowler v Potter (1940) the lease of a cafeacute was granted toPotter who had previously been convicted of keeping adisorderly cafe under the name of Robinson The courtheld that the contract was void because of the lessorrsquosmistaken belief that Potter was not Robinson This casehas also been much criticised and doubted as it did notseem that Sowler had intended to do business with anyother identifiable person The contract could in any casehave been set aside for misrepresentation

The contract would in most cases be voidable in any case formisrepresentation where one party has misled the otherwith regard to his identity The advantage of having the contract declared void for mistake is to avoid the bars torescission

See Chapter 5 pp 75ndash76

Mistake as to the nature of the document signed

Defence of non est factum

bull The scope of this defence has been limited since thedecision in Saunders v Anglia Building Society (Gallie v Lee)(1971) where an old lady was persuaded by her nephewto sign a document conveying her house to her nephewrsquosfriend She had believed that she was signing a deed ofgift to her nephew She had not read the documentbecause her glasses were broken It was held that thedocument was valid It was stated that

CA

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106

It is also thought that it will only protect a person who isunder some disability The defence did succeed in LloydsBank v Waterhouse (1990) where the defendant who wasilliterate signed a guarantee of his sonrsquos debt to the bankThe father thought that the guarantee covered the purchaseprice of a farm but in fact it covered all his sonrsquosindebtedness to the bank It was held that the effect of thedocument was fundamentally different from what it wasbelieved to be There was no negligence and the contractwas therefore void

In UDT Ltd v Western (1976) it was held that these samerules applied to cases where a person had signed a formbefore all the details required by the form had been entered

Mistake in equity

The narrow approach taken by the common law towardsremedies for mistake (that is that it renders the contractvoid) is supplemented by the more flexible approach ofequity The following remedies may be available in equity

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W107

Rescission RectificationRefusal of

specificperformance

The signed document must be fundamentally different in effect from what it was thought to be

The signatory must prove that he had not been negligent in signing the document

Rescission

See common mistake (above)

Rectification

Where there has been a mistake not in the actual agreementbut in reducing it to writing equity will order rectification ofthe document so that it coincides with the true agreement ofthe parties

Necessary conditionsbull The document does not represent the intention of both

parties or

bull one party mistakenly believed a term was included in thedocument and the other party knew of this error InRoberts amp Co Ltd v Leicestershire CC (1961) the completiondate of a contract was rectified at the request of one partybecause it was clear that the other party was aware of theerror when the contract was signed

If the document fails to mention a term which one partybut not the other had intended to be a term of thecontract there is no case for rectification

bull There must have been a concluded agreement but notnecessarily a legally enforceable contract In Joscelyne vNissen (1970) a father and daughter agreed that thedaughter should take over the car hire business Inreturn the father would continue to live in the house andthe daughter would pay all the household expenses Thislast provision was not included in the written contractHeld ndash the contract should be rectified to include it

Note ndash a document which accurately records a prioragreement cannot be rectified because the agreement wasmade under some mistake (Rose v Pym above) Equityrectifies documents not agreements

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108

Rectification is an equitable remedy and is available at thediscretion of the court Lapse of time or conflict with thirdparty rights may prevent rectification

Refusal of specific performance

bull In Webster v Cecil (1861) the defendant having previouslyrefused the plaintiffrsquos offer of pound2000 for his land wrote tothe plaintiff offering to sell it to him for pound1250 instead ofpound2250 as he had intended The plaintiff accepted theoffer Specific performance was refused as the plaintiffmust have been aware of the error (unilateral mistake)

bull Where there is no blame on the claimant the situation ismore difficult In Malins v Freeman (1837) the defendanthad mistakenly bought the wrong property at an auctionSpecific performance was refused In Tamplin v James(1879) however the court ordered specific performancewhere the defendant had bid for a property under anerror as to its true extent Presumably being forced to buya totally different property from the one he intendedwould have caused greater hardship than being forced tobuy a property whose dimensions differed from hisexpectations

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W109

Specific performance will be refused when the contract is void at common law Equity may also

refuse specific performance where a contract is validat law but only lsquowhere a hardship amounting toinjustice would have been inflicted upon him by

holding him to his bargainrsquo (Tamplin v James (1879))

7 Illegality and capacity

Illegal contracts are classified in different ways by differentauthorities In this chapter a distinction is drawn betweencontracts which involve the commission of a common lawor statutory offence and those which are void as beingcontrary to public policy

Illegality

The main issue with regard to illegal contracts is the effectof illegality on a contract The most often examined topicwith regard to contracts which are declared void ongrounds of public policy is contracts in restraint of trade

Illegal contracts

Contracts illegal by statute

bull Statute may declare a contract illegal for example theCompetition Act 1998

bull Statute may prohibit an act but declare that it shall noteffect validity of contract for example the ConsumerProtection Act 1987

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W111

Illegal contracts Contracts void

against public policy

Contracts prohibited by statute

Contracts illegal at common law

bull Statute may prohibit an act but not stipulate its effect onthe contract The status of the contract will in this casebe a matter of interpretation for the court In ReMahmoud and Ispahani (1921) the court decided that astatement that lsquoa person shall not buy or otherwise dealin linseed oil without a licencersquo was a prohibition and acontract entered into by a person without a licence wastherefore void

bull The courts are reluctant to imply a prohibition when thisis not clearly indicated in the statute In Hughes v AssetManagers (1995) the court held a contract valid despitethe fact that a document had not been signed by a personauthorised to do so as required by statute

Contracts illegal at common law

bull An agreement to commit a crime a tort or a fraud forexample defraud the rating authority (Allen v Roscous(1676)) to publish a libel (Clay v Yates)

bull An agreement to defraud the Inland Revenue (Napier vBusiness Associates (1951))

bull Contracts damaging to the countryrsquos safety or foreignrelations

bull Contracts interfering with the course of justice forexample contracts to give false evidence

bull Contracts leading to corruption in public life (Parkinson vRoyal College of Ambulance (1925))

bull Contracts tending to promote sexual immorality (Pearcev Brooks (1866))

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112

Effects of illegality

Contracts illegal as formed

In Pearce v Brooks (1866) the owner of a coach of unusualdesign was unable to recover the cost of hire from aprostitute who to his knowledge had hired it in order toattract clients

In Parkinson v Royal College of Ambulance (1925) Parkinsonwas unable to recover the money he had donated to thedefendants on the understanding that they would obtain aknighthood for him

Exceptionsbull Where the parties are not in pari delicto (that is not

equally at fault) for example where one party isunaware of the illegal nature of the contract or has beeninduced to enter into it by fraudulent misrepresentationor is the party the law was attempting to protect forexample a tenant who has paid an illegal premium(Kiriri Cotton Co v Dewani (1960))

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W113

Contracts illegal as formed

Contracts illegal in their performance

Such contracts are void ab initio there can be no action for breach of contract

Money paid or property transferred under the contract cannot be recovered

bull Where the transferor genuinely repents and repudiatesthe contract before performance In Tribe v Tribe (1995)money was transferred to a son in order to avoid thefatherrsquos creditors At the end of the day the creditorswere all paid in full and the father was allowed to cite theoriginal reason for the transfer in order to rebut thepresumption of advancement (which would have meantthat his son could keep the shares) He had withdrawnfrom the illegal purpose before performance

In Bigos v Boustead (1951) however the court was notconvinced that the plaintiff had genuinely repented

bull Where the transferor can frame his claim without relyingon the contract In Bowmakers v Barnet Instruments (1945)the plaintiffs were able to rely on an action in the tort ofconversion to recover goods delivered under an illegalhire purchase contract

Similarly in Tinsley v Milligan (1993) both parties hadcontributed money towards the purchase of a house putin the name of Tinsley alone in order to allow Milligan tomake various social security claims When Milligan suedfor the return of the money it was argued that theagreement had been entered into for an illegal purposeand that the public conscience lsquowould be affronted byrecognising rights created by illegal transactionsrsquo TheHouse of Lords held however that a resulting trust hadbeen created in favour of Milligan by the contribution tothe purchase price Milligan therefore could rely on theresulting trust and had no need to rely on the illegalagreement

This case shows (a) that the rule applies to equity as wellas to common law (b) the test of lsquoaffront to the publicconsciencersquo previously used by the Court of Appeal is nolonger good law

CA

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114

bull Where part of the contract is lawful the court will notsever the good from the bad In Napier v National BusinessAgency (1951) certain payments were described aslsquoexpensesrsquo in order to defraud the Inland Revenue Thecourt refused to enforce payment of the accompanyingsalary as the whole contract was tainted with the illegality

Note ndash property can pass under an illegal contract as in Singv Ali (1960)

Contracts illegal in their performance

A claim by the innocent party to enforce the contract in thesecases is strong

bull In Marles v Philip Trant (1954) the defendant sold winterwheat described as spring wheat without anaccompanying invoice as required by statute Held ndash theplaintiff could sue for damages for breach of contractThe contract was illegal in its performance but not in itsinception

bull In Strongman v Sincock (1955) Sincock failed to getlicences which were needed to modernise some houseswhich belonged to him and refused to pay for the workon the basis that the contracts were illegal Held ndashStrongman could not sue on the illegal contracts butcould sue Sincock on his collateral promise to obtain thelicences

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W115

The illegality may only arise during the performance of a contract for example

a carrier may break the law by exceeding the speed limit whilst delivering goods

belonging to a client He will be punished but the contract will not necessarily be void

bull In Archbolds v Spanglett (1961) Spanglett contracted tocarry Archbolds whisky in a van which was not licensedto carry any goods other than his own Archbold wasunaware of this and could therefore recover damages forbreach of contract

But in Ashmore Benson Pease amp Co v Dawson Ltd (1973)the other party knew of the overloading of the lorry andcould not therefore recover damages He hadparticipated in the illegality

bull Even the guilty party may enforce the contract if theillegality is incidental

In Shaw v Groom (1970) a landlord failed to give histenant a rent book as required by law Held ndash he could suefor the rent The purpose of the statute was to punish thelandlordrsquos failure to provide a rent book not to render thecontract void

In St John Shipping v Rank (1957) a ship owner who hadoverloaded his ship in contravention of a statute was ableto recover freight

Contracts void at common law on grounds of publicpolicy

CA

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116

Contracts damaging to theinstitution of marriage

For example contracts inrestraint of marriage

marriage brokerage contractscontracts for future separation

(pre-nuptial agreements)

Contracts made after orimmediately beforeseparation are valid

Contracts to oust thejurisdiction of the courts

However arbitrationagreements are valid

In Esso Petroleum v Harpers Garage (1968) it was stated thatthe court will consider

bull whether the contract is in restraint of trade A contract isin restraint of trade if it restricts a personrsquos liberty tocarry on his trade or profession Certain restraints havebecome acceptable over the years for example lsquotiedhousesrsquo restrictive covenants in leases sole agency orsole distributorship agreements

bull whether it should nevertheless be enforced because itprotects a legitimate interest and is reasonable Theonus of proving reasonability is on the promisee Arestraint to be permissible must be no wider than isnecessary to protect the relevant interest of thepromisee

Categories of contracts in restraint of trade

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W117

Restraints onemployees

Restraints on thevendors of a business

Exclusive dealingagreements

A contract in restraint of trade is prima facie void but thecourts will now uphold the restriction if it is shown that

bull the restraint protects a legitimate interest

bull the restraint is reasonable between the parties

bull the restraint is reasonable as regards the interest of thepublic

Contracts in restraint of trade

Restraints on employeesThe restraint is void unless the employer can show

bull That it is necessary to protect a proprietary interest forexample the trade secrets of a works manager in Foster vSuggett (1918) the trade connections of a solicitorrsquosmanaging clerk in Fitch v Dewes (1921)

A restraint merely to prevent competition will not beenforced

In Eastham v Newcastle United FC (1964) the courtaccepted that the proper organisation of football was avalid matter for clubs to protect but found the lsquoretainand transfer systemrsquo unreasonable

bull That the restraint is no greater than is necessary toprotect the employerrsquos interest in terms of time andarea

In Scorer v Seymore-Jones (1966) the court upheld arestriction of 10 miles within branch A at which theemployee had worked but held that a similar restraintcovering branch B at which the employee had notworked was unreasonable and void

bull Problems with area can be overcome by using lsquonon-solicitationrsquo clauses instead

In Home Counties Dairies v Skilton (1970) a milkmanagreed that for one year after leaving his present job hewould not sell milk to his employerrsquos customers Held ndashrestraint valid It was necessary to protect the employeragainst loss of customers

bull The validity of the duration of the restraint depends onthe nature of the business to be protected and on thestatus of the employee

CA

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118

In Briggs v Oates (1991) a restriction of five miles for fiveyears on an assistant solicitor was upheld as reasonable

bull A restraint imposed by indirect means for example byloss of pension rights (Bull v Pitney Bowes (1966)) orwhere two companies agreed not to take on the otherrsquosemployees (Kores v Kolok (1959)) will be judged by thesame criteria

Restraints on the vendor of a business

bull In Vancouver Malt and Sake Brewing Co v VancouverBreweries Ltd (1934) a company which was licensed tobrew beer but which had not at any time brewed beerwas sold and agreed not to brew any beer for 15 yearsHeld ndash the restraint was void since there was no goodwillof a beer brewing business to be transferred

bull In British Concrete v Schelff (1921) S sold his localisedbusiness to B who had branches all over the UK andagreed not to open any business within 10 miles of any ofBrsquos branches Held ndash the restriction was void B wasentitled only to protect the business he had bought notthe business which he already owned

bull In Nordenfelt v Maxim Nordenfelt (1894) N a worldwidesupplier of guns sold his worldwide business to M andagreed not to manufacture guns anywhere in the worldfor 25 years Held ndash the restriction was valid C

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AW

119

Such a restraint is valid if it is intended to protectthe purchaserrsquos interest in the goodwill of the

business bought and is reasonable

Exclusive dealing agreements

bull In Esso Petroleum v Harpers Garage (1968) a solusagreement for four years was held reasonable but asolus agreement for 21 years was held unreasonable andtherefore void

bull Solus agreements were distinguished from restrictivecovenants in a lease When an oil company leases afilling station to X inserting a clause that X should buyall its requirements from the company this is not subjectto restraint of trade rules because the tenant is notgiving up a previously held freedom

bull But in Amoco v Rocca Bros (1975) the court held thatrestraint of trade rules did apply to lease and lease backagreements

bull In Alec Lobb (Garages) v Total Oil (1985) in a similar leaseback arrangement a solus agreement for between sevenand 21 years was held reasonable on the ground that thearrangement was a rescue operation benefiting theplaintiffs and there were lsquobreakrsquo clauses in theunderlease

bull In Schroeder Music Publishing Co v Macaulay (1974) itwas held that a contract by which an unknown songwriter undertook to give his exclusive services to apublisher who made no promise to publish his work

CA

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120

Solus agreements whereby A agrees to buy all his re-quirements of a particular commodity from B

Most exclusive services contracts are found in professional sport or entertainment

was subject to the restraint of trade doctrine as it waslsquocapable of enforcement in an oppressive mannerrsquo

bull In Greig v Insole (1978) the MCC banned any cricketerwho played for a cricketing lsquocircusrsquo from playing forEngland The court held that the ban was void as beingin restraint of trade

It has been suggested that the courts will hold exclusivedealing and service contracts to be within the restraint oftrade doctrine if they contain unusual or novel features orif there is disparity in the bargaining power and theagreement is likely to cause hardship to the weaker party

Cartel agreementsThese are now covered by statute for example the FairTrading Act 1973 and the Competition Act 1998 This mayalso fall within Article 81 of the Treaty of the EuropeanCommunities

Effect of a restraint

Two tests must be satisfied

bull The lsquoblue pencilrsquo test It must be possible to sever theillegal part simply by deleting words in the contract Thecourt will not add words substitute one word foranother rearrange words or in any way redraft the

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W121

A void restraint is severable Severance can be operated intwo ways

bull severance of the whole of the objectionable promiseleaving the rest of the contract to be enforced

bull severance of the objectionable part of the promise

contract In Mason v Provident Clothing Co Ltd (1913) theHouse of Lords refused to redraft a promise not to workwithin 25 miles of London But in Goldsoll v Goldman(1915) a dealer in imitation jewellery promised not todeal in real or imitation jewellery either in the UK orabroad Dealing in real jewellery and dealing abroadwere severed

bull Severance of the objectionable part of the contract mustnot alter the nature (as distinct from the extent) of theoriginal contract The illegal restraint will not be severedif it is the the main purpose of the restraint or if to severit would alter entirely the scope and intention of theagreement In Attwood v Lamont (1920) the court refusedto sever restrictions on a tailor from competing with anydepartment of the department store which had employedhim The court stated that this was a covenant lsquowhichmust stand or fall in its unaltered formrsquo

Capacity

Minors

The law pursues two conflicting policies in the case ofminors On the one hand it tries to protect minors from theirown inexperience on the other it tries to ensure that personsdealing with minors are not dealt with in a harsh manner

CA

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122

Minorspersons under 18

Persons of unsound mindand drunken persons

Contracts with minors can be divided into three categories

Valid contracts ndash contracts which can be enforced

against a minor

Necessaries

bull In Nash v Inman (1908) a student purchased 11 silkwaistcoats while still a minor The court held that silkwaistcoats were suitable to the conditions of life of aCambridge undergraduate at that time but they were notsuitable to his actual needs as he already had a sufficientsupply of waistcoats

It is important to distinguish between luxurious goods ofutility and goods of pure luxury The status of the minor canmake the former into necessaries but the latter can never beclassified as necessaries

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W123

Contracts fornecessaries

Beneficial contracts of service

Valid contracts Voidable contracts Other contracts

Necessary goods are defined in the Sale of GoodsAct 1979 as lsquogoods suitable to his conditionin life and to his actual requirements at the

time of sale and deliveryrsquo

The burden of proving that the goods are necessaries is onthe seller

They must satisfy the same tests as necessary goods

Professor Treitel considers that both executed andunexecuted contracts for necessaries can be enforced Hecites Roberts v Gray (1913) Roberts agreed to take Gray aminor on a billiard tour to instruct him in the profession ofbilliard player Gray repudiated the contract The court heldthat Roberts could recover damages despite the fact that thecontract was executory

Cheshire Fifoot and Furmston agree that executorycontracts for necessary services are enforceable as in Robertsv Gray but deny that executory contracts for necessary goodscan be enforced

They cite

bull the actual wording of the Sale of Goods Act which refersto time of lsquosale and deliveryrsquo

bull the minor has to pay a reasonable price for the goods notthe contractual price

These indicate it is argued that liability is based onacceptance of the goods not on agreement

Beneficial contracts of service

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124 These must be for the benefit of the minor

Necessary services include education medical and legal services

bull In De Francesco v Barnum (1890) a contract whose termswere burdensome and harsh on the minor was held void

bull But in White City Stadium v Doyle (1935) where a minorhad forfeited his payment for a fight because ofdisqualification the contract was neverthelessenforceable against him Where a contract is on the wholefor the benefit of a minor it will not be invalidatedbecause one term has operated in a way which is not tohis advantage

bull In Chaplin v Leslie Frewin (Publishers) Ltd (1966) the courtenforced a contract by a minor to publish his memoirs asthis would train him in becoming an author and enablehim to earn a living

bull But trading contracts (involving the minorrsquos capital) willnot be enforced even if it does help the minor earn aliving In Mercantile Union Guarantee Co Ltd v Ball (1937)the court refused to enforce a hire purchase contract for alorry which would enable a minor to trade as a haulagecontractor

Voidable contracts

These comprise contracts of continuing obligation such ascontracts to acquire an interest in land or partly paid sharesor partnership agreements

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W125

They must be contracts of service or similar to a contract of service

Contracts which can be avoided by the minor beforemajority or within a short time afterwards

The minor can free himself from obligations for the futurefor example an obligation to pay rent under a lease but willhave to pay for benefits already received He cannot recovermoney already paid under the contract unless there has beena total failure of consideration (Steinberg v Scala (Leeds) Ltd(1923))

Other contracts

But

bull The minor himself may enforce such contracts

bull Property can pass under such contracts

bull Where the contract has been carried out by the minor hecannot recover any property unless there has been atotal failure of consideration or some other failingwhich would equally apply to an adult

bull The Minors Contracts Act 1987 provides that

a minor may ratify such a contract on majority and itcan thereafter be enforced against him

a guarantee of a minorrsquos debt will not be voidbecause a minorrsquos debt is unenforceable against him

a court may if it considers it is just and equitable to doso order a minor to return property he has receivedunder a void contract or any property representing itIt is not clear whether property transferred under thecontract covers money for example in money lendingcontracts It is argued that as lsquoproperty representing itrsquo

CA

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126

These cannot be enforced against a minor

must cover money it would therefore be illogical toexclude money acquired directly but there is as yet nodecision on this point Property cannot presumably berecovered under this section where the minor hasgiven away the contract property

bull Equity will order restitution of property acquired byfraud But there can be no restitution of money (Leslie vSheill (1914)) and no restitution if the minor has resold theproperty

bull An action may be brought in tort if it does not in any wayrely on the contract But although a minor is fully liablefor all his torts he may not be sued in tort if this is just anindirect way of enforcing a contract In Leslie v Sheill(1914) a minor obtained a loan by fraudulentlymisrepresenting his age Held ndash he could not be sued inthe tort of deceit as this would be an indirect way ofenforcing a contract which was void

Persons of unsound mind and drunken persons

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W127

A person who has been declared a lsquopatientrsquo under the MentalHealth Act 1983 by the Court of Protection is incapable ofentering into a valid contract

Other mentally disordered persons and drunken personswill be bound by their contracts unless

bull they were so disordered or drunk that they did notunderstand the nature of what they were doing and

bull the other party was aware of this

Such contracts may be affirmed during a sober or lucidmoment The Sale of Goods Act requires that wherelsquonecessaries are sold and delivered to a person who byreason of mental incapacity or drunkenness is incompetentto contract he must pay a reasonable price for themrsquo

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128

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W129

8 Discharge

A contract may be discharged by

Performance

Precision of performance

bull In Cutter v Powell (1795) a shiprsquos engineer undertook tosail a ship from Jamaica to Liverpool but died before thevoyage was complete Held ndash nothing could berecovered in respect of his service he had not fulfilled hisobligation

bull In Bolton v Mahadeva (1972) a central heating systemgave out less heat than it should and there were fumesin one room Held the contractor could not claimpayment although the boiler and pipes had beeninstalled they did not fulfill the primary purpose ofheating the house

A contract is lsquodischargedrsquo when there are noobligations outstanding under it

Performance Agreement Breach Frustration

Precision ofperformance

Time ofperformance

Tender ofperformance

To discharge his obligations under a contract aparty must perform exactly what he promised

These are examples of lsquoentirersquo contracts which consist ofone unseverable obligation

bull Where the contract is divisible payment can berecovered for the completed part for example goodsdelivered by instalments

bull Where the promisee accepts partial performance InSumpter v Hedges (1898) however payment for partialperformance was refused as Hedges had been left with ahalf-built house and had been put in a position where hehad no choice but to accept partial performance

bull Where the promisee prevents complete performance forexample in Plancheacute v Colburn (1831) a writer wasallowed payment for the work he had already donewhen the publisher abandoned the series

bull Where the promisor has performed a substantial part ofthe contract In Hoenig v Isaacs (1952) the plaintiffdecorated the defendantrsquos flat but because of faultyworkmanship the defendant had to pay pound50 to anotherfirm to finish the job Held ndash the plaintiff was entitled topound150 (the contract price) minus the pound50 paid to the otherfirm cf Bolton v Mahadeva (1972) where the courtdeclined to find substantial performance

This has become known as the doctrine of substantialperformance In order for the claimant to rely on thisdoctrine the failure to perform must amount only to a

CA

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130

Despite the rule that performance must be exact the law will allow payment to be made on a

quantum meruit basis for incomplete performance in the following circumstances

breach of warranty or a non-fundamental breach of aninnominate term It will not apply to a fundamentalbreach or to a breach of condition

Time of performance

bull It is stipulated in the contract see Lombard North Centralv Butterworth (1987)

bull One party has given reasonable notice during thecurrency of the contract that performance must takeplace within a certain time In Rickards v Oppenheim(1950) a car body which had been ordered from theplaintiffs was late The defendants gave final notice to theplaintiff that unless it was delivered within three monthsthey would cancel the order Held ndash time had been madeof the essence the defendants could cancel the order

bull The nature of the contract makes it imperative thatstipulations as to time should be observed for examplecontracts for the sale of perishable goods

The Law of Property Act 1925 stipulated that terms as tothe time of performance should be interpreted in thesame way at common law as in equity In Rainieri v Miles(1981) the House of Lords held that that meant that lateperformance would not give rise to a right to terminatebut would give rise to damages

Tender of performance

If one party tenders performance which is refused he maysue for breach of contract

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W131

Equity considers that time is not lsquoof the essence of a contractrsquo that is a condition

except in the following circumstances

If payment is tendered and rejected the obligation to tenderpayment is discharged but the obligation to pay remains

Agreement

bull If the contract is wholly executory there is no problemwith consideration as both parties surrender their rightsunder the contract

bull If the contract is partly executed one party hascompleted his performance under the contract ndash to makethe agreement binding there must either be a deed (alsquoreleasersquo) or new consideration (lsquoaccord and satisfactionrsquo)or the doctrine of equitable estoppel or waiver mustapply See Chapter 2

CA

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132

A term in the originalcontract for example acondition subsequent

or method for terminating the contract

A new agreement

A contract may be discharged by

As contracts are created by agreement so they may be discharged by agreement Consideration is

necessary to make the agreement binding

Breach

See classification of terms p 45 above

There are special problems where a party repudiates acontract under a wrong assumption that he has a right to doso

bull In Federal Commerce and Navigation v Molena Alpha (1979)the owners of a ship gave instructions not to issue bills oflading without which the charterers could not operatethe ship They wrongly believed that they had the rightto do so Held ndash their conduct constituted a wrongfulrepudiation of the contract which allowed the other partyto treat the contract as discharged

bull In Woodar Investment Development v Wimpey Construction(1980) the purchaser wrongly repudiated a contract forthe sale of land wrongly believing that he had a right todo so Held ndash a wrongful repudiation made in good faithwould not necessarily allow the other party to treat thecontract as discharged

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W133

A breach of condition

A fundamentalbreach of an

innominate term

A breach does not of itself discharge a contract It may allowthe other other party an option to treat the contract as discharged that is to terminate the contract if the breach is sufficiently serious that is if it is

A repudiatory breach

It is difficult to distinguish these decisions The general viewis that the approach in Molena Alpha is to be preferred so thateven a good faith lsquorepudiatoryrsquo response to a non-repudiatory breach will amount to a breach of contract

Effect of treating the contract as discharged

The obligation of both parties to perform (that is theprimary obligation) is discharged from the date of thetermination

However the party in breach may have to pay damages forany losses past and future caused to the innocent party as aresult of the breach (Lombard North Central v Butterworth ndashChapter 3)

The discharge does not operate retrospectively In PhotoProduction v Securicor (1980) Securicor was able to rely on anexclusion clause in the contract despite the fact that thecontract had been discharged

Note ndash it was held by the House of Lords in Vitol v Norelf(1996) that the defendantrsquos failure to perform his ownobligation could constitute acceptance of the plaintiffrsquos repudiation

The decision to terminate cannot be retracted

Anticipatory breach of contract

CA

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134

Explicit

Hochter v La Tour (1853) atravel courier announced

in advance that he would not be fulfilling

his contract

Implicit

Frost v Knight (1872) aparty disabled himself

from carrying out apromise to marry by

marrying another person

Effect of anticipatory breach

bull The other party may sue for damages immediately Hedoes not have to await the date of performance (Hochsterv De La Tour (1853))

bull The innocent party may refuse to accept the repudiationHe may affirm the contract and continue to perform hisobligations under the contract In White and Carter Ltd vMcGregor (1962) the defendants cancelled a contractshortly after it had been signed The plaintiffs refused toaccept the cancellation carried on with the contract andthen sued for the full contract price Held ndash the plaintiffswere entitled to succeed a repudiation does notautomatically bring a contract to an end the innocentparty has an option either to affirm the contract or toterminate the contract unless

the innocent party needs the co-operation of the other party In Hounslow BC v Twickenham GardenDevelopments Ltd (1971) Hounslow council cancelled acontract to lay out a park It was held that thedefendants could not rely on White and Carter vMcGregor because the work was to be performed oncouncil property

the innocent party had no legitimate interestfinancial or otherwise in performing the contractrather than in claiming damages In The AlaskanTrader (1984) a ship chartered to the defendantsrequired extensive repairs at the end of the first yearwhereupon the defendants repudiated the contractThe plaintiffs however refused to accept therepudiation repaired the ship and kept it fullycrewed ready for the defendantrsquos use Held ndash theplaintiffs had no special interest in keeping the

CO

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W135

contract alive They should have accepted therepudiation and sued for damages

Where a party has affirmed the contract

bull He will have to pay damages for any subsequent breachwhich he commits he cannot argue that the other partyrsquosanticipatory breach excuses him (Fercometal SARL vMediterranean Shipping Co (1988))

bull There is a danger that a supervening event may frustratethe contract and deprive the innocent party of his right todamages as in Avery v Bowden (1855) (below)

Frustration

The doctrine has been kept to narrow limits

The basis of the doctrine and the tests

bull Until the 19th century the courts adhered to a theory oflsquoabsolute contractsrsquo as in Paradine v Jane (1647) It wassaid that if the parties wished to evade liability because of

CA

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136

By the courts whohave insisted that the

supervening event mustdestroy a fundamental

assumption

By business persons who have lsquodrafted outrsquo

the doctrine byforce majeure clauses

Frustration occurs where it is established that due to a subsequent change in circumstances the

contract has become impossible to perform or it hasbeen deprived of its commercial purpose

some supervening event then they should provide forthis in the contract However in Taylor v Caldwell (1863)the courts relented and held that if the contract becameimpossible to perform due to some extraneous cause forwhich neither party was responsible then the contactwould be discharged

bull The modern test was enunciated by Lord Simon inNational Carriers v Panalpina (1981) frustration ariseswhere lsquothere supervenes an event (without default ofeither party and for which the contract makes nosufficient provision) which so significantly changes thenature (not merely the expense or onerousness) of theoutstanding contractual rights andor obligations fromwhat the parties could reasonably have contemplated atthe time of its execution that it would be unjust to holdthem to the literal sense of its stipulations in the newcircumstancesrsquo

bull In Davis Contractors v Fareham UDC (1956) Lord Radcliffstated that frustration occurs where to requireperformance would be to render the obligationsomething lsquoradically differentrsquo from what wasundertaken by the contract

Circumstances in which frustration may occur

bull The subject matter of the contract has been destroyed oris otherwise unavailable

In Taylor v Caldwell (1863) a contract to hire a music hallwas held to be frustrated by the destruction of the musichall by fire (see also s 7 of the Sale of Goods Act 1979)

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W137

Note ndash it is not the circumstances but the nature ofthe obligation which must have changed

bull But the unavailable or destroyed object must have beenintended by both parties to be the subject of the contract

In Blackburn Bobbin Co v Allen (1918) the contract was forthe sale of lsquobirch timberrsquo which the seller intended toobtain from Finland Held ndash the contract was not frustratedwhen it became impossible to obtain timber from FinlandThe subject matter of the contract was birch timber notFinnish birch timber

bull Death or incapacity of a party to a contract of personalservice or a contract where the personality of one partyis important

In Condor v The Baron Knights (1966) a contract between apop group and its drummer was held frustrated whenthe drummer became ill and was unable to fulfill theterms of the contract A claim for unfair dismissal can alsosometimes be defeated by the defence of frustrationwhere an employee has become permanentlyincapacitated or imprisoned for a long period

bull The contract has become illegal to perform eitherbecause of a change in the law or the outbreak of war

In Avery v Bowden (1855) a contract to supply goods toRussia was frustrated when the Crimean War broke out Ithad become an illegal contract ndash trading with the enemy

Note the outbreak of war between two foreign States willnot render a contract illegal but may make it impossibleto perform In Finelvet v Vinava Shipping Co (1983) acontract to deliver goods to Basra did not become illegalon the outbreak of the Iraq-Iran war but was frustratedwhen it became too dangerous to sail to Basra

bull The commercial purpose of the contract has failedCA

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138

Establishing whether a contract is impossible or illegal toperform is relatively straightforward but it is more difficultto decide whether the commercial purpose of the contracthas failed

It may happen in the following circumstances

bull Failure of an event upon which the contract was based

In Krell v Henry (1903) the court held that a contract tohire a room overlooking the proposed route of thecoronation procession was frustrated when thecoronation was postponed The purpose of the contractwas to view the coronation not merely to hire a room Ithas been argued that the fact that the hire of the roomwas a lsquoone offrsquo transaction was important The judge inthe case contrasted it with the hire of a taxi to take theclient to Epsom on Derby day This would be a normalcontractual transaction for the taxi driver thecancellation of the Derby would not therefore frustratethe contract

In the case of Herne Bay Steamboat Co v Hutton (1903) thecourt refused to hold that a contract to hire a boat to seethe king review the fleet was frustrated when the reviewwas cancelled the fleet was still there and could beviewed ndash there was therefore no overall failure of thepurpose of the contract

bull Government interference or delay

In Metropolitan Water Board v Dick Kerr (1918) a contracthad been formed in 1913 to build a reservoir within sixyears In 1915 the government ordered the work to bestopped and the plant sold Held ndash the contract wasfrustrated C

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139

In Jackson v Union Marine Insurance Co (1874) a ship waschartered in November to proceed with all dispatch toNewport The ship did not reach Newport until thefollowing August Held ndash the contract was frustratedsince the ship was not available for the voyage for whichshe had been chartered

In The Nema (1982) a charter party was frustrated when along strike closed the port at which the ship was due toload so that of the six or seven voyages contracted to bemade between April and December only two could bemade

Similar difficult problems arise in the case of contracts ofemployment (illness or imprisonment) and leases

It has been suggested that where the contract is of a fixedduration and the unavailability of the subject matter isonly temporary the court should consider the ratio of thelikely interruption to the duration of the contract

LeasesIt had long been thought that the doctrine of frustration didnot apply to leases (see Paradine v Jane (1647) and CricklewoodInvestments v Leightonrsquos Investments (1945))

bull However in National Carriers v Panalpina (1981) theHouse of Lords declared that in principle a lease couldbe frustrated In that case a street which gave the onlyaccess to a warehouse was closed for 18 months Thelease for the warehouse was for 10 years Held ndash the leasewas not frustrated

bull The House of Lords did state however that where therewas only one purpose for the property leased and thispurpose became impossible then the lease would be

CA

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140

frustrated for example a short term holiday lease It isstill true that it will be very rare for a lease to befrustrated

Limits to the doctrine of frustration

It will not be applied

bull In Davis Contractors LTD v Fareham UDC (1956) thecontractors had agreed to build a council estate at a fixedprice Due to strikes bad weather and shortages oflabour and materials there were considerable delays andthe houses could only be built at a substantial loss Heldndash the contract was not frustrated

bull See also the Suez cases where the courts refused to holdshipping contracts frustrated as a result of the closing ofthe Suez Canal unless the contracts specified a routethrough the canal

But a force majeure clause will be interpreted narrowly asin Metropolitan Water Board v Dick Kerr amp Co (1918) wherea reference to lsquodelaysrsquo was held to refer only to ordinarydelays and not to a delay caused by government decree

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W141

lsquoDoctrine must be kept within narrow limitsrsquo

on the grounds of inconvenience increase in expense loss of profit

Where there is an express provision in thecontract covering the intervening event

(that is a force majeure clause)

A force majeure clause will not in any case be applied to covertrading with an enemy

A contract will not be frustrated if the event makingperformance impossible was the voluntary action of oneof the parties If the party concerned had a choice open tohim and chose to act in such a way as to makeperformance impossible then the frustration will be self-induced and the court will refuse to treat the contract asdischarged

bull In The Superservant Two (1990) one of two barges ownedby the defendants and used to transport oil rigs wassunk They were therefore unable to fulfill their contractto transport an oil rig belonging to the plaintiff as theirother barge (Superservant One) was already allocated toother contracts The court held that the contract was notfrustrated The plaintiffs had another barge available butchose not to allocate it to the contract with the plaintiffs

This case illustrates both the courts reluctance to applythe doctrine of frustration and the advantage of using aforce majeure clause

If by reason of special knowledge the event wasforeseeable by one party then he cannot claimfrustration

bull In Amalgamated Investment and Property Co v John Walker ampSons Ltd (1976) the possibility that a building could belisted was foreseen by the plaintiff who had inquiredabout the matter beforehand A failure to obtain planning

CA

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142

Where the frustration is self-induced

Where the event was foreseeable

permission was also foreseeable and was a normal riskfor property developers The contract was therefore notfrustrated

The effect of frustration

This rule could be very unfair in its operation as in Chandlerv Webster (1904) where the hirer had to pay all the sum duefor the hire of a room to view the coronation despite thecourt holding the contract frustrated by the cancellation ofthe coronation

This rule however would only apply in the event of a totalfailure of consideration and could itself in any case causehardship if the other party had expended a considerableamount of money in connection with the contract

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W143

At common law the loss lay where it fell that isthe date of the frustrating event was all important

Anything paid or payable before that datewould have to be paid Anything payable

after that date need not be paid

In the Fibrosa case (1943) the House of Lordsdid move away from this rule and held that

where there was a total failure of considerationthen any money paid or payable in advance

would have to be returned

Note these two sections are to be applied independently Theexpenses in s 1(2) can only be recovered from lsquosums paid orpayable before the frustrating eventrsquo

Section 1(3) was applied in BP Exploration v Hunt (1982)where it was held that the court must

bull identify and value the lsquobenefit obtainedrsquo

bull assess the lsquojust sumrsquo which it is proper to award

The court also stated that

bull the section was designed to prevent unjust enrichmentnot to apportion the loss or to place the parties in theposition they would be in had the contract beenperformed or to restore them to their pre-contractposition

CA

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144

The Law Reform (Frustrated Contracts) Act 1943was therefore passed to remedy these deficiencies

It provided

s 1(2) ndash all sums paid or payable before the frustratingevent shall be recoverable or cease to be payable but

the court has a discretionary power to allow the payeeto set off against the sum so paid expenses he has

incurred before the frustrating event

s 1(3) ndash where one party has obtained a valuablebenefit before the time of discharge the other

party may recover from him such sums asthe court considers just

bull in assessing the valuable benefit the section requiredreference to the end benefit received by a party not thecost of performance In assessing the end benefit theeffect of the frustrating event had to be taken intoaccount

bull the cost of performance can be taken into account inassessing the just sum

In BP v Hunt (1982) BP were to do the exploration andprovide the necessary finance on an oil concession ownedby Mr Hunt in Libya They were also to provide certainlsquofarm-inrsquo payments in cash and oil In return they were toget a half-share in the concession and 5 of theirexpenditure in reimbursement oil A large field wasdiscovered the oil began to flow then in 1971 the LibyanGovernment nationalised the field

The court held

bull the valuable benefit to Hunt was the net amount of oilreceived plus the compensation payable by the LibyanGovernment which amounted to pound85000000

bull the just sum would cover the work done by BP less thevalue of the reimbursement oil already received Thiswas assessed at pound34000000 As the valuable benefitexceeded the just sum BP recovered their expenses infull The position would have been very differenthowever if the field had been nationalised at an earlierstage and no compensation had been paid

CO

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W145

The Law Reform (Frustrated Contracts) Act 1943 does notapply to

CA

VE

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146

Charter parties Contracts of insurance

Contracts for the sale of specificgoods which have perished

CO

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W147

9 Remedies for breach of contract and restitution

not

If no loss has been suffered then nominal damages onlywill be awarded

bull In Surrey CC v Bredero Homes (1993) the court refused toaward damages against a defendant who had notcomplied with planning permission as there was no lossto the council

Unliquidated damages (that is damages assessed by

the court)

The purpose of unliquidated damages is to compensate the claimant for the loss he has

suffered as a result of a breach

Unliquidateddamages

Equitableremedies

Liquidateddamages

Restitutionor

quasi-contract

to punish the defendantPunitive damages are

not awarded for breachof contract

generally to recoup again made by the

defendant (but cf AG vBlake (2000) below)

bull However in Chaplin v Hicks (1911) damages wereawarded for the loss of a chance to win a competitionalthough there was no certainty that the plaintiff wouldhave been one of the winners

Reliance damages rather than expectation damages may beappropriate where the benefits which would have beenobtained by successful performance are difficult to assess asin

bull McRae v Commonwealth Disposals Commission (1951)where the plaintiff recovered the expenses incurred insearching for a wreck which did not exist

bull Anglia Television v Reed (1972) where the leading actor ina film project withdrew at the last moment The plaintiffswere able to recover all their wasted expenditure on theprogramme including even those incurred before thecontract had been signed

CA

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148

Methods of compensating the claimant

Expectation that is loss ofbargain is the traditional

basis for assessing damagesin contract It aims to putthe claimant in the sameposition as far as money

can do it as if the contracthad been performed

Reliance that is out of pocketor wasted expenditure This

is the normal way ofassessing damages in tort

but can be used in contractas illustrated below

bull But cf Regalian Properties v London Dockland Development(1995) where expenses incurred while negotiations wereexpressly lsquosubject to contractrsquo were not recoverable

It has been held that a claimant may freely choose betweenexpectation and reliance damages unless the difficulty inidentifying profits is because he has made a lsquobad bargainrsquo

bull In C and P Haulage v Middleton (1983) the plaintiff hired agarage for six months on the basis that anyimprovements would become the property of thelandlord He was ejected in breach of contract and suedfor the cost of the improvements Held ndash expenditurewould have been wasted even if the contract had beenperformed

bull It is for the defendant to prove that the claimant hadmade a bad bargain as in CCC Films v Impact QuadrantFilms (1985) where the defendant failed to prove that theplaintiff would not have made a profit from distributingthe films had they been delivered in accordance with thecontract

bull In normal circumstances the claimant will ask fordamages on an expectation basis as this is moreprofitable for him

Restitutionary measure

In Attorney General v Blake (2000) the House of Lords for thefirst time recognised that in some circumstances alsquorestitutionaryrsquo measure of damages requiring thedefendant to pay over the profit made as a result of thebreach of contract may be appropriate The case was anunusual one involving a book published by a member ofthe security services who had spied for Russia The House ofLords regarded the defendant as having been under

CO

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W149

something lsquoakin to a fiduciary obligationrsquo and it is not yetclear how far the principle adopted in this case is likely to beapplied in other situations

Contributory negligence

This is only relevant where the liability in contract isidentical with the liability on tort that is the breach is of acontractual duty to take care (Barclays Bank v FaircloughBuilding (1994))

Quantification of damage

Where lsquoloss of bargainrsquo damages are claimed there are twopossible methods of quantification

The court will normally adopt the most appropriate (RuxleyElectronics and Construction v Forsyth (1995))

Prima facie rules

CA

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150

Sale of goods ndash difference in value

Failure to repair (lease) ndash difference in value

Building contracts ndash cost of cure

Difference in value Cost of cure

Failure to deliver goods

bull In Williams Bros v Agius (1914) the profit which wouldhave been earned on a resale was ignored damagesrepresented the difference between the contract price andthe market price (which was higher than the resale price)

Failure to accept delivery and pay

bull If the seller is a dealer in mass produced goods then thedamage to him will be the loss of profit on onetransaction The claimant had sold one item less than heotherwise would have during the year (Thomson vRobinson (1955))

bull However if the mass produced item is in short supplyand the number of sales is governed by supply not bydemand then there is no loss of profit and damageswould not be awarded (Charter v Sullivan (1957))

bull The damages revert to the difference between thecontract price and market price in the case of secondhand goods even if the seller is a dealer (Lazenby Garagesv Wright (1976))

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W151

The Sale of Goods Act 1979 states thatdamages will represent the difference between

the contract price and the market price

The Sale of Goods Act 1979 states that damages willagain represent the difference between the contract

price and the market price

Limitations on principle of expectation

Although the stated aim of the expectation basis of assessingdamages is to put the claimant in the position he would havebeen in had the contract been performed there are a numberof rules which militate against this result

Remoteness of damage

bull In Hadley v Baxendale (1854) a mill was closed because ofthe delay of a carrier in returning a mill shaft The courtheld that the carrier was not liable for damages for theclosure of the mill as he was not aware that the absenceof a mill shaft would lead to this conclusion

The following damages were said to be recoverable

those arising naturally out of the breach

those which because of special knowledge wouldhave been within the contemplation of the parties

bull In Victoria Laundry v Newman Industries (1949) the rulewas restated and based on knowledge The laundry wasable to recover damages for normal loss of profitC

AV

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DIS

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S152

Damages cannot be recovered for losses that are tooremote The losses must be lsquowithin the reasonable

contemplationrsquo of the parties

Kind ofloss

CausationDuty of

mitigationRemotenessof damage

following a delay in the delivery of a boiler but not forspecially lucrative dyeing contracts they were offeredduring this time

Damages were said to be recoverable for losses whichwere within the reasonable contemplation of the partiesat the time of the contract either from

imputed knowledge or

actual knowledge

bull In The Heron II (1969) the House of Lords confirmed thata higher degree of foreseeability is required in contractthan in tort Damages were awarded to cover lossesarising from the late delivery of sugar to Basra Theparties must have been aware that the price of sugar inBasra might fluctuate For a loss not to be too remotethere must be

lsquoa real dangerrsquo

lsquoa serious possibilityrsquo

or the loss must be

lsquonot unlikelyrsquo

lsquoliable to resultrsquo

The difference between the tests of remoteness in contractand tort has been criticised but justified on the ground thata contracting party can protect himself against unusual risksby drawing them to the attention of the other party to thecontract

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W153

Application of remoteness rules

bull Imputed knowledge

Hadley v Baxendale (1854) Victoria Laundry v Newman Industries (1949)The Heron II (1967)

bull Actual knowledge

Defendantrsquos knowledge of special circumstances must beprecise This encourages contracting parties to discloseclearly any likely exceptional losses in advance

In Simpson v L amp NWR (1876) the defendant was liable forloss caused to the plaintiff by delivering goods toNewcastle Show Ground the day after the show had finished

In Horne v Midland Railway (1873) defendants were heldnot liable for exceptionally high profit lost by plaintiffthrough late delivery They knew that shoes would haveto be taken back if not delivered on 3 February but notthat the plaintiff would lose an exceptionally high profit

bull In Wroth v Tyler (1974) the defendant was liable for thefull difference between the contract price and the marketprice although the rise in the market price wasexceptional and could not have been foreseen

bull In Parsons (Livestock) Ltd v Uttley Ingham Co Ltd (1978) thedefendants who had supplied inadequately ventilatedhoppers for pig food were held liable for the loss of theplaintiffrsquos pigs even though the disease from which they

CA

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154

Note the test of remoteness determinesentitlement not quantum

died was not foreseeable It was enough that they couldhave contemplated any illness of the pigs (But cf VictoriaLaundry v Newman Industries (1849))

Lord Denning in this case argued that so far as physicaldamage was concerned (not loss of profit) all directlosses should be recoverable as in tort

Lord Scarman has also stated that it would be ridiculousif the amount of damages depended on whether anaction was framed in contract or tort A House of Lordsrsquodecision on these issues is awaited

It is sometimes disputed that the decisions since Hadley vBaxendale have not in any way clarified the rule

Types of loss recognised

This is the normal ground for the award of damages forbreach of contract

However damages for non-pecuniary loss will be awardedin specific cases for example

bull Pain and suffering consequent on physical injury

bull Physical inconvenience

In Watts v Morrow (1991) damages were awarded tocover the inconvenience of living in a house whilst it wasbeing repaired C

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155

Pecuniary loss

Non-pecuniary loss

bull Damage to commercial reputation

In Gibbons v Westminster Bank (1939) damages wereawarded to cover the losses caused by the wrongfulreferring of a cheque

Cf Malik v BCCI (1997) where the House of Lords heldthat compensation was payable for the stigma of havingworked for an organisation which had been run corruptly

bull Distress to claimant

Traditionally damages for injured feelings were notawarded for breach of contract Addis v Gramaphone Co(1909) This general principle has recently been confirmedby the House of Lords in Johnson v Unisys Ltd (2001)

However some limited exceptions to this rule have beenrecognised

Damages for disappointment were awarded againsta holiday company in Jarvis v Swan Tours (1973)where the holiday was not as described

In Hayes v Dodd (1990) the Court of Appealconfirmed that damages for distress are notrecoverable in normal commercial contracts butcould be recovered in contracts

CA

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156

to provide pleasure See Jarvis v Swan Tours Ltd

(1973)

to prevent distress Heywood v Wellers (1976) ndashsolicitorrsquos failure to obtain

an injunction

It has been suggested that damages for distress areparticularly appropriate in lsquoconsumer contractsrsquo

The duty of mitigation

In Payzu v Saunders (1919) the plaintiff had refused the offerof goods at below market price In Brace v Calder (1895) anemployee dismissed by a partnership turned down an offerof similar employment by one of the partners In both casesthe plaintiff was penalised for his failure to mitigate

bull He need not however take lsquounreasonablersquo steps inmitigation

In Pilkington v Wood (1953) it was stated that the plaintiffdid not need to embark on hazardous legal action inmitigation of his loss He should not take unreasonablesteps which would increase losses

bull The claimant cannot recover damages for losses he hasavoided

In British Westinghouse v Underground Electric Railways Co(1912) the plaintiff replaced a defective turbine with anew turbine which was so much more efficient that thesavings exceeded the losses on the defective turbineHeld ndash no loss ndash no damages

bull Note ndash the duty to mitigate does not arise until there hasbeen an actual breach of contract or an anticipatorybreach has been accepted by the other party (see Whiteand Carter v McGregor (above))

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W157

The claimant has a duty to take reasonablesteps to mitigate his loss

Causation (losses which the defendant did not cause)

bull The action of a third party may break the chain ofcausation if it is not foreseeable

In Lambert v Lewis (1981) a farmer continued to use acoupling even though he knew it was broken Held ndash thefarmer was responsible for losses caused by the failure ofthe coupling the manufacturer could not have foreseenthat he would continue to use it knowing it was faulty

bull However where the action is foreseeable the chain ofcausation will not be broken

In Stansbie v Troman (1948) a painter who in breach ofcontract had left a door unlocked was held liable forgoods taken by thieves since this was the kind of loss hehad undertaken to guard against by locking the doors

CA

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158

The breach must have caused the loss as well ashaving preceded the loss

Liquidated damages

Damages set by the parties themselves

The following guidelines for distinguishing between thetwo were suggested in Dunlop Pneumatic Tyre Ltd v NewGarage and Motor Co (1915)

bull a penalty ndash if the sum is extravagant and unconscionable

bull a penalty ndash if a larger sum is payable on the failure to paya smaller sum

bull a penalty ndash if the same sum is payable on major andminor breaches

bull it is no obstacle to the sum being liquidated damages thata precise pre-estimate is almost impossible

CO

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W159

Penalty clauses will not be enforced by the courtInstead the court will award unliquidated damages

The parties may stipulate that a certain sum mustbe paid on a breach of contract

If the sum represents a genuine pre-estimatethen it will be enforced by the court

as liquidated damages

If the sum is not genuine but is an attemptto frighten the other party into performing

then it is a penalty A penalty will not beenforced by the court

The rule against penalties does not apply to

bull Acceleration clauses

Here the whole of a debt becomes payable immediatelyif certain conditions are not observed

bull Deposits

Money paid otherwise than on a breach of contract

Alder v Moore (1961)

Bridge v Campbell Discount Co Ltd (1962)

bull clauses declaring a term to be a condition

Lombard North Central v Butterworth (1987)

Equitable remedies

Specific performance

Traditionally specific performance will only be awardedwhere damages are not an adequate remedy that is

CA

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160

An order of the court directing the defendant to fulfill his obligations under the contract

Specific performance Injunctions

All equitable remedies are discretionary

The following will be taken into account

bull Mutuality Negative ndash a minor cannot get it because it isnot available against a minor Positive ndash a vendor of landmay obtain it although damages would be an adequateremedy because it is also available to a purchaser of land

bull Supervision The need for constant supervisionprevented the appointment of a resident porter beingordered in Ryan v Mutual Tontine Association (1893) but inPosner v Scott Lewis (1986) a similar order was madebecause the terms of the contract were sufficientlyprecise

bull Impossibility ndash Watts v Spence (1976) ndash land belonged to athird party C

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161

Where damages are difficult to assessfor example annuities

Where there is no alternative remedy available(Beswick v Beswick (1968)) see above

Where the claimant cannot get a satisfactory substitute for example

contracts for the sale of land or contracts for the sale of goods which cannot be

obtained elsewhere for example antiquesvaluable paintings ndash unless bought as an

investment as in Cohen v Roche (1927)

bull Hardship ndash Patel v Ali (1984) ndash defendant would lose thehelp of supportive neighbours

bull Conduct of the claimant ndash Shell (UK) Ltd v Lostock Garages(1977) ndash Shellrsquos behaviour was unreasonable

bull Vagueness ndash Tito v Waddell (1977) ndash see above

bull Mistake ndash Webster v Cecil (1861) ndash see above

Special problems

bull Contracts of personal service

These are considered to involve personal relationshipsand are therefore not thought suitable for an order of specific performance

However such orders were exceptionally made in Hill vCA Parsons Ltd (1972) and Irani v Southampton AHA(1985) on the ground that in the very unusualcircumstances of those cases the mutual trust betweenthe employer and employee had not been destroyed

bull Building contracts

The courts are reluctant to enforce building contracts onthe grounds that damages are generally an adequateremedy the terms are often vague there are difficultieswith supervision

But it was held in Wolverhampton Corpn v Emmons (1901)that provided the terms were clear the problem ofsupervision would not be an absolute barrier

Injunctions

CA

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162

These are orders directing the defendant not to do a certain act

Types of injunction

Injunctions are also discretionary remedies and are subject to the similar constraints to orders of specific performance However an injunction will be granted toenforce a negative stipulation in a contract of employmentas long as this is not an indirect way of enforcing thecontract

bull Warner Bros v Nelson (1937)

bull cf Page One Records v Britton (1968)

CO

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W163

Interim injunction

This is designed to regulatethe position of the parties

pending trial

Prohibitory injunction

This is an ordercommanding the

defendant not to dosomething

Mandatory injunction

This orders thedefendant to undosomething he had

agreed not to

A comparison of the remedies for misrepresentation

and for breach of contract

Setting aside contracts

CA

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164

DamagesDamages available as of right Normally assessedon expectation basis Losses must be within thecontemplation of the parties See above

Damages available in tort of deceit negligentstatements and under s 2(1) of the 1967 ActDamages assessed on reliance basis All lossesflowing directly from misrepresentation will becovered whether or not foreseeable in actions indeceit and under s 2(1) of the 1967 Act (Royscot vRogerson (1991)) Losses must be foreseeable inthe tort of negligence No right to damages forinnocent misrepresentation but may be awardedin lieu of rescission at the discretion of the court

Breach

Misrep

Termination or rescission for breach

Available only for breaches of conditionsfundamental breaches of innominate terms and repudiations

Contract discharged from time of breachdischarge not retrospective Innocent party canalso sue for damages (see Chapter 8)

Rescission

Available for all misrepresentations but atdiscretion of court and subject to certain barsContract cancelled prospectively and retrospectivelyparties returned to the position they were in beforethe contract was entered into (see Chapter 6)

Breach

Misrep

Exclusion clauses

See ss 3 6 7 of UCTA

All clauses must be reasonable

Restitution or quasi-contract (based on unjust

enrichment)

It covers

Money may be recovered

bull Where there is a total failure of consideration (see Fibrosacase (frustration))

In Rowland v Divall (1923) the plaintiff had bought a carwhich turned out to be stolen property and which wasrecovered by the owner Despite the fact that the plaintiffhad had the use of the car for a considerable time and ithad fallen in value during this time the plaintiff was ableto recover the full purchase price of the car from thedefendant There had been a total failure of consideration

CO

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W165

Breach

Misrep

recovery of money payment for work done

Restitution may be available where parties arenot in a contractual relationship

It is based on the principle of unjust enrichment it allows the injured party to

recover money paid or the value of benefitsconferred where it would be unjust to allow the

other party to retain the benefit

bull Money paid under a mistake of fact is recoverableprovided the mistake is as to a fact which if true wouldhave legally or morally obliged the claimant to pay themoney or is sufficiently serious to require payment forexample

In Kleinwort Benson Ltd v Lincoln City Council (1998) theHouse of Lords held that in certain circumstances moneypaid under a mistake of law could also be recovered if itwould be unjust to allow the recipient to retain the money(See also Nurdin and Peacock plc v DB Ramsden amp Co Ltd(1999))

bull Money paid under a void contract

For example contracts void

bull In Westdeutche Landesbank v Islington LBC (1994) thecouncil had entered into a rate swapping arrangementwith the bank under which the bank had paid pound2500000to the council in advance The council had paidapproximately pound1200000 to the bank by instalment andargued that since there was not a total failure ofconsideration it should not have to pay the bank theremaining pound1300000 The Court of Appeal held that theprinciple upon which money must be repaid under a

CA

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166

because ultra vires

as against public policy

for a commonmistake

Mistaken payments underinsurance policies

Mistaken payments intoa bank account

void contract is different from that on a total failure ofconsideration Recovery of money under a void contractis allowed if there is no legal basis for such a payment

bull Note ndash money paid under contract which is void forillegality cannot be recovered unless the action can beframed without relying on the contract

Parkinson v Royal College of Ambulance (1925)Bowmakers v Barnet Instruments (1945) Tinsley v Milligan (1993)

bull Note ndash recovery under these heads will not be possible if

In Lipkin Gorman v Karpnale Ltd (1992) a partner in a firmof solicitors was a compulsive gambler who regularlygambled at a casino run by the defendants In order tofinance his gambling he had drawn cheques on clientaccounts where he was the sole signatory He had spentat least pound154000 of this money at the defendantrsquos casinoand the plaintiff sued for the return of the money as ithad been received under a contract which was void(declared void by statute) Held ndash where the true ownerof stolen money sought to recover it from an innocentthird party the recipient was under an obligation toreturn it where he had given no consideration for itunless he could show that he had altered his position ingood faith In this case the plaintiff was able to recoverthe pound154000 less the winnings paid to the partner The

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W167

the payer hadintended the

payee tobenefit in any

event

there is goodconsiderationfor exampledischarge of

a debt

the payee haschanged

position as aresult of the

payment

casino had altered their position on each gamble in thatthey had become vulnerable to a loss

However in South Tyneside Metropolitan Borough Council vSvenska International (1994) the House of Lords allowedthe council to recover approximately pound200000 it had paidto a bank under a rate swap agreement which had beendeclared ultra vires and void The court rejected thebankrsquos claim that it had changed its position in that it hadentered into financial arrangements with otherorganisations in order to hedge its losses

bull Money paid to a third party for the benefit of thedefendant provided the claimant was not acting as avolunteer (for example a mother paying off a sonrsquos debt)but was acting under some constraint

In Macclesfield Corpn v Great Central Railway (1911) theplaintiffs carried out repairs to a bridge which thedefendants were legally obliged (but had refused) tomaintain They were regarded as purely volunteers andcould not therefore recover the money However in Exallv Partridge (1799) the plaintiff paid off arrears of rentowed by the defendant in order to avoid seizure of theplaintiffrsquos carriage which was kept on the defendantrsquospremises The plaintiff was acting under a constraint andcould therefore recover the money

Payment for work done

bull Where the claimant has prevented performance of thecontract (see Plancheacute v Colburn (1831))

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168

Here the claimant is seeking compensationon a quantum meruit basis (cf s 1(3) of the

Law Reform (Frustrated Contracts) Act 1943)

bull Where work has been carried out under a void contractIn Craven Ellis v Canons Ltd (1936) the plaintiff hadcarried out a great deal of work on behalf of a companyon the understanding that he had been appointedmanaging director It was later discovered that he hadnot properly been appointed managing director Thecourt held that he should be paid on a quantum meruitbasis for the work he had done

bull Where agreement has not been reached and

the work was requested by the defendants InWilliam Lacey v Davis (1957) the plaintiffs hadsubmitted the lowest tender for a building contractand had been led to believe that they would beawarded it At the defendantsrsquo request they thenprepared various plans and estimates Thedefendants then decided not to proceed The courtordered the defendants to pay a reasonable sum on aquantum meruit basis for the work that had beendone on analogy with Craven Ellis v Cannons or

the work had been freely accepted In British SteelCorpn v Cleveland Bridge Engineering Co (1984) a letterof intent was issued by the defendants indicating thatthey intended to enter into a contract with theplaintiffs for the construction and delivery of cast-steel lsquonodesrsquo However it proved impossible to reachagreement on a number of major items Despite this anumber of lsquonodesrsquo were eventually constructed andaccepted by the defendants It was held by the courtthat the defendants should pay for the nodes they hadaccepted

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10 Privity of contract

Introduction

The traditional approach to the doctrine of privity is that

Privity of contract is closely associated with the rule thatconsideration must move from the promisee See Dunlop vSelfridge (above)

Only a party to a contractcan sue on a contract

Only a party to a contractcan be sued on a contract

In Tweddle v Atkinson(1861) the plaintiff had

married Mr Guyrsquosdaughter The plaintiffrsquosfather and Mr Guy had

agreed together that theywould each pay a sum ofmoney to the plaintiff Mr

Guy died before themoney was paid and the

plaintiff sued hisexecutors The action wasdismissed ndash the plaintiffwas not a party to thecontract which wasmade between the

two fathersSee also

Beswick v Beswick (1968)

In Dunlop v Selfridge(1915) Dew amp Co at the

instigation of Dunlophad placed a minimum

resale price in theircontract with Selfridge

Held ndash Dunlop could notsue Selfridge for breach of contract they were

not parties to the contract nor had they

given consideration to Selfridge

Matters relevant to the doctrine of privity

One part of the traditional approach that is that relating toconferring benefits has recently been significantly changedby legislation which is discussed below In addition thereare a number of situations which fall outside the scope ofthe doctrine

Matters outside the doctrine

It has been argued that it is only because English law hasdeclared many transactions not to be subject to the doctrineof privity that the doctrine itself has survived so long

CA

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172

AssignmentRights can be assignedprovided that certain

formalities are followed

AgencyA principal can sue and

be sued on contractsmade by an agent

on his behalf

TrustsWhere a trust has beencreated the beneficiaryunder the trust can suethe trustees even if hewas not a party to the

original agreement

Multi-partite agreementsIn Clarke v Dunraven(1897) entrants in a

yacht race were allowedto sue each other TheCompanies Act 1985allows shareholders

to sue each other

Land law recognises a number of exceptions

Statutory exceptions

bull Price maintenance agreements

bull Various insurance contracts

bull For example Married Womanrsquos Property Act

bull Law of Property Act 1925 s 56

bull Negotiable instruments

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W173

Collateral contractsIn limited cases the court will find a separate

(collateral) contract between the promisor and the third party

(Shanklin Pier v Detel Products (1951))

LeasesThe benefits and

obligations under a lease can be transferred

to third parties

Law of Property Act 1925 s 56

See below

Restrictive covenantsThese can bind a third party under the rule in

Tulk v Moxhay (1848)

Conferring benefits on a third party

Statutory intervention

The common law rule preventing a third party fromenforcing a contract was much criticised and has now beenreformed by legislation that is the Contracts (Rights ofThird Parties) Act 1999 based on recommendations from theLaw Commission

Main effectA third party will be able to enforce a contractual provisionpurporting to confer a benefit on him or her if both of twoconditions are satisfied (s 1)

Right to vary the contract

Unless they have provided otherwise the contractingparties will lose the right to vary or cancel the provisionbenefiting the third party if (s 2)

bull the third party has communicated his assent or

bull the third party has relied on the term and the promisor isaware of this or

bull the third party has relied on the term and the promisorcould be reasonably expected to have foreseen this

on its proper constructionthe contract is intended to

give the third party a legallyenforceable right

the contract expresslyprovides that the third party

may benefit

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174

DefencesThe promisor can raise against the third party any defencesthat could have been raised against the promisee (forexample misrepresentation duress) (s 3)

The promisor can also rely on defences set-offs orcounterclaims arising from prior dealings with the thirdparty

ExceptionsThere cannot be double liability that is as against thepromisee and the third party (s 5)

Some contracts are excluded from the Act (s 6)

bull contracts on a bill of exchange or promissory note

bull terms of a contract of employment as against anemployee

bull contracts for the carriage of goods by sea or if subject toan international transport convention by road rail or air

The exception for carriage of goods by sea does not apply toreliance on an exclusion clause (as in The Eurymedon (1975)for example)

Note also that the main contracting parties are in control ndashthey can decide that the provisions of the new Act shouldnot apply and there will be nothing that the third party cando about it

The Act does not affect the other part of the privity doctrinendash relating to the imposition of obligations on third parties ndashwhich remains governed by the common law

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W175

The common law approach

The common law developed a number of devices to allow athird party to receive the benefit of contract by

These devices will be of much less importance now that theContracts (Rights of Third Parties) Act 1999 is in force Theymay still be used however particularly in situations wherefor one reason or another the 1999 Act does not apply

Attempts to allow the third party to sue

bull Attempts to extend the use of lsquotrustsrsquo

In Walfordrsquos case (1919) under a charterparty theship owner promised the charterer to pay a broker acommission Held ndash the charterer was trustee of thispromise for the broker who could thus enforce itagainst the ship owner

However in Re Schebsman (1944) a contract betweenSchebsman and X Ltd that in certain circumstanceshis wife and daughter should be paid a lump sumwas held not to create a trust

The trust as a device to outflank privity was limited bythe courts presumably because of concern that theirrevocable nature of the trust may prevent thecontracting parties from changing their minds Thecourts no longer go out of their way to find that theparties intended to create a trust

CA

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176

Allowing the thirdparty to sue

Allowing the promiseeto sue on behalf of the

third party

bull Lord Denning launched a campaign against privity andargued that s 56 of the Law of Property Act 1925 intendedto destroy doctrine altogether This was finally rejected bythe House of Lords in Beswick v Beswick (1968) theyacknowledged that the wording was wide enough tosupport Lord Denningrsquos view but insisted neverthelessthat it must be restricted to contracts concerning land asthe purpose of the Act was to consolidate the law relatingto real property

bull Agency

Agency has been used to allow a third party to takeadvantage of an exclusion clause in a contract to whichhe was not a party

The House of Lords refused to allow stevedores torely on an exclusion clause in a contract between thecarriers and the cargo owner in Scruttons v MidlandSilicones (1962) on the basis that only a party to thecontract could claim the benefit of the contract that isthe exclusion clause

However in The Eurymedon (1975) the Privy Councilon similar facts held that the carriers had negotiateda second contract (a collateral contract) as agents ofthe stevedores and the stevedores could claim thebenefit of the exclusion clause in this contract

But in Southern Water Authority v Carey (1985) sub-contractors sought to rely on a limitation of liabilityclause in a main contract Held ndash they must havespecific authority to negotiate on behalf of a thirdparty before this device could work

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W177

In Norwich City Council v Harvey (1989) instead ofusing an exclusion clause the contract placed the riskof loss or damage by fire on the owner and thisprotected both main contractor and sub-contractor

Attempts to allow the promisee to enforce the contract onbehalf of the third party

bull Specific performance

In Beswick v Beswick (1968) Peter Beswick had transferredhis business to his nephew in return for his nephewrsquospromise to pay his uncle a pension and after his deathan annuity to his widow The nephew paid his uncle thepension but only one payment of the annuity was madeThe widow as administratrix of her husbandrsquos estatesuccessfully sued her nephew for specific performance ofthe contract to pay the annuity although the House ofLords implied that she would not have succeeded if shehad been suing in her own right

bull Injunction

Similarly an injunction may be awarded to restrain abreach of a negative promise on a suit brought by thepromisee for example A promised B not to compete withC or by a stay of proceedings

In Snelling v Snelling Ltd (1973) three brothers lent moneyto a family company and agreed not to reclaim themoney for a certain period A stay of proceedings wasgranted to one of the brothers to stop another brotherfrom breaking his promise and suing the company for thereturn of his money

CA

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178

bull Damages

Damages to cover the disappointment of a third partywas sanctioned by Lord Denning in Jackson v HorizonHolidays Ltd (1975) where the plaintiff entered into acontract with a holiday firm for a holiday for his familyand himself in Ceylon The holiday was a disaster Theplaintiff recovered damages for pound500 for lsquomental stressrsquoOn appeal the court confirmed the amount on theground that witnessing the distress of his family hadincreased the plaintiffrsquos own distress Lord Denninghowever stated that the sum was excessive for theplaintiffrsquos own distress but upheld the award on theground that the plaintiff had made the contract on behalfof himself and of his wife and children and that he couldrecover in respect of their loss as well as their own

This statement by Lord Denning was disapproved by theHouse of Lords in Woodar Investment Development Ltd vWimpey Construction (UK) Ltd (1980) They stated thatdamages should not generally be recovered on behalf ofa third party

Lord Wilberforce however did suggest that there was aspecial category of contracts which called for specialtreatment That is where one party contracted for abenefit to be shared equally between a group forexample family holidays ordering meals in restaurantsfor a party hiring taxis for a group The decision inJackson could therefore be supported on this ground Afurther exception was identified by the House of Lords inLinden Gardens Trust v Lenesta Sludge Disposals Ltd (1993)where in a construction contract the original propertyowner may be able to sue the contractor for damagesresulting from defects in the work even though theproperty has been transferred to a third party The

CO

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W179

damages would be held in trust for the third party Thisexception was again confirmed by the House of Lords inAlfred McAlpine Construction Ltd v Panatown Ltd (2000) inorder to avoid the situation where otherwise no onewould be able to sue the contractor although on the factsthe exception did not apply (because a separatearrangement had been made under which the contractorwas directly liable to the third party)

Attempts to impose obligations on third parties

bull Restrictive covenants inserted into a contract for the saleof land may bind subsequent purchasers provided

they are negative in nature the subsequent purchaser has notice of the covenants

the person claiming the benefit has land capable ofbenefiting from its enforcement (Tulk v Moxhay (1848))

bull The courts extended the rule in Tulk v Moxhay to personalproperty for example a ship in The Strathcona (1926)where the plaintiffs had chartered The Strathcona forcertain months each year The ship was sold to thedefendant who refused to allow the plaintiffs to use theship The plaintiffs sought an injunction on the groundthat the doctrine in Tulk v Moxhay should be extendedfrom land to ships The court granted an injunction

This decision was criticised in Port Line Ltd v Ben Line Ltd(1958) where a ship chartered to the plaintiffs was sold tothe defendants The ship was requisitioned during theSuez war and compensation was paid to the defendantsThis compensation was claimed by the plaintiffs Held ndasheven if The Strathcona case was rightly decided it couldC

AV

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DIS

HL

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RD

S180

not be applied in this case as (a) the defendants were notin breach of any duty and (b) the plaintiffs had notsought an injunction but financial compensation whichwas outside Tulk v Moxhay

The decision in The Strathcona has been widely criticisedbecause

a contract of hire creates personal not proprietaryrights in the hired object

the retention of land which can benefit from thecovenant is a necessary condition of the doctrine inTulk v Moxhay

bull However in Swiss Bank Corpn v Lloyds Bank (1979)Browne-Wilkinson J considered that the decision in TheStrathcona was correct He suggested however that thetort of inducing a breach of contract or knowinglyinterfering with a contract would be a more suitable basisfor the decision than Tulk v Moxhay He stated that in hisjudgment a person proposing to deal with property insuch a way as to cause a breach of a contract affecting thatproperty will be restrained by injunction from doing so ifwhen he acquired that property he had actualknowledge of the contract

CO

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W181

• Book Cover
• Title
• Copyright
• Contents
• 1 Agreement
• 2 Consideration and intention
• 3 Contents of a contract
• 4 Exemption (exclusion or
• 5 Vitiating elements which render
• 6 Mistake
• 7 Illegality and capacity
• 8 Discharge
• 9 Remedies for breach of contract
• 10 Privity of contract

The distinction between an offer and an invitation to treatdepends on the reasonable expectations of the parties

The courts have established that there is no intention to bebound in the following cases

Display of goods for sale

bull In a shop In Pharmaceutical Society of GB v Boots CashChemists Ltd (1952) the Court of Appeal held that in aself-service shop the sale takes place when the assistantaccepts the customerrsquos offer to buy the goods Thedisplay of goods is a mere invitation to treat

bull In a shop window In Fisher v Bell (1961) it was held thatthe display of a lsquoflick knifersquo in a shop window with aprice attached was an invitation to treat

However it was suggested by Lord Denning in Thorntonv Shoe Lane Parking (1971) (see below) that vendingmachines and automatic ticket machines are makingoffers since once the money has been inserted thetransaction is irrevocable

bull In an advertisement In Partridge v Crittenden (1968) anadvertisement which said lsquoBramblefinch cocks and hensndash 25srsquo was held to be an invitation to treat The courtpointed out that if the advertisement was treated as anoffer this could lead to many actions for breach ofcontract against the advertiser as his stock of birds waslimited He could not have intended the advertisement tobe an offer

However if the advertisement is unilateral in nature andthere is no problem of limited stock then it may be an offerSee Carlill v Carbolic Smoke Ball Co Ltd (above) Advertising areward may also be a unilateral offer

CA

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4

Auctions

bull An auctioneerrsquos request for bids in Payne v Cave (1789)was held to be an invitation to treat The offer was madeby the bidder (cf Sale of Goods Act 1979 s 57(2))

bull A notice of an auction In Harris v Nickerson (1873) it washeld that a notice that an auction would be held on acertain date was not an offer which then could beaccepted by turning up at the stated time It was astatement of intention

If the auction is stated to be lsquowithout reserversquo then there isstill no necessity to hold an auction but if the auction isheld lots must be sold to the highest bidder (Barry vHeathcote Ball (2001) confirming obiter dicta in Warlow vHarrison (1859)) The phrase lsquowithout reserversquo constitutes aunilateral offer which can be accepted by turning up andsubmitting the highest bid

Tenders

A request for tenders is normally an invitation to treat

bull However it was held in Harvela Ltd v Royal Trust ofCanada (1985) that if the request is made to specifiedparties and it is stated that the contract will be awardedto the lowest or the highest bidder then this will bebinding as an implied unilateral offer It was also held inthat case that a referential bid for example lsquothe highestother bid plus 10rsquo was not a valid bid

bull It was also held in Blackpool and Fylde Aero Club v BlackpoolBC (1990) that if the request is addressed to specifiedparties this amounts to a unilateral offer thatconsideration will be given to each tender which isproperly submitted C

ON

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5

Subject to contract

The words lsquosubject to contractrsquo may be placed on top of a letter in order to indicate that an offer is not to be legallybinding (Walford v Miles (1992))

Termination of the offer

Revocation (termination by the offeror)

An offeror may withdraw an offer at any time before it hasbeen accepted

bull The revocation must be communicated to the offereebefore acceptance In Byrne v van Tienhoven (1880) thewithdrawal of an offer sent by telegram was held to becommunicated only when the telegram was received

bull Communication need not be made by the offerorcommunication through a third party will suffice InDickinson v Dodds (1876) the plaintiff was told by aneighbour that a property which had been offered to himhad been sold to a third party Held ndash the offer had beenvalidly revoked

bull An offer to keep an offer open for a certain length of timecan be withdrawn like any other unless an option hasbeen purchased for example consideration has beengiven to keep the offer open (Routledge v Grant (1828))

Unilateral offersbull Communication of the revocation is difficult if the offer

was to the whole world It was suggested however inthe American case of Shuey v USA (1875) that

CA

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6

Revocation Lapse Rejection

communication will be assumed if the offeror takesreasonable steps to inform the public for example placesan advertisement in the same newspaper

bull It now seems established that revocation cannot takeplace if the offeree has started to perform In Errington vErrington (1952) a father promised his daughter and son-in-law that if they paid off the mortgage on a house heowned he would give it to them The young couple dulypaid the instalments but the offer was withdrawnshortly before the whole debt was paid Held ndash there wasan implied term in the offer that it was irrevocable onceperformance had begun This is also supported by dictain Daulia v Four Millbank Nominees (1978)

Lapse (termination by operation of law)

An offer may lapse and thus be incapable of being acceptedbecause of

bull Passage of time

at the end of a stipulated time (if any) or

if no time is stipulated after a reasonable time InRamsgate Victoria Hotel Co v Montefiore (1866) anattempt to accept an offer to buy shares after fivemonths failed as the offer had clearly lapsed

bull Death

of the offeror if the offer was of a personal nature

of the offeree

bull Failure of a condition

an express condition or CO

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W7

an implied condition In Financings Ltd v Stimson(1962) it was held that an offer to buy a car lapsedwhen the car was badly damaged on the ground thatthe offer contained an implied term that the carwould remain in the same condition as when the offer was made

Rejection (termination by the offeree)

A rejection may be

bull express

bull implied

A counter offer is an implied rejectionbull Traditionally an acceptance must be a mirror image of

the offer If any alteration is made or anything addedthen this will be a counter offer and will terminate theoffer In Hyde v Wrench (1840) the defendant offered tosell a farm for pound1000 The plaintiff said he would givepound950 for it Held ndash this was a counter offer whichterminated the original offer which was therefore nolonger open for acceptance In Brogden v MetropolitanRailway (1877) the defendant sent to the plaintiff forsignature a written agreement which they hadnegotiated The plaintiff signed the agreement andentered in the name of an arbitrator on a space which hadbeen left empty for this purpose Held ndash the returneddocument was not an acceptance but a counter offer

bull This is particularly important for businesses whocontract by means of sales forms and purchase forms forexample if an order placed by the buyerrsquos purchase formis lsquoacceptedrsquo on the sellerrsquos sales form and the conditionson the back of the two forms are not identical (which theyare very unlikely to be) then the lsquoacceptancersquo is a counter

CA

VE

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8

offer and an implied rejection In Butler Machine Tool CoLtd v Ex-Cell-O Corpn Ltd (1979) the sellers offered to sella machine tool to the buyers for pound75535 on their ownconditions of sale which were stated to prevail over anyconditions in the buyersrsquo order form and whichcontained a price variation clause The buyers lsquoacceptedrsquothe offer on their own order form which stated that theprice was a fixed price and which contained a tear offslip which said lsquowe accept your order on the terms andconditions stated thereonrsquo This was in effect a lsquocounterofferrsquo The sellers signed and returned the slip togetherwith a letter which stated that they were carrying out theorder in accordance with their original offer When theydelivered the machine they claimed the price hadincreased by pound2892 The buyers refused to pay the extrasum Held ndash the contract was concluded on the buyersrsquoterms the signing and returning of the tear-off slip wasconclusive that the sellers had accepted the buyersrsquocounter offer The court analysed the transaction bylooking for matching offer and acceptance

Note ndash a request for further information is not a counteroffer In Stevenson v McLean (1880) the defendant offered tosell to the plaintiff iron at 40s a ton The plaintiff telegraphedto inquire whether he could pay by instalments Held ndash thiswas a mere inquiry for information not a counter offer andso the original offer was not rejected

A conditional acceptance

A conditional acceptance may be a counter offer capable ofacceptance for example I will pay pound500 for your car if youpaint it red If the owner agrees to this condition a contractwill be formed CO

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W9

A valid acceptance must

bull be made while the offer is still in force (see termination ofoffer above)

bull be made by the offeree

bull exactly match the terms of the offer (see counter offersabove)

bull be written oral or implied from conduct In Brogden vMetropolitan Railway (1877) (above) the returneddocument was held to be a counter offer which thedefendants then accepted either by ordering coal fromBrogden or by accepting delivery of the coal (see alsolsquoThe Battle of the Formsrsquo)

However the offeror may require the acceptance to be madein a certain way If the requirement is mandatory it must befollowed

If the requirement is not mandatory then another equallyeffective method will suffice In Manchester Diocesan Councilfor Education v Commercial and General Investments Ltd (1969)an invitation to tender stated that the person whose bid was

CA

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10

The fact of acceptance

An acceptance is a final and unqualified assent to all the terms of the offer

The fact of acceptance

Acceptance

Communication ofacceptance

accepted would be informed by a letter to the address givenin the tender The acceptance was eventually sent not to thisaddress but to the defendantrsquos surveyor Held ndash thestatement in the tender was not mandatory the tender hadtherefore been validly accepted

bull Where the offer is made in alternative terms theacceptance must make it clear to which set of terms itrelates

bull A person cannot accept an offer of which he has noknowledge (Clarke (1927) (Australia))

But a personrsquos motive in accepting the offer is irrelevantIn Williams v Carwardine (1833) (Australia) the plaintiffknew of the offer of a reward in exchange forinformation but her motive was to salve her conscienceHeld ndash she was entitled to the reward

bull lsquoCross-offersrsquo do not constitute an agreement (Tinn vHoffman amp Co (1873))

Communication of acceptance

Acceptance must be communicated by the offeree or hisagent In Powell v Lee (1908) an unauthorised communicationby one of the managers that the Board of Managers hadselected a particular candidate for a headship was held notto be a valid acceptance

Silence as communication

An offeror may not stipulate that silence of the offeree is toamount to acceptance In Felthouse v Bindley (1862) the

CO

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W11

Acceptance must be communicated

plaintiff wrote to his nephew offering to buy a horse andadding lsquoIf I hear no more I will take it that the horse isminersquo The nephew did not reply to this letter Held ndash nocontract Acceptance had not been communicated to theofferor

It has been suggested that this does not mean that silencecan never amount to acceptance for example if in Felthousev Bindley the offeree had relied on the offerorrsquos statementthat he need not communicate his acceptance and wished toclaim acceptance on that basis the court could decide thatthe need for acceptance had been waived by the offeror (seebelow)

Exceptions to the rule that acceptance must be

communicated

bull In a unilateral contract where communication isexpressly or impliedly waived (see Carlill v CarbolicSmoke Ball Co Ltd (above))

bull Possibly where failure of communication is the fault ofthe offeror This was suggested by Lord Denning inEntores Ltd v Miles Far East Corpn (1955)

bull Where the post is deemed to be the proper method ofcommunication In Adams v Lindsell (1818) thedefendants wrote to the plaintiffs offering to sell them aquantity of wool and requiring acceptance by post Theplaintiffs immediately posted an acceptance on 5December Held ndash the contract was completed on 5December

CA

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12

The postal rule

bull Adams v Lindsell (1818) above

bull Acceptance is effective on posting even when the letter islost in the post In Household Fire Insurance Co Ltd v Grant(1879) the defendant offered to buy shares in theplaintiffrsquos company A letter of allotment was posted tothe defendant but it never reached him Held ndash thecontract was completed when the letter was posted

bull Note the difference between acceptance and revocationof an offer by post

Acceptance of an offer takes place when a letter isposted

Revocation of an offer takes place when the letter isreceived

bull Byrne v van Tienhoven (1880) above

Limitations to the postal rule

bull It only applies to acceptances and not to any other typeof communication (for example an offer or a revocation)

bull It only applies to letters and telegrams It does not applyto instantaneous methods of communication such astelex or probably fax or email

bull It must be reasonable to use the post as the means ofcommunication (for example an offer by telephone or byfax might indicate that a rapid method of response wasrequired)

CO

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W13

Acceptance takes place when a letter is postednot when it is received

bull Letters of acceptance must be properly addressed andstamped

bull The rule is easily displaced for example it may beexcluded by the offeror either expressly or impliedly InHolwell Securities Ltd v Hughes (1974) it was excluded bythe offeror requiring lsquonotice in writingrsquo It was alsosuggested by the court that the postal rule would not beused where it would lead to manifest inconvenience

There is no direct English authority on this point

CA

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14

Arguments againstLogic ndash once a letter is posted the offer is accepted there isno provision in law for revoking an acceptance

bull The lsquologicalrsquo view is supported by the New Zealand caseof Wenckheim v Arndt (1878) and the South African case ofA to Z Bazaars (Pty) Ltd v Minister of Agriculture (1974)

Fairness ndash

bull Cheshire argues that it would be unfair to the offeror whowould be bound as soon as the letter was posted whereasthe offeree could keep his options open

Query ndash can a letter of acceptance be cancelled byactual communication before the letter is delivered

Communication by instantaneouselectronic means

bull The rules on telephones and telex were laid down inEntores v Miles (above) and confirmed in Brinkibon Ltd vStahag Stahl (1983) where it was suggested that duringnormal office hours acceptance takes place when themessage is printed out not when it is read The House ofLords however accepted that communication by telexmay not always be instantaneous for example whenreceived at night or when the office is closed

bull Lord Wilberforce stated

lsquoNo universal rule could cover all such cases theymust be resolved by reference to the intention of theparties by sound business practice and in some casesby a judgment of where the risk should liersquo

CO

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W15

Arguments forThere is some support for allowing recall in the Scottishcase of Countess of Dunmore v Alexander (1830)

bull It is argued that actual prior communication of rejectionwould not necessarily prejudice the offeror who bydefinition will be unaware of the lsquoacceptancersquo

bull It is also argued that it would be absurd to insist onenforcing a contract when both parties have acted on therecall This however could be interpreted as anagreement to discharge

Acceptance takes place when and where the message is received

bull It has been suggested that a message sent outsidebusiness hours should be lsquocommunicatedrsquo when it isexpected that it would be read for example at the nextopening of business It is generally accepted that thesame rules should apply to faxes and email as to telex

bull There is no direct authority on telephone answeringmachines It might well be argued that the presence of ananswering machine indicates that communication is notinstantaneous there is a delay between sending andreceiving messages It would then follow that the basicrule should apply that is that acceptance must becommunicated Acceptance therefore would take placewhen the message is actually heard by the offeror

Certainty of terms

The courts will not enforce

CA

VE

ND

ISH

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16

Vague agreementsfor example

Scammell v Ouston (1941)

The courts refused toenforce a sale stated to bemade lsquoon hire purchase

termsrsquo neither the rate ofinterest nor the period of

repayment nor the numberof instalments were stated

Incomplete agreementsfor example

lsquoan agreement to make anagreementrsquo will be void

In Walford v Miles (1992) thecourt refused to enforce anlsquoagreement to negotiate in

good faithrsquo

See also May and Butcher v R (1934)

It is for the parties to make their intentions clear

But the uncertainty may be cured by

bull a trade custom where a word has a specific meaning

bull previous dealings between the parties whereby a word orphrase has acquired a specific meaning for exampletimber of lsquofair specificationrsquo in Hillas v Arcos (1932)

bull the contract itself which provides a method for resolvingan uncertainty In Foley v Classique Coaches (1934) therewas an executed contract where the vagueness of lsquoat aprice to be agreedrsquo was cured by a provision in thecontract referring disputes to arbitration Cf May andButcher v R an unexecuted contract where the courtrefused to allow a similar arbitration clause to cure theuncertainty

The courts will strive to find a contract valid where it hasbeen executed

bull The Sale of Goods Act 1979 provides that if no price ormechanism for fixing the price is provided then thebuyer must pay a lsquoreasonable pricersquo but this provisionwill not apply where the contract states that the price islsquoto be agreed between the partiesrsquo

bull Note a lsquolock-out agreementrsquo for example an agreementnot to negotiate with any one else is valid provided it isclearly stated and for a specific length of time This wasapplied by the Court of Appeal in Pitt v PHH AssetManagement (1993) where a promise not to negotiate withany third party for two weeks was enforced

CO

NT

RA

CT

LA

W17

CO

NT

RA

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W19

2 Consideration and intention

Consideration

Most legal systems will only enforce promises where thereis something to indicate that the promisor intended to bebound that is there is some

Consideration is the normal lsquobadge of enforceabilityrsquo inEnglish law

ReciprocityConsideration

RelianceLord Denning tried to

introduce reliance as basisfor enforcing promisesthrough the doctrine of

promissory estoppel

FormFor example writing English

law will enforce promiseswhich are contained in a

deed (A deed is a document which

is signed and attested andindicates on its face

that it is a deed)

lsquoBadge of

enforceabilityrsquo

Definitions of consideration

Shorter version

Limitation of the definition

bull It makes no mention of why the promisee incurs adetriment or confers a benefit or that the element of abargain is central to the classical notion of considerationFor example in Combe v Combe (1951) it was held thatthere was no consideration for the defendantrsquos promiseto pay his ex-wife pound100 per year even though in relianceon that promise she had not applied to the divorce courtfor maintenance and in that sense she had suffered adetriment The reason why the detriment did notconstitute consideration was that there was no request bythe husband express or implied that she should forbearfrom applying for maintenance There was nolsquoexchangersquo

bull Some writers have preferred to emphasise this elementof bargain and have defined consideration as

CA

VE

ND

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20

A valuable consideration in the eyes of the law mayconsist of (Currie v Misa (1875))

bull either some right interest profit or benefit to oneparty or

bull some forbearance detriment loss orresponsibility given suffered or undertaken bythe other

A benefit to one party or a detriment to the other

lsquothe element of exchange in a contractrsquoor

lsquothe price paid for a promisersquo

bull These definitions however are vague and despite itslimitation the benefitdetriment definition is mostcommonly used

Consideration and condition

Consideration must be distinguished from the fulfilment ofa condition If A says to B lsquoI will give you pound500 if you shouldbreak a legrsquo there is no contract but simply a gratuitouspromise subject to a condition In Carlill v Carbolic Smoke BallCo (1893) the plaintiff provided consideration for thedefendantrsquos promise by using the smoke ball Catchinginfluenza was only a condition of her entitlement to enforcethe promise

Kinds of consideration

bull In Roscorla v Thomas (1842) the defendant promised theplaintiff that a horse which had been bought by him wassound and free from vice It was held that since thispromise was made after the sale had been completedthere was no consideration for it and it could not beenforced In Re McArdle (1951) a promise made lsquoin

CO

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W21

Past consideration that is something already completed before the promise is made cannot

generally amount to consideration

Executed considerationAn act wholly

performed as part of a contract

Executory ConsiderationA promise to do something

in the future

consideration of your carrying out certain improvementsto the propertyrsquo was held by the Court of Appeal to beunenforceable as all the work had been done before thepromise was made

Exceptions to this rule

bull The modern requirements were laid down by LordScarman in Pao On v Lau Yiu Long (1980) Where a serviceis rendered

at the request of the promisor (as in Lampleigh vBraithwait (1615))

on the understanding that a payment will be made (asin Re Caseyrsquos Patents (1892)) and

if the payment would have been legally enforceableif it had been promised in advance

then a subsequent promise to pay a certain sum will beenforced

Note ndash the lsquoinferredrsquo intention to pay makes this a veryflexible exception

Consideration must move from the promisee

bull See Chapter 10 ndash Privity of contract

Consideration need not be adequate

CA

VE

ND

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22

Only a person who has provided consideration for a promise can enforce that promise

The consideration provided by one party need not equal in value the

consideration provided by the other party

It is for the parties themselves to make their own bargainThe consideration need only have lsquosome value in the eyes ofthe lawrsquo (See lsquoConsideration must be sufficientrsquo p 24below)

bull The value may be slight In Chappell Co Ltd v Nestleacute Co Ltd(1960) three wrappers from the defendantrsquos chocolatebars were held to be part of the consideration InMountford v Scott (1975) pound1 was held to be goodconsideration for an option to buy a house

bull Withdrawal of threatened legal proceedings will amountto consideration even if the claim is found to have nolegal basis provided that the parties themselves believethat the claim is valid (Callisher v Bischoffstein (1870))

bull In Pitt v PHH Asset Management (1993) the defendantagreed to a lock-out agreement in return for Pittdropping his claim for an injunction against them Theclaim for an injunction had no merit but had a nuisancevalue and dropping it was therefore good consideration

bull In Alliance Bank v Broome (1964) the bankrsquos forbearance tosue was held to be consideration for the defendantrsquospromise to provide security for a loan

bull In Edmonds v Lawson (2000) it was held that the generalbenefits to chambers of operating a pupillage system wassufficient to provide consideration for contracts withindividual pupils

There is no consideration however where the promises arevague for example lsquoto stop being a nuisance to his fatherrsquo(White v Bluett (1853) but cf Ward v Byham (1956) below) orillusory for example to do something impossible or merelygood for example to show love or affection or gratitude CO

NT

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W23

It has been argued that because the latter are invalidconsideration must have some economic value Buteconomic value is extremely difficult to discern in the othercases cited above Since consideration is a lsquobadge ofenforceabilityrsquo it is argued that nominal consideration isadequate it is only designed to show that the promise isintended to be legally enforceable ndash whether it creates anyeconomic advantage is therefore irrelevant

Consideration must be sufficient

Traditionally the following have no value in the eyes of thelaw

Performing a duty imposed by law

bull For example promising not to commit a crime orpromising to appear in court after being subpoenaed InCollins v Godefroy (1831) a promise to pay a fee to awitness who has been properly subpoenaed to attend a

CA

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24

The consideration must have some value in the eyes of the law

Consideration therefore is found when a person receives whatever he requests

in return for a promise whether or not it has aneconomic value provided it is not too vague

Performing a duty imposed

by law

Performing an existingcontractual duty owed

to the other party

trial was held to have been made without considerationThe witness had a public duty to attend

bull But if a person does or promises to do more than he isrequired to do by law then he is providing considerationIn Glasbrook Bros v Glamorgan CC (1925) the council aspolice authority on the insistence of a colliery owner andin return for a promise of payment provided protectionover and above that required by law Held ndash they hadprovided consideration for the promise to pay

bull In Ward v Byham (1956) the father of an illegitimate childpromised to pay the mother an allowance of pound1 per weekif she proved that the child was lsquowell looked after andhappyrsquo Held ndash the mother was entitled to enforce thepromise because in undertaking to see that the child waslsquowell looked after and happyrsquo she was doing more thanher legal obligation Lord Denning however based hisdecision on the ground that the mother providedconsideration by performing her legal duty to maintainthe child

Treitel agreed with Denning that performance of a dutyimposed by the law can be consideration for a promise Heargues that it is public policy which accounts for the refusalof the law in certain circumstances to enforce promises toperform existing duties Where there are no grounds ofpublic policy involved then a promise given inconsideration of a public duty can be enforced

He cites

bull promises to pay rewards for information leading to thearrest of a felon See Sykes v DPP (1961)

bull Ward v Byham (above) CO

NT

RA

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W25

In most cases it would make no difference whether the courtproceeded on the basis that the matter was one of publicpolicy or a lack of consideration But the former ground doesallow a greater degree of flexibility

Performing an existing contractual duty

Where the duty is owed to the other party this cannot beconsideration for

A request for extra payment

bull In Stilk v Myrick (1809) the captain promised the rest ofcrew extra wages if they would sail the ship back homeafter two sailors had deserted Held ndash the crew werealready bound by their contract to meet the normalemergencies of the voyage and were doing no more thantheir original contractual duty in working the ship home

bull Where the promisor however performs more than hehad originally promised then there can be considerationIn Hartley v Ponsonby (1857) nearly half the crewdeserted This discharged the contracts of the remainingsailors as it was dangerous to sail the ship home withonly half the crew The sailors were therefore free to makea new bargain so the captainrsquos promise to pay themadditional wages was enforceable

Exceptions to the rule in Stilk v Myrick

Factual advantages obtained by the promisorIn Williams v Roffey Bros (1991) the defendants (the maincontractors) were refurbishing a block of flats They sub-

CA

VE

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26

A request for extra payment

A request to avoid part of a debt

contracted the carpentry work to the plaintiff The plaintiffran into financial difficulties whereupon the defendantsagreed to pay the plaintiff an additional sum if theycompleted the work on time Held ndash where a party to anexisting contract later agrees to pay an lsquoextra bonusrsquo in orderthat the other party performs his obligations under theoriginal contract then the new agreement is binding if theparty agreeing to pay the bonus has thereby obtained somenew practical advantage or avoided a disadvantage In thisparticular case the advantage was the avoidance of apenalty clause and the expense of finding new carpenters

bull Note ndash Stilk v Myrick (above) recognises as considerationonly those acts which the promisee was not under a legalobligation to perform Williams v Roffey Bros (above) addsto these factual advantages obtained by the promisor

bull This decision pushes to the fore the principles ofeconomic duress as a means of distinguishing enforceableand unenforceable modifications to a contract (seeChapter 5 on economic duress p 87)

Duties owed to third partyWhere a duty is owed to a third party its performance canalso be consideration for a promise by another It is clear thatthe third party is getting something more than he is entitledto

bull In Shadwell v Shadwell (1860) an uncle promised to pay anannual sum to his nephew on hearing of his intendedmarriage The fact of the marriage providedconsideration although the nephew was already legallycontracted to marry his fianceacutee

bull In Scotson v Pegg (1861) A agreed to deliver coal to Brsquosorder B ordered A to deliver coal to C who promised A to

CO

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W27

unload it Held ndash A could enforce Crsquos promise as Arsquosdelivery of the coal was good considerationnotwithstanding that he was already bound to do so byhis contract with B

bull In New Zealand Shipping Co v Satterthwaite amp Co Ltd TheEurymedon (1975) it was held by the Privy Council thatwhere a stevedore at the request of the consignee ofcertain goods removed the goods from a ship this wasconsideration for the promise by the consignee to give thestevedore the benefit of an exclusion clause although thestevedore in removing the goods was only performingcontractual duties he owed to the carrier

A request to avoid part of a debt

If a creditor is owed pound100 and agrees to accept pound90 in fullsettlement he can later insist on the remaining pound10 beingpaid as there is no consideration for his promise to waive thepound10 (the rule in Pinnelrsquos Case (1602))

bull This rule was confirmed by the House of Lords in Foakesv Beer (1884) Dr Foakes was indebted to Mrs Beer on ajudgment sum of pound2090 It was agreed by Mrs Beer thatif Foakes paid her pound500 in cash and the balance of pound1590in instalments she would not take lsquoany proceedingswhatsoeverrsquo on the judgment Foakes paid the moneyexactly as requested but Mrs Beer then proceeded toclaim an additional pound360 as interest on the judgment debtFoakes refused and when sued pleaded that his duty topay interest had been discharged by the promise not tosue Their Lordships deferred as to whether on its trueconstruction the agreement merely gave Foakes time to

CA

VE

ND

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28

Basic rule payment of a smaller sum will not discharge the duty to pay a higher sum

pay or was intended to cover interest as well But theyheld even on the latter construction there was noconsideration for the promise and that Foakes was stillbound to pay the additional sum

There are situations however where payment of a smallersum will discharge the liability for the higher sum

bull where the promise to accept a smaller sum in fullsettlement is made by deed or in return forconsideration

bull where the original claim was not for a fixed sum or theamount is disputed in good faith

bull where the debtor does something different for examplewhere payment is made at the creditorrsquos request

at an earlier time

at a different place

by a different method (it was held in D amp C BuildersLtd v Rees (1966) that payment by cheque is notpayment by a different method)

bull where payment is accompanied by a benefit of somekind

bull in a composition agreement with creditors

bull where payment is made by a third party (see HirachandPunachand v Temple (1911))

It has been argued that to allow the creditor to sue for theremaining debt would be a fraud on the third parties in thelast two cases above

Note ndash the doctrine of promissory estoppel under certaincircumstances may allow payment of smaller sum todischarge liability for the larger sum

CO

NT

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W29

In Re Selectmove (1995) the Court of Appeal refused toextend the principle laid down in Williams v Roffey Bros topart payment of a debt The company had offered to pay itsarrears by instalments to the Inland Revenue who said thatthey would let them know if this was acceptable They heardnothing further but paid some instalments and thenreceived a threat of being wound up if the full arrears werenot paid immediately The court was not prepared to allowWilliams v Roffey Bros to overturn a rule laid down by theHouse of Lords in Foakes v Beer

Promissory estoppel

There are problems with regard to

Origins

bull It was introduced (obiter) by Lord Denning in the CentralLondon Property Trust Ltd v High Trees House Ltd (1947)where owners of a block of flats had promised to acceptreduced rents in 1939 There was no consideration fortheir promise but Lord Denning nevertheless stated thathe would estop them from recovering any arrears Hebased his statement on the decision in Hughes vMetropolitan Railway (1877)

CA

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30

If a promise intended to be binding andintended to be acted upon is acted upon then the court will not allow the promisor

to go back on his promise

the origins ofthe doctrine

the scope ofthe doctrine

the effect of the doctrine

bull It would however seem to conflict with the House ofLordsrsquo decision in Jorden v Money (1854) where it wasstated that estoppel applied only to statements of fact andnot to promises and also with the decision in Foakes vBeer (1884) where the House of Lords confirmed thatpayment of a smaller sum will not discharge the liabilityfor a larger sum

Scope

bull It only applies to the modification or discharge of anexisting contractual obligation It cannot create a newcontract See Combe v Combe (1951) above (However itwas used to create a new right of action in the Australiancase of Waltons v Maher (1988))

bull It can be used only as a lsquoshield and not a swordrsquo

bull The promise not to enforce rights must be clear andunequivocal In The Scaptrade (1983) the mere fact of nothaving enforced onersquos full rights in the past was notsufficient

bull It must be inequitable for the promisor to go back on hispromise In D amp C Builders v Rees (1966) Mrs Rees had forced the builders to accept her cheque by inequitable means and so could not rely on promissory estoppel

bull The promisee must have acted in reliance on the promisealthough not necessarily to his detriment (Alan amp Co Ltdv El-Nasr Export and Import Co (1972))

CO

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W31

The exact scope of the doctrine is a matter ofdebate but certain requirements must be met

Effect of the doctrine

bull In Tool Metal Manufacturing Co v Tungsten Electric Co(1955) the owner of a patent promised to suspendperiodic payments during the war It was held by theCourt of Appeal that the promise was binding for theduration of the war but the owners could on givingreasonable notice at he end of the war revert to theiroriginal legal entitlements

bull In Ajayi v Briscoe (1964) the Privy Council stated that thepromisee could resile from his promise on givingreasonable notice which allowed the promisee areasonable opportunity of resuming his position but thatthe promise would become final if the promisee could notresume his former position

On one interpretation these cases show that as regardsexisting or past obligations it is extinctive but as regardsfuture obligations it is suspensory

On another interpretation the correct approach is to look atthe nature of the promise If it was intended to bepermanent then the promiseersquos liability will beextinguished

Lord Denning consistently asserted that promissoryestoppel can extinguish debts However this view iscontrary to Foakes v Beer

The view that promissory estoppel is suspensory onlywould reconcile it with the decisions in Jorden v Money

CA

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32

It is not clear whether the doctrine extinguishesrights or merely suspends them

Foakes v Beer and Pinnelrsquos Case but it would deprive it of mostof its usefulness

The question of whether the doctrine is suspensory orextinctive is particularly important with regard to singlepayments

Intention to be legally bound

This presumption may be rebutted but the onus of proof ison the party seeking to exclude legal relations In EssoPetroleum Co Ltd v Commissioners of Customs and Excise (1976)Esso promised to give one world cup coin with every fourgallons of petrol sold A majority of the House of Lordsbelieved that the presumption in favour of legal relationshad not been rebutted

Examples of rebuttals

bull lsquoThis arrangement is not entered into as a formal orlegal agreement and shall not be subject to legaljurisdiction in the law courtsrsquo (Rose and Frank v CromptonBros (1925))

bull Agreement to be binding lsquoin honour onlyrsquo (Jones v VernonPools (1939))

CO

NT

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W33

Commercial andbusiness

agreements

Social anddomestic

agreements

In commercial and business agreements there is a presumption that the parties

intend to create legal relations

bull Letters of comfort for example statements to encouragelending to an associated company It was held inKleinwort Benson Ltd v Malaysia Mining Corpn (1989) thatthe defendantrsquos statement that lsquoit is our policy to ensurethat the business is at all times in a position to meet itsliabilities to yoursquo was a statement of present fact and nota promise for the future As such it was not intended tocreate legal relations

bull Collective agreements are declared not to be legallybinding by the Trade Unions and Labour Relations(Consolidation) Act 1992 unless expressly stated inwriting to be so

This can be rebutted by evidence to the contrary forexample

bull Agreements between husband and wife In Balfour vBalfour (1919) the court refused to enforce a promise bythe husband to give his wife pound50 per month whilst he wasworking abroad However the court will enforce a clearagreement where the parties are separating or separated(Merritt v Merritt (1970))

bull Agreements between members of a family In Jones vPadavatton (1969) Mrs Jones offered a monthly allowanceto her daughter if she would come to England to read forthe Bar Her daughter agreed but was not very successfulMrs Jones stopped paying the monthly allowance butallowed her daughter to live in her house and receive therents from other tenants Mrs Jones later sued forpossession The daughter counterclaimed for breach of

CA

VE

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34

In social and domestic agreements there is a presumption against legal relations

the agreement to pay the monthly allowance andor for accommodation Held (a) the first agreement may havebeen made with the intention of creating legal relationsbut was for a reasonable time and would in any case havelapsed (b) the second agreement was a familyarrangement without an intention to create legalrelations It was very vague and uncertain

bull An intention to be legally bound may be inferred where

one party has acted to his detriment on theagreement (Parker v Clark (1960)) or

a business arrangement is involved (Snelling vSnelling (1973)) or

there is mutuality (Simpkins v Pays (1955))

But in all such cases the agreement must be clear

CO

NT

RA

CT

LA

W35

CO

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W37

3 Contents of a contract

Once a contract has been formed it is necessary to explorethe scope of the obligations which each party incurs

(Incorporation of terms is covered in Chapter 4)

The distinction between terms and mere

representations

Is a statement part of the contract Statements made duringnegotiations leading to a contract may be either

bull Terms

that is statements which form the express terms of thecontract As such they constitute promises as to thepresent truth of the statement or as to future action Ifsuch a promise is broken (for example because thestatement is untrue) this will involve a breach of contractor

Different weighting may be given to different terms

Distinction between termsand mere representations

Interpretation of expressterms

Identification of impliedterms

This involves

bull Mere representations

that is statements which do not form part of the contractbut which helped to induce the contract If these areuntrue they are lsquomisrepresentationsrsquo

Now that damages can be awarded for negligent misrepresentation the distinction has lost much of itsformer significance but there are still some importantconsequences

In trying to ascertain such intention the court may take intoaccount the following factors

The importance of the statement to the parties

bull In Bannerman v White (1861) the buyer stated lsquoif sulphurhas been used I do not want to know the pricersquo Held ndasha term Similarly in Couchman v Hill (1947) the buyerasked if the cow was in calf stating that if she was hewould not bid The auctioneerrsquos reply that she was not incalf was held to be a term overriding the printedconditions which stated that no warranty was given

The respective knowledge of the parties

bull In Oscar Chess Ltd v Williams (1957) it was held that astatement by a member of the public (a non expert) to agarage (an expert) with regard to the age of a car was amere representation not a term On the other hand astatement made by a garage (an expert) to a member ofthe public (a non-expert) concerning the mileage of a carwas held to be a term (Dick Bentley Productions Ltd vHarold Smith (Motors) Ltd (1965))

CA

VE

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38

Whether a statement has become a term of thecontract depends on the intention of the parties

The manner of the statement

bull For example if it suggests verification (Ecay v Godfrey(1947)) it is unlikely to be a term If it discouragesverification lsquoIf there was anything wrong with the horseI would tell yoursquo (Schawel v Reade (1913)) it is more likelyto be a term

Where a contract has been reduced to writing

The terms will normally be the statements incorporated intothe written contract (Routledge v McKay (1954))

bull But a contract may be partly oral and partly written (seeCouchman v Hill (1947) above) In Evans amp Sons Ltd vAndrea Merzario Ltd (1976) an oral assurance thatmachinery would be stowed under not on the deck washeld to be a term of a contract although it was notincorporated into the written terms The court held thatthe contract was partly oral and partly written and insuch hybrid circumstances the court was entitled to lookat all the circumstances

bull Note ndash the discovery of a collateral contract mayovercome the difficulties of oral warranties in writtencontracts In City of Westminster Properties v Mudd (1959)a tenant signed a lease containing a covenant to use thepremises for business premises only He was induced tosign by a statement that this clause did not apply to himand that he could continue to sleep on the premises Thecourt found that his signing the contract was con-sideration for this promise thus creating a collateralcontract In Evans amp Son Ltd v Andrea Merzario Ltd (1976)Lord Denning considered the oral statement to be acollateral contract In Esso Petroleum Co v Mardon (1976)the court held that the statement by a representative of C

ON

TR

AC

TL

AW

39

Esso with regard to the throughput of a petrol station wascovered by an implied collateral warranty that thestatement had been made with due care and skill

bull The use of a collateral contract will not be possiblehowever if the main contract contains an appropriatelyworded lsquoentire agreementrsquo clause (The Inntrepreneur PubCo (GL) v East Crown Ltd (2000))

Identification of express terms

bull See incorporation of terms in Chapter 4 p 54

Interpretation of express terms of a contract

Oral contracts

The contents is a matter of evidence for the judge Theinterpretation will be undertaken by applying an objectivetest that is what would a reasonable person haveunderstood to have been meant by the words used (Thake vMaurice (1986))

Written contracts

If a contract is reduced to writing then under the lsquoparolevidencersquo rule oral or other evidence extrinsic to thedocument is not normally admissible to lsquoadd to vary orcontradictrsquo (Jacobs v Batavia and General Plantations Trust(1924)) the terms of the written agreement

Exceptions to the parol evidence rule

bull to show that the contract is not legally binding forexample because of mistake or misrepresentation

bull to show that the contract is subject to a lsquoconditionprecedentrsquo In Pym v Campbell (1856) oral evidence was

CA

VE

ND

ISH

LA

WC

AR

DS

40

admitted to show that a contract was not to come intooperation unless a patent was approved by a third party

bull to establish a custom or trade usage (Hutton v Warren(1836) see below)

bull to establish that the written contract is not the wholecontract It is presumed that lsquoa document which lookslike a contract is the whole contractrsquo but this isrebuttable See Couchman v Hill (1947) and Evans v AndreaMerzario (above)

bull a contract may be contained in more than one document(Jacobs v Batavia Plantation Trust Ltd (1924))

bull to establish a collateral contract (City of WestminsterProperties Ltd v Mudd (1959) Evans amp Son Ltd v AndreaMerzario Ltd (1976))

The Law Commission recommended in 1976 that the lsquoparolevidencersquo rule be abolished However in view of the wideexceptions to the rule it recommended in 1986 that no actionneed be taken

Identification of implied terms

In addition to the terms which the parties have expresslyagreed a court may be prepared to hold that other termsmust be implied into the contract Such terms may beimplied by

CO

NT

RA

CT

LA

W41

Custom Statute The courts

Custom

A contract may be deemed to incorporate any relevantcustom of the market trade or locality in which the contractis made In Hutton v Warren (1836) a tenant established aright to fair allowance for improvements to the land througha local custom

Statute

Parliament as a matter of public policy has in variousinstances seen fit to imply terms into contracts for example

Terms implied into all sales

bull that the seller has the right to sell the goods

bull that goods sold by description correspond with thedescription

Terms implied only into sales by way of business

bull that the goods are of satisfactory quality

Goods are of a satisfactory quality if they meet thestandard that a reasonable person would regard assatisfactory taking account of any description of thegoods the price if relevant and all other relevantcircumstances In particular it will be necessary toconsider their

fitness for all purposes for which goods of that kindare commonly supplied

appearance and finish

CA

VE

ND

ISH

LA

WC

AR

DS

42

The Sale of Goods Act 1979 which impliesthe following terms into contracts

for the sale of goods

freedom from minor defects

safety and

durability

This term does not apply to matters specifically drawn tothe buyerrsquos attention before the contract is made orwhere the buyer examines the goods defects which thatexamination should have revealed

bull that the goods are fit for any special purpose madeknown to the seller

bull that goods sold by sample correspond with the sample

bull In contracts of service there is an implied term that theservice will be carried out with reasonable care and skillwithin a reasonable time and for a reasonable price

In Wilson v Best (1993) it was held that the duty of a travelagent under this provision extended to checking that thelocal safety regulations had been complied with It did notrequire them to ensure that they complied with UKregulations

The courts

CO

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CT

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W43

Terms implied in fact Terms implied in law

The Supply of Goods and Services Act 1982implies similar terms into contracts of hire contracts for work and materials and other

contracts not covered by the Sale of Goods Act

Terms implied in fact

When interpreting terms implied in fact the court seeks togive effect to the unexpressed intention of the parties Thereare two tests A term may be implied because

bull It is necessary to give business efficacy to the contract InThe Moorcock (1889) a term was implied that the riverbedwas in a condition that would not damage a shipunloading at the jetty

bull It satisfies the lsquoofficious bystanderrsquo test that is if abystander suggested a term the parties would respondwith a common lsquoof coursersquo In Spring v NASDS (1956) theunion tried to imply the lsquoBridlington Agreementrsquo Thecourt refused on the basis that if an lsquoofficious bystanderhad suggested this the plaintiff would have repliedldquoWhatrsquos thatrdquorsquo

The Moorcock doctrine is used in order to make the contractworkable or where it was so obvious that the parties musthave intended it to apply to the agreement It will not beused merely because it was reasonable or because it wouldimprove the contract

It was suggested in Shell UK Ltd v Lostock Garages Ltd (1977)that the courts will be reluctant to imply a term where theparties have entered into a detailed and carefully draftedwritten agreement

Terms implied in law

bull When terms are implied in law they are implied into allcontracts of a particular kind Here the court is not tryingto put into effect the parties intention but is imposing anobligation on one party often as a matter of public policyFor example the court implies into all contracts ofC

AV

EN

DIS

HL

AW

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RD

S44

employment a term that the employee will carry out hiswork with reasonable care and skill and will indemnifyhis employer against any loss caused by his negligence(Lister v Romford Ice Cold Storage Co (1957))

bull In these cases the implication is not based on thepresumed intention of the parties but on the courtrsquosperception of the nature of the relationship between theparties and whether such an implied term wasreasonable

bull In Liverpool CC v Irwin (1977) the tenants of a block ofcouncil flats failed to persuade the court to imply a termthat the council should be responsible for the commonparts of the building on the Moorcock or lsquoofficiousbystanderrsquo test but succeeded on the basis of the Listertest that is the term should be implied in law in that theagreement was incomplete it involved the relationshipof landlord and tenant and it would be reasonable toexpect the landlord to be responsible for the commonparts of the building

Classification of terms

There is a very important distinction between those terms ofa contract which entitle an innocent party to terminate(rescind or treat as discharged) a contract in the event of a

CO

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W45

Conditions Warranties Innominate terms

breach and those which merely enable a person to claimdamages

Traditionally a distinction has been made in English lawbetween

Conditions

bull The Sale of Goods Act 1979 designates certain impliedterms for example re satisfactory quality as conditions ndashthe breach of which entitles the buyer to terminate (ortreat as discharged) the contract

bull In Poussard v Spiers and Pond (1876) a singer failed to takeup a role in an opera until a week after the season hadstarted Held ndash her promise to perform as from the firstperformance was a condition ndash and its breach entitled themanagement to treat the contract as discharged

Warranties

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46

Contractual terms concerning the less importantor subsidiary statements of facts or promisesIf a warranty is broken this does not entitle

the other party to terminate (or treat asdischarged) the contract it merely entitles

him to sue for damages

Statements of fact or promises which form theessential terms of the contract If the statement is not true or the promise is not fulfilled the

injured party may terminate (or treat as discharged) the contract and claim damages

bull The Sale of Goods Act 1979 designates certain terms aswarranties breach of which do not allow the buyer totreat the contract as discharged but merely to sue fordamages for example the right to quiet enjoyment

bull In Bettini v Gye (1876) a singer was engaged to sing for awhole season and to arrive six days in advance to takepart in rehearsals He only arrived three days in advanceHeld ndash the rehearsal clause was subsidiary to the mainclause It was only a warranty The management wastherefore not entitled to treat the contract as dischargedThey should have kept to the original contract andsought damages for the three daysrsquo delay

Innominate or intermediate terms

bull In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha(1962) it was suggested by the Court of Appeal that itwas not enough to classify terms into conditions andwarranties Regard should also be had to the characterand nature of the breach which has occurred In HongKong Fir the defendants chartered the vessel Hong KongFir to the plaintiffs for 24 months the charter partyprovided that the ship was lsquofitted in every way forordinary cargo servicersquo The vessel spent less than nineweeks of the first seven months at sea because ofbreakdowns and the consequent repairs which werenecessary

CO

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W47

On the facts this was not the case because the charter partystill had a substantial time to run

After the Hong Kong Fir case in 1962 there was someconfusion as to whether the breach based test which appliedto innominate terms had replaced the term based test whichrelied on the distinction between conditions and warrantiesor merely added to it an alternative in certain circumstances

bull In the Mihalis Angelos (1970) the Court of Appeal revertedto the term based test The owners of a vessel stated thatthe vessel was lsquoexpected ready to loadrsquo on or about 1 JulyIt was discovered that this was not so Held ndash the termwas a condition ndash the charterers could treat the contract as discharged

In 1976 two cases were decided on the breach based principle

bull In Cehave v Bremer Handelsgesellshaft MBH The Hansa Nord(1976) the seller had sold a cargo of citrus pellets with aterm in the contract that the shipment be made in goodcondition The buyer rejected the cargo on the basis thatthis term had been broken The defect however was notserious and the court held that although the Sale ofGoods Act had classified some terms as conditions andwarranties it did not follow that all the terms had to be soclassified Accordingly the court could consider the effect

CA

VE

ND

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48

Held ndash the term was neither a condition nor awarranty and in determining whether the

defendants could terminate the contract it wasnecessary to look at the consequences of the

breach to see if it deprived the innocent party ofsubstantially the whole benefit he should

have received under the contract

of the breach since this was not serious the buyer hadnot been entitled to reject

bull In Reardon Smith v Hansen Tangen (1976) an oil tanker wasdescribed as lsquoOsaka No 354rsquo where in fact it was lsquoOshimaNo 004rsquo but was otherwise exactly as specified Becausethe market for oil tankers had collapsed the chartererssought to argue that the number was a condition whichwould enable them to repudiate the contract The Houseof Lords rejected this argument Held ndash the statement wasan innominate term not a condition since the effect ofthe breach was trivial it did not justify termination of thecontract

bull Note ndash the time for determining whether a clause was acondition or an innominate term is at the time ofcontracting ndash not after the breach

Traditionally a term is a condition if it has been establishedas such

bull By statute ndash for example the Sale of Goods Act 1979

bull By precedent after a judicial decision In The MihalisAngelos (1970) the Court of Appeal held that thelsquoexpected readinessrsquo clause in a charter party is acondition

bull By the intention of the parties The court must ascertainthe intention of the parties If the wording clearly revealsthat the parties intended that breach of a particular termshould give rise to a right to rescind that term will beregarded as a condition In Lombard North Central vButterworth (1987) the Court of Appeal held thatcontracting parties can provide expressly in the contractthat lsquospecific breaches could terminate the contractrsquo Inthat case the contract included an express clause that the

CO

NT

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CT

LA

W49

time for payment of instalments was lsquoof the essence of thecontractrsquo An accountant had contracted to hire acomputer for five years agreeing to make an initialpayment and 19 quarterly rental payments He was latein paying some instalments and the owners terminatedthe agreement recovered possession of the computerand claimed damages not only for the arrears but also forloss of future instalments The claim succeeded becausethe contract specifically stated that the time of paymentof each instalment was to be of the essence of the contract

Note the mere use of the word lsquoconditionrsquo is not conclusive

In Schuler v Wickman Tool Sales Ltd (1974) the House of Lordsheld that breach of a lsquoconditionrsquo that a distributor shouldvisit six customers every week could not have been intendedto allow rescission The word lsquoconditionrsquo had not been usedin this particular sense There was in the contract a separateclause which indicated when and how the contract could beterminated

bull By the court ndash deciding according to the subject matter ofthe contract (see Poussard v Spiers (1876) and Bettini v Gye(1876) above)

CA

VE

ND

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50

If a term is not a condition then the lsquowait and seersquotechnique can be used to decide if the gravity of

the breach is such that it deprivedthe innocent party of substantially the whole

benefit of the contract If so ndash then the innocentparty can terminate the contract

(innominate or intermediate term)

Certainty and flexibility

Certainty

bull The term based test is alleged to have the advantage ofpredictability and certainty It is important for the partiesto know their legal rights and liabilities as regards theavailability of termination The character of all terms isascertainable at the moment the contract is concludedNothing that happens after its formation can change thestatus of a term If the term is a condition then the partieswill know that its breach allows the other party toterminate But there can still be uncertainty where theparties have to await the courtrsquos decision on the nature ofthe term

bull The advantage of certainty is however balanced by thefact that it is possible to terminate a contract on atechnicality for sometimes a very minor breach

Flexibility

bull The breach based test is stated to bring flexibility to thelaw Instead of saying that the innocent party can in thecase of a condition always terminate or in the case of awarranty never terminate innominate terms allow thecourts to permit termination where the circumstancesjustify it and the consequences are sufficiently serious

bull It is however more difficult for the innocent party toknow when he has the right to terminate or for the partyin breach to realise in advance the consequence of hisaction

CO

NT

RA

CT

LA

W51

Note the distinction between the different types of contract terms remains of

considerable importance

CO

NT

RA

CT

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W53

4 Exemption (exclusion or limitation) clauses

A total exclusion is referred to as an exclusion clause apartial exclusion is known as a limitation clause

Exemption clauses are most commonly found in standardform contracts

To be valid an exemption clause must satisfy the tests set bythe

Common law requirements

A clause which purports to exclude wholly or inpart liability for a breach of contract or a tort

Common lawUnfair Contract

Terms Act (UCTA)1977

Regulations onUnfair Terms in ConsumerContracts 1999

The term must be incorporated into the

contract

The wording mustcover what actually

happened

Incorporation

bull This requirement applies to all terms but has beeninterpreted strictly in the case of exemption clauses

A term may be incorporated into a contract by being

Contained in a signed document

In LrsquoEacutestrange v Graucob Ltd (1934) the plaintiff had signed acontract of sale without reading it Held ndash she was bound bythe terms which contained an exemption clause

ExceptionsWhere the offeree has been induced to sign as a result ofmisrepresentation

bull In Curtis v Chemical Cleaning Co (1951) the plaintiffsigned a lsquoreceiptrsquo when she took a dress to be cleaned onbeing told that it was to protect the cleaners in case ofdamage to the sequins In fact the clause excludedliability for all damage Held ndash the cleaners were notprotected for damage to the dress the extent of theclause had been misrepresented and therefore thecleaners could not rely on it

bull lsquoNon est factumrsquo (see p 106 below)

Contained in an unsigned document (ticket cases)

bull This must be seen to be a contractual document

In Chapelton v Barry UDC (1940) on hiring a deckchair the plaintiff was given a ticket with only alarge black 3d on the face of the ticket and exclusionclauses on the back Held ndash the defendants could notrely on the exclusion clauses as it was not apparenton the face of it that the ticket was a contractualdocument rather than just a receipt

CA

VE

ND

ISH

LA

WC

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DS

54

bull Reasonable notice of the term must be given

In Parker v South Eastern Railway Co (1877) theplaintiff received a ticket which stated on the facelsquosee backrsquo Held ndash as long as the railway companyhad given reasonable notice of the exemptionclausersquos existence it did not matter that the plaintiffhad not read the clause

In Thompson v London Midland and Scottish Railway(1930) the ticket indicated that the conditions of thecontract could be seen at the station masterrsquos office oron the timetable The exemption clause was in clause552 of the timetable which cost sixpence ndash the ticketitself only cost two and sixpence In the circumstancesnevertheless reasonable notice had been given

The test is objective and it is irrelevant that the partyaffected by the exemption clause is blind or illiterateor otherwise unable to understand it (Thompson vLMS above)

But in Geir v Kujawa (1970) a notice in English wasstuck on the windscreen of a car stating thatpassengers travelled at their own risk A Germanpassenger who was known to speak no English washeld not to be bound by the clause as reasonable carehad not been taken to bring it to his attention

bull Attention must be drawn to any unusual clause

In Thornton v Shoe Lane Parking (1971) it was statedthat a person who drives his car into a car park mightexpect to find in his contract a clause excludingliability for loss or damage to the car but specialnotice should have been given of a clause purportingto exclude liability for personal injury

CO

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W55

In Interfoto Picture Library v Stiletto Visual Programmes(1989) the Court of Appeal confirmed that onerousconditions required special measures to bring them tothe attention of the defendant The clause in that casewas not an exemption clause but a clause imposingcharges 10 times higher than normal The Court ofAppeal stated that the more unusual the clause thegreater the notice required

bull Notice of the term must be communicated to the otherparty before or at the time that the contract is enteredinto

In Thornton v Shoe Lane Parking Ltd (1971) the plaintiffmade his contract with the car company when heinserted a coin in the ticket machine The ticket wasissued afterwards and in any case referred toconditions displayed inside the car park which hecould see only after entry Notice therefore came toolate

bull The rules of offer and acceptance and the distinctionsbetween offers and invitations to treat must be consultedin order to ascertain when the contract was madeProblems with regard to incorporation can arise in atypical lsquoBattle of the Formsrsquo problem See Butler MachineTool Ltd v Ex-Cell-O Corpn (Chapter 1)

Notice by display

Notices exhibited in premises seeking to exclude liability forloss or damage are common for example lsquocar parked atownerrsquos riskrsquo and must be seen before or at the time of entryinto contract

bull In Olley v Marlborough Court Hotel (1949) Mr and MrsOlley saw a notice on the hotel bedroom wall which

CA

VE

ND

ISH

LA

WC

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DS

56

stated lsquothe proprietors will not hold themselvesresponsible for articles lost or stolen unless handed tothe manageress for safe keepingrsquo The contract had beenentered into on registration and the clause was thereforenot incorporated into the contract and could not protectthe proprietors

Notice by a lsquocourse of dealingrsquo

bull If there has been a course of dealing between the partiesthe usual terms may be incorporated into the contractalthough not specifically drawn to the attention of theparties each time a contract is made

In Spurling v Bradshaw (1956) Bradshaw deposited someorange juice in Spurlingrsquos warehouse The contractualdocument excluding liability for loss or damage was notsent to Spurling until several days after the contract Held ndashthe exclusion clauses were valid as the parties had alwaysdone business with each other on this basis

bull Note ndash the transactions must be sufficiently numerous toconstitute a course of dealings The established course ofdealings must be consistent The established course ofdealings must not have been deviated from on the occasion in question

In Hollier v Rambler Motors (1972) the Court of Appeal heldthat bringing a car to be serviced or repaired at a garage onthree or four occasions over a period of five years did notestablish a course of dealings

Notice through patent knowledge

bull In British Crane Hire Corpn v Ipswich Plant Hire (1975) theowner of a crane hired it out to a contractor who was alsoengaged in the same business It was held that the hirer

CO

NT

RA

CT

LA

W57

was bound by the ownerrsquos usual terms though they werenot actually communicated at the time of the contractThey were however based on a model supplied by atrade association to which both parties belonged It wasstated that they were reasonable and were well known inthe trade

Oral contracts

bull Whether a clause has been incorporated into an oralcontract is a matter of evidence for the court (McCutcheonv MacBrayne (1964))

On a proper construction the clause covers the loss

in question

bull An exclusion clause is interpreted contra proferentem thatis any ambiguity in the clause will be interpreted againstthe party seeking to rely on it

in Houghton v Trafalgar Insurance Co Ltd (1954) it washeld that the word lsquoloadrsquo could not refer to people

in Andrews Bros v Singer amp Co Ltd (1934) an exclusionreferring to implied terms was not allowed to cover aterm that the car was new as this was an express term

It was however suggested by the House of Lords inPhoto Production Ltd v Securicor Ltd (1980) that any needfor a strained and distorted interpretation of contracts inorder to control the effect of exemption clauses had beenreduced by the UCTA

bull Especially clear words must be used in order to excludeliability for negligence for example the use of the wordlsquonegligencersquo or the phrase lsquohowsoever causedrsquo (Smith vSouth Wales Switchgear Ltd (1978))

CA

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ND

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DS

58

But if these words are not used provided the wording iswide enough to cover negligence and there is no otherliability to which they can apply then it is assumed thatthey must have been intended to cover negligence(Canada Steamship Lines v The King (1952))

bull It was stated in Ailsa Craig Fishing Co v Malvern Fishing Co(1983) that limitation clauses may be interpreted lessrigidly than exclusion clauses

bull Only a party to a contract can rely on an exclusion clause(See Chapter 10)

bull Especially clear words are required when the breach is ofa fundamental nature In the past Lord Denning andothers argued that it was not possible to exclude breachesof contract which were deemed to be fundamental byany exclusion clause however widely and clearlydrafted

However the House of Lords confirmed in Photo ProductionLtd v Securicor Ltd (1980) that the doctrine of fundamentalbreach was a rule of construction not a rule of law that isliability for a fundamental breach could be excluded if thewords were sufficiently clear and precise

The House also stated that

bull the decision in Harbuttrsquos Plasticine Ltd v Wayne Tank andPump Co (1970) was not good law In that case the Courtof Appeal had held that as a fundamental breach broughta contract to an end there was no exclusion clause left toprotect the perpetrator of the breach

bull there is no difference between a lsquofundamental termrsquo anda lsquoconditionrsquo C

ON

TR

AC

TL

AW

59

bull a strained construction should not be put on words in anexclusion clause which are clearly and fairly susceptibleof only one meaning

bull where the parties are bargaining on equal terms theyshould be free to apportion risks as they wish

bull the courts should be wary of interfering with the settledpractices of business people as an exclusion clause oftenserves to identify who should insure against a particularloss

Unfair Contract Terms Act 1977

Note ndash the title is misleading

bull The Act does not cover all unfair contract terms onlyexemption clauses

bull The Act covers certain tortious liability as well ascontractual liability The following must be examined

CA

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60

Clauses whichare void

Clauses which are valid only if reasonable

The meaning of lsquoreasonablersquo

Scope of the Act

Scope of the Act

bull s 1 ndash the Act applies to contracts made after 1 February1978 which arise in the course of business lsquoBusinessrsquoincludes a profession and the activities of anygovernment department andor public or localauthority

bull s 5 ndash contracts specifically excluded include contracts ofinsurance contracts for the transfer of land andinternational commercial contracts

bull s 13 ndash the Act limits the effectiveness of clauses thatexclude or restrict liability It also covers clauses whichmake it difficult to enforce a contract for example byimposing restrictive time limits or which excludeparticular remedies In Stewart Gill v Horatio Myer and Co(1992) it was held that a clause restricting a right of set-off or counterclaim was subject to the Act It was alsoheld in Smith v Bush (1990) that it covered lsquodisclaimerswhich restrictively defined a partyrsquos obligation under acontractrsquo In that case a valuation was stated to be givenlsquowithout any acceptance of liability for its accuracyrsquo

Negligence

bull The Act covers contractual tortious and statutory (that isunder the Occupiersrsquo Liability Act 1957) negligence

bull The difference between excluding liability for negligenceand transferring liability for negligence is seen in PhillipsProducts v Hyland Bros (1987) where the contracttransferred liability for the negligence of the driver of ahired excavator to the hirer The driver negligentlydamaged property belonging to the hirer Held ndash theclause was an exclusion clause and was subject to UCTA

CO

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W61

bull In Thompson v Lohan (Plant Hire) (1987) on the otherhand an excavator and driver were hired under the sameconditions The driver negligently killed a third partyHeld ndash the clause transferring liability to the hirer was notan exclusion clause in this case as the third party was ableto sue the hirer It was merely a clause transferring liability

Misrepresentation

bull The difference between excluding liability formisrepresentation and defining the powers of an agent isseen in Cremdean Properties v Nash (1977) where a clausein the special conditions of sale stating that thelsquoparticulars were believed to be correct but theiraccuracy is not guaranteedrsquo was held to be an exclusionclause

bull In Collins v Howell Jones (1980) however the Court ofAppeal held a statement that the lsquovendor does not makeor give any representation or warranty and neither theestate agent or any person in their employment has anyauthority to make or give a representation or warrantywhatsoever in relation to the propertyrsquo had the effect ofdefining or limiting the scope of the agentrsquos authority

Effect of the Act

Clauses which are void

Exclusions of liability

bull for death or personal injury caused by negligence (s 2)

bull in a manufacturerrsquos guarantee for loss or damage causedby negligence (s 5)

bull for the statutory guarantee of title in contracts for the saleof goods or hire purchase (s 6)

CA

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62

bull for the other statutory guarantees in consumer contractsfor the sale of goods or hire purchase (descriptionsatisfactory quality fitness for purpose) (s 6)

bull for similar statutory guarantees in other consumercontracts for the supply of goods for example contractsof hire (s 7)

Clauses which are valid only if reasonable

Clauses excluding liability

bull for loss or damage to property caused by negligence (s 2)

bull for breach of contract in a consumer or standard formcontract (s 3) This includes clauses in such contractsclaiming to render a substantially different performancefrom that reasonably expected or to render noperformance at all (s 3)

bull for statutory guarantees (other than those concerningtitle) in inter-business contracts for the sale of goods andhire purchase (description satisfactory quality andfitness for purpose) (s 6)

bull for statutory guarantees concerning title or possession inother contracts for the supply of goods (for examplehire) (s 7)

bull for other statutory guarantees (description satisfactoryquality fitness for purpose) in other inter-businesscontracts for the supply of goods (s 7)

bull for misrepresentation in all contracts

Note

lsquoConsumer transactionrsquo ndash a person is a lsquoconsumerrsquo where hedoes not make or hold himself out as making the contract in

CO

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W63

the course of business and the other party does make thecontract in the course of business In contracts for the sale ofgoods the goods must also be of a type normally sold forprivate use

bull A controversial interpretation of a lsquoconsumerrsquo was madeby the Court of Appeal in R and B Customs v UnitedDominion Trust (1988) where a car was bought by aprivate company for the business and private use of itsdirectors It was held by the Court of Appeal that it wasnot bought lsquoin the course of a businessrsquo Buying cars wasincidental not central to the business of the company If itis incidental only then the purchase would only be lsquoin thecourse of a businessrsquo if it was one made with sufficientregularity

Note however that in Stevenson v Rogers (1999) the Courtof Appeal refused to apply the R and B Customs Brokersapproach to the question of whether a sale was in the courseof a business for the purpose of s 14(12) of the Sale of GoodsAct 1979

A lsquostandard form contractrsquo occurs when the parties deal onthe basis of a standard form provided by one of them

Reasonableness

In assessing reasonableness the following matters should beconsidered

CA

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64

It is for the person relying on the clause to prove that the clause is reasonable

Section 11 of UCTA 1977

bull Contract terms are to be adjudged reasonable or notaccording to the circumstances which were or oughtreasonably to have been known to the parties when thecontract was made

bull Where a person seeks to restrict liability to a specifiedsum of money regard should be had to the resourceswhich he could expect to be available to him for thepurpose of meeting the liability and as to how far it wasopen to him to cover himself by insurance

bull In determining for the purpose of s 6 or s 7 whether acontract term satisfies the requirement of reasonablenessregard shall be had to

the strength of the bargaining position of the partiesrelative to each other

whether the customer received an inducement toagree to the term and had an opportunity of enteringinto a similar contract with other persons butwithout having to accept similar terms

whether the customer knew or ought reasonably tohave known of the existence and extent of the term

where the exclusion is conditional whether it wasreasonable to expect that compliance with thatcondition would be practicable

whether the goods were manufactured processed oradapted to the special order of the customer(Sched 2)

CO

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W65

Decisions of the courts

In Smith v Bush (1990) and Harris v Wyre Forest DC (1989) theHouse of Lords dealt with two cases involving the validity ofan exclusion clause protecting surveyors who had carriedout valuations of a house The House of Lords decided thatthe clauses were exclusion clauses designed to protect thesurveyors against claims for negligence Lord Griffithsdeclared that there were four matters which should alwaysbe considered

bull were the parties of equal bargaining power

bull in the case of advice would it have been reasonable toobtain advice from another source

bull was the task being undertaken a difficult one for whichthe protection of an exclusion clause was necessary

bull what would be the practical consequences for the partiesof the decision on reasonableness For example wouldthe defendant normally be insured Would the plaintiffhave to bear the cost himself

In inter-business contracts the practices of business peopleare considered

bull In Photo Production v Securicor (1980) the House of Lordsstated that the courts should be reluctant to interfere withthe settled practices of businesses They pointed out thatthe function of an exclusion clause was often to indicatewho should insure against a particular risk

bull In Green v Cade Bros (1983) it was decided that a clauserequiring notice of rejection within three days of deliveryof seed potatoes was unreasonable as a defect could nothave been discovered by inspection within this time buta clause limiting damages to the contract price was

CA

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66

upheld ndash as it had been negotiated by organisationsrepresenting the buyers and sellers and lsquocertifiedrsquopotatoes had been available for a small extra charge (thatis Sched 2 was applied)

bull However in George Mitchell v Finney Lock Seeds Ltd (1983)the buyers suffered losses of pound61000 due to the supply ofthe wrong variety of cabbage seeds The contract limitedthe liability of the seller to a refund of the price paid(pound192) Held ndash the clause was not reasonable Matterstaken into consideration

the clause was inserted unilaterally ndash there was nonegotiation

loss was caused by the negligence of the seller

the seller could have insured against his liability

the sellers implied that they themselves consideredthe clause unreasonable by accepting liability inprevious cases

bull In Overland Shoes Ltd v Schenkers Ltd (1998) the Court ofAppeal upheld a judgersquos ruling that a clause preventingreliance on a lsquoset-offrsquo was not unreasonable on the basisthat it formed part of a set of standard trading conditionsused widely in the shipping industry They had arisenfrom careful negotiation and were generally recognisedin the industry as lsquofair and reasonablersquo

bull In Overseas Medical Supplies Ltd v Orient Transport ServicesLtd (1999) the Court of Appeal summarised the variousfactors which should be looked at in considering the testof reasonableness It confirmed that the lsquoGuidelinesrsquocontained in Sched 2 to UCTA although specificallyintended for consumer contracts for the sale of goods

CO

NT

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CT

LA

W67

should be regarded as relevant wherever the test ofreasonableness is applied

In many of the cases the appeal courts have emphasised thatthe decision on lsquoreasonablenessrsquo is best made by the trialjudge and that the appeal courts should be reluctant tointerfere with the conclusion arrived at at first instance

Unfair Terms in Consumer Contracts Regulations 1999

Based on EU Directive on Unfair Terms in ConsumerContracts The 1999 regulations replaced earlier regulationsmade in 1994

Coverage

The regulations apply to

This will be so even if some other parts of the contract havenot been drafted in advance

bull The regulations do not apply to contracts which relate toemployment family law or succession rights companiesor partnerships terms included in order to comply withlegislation or an international convention

CA

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68

Coverage Fairness Remedies

lsquoany term in a contract between a seller or supplier and a consumer where

the term has not been individually negotiatedrsquo thatis it has been drafted in advance

bull They do however cover insurance policies and contractsrelating to land

bull A lsquobusinessrsquo is defined to include a trade or professionand the activities of any government department or localor public authority

bull A lsquo consumerrsquo means a natural person who is acting for apurpose outside his business

Note ndash they are wider than UCTA in that they cover allterms not only exclusion clauses for example harsh termsconcerning unauthorised overdrafts The regulations arenarrower than UCTA in that they only cover clauses inconsumer contracts which have not been individuallynegotiated The definition of a consumer is also narrower cfR and B Customs v UDT (1988)

Unfairness

Regard must be had to the nature of the goods and servicesprovided the other terms of the contract and all thecircumstances relating to its conclusion

The definition of the main subject matter and the adequacyof the price or remuneration are not subject to the test offairness

CO

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CT

LA

W69

The clause is unfair if contrary to the requirementsof good faith it creates a significant imbalance

in the partiesrsquo rights and obligations to thedetriment of the consumer

lsquoGood faithrsquo is not defined and unlike the earlier (1994)regulations the 1999 regulations do not spell out anyrelevant factors

In Director General of Fair Trading v First National Bank plc(2000) the Court of Appeal emphasised the need foropenness and information which will enable the consumerto make a properly informed choice about entering into thecontract In this case a clause imposing a lsquosurprisingrsquorequirement as to the payment of interest on a loan whichhad been the subject of a court order did not meet therequirement of good faith

The regulations contain a long indicative list of clauses likelyto be unfair These include not only exemption clauses butalso clauses which give the sellersupplier rights withoutcompensating rights for the consumer for example

bull enabling the sellersupplier to raise the price withoutgiving the buyer a chance to back out if the price rise istoo high

bull enabling the sellersupplier to cancel the agreementwithout penalty without also allowing the customer asimilar right

bull automatically extending the duration of the contractunless the customer indicates otherwise within an unreasonably brief period of time

Note also that all terms (including those defining thesubject matter or the price) should be expressed in plainEnglish and any ambiguity should be interpreted in theconsumerrsquos favour

CA

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70

Effect of an unfair term

bull The term itself shall not be binding on the consumer butthe rest of the contract may be enforced

bull The Director General of Fair Trading has a duty toconsider any complaint made to him that a term is unfairHe is empowered to bring proceedings for an injunctionagainst any business using an unfair term It was thispower that was used in the first reported case on theregulations Director General of Fair Trading v FirstNational Bank plc (2000) discussed above For the firsttime a similar power to apply for such an injunction isgiven to certain other lsquoqualifying bodiesrsquo including theData Protection Registrar various Directors General (ofgas supply electricity supply telecommunicationswater services) and the Consumersrsquo Association

CO

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W71

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W73

5 Vitiating elements which render a contract voidable

Significance of a contract being voidable

Thus

bull The innocent party may if he wishes affirm the contract

bull Where the innocent party has not performed thecontract he may refuse to perform and rely on themisrepresentation as a defence

bull The misled party may rescind the contract by

informing the other party or

where a fraudulent party cannot be traced byinforming the police (Car and Universal Finance Co vCaldwell (1965)) or

bringing legal proceedings

The innocent party may set the contractaside if he so wishes

Misrepresentation Duress Undue influence

Certain mistakes (see Chapter 6)

bull It was stated in TSB v Camfield (1995) that the right torescind is that of the representee not the court All thecourt can do is decide whether the representee haslawfully exercised the right to rescind It is not thereforean exercise of equitable relief by the court

Rescission

bull But in Cheese v Thomas (1993) the court declared that thecourt must look at all the circumstances to do what waslsquofair and justrsquo In that case a house which had beenjointly bought had to be sold afterwards at aconsiderable loss The agreement between the twoparties for the purchase of the house was rescinded butthe court held that it was not necessary for the guiltyparty to bear the whole of the loss It was fair and justthat the proceeds should be divided according to thepartiesrsquo respective contributions

bull This contrasts with the normal situation where aproperty has diminished in value and the misled partywould get all his money returned (Erlanger v NewSombrero Phosphate Co (1878))

bull As part of this restoration equity may order a sum ofmoney to be paid to the misled person to indemnify himagainst any obligations necessarily created by the contract

In Whittington v Seale-Hayne (1900) the plaintiffsbreeders of prize poultry were induced to take a lease ofthe defendants premises by his innocent

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74

Restoring the parties as far as is possible to the position they were in before they

entered into the contract

misrepresentation that the premises were in a sanitarycondition Under the lease the plaintiffs covenanted toexecute all works required by any local or publicauthority Owing to the insanitary conditions of thepremises the water supply was poisoned the plaintiffsrsquomanager and his family became very ill and the poultrybecame valueless for breeding purposes or died Inaddition the local authority required the drains to berenewed The plaintiffs sought an indemnity for all theirlosses The court rescinded the lease and held that theplaintiffs could recover an indemnity for what they hadspent on rates rent and repairs under the covenants inthe lease because these expenses arose necessarily out ofthe contract It refused to award compensation for otherlosses since to do so would be to award damages not anindemnity there being no obligation created by thecontract to carry on a poultry farm on the premises or toemploy a manager etc

bull Note ndash rescission even if enforced by the court is alwaysthe act of the defrauded party It is effective from the dateit is communicated to the representor or the police (seeabove) and not from the date of any judgment insubsequent litigation

Rescission is subject to certain barsC

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Affirmation of the contract

Lapse of time

Restitution mustbe possible

Third party rights

Affirmation of the contractThe representee may not rescind if he has affirmed thecontract after learning of the misrepresentation either bydeclaring his intention to proceed with the contract or byperforming some act from which such an intention can beinferred In Long v Lloyd (1958) the buyer of a lorryundertook a long journey after discovering serious defects inthe lorry Held ndash he had affirmed the contract

Lapse of timeThis can provide evidence of affirmation where themisrepresentee fails to rescind for a considerable time afterdiscovering the falsity

In cases of innocent misrepresentation lapse of time canoperate as a separate bar to rescission In Leaf v InternationalGalleries (1950) the plaintiff bought a picture which the sellerhad innocently misrepresented to be by Constable Fiveyears later the plaintiff discovered it was not by Constableand immediately sought to rescind the contract Held ndashbarred by lapse of time

Restitution must be possibleA person seeking to rescind the contract must be able andwilling to restore what he has received under it Howeverrescission is an equitable remedy and the court will notallow minor failures in the restoration to the originalposition to stand in the way In Erlanger v New SombreroPhosphate Co (1878) the purchaser had worked phosphatemines briefly Held ndash he could rescind by restoring propertyand accounting for any profit derived from it

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76

Third party rightsThere can be no rescission if third parties have acquiredrights in the subject matter of the contract See Phillips vBrooks (1919) and Lewis v Averay (1972) ndash Chapter 6

Misrepresentation

Representations and terms of a contract

Material statements made during negotiations leading to acontact may be either

bull terms of the contract If these are untrue the untruthconstitutes a breach of contract

bull statements which helped to induce the contractthat is lsquomere representationsrsquo If untrue ndash they arelsquomisrepresentationsrsquo

(For distinctions between terms and lsquomere representationsrsquosee Chapter 3)

Requirements of misrepresentation

It must be

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W77

An untrue statement of fact made by one party tothe contract (representor) to the other (representee)which induces the other to enter into the contract

The requirements ofmisrepresentation

Remedies formisrepresentation

A statement of fact

bull Not a lsquomere puffrsquo that is a statement so vague as to bewithout effect for example describing a house as alsquodesirable residencersquo

bull Not a promise A promise to do something in the futureis only actionable if the promise amounts to a bindingcontract (Kleinwort Benson Ltd v Malaysian Mining CorpnBhd (1989))

bull Not a statement of opinion for example in Bisset vWilkinson (1927) the vendor of a farm which had neverbeen used as a sheep farm stated that in his judgment thefarm would support 2000 sheep Held ndash a statement ofopinion

But a statement expressed as an opinion may be treatedas a statement of fact if the person making the statementwas in a position to know the true facts In Smith v Landand House Prop Corpn (1884) the vendor of a hoteldescribed it as lsquolet to a most desirable tenantrsquo when thetenant had for a long time been in arrears with the rentThe Court of Appeal held there was a misrepresentationof fact

bull Not a statement of intention But if the representor didnot have that intention then it is a misstatement of fact asin Edgington v Fitzmaurice (1885) where the directorsissued a prospectus claiming that the money raised was tobe used to improve the companyrsquos buildings and toexpand its business Their real intention was to pay off thecompanyrsquos debts Held ndash fraudulent misrepresentation

bull Not a statement of law

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78

An active representation

bull The statement will normally be in words but other formsof communication which misrepresent the facts willsuffice as in Horsfall v Thomas (1862) (below)

bull Failure to make a statement however or the non-disclosure of facts will not generally qualify asmisrepresentation

Exceptionsbull Where facts have been selected to give a misleading

impression as in Dimmock v Hallett (1866) where avendor of land stated that farms were let but omitted tosay that the tenants had given notice to quit

bull Where circumstances have changed since arepresentation was made then the representor has a dutyto correct the statement In With v OrsquoFlanagan (1936) itwas stated correctly that a medical practice was worthpound2000 a year but by the time the practice changedhands it was practically worthless Held ndash there was aduty to disclose the changed circumstances

bull Contracts uberrimae fidei (lsquoof the utmost good faithrsquo) forexample

Contract of insurance Material facts must bedisclosed that is facts which would influence aninsurer in deciding whether to accept the proposalor to fix the amount of the premium for example apolicy of life insurance has been avoided because itwas not disclosed that the proposer had already beenturned down by other insurers

Family arrangements In Gordon v Gordon (1816ndash19)a division of property based on the proposition thatthe elder son was illegitimate was set aside upon

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W79

proof that the younger son had concealed hisknowledge of a private marriage ceremonysolemnised before the birth of this brother

Analogous contracts Where there is a duty todisclose not material but unusual facts for examplecontracts of suretyship

It must have been a material inducement

A statement likely to induce a person to contract willnormally be assumed to have done so Moreover if theclaimant can show that he was in fact induced it is nodefence to argue that a reasonable person would have beeninfluenced by the misrepresentation (Museprime PropertiesLtd v Adhill (1990)) There is no inducement however where

bull the misrepresentee or his agent actually knew the truth

bull the misrepresentee was ignorant of the misrepresentationwhen the contract was made In Horsfall v Thomas (1862)the vendor of a gun concealed a defect in the gun(misrepresentation by conduct) The buyer howeverbought the gun without examining it Held ndash theattempted misrepresentation had not induced thecontract

bull the misrepresentee did not allow the representation toaffect his judgment In Attwood v Small (1838) a buyerappointed an agent to check the statement made by theseller as to the reserves in a mine Held ndash not actionablemisrepresentation The buyer had relied on his ownagentrsquos statements not that of the vendor

Note however that

bull provided that the representation was one of theinducements it need not be the sole inducement

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80

bull the fact that the representee did not take advantage of anopportunity to check the statement is no bar to an actionfor misrepresentation

In Redgrave v Hurd (1881) a solicitor was induced topurchase a house and practice by the innocentmisrepresentation of the seller Held ndash he was entitled torescission although he did not examine the documentswhich were available to him and which would haveindicated to him the true state of affairs

bull neither is it contributory negligence not to check astatement made by a vendor (Gran Gelato v Richcliff(1992))

Remedies for misrepresentation

Rescission

Misrepresentation renders a contract voidable ndash see aboveThe Misrepresentation Act 1967 provides that rescission isavailable in relation to

bull lsquoexecutedrsquo contracts for the sale of goods andconveyances of property

bull representations which have been incorporated as a termof the contract

Rescission was not available in these circumstances before1967

Damages

bull There are five ways in which damages may be claimedfor misrepresentation It seems likely that in future thenormal ground for damages will be the

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Misrepresentation Act 1967 but there are still cases wheredamages can only be claimed at common law if at all

bull Note ndash rescission and damages are alternative remediesin many cases but if the victim of fraudulent ornegligent misrepresentation has suffered consequentialloss he may rescind and sue for damages

bull Damages can be claimed on different bases according tothe kind of misrepresentation that was committed

Damages in the tort of deceit for fraudulent misrepresentationIt is up to the misled party to prove that themisrepresentation was made fraudulently that isknowingly without belief in its truth or recklessly as towhether it be true or false (Derry v Peek (1889))

The burden of proof on the misled party is a heavy one

Damages in the tort of negligence Victims of negligent misrepresentation may be able to sueunder Hedley Byrne v Heller amp Partners (1963) Themisrepresentee must prove (1) that the misrepresentorowed him a duty to take reasonable care in making therepresentation that is there must be a lsquospecial relationshiprsquo(2) that the statement had been made negligently

Damages under s 2(1) of the Misrepresentation Act 1967Section 2(1) of the Misrepresentation Act 1967 provides thatwhere a person has entered into a contract after amisrepresentation has been made to him by another partythereto and as a result of it has suffered loss lsquothen if themisrepresentor would be liable for damages if it had beenmade fraudulently he will be so liable notwithstanding thatthe misrepresentation was not made fraudulently unless heproves that he had reasonable grounds to believe and did

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82

believe up to the time the contract was made that the factsrepresented were truersquo

Note that this is a more beneficial remedy for themisrepresentee as he only need prove that the statement isuntrue It is for the misrepresentor to prove that he had goodgrounds for making the statement and the burden of proofis a heavy one In Howard Marine and Dredging Co Ltd vOgden (1978) the owner of two barges told the hirer that thecapacity of the barges was 1600 tons He obtained thesefigures from the Lloydrsquos list but in this case the Lloydrsquos listwas incorrect The court held that he did not have goodgrounds for this statement he should have consulted themanufacturerrsquos specifications which should have been in hispossession

Assessment of damages

The Court of Appeal confirmed in Royscot Trust v Rogerson(1991) that damages under s 2(1) of the MisrepresentationAct should also be awarded on the reliance basis because ofthe lsquofiction of fraudrsquo in the wording of the Act

Remoteness of damage

The Court of Appeal also held in that case because of thelsquofiction of fraudrsquo that the rules of remoteness whichnormally apply only to the tort of deceit should be appliedunder s 2(1)

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W83

Damages in the tort of deceit and the tortof negligence are assessed on the tortious basis of reliance that is the claimant is entitled to be

put in the position he was in before the tort was committed

(In contract and in all torts other than deceit the losses mustbe lsquoreasonably foreseeablersquo)

bull In Royscot Trust v Rogerson (1991) a customer arranged toacquire a car on hire purchase from a car dealer Thefinance was to be provided by a finance company theRoyscot Trust which insisted on a deposit of 20 Thedealer falsified the figures in order to indicate a deposit of20 as required Some months later the customerwrongfully sold the car thus depriving the financecompany of its property The finance company sued thedealer under s 2(1) of the Misrepresentation Act It washeld by the Court of Appeal that the finance companycould recover damages from the car dealer to cover theloss of the car since the loss followed themisrepresentation The remoteness rules applicable to thetort of deceit would be applied and the loss did not needto be foreseeable

Controversy has followed this decision as the tort ofdeceit to which this rule only previously applied isdifficult to establish and involves moral culpability onthe part of the defendant It has now been extended to anaction which is relatively easy to establish (see HowardMarine and Dredging v Ogden) and may only involvecarelessness Some doubts as to whether this was thecorrect approach were expressed obiter by the House ofLords in Smith New Court Securities Ltd v ScrimgeourVickers (Asset Management) Ltd (1996) but for the timebeing Royscot v Rogerson remains good law

CA

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84

That is damages would be awarded to coverall losses which flow directly from the

untrue statement whether or not those losses were foreseeable

bull Further problems are caused by the decision of the Courtof Appeal in East v Maurer (1991) a case in the tort ofdeceit where it was held that lsquoall damages flowingdirectly from the fraudrsquo would cover damages for somedegree of loss of profit ndash a heading previously consideredto be appropriate only to expectation damages incontract It is a matter for speculation whether the courtswill apply this decision to cases under theMisrepresentation Act and bring loss of profit under theheading of reliance loss on the basis that all losses whichflow directly from the misrepresentation should berecoverable

bull A generous interpretation of s 2(1) of the 1967 Act hadalso been applied by the court in Naughton v OrsquoCallaghan(1990) where reliance damages had been awarded tocover not only the difference between the value of the coltand the value it would have had if the statements madeabout it were correct (the quantification rule for breach ofcontract) but also the cost of its maintenance since thesale

It has been alleged that these three cases swell the amount ofdamages which can be awarded under the MisrepresentationAct to a greater extent than intended by Parliament and thatthe damages available for misrepresentation can nowexceed those available for breach of contract

Damages for wholly innocent misrepresentationDamages cannot be claimed for a misrepresentation whichis not fraudulent or negligent but

bull an indemnity may be awarded (see above)

bull damages in lieu of rescission may be awarded under s 2(2) of the Misrepresentation Act 1967 C

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85

In William Sindall v Cambridgeshire CC (1994) the Court ofAppeal stated (obiter) that where the court is consideringwhether to award damages in lieu of rescission threematters should be taken into consideration

the nature of the misrepresentation

the loss which would be caused to the representee ifthe contract were upheld

the hardship caused to the misrepresentor if the con-tract were rescinded The Court of Appeal also statedthat the damages should resemble damages forbreach of warranty

bull lsquodamages in lieursquo can it seems be awarded even if one ofthe bars to recision apply (Thomas Witter Ltd v TBPIndustries (1996))

bull where the misrepresentation has become a term of thecontract the misrepresentee can sue for damages forbreach of contract as an alternative to damages formisrepresentation

Duress

A common law doctrine

Duress to the person

This requires actual or threatened violence to the personOriginally it was the only form of duress recognised by thelaw

CA

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86

Duress involves coercion

Duress to goods

bull Threat of damage to goods ndash traditionally this has notbeen recognised by the law but in view of thedevelopment of economic duress it is assumed thatduress to goods would today be a ground for relief

Economic duress

Requires

Economic duress led to rescission of a contract in UniverseTankships of Monrovia v ITWF (1983) where a union hadlsquoblackedrsquo a tanker and refused to let it leave port untilcertain moneys had been paid The House of Lordsconsidered that this amounted to economic duress andordered return of the money

It has been stated that economic duress requires

Compulsion or coercion of the will

In Pau On v Lau Yiu Long (1980) Lord Scarman listed thefollowing indications of compulsion or coercion of the will

bull did the party coerced have an alternative course open tohim

bull did the party coerced protest

bull did the party coerced have independent advice

bull did the party coerced take steps to avoid the contract

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W87

Compulsion of the will An illegitimate threat

Illegitimate pressure

There must be some element of illegitimacy in the pressureexerted for example a threatened breach of contract Theillegitimacy will normally arise from the fact that what isthreatened is unlawful In CTN Cash and Carry v Gallaher(1994) however the Court of Appeal accepted obiter that anoutrageous but technically lawful threat could amount toduress This possibility has not so far been developed in anylater cases

Economic duress is often pleaded together with lack ofconsideration in cases where a breach of contract isthreatened by the promisor unless he receives additionalpayment

bull In Atlas Express v Kafco (1989) Kafco a small companywhich imported and distributed basketware had acontract to supply Woolworths They contracted withAtlas for delivery of the basketware to Woolworths Thecontract commenced then Atlas discovered they hadunderpriced the contract and told Kafco that unless theypaid a minimum sum for each consignment they wouldcease to deliver Kafco were heavily dependent on theWoolworths contract and knew that a failure to deliverwould lead both to the loss of the contract and an actionfor damages At that time of the year they could not findan alternative carrier and agreed under protest to makethe extra payments Atlas sued for Kafkorsquos non-paymentHeld ndash the agreement was invalid for economic duressand also for lack of consideration

bull Cf Williams v Roffey Bros (1989) ndash Chapter 2

The following threats are probably not illegitimate (subjectto the possibility raised by CTN Cash and Carry v Gallaher(1994) discussed above)

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88

bull a threat not to enter into a contract

bull a threat to institute civil proceedings

bull a threat to call the police

Note ndash not all threatened breaches of contract will amount toeconomic duress It will only do so when the threatenedparty has no reasonable alternative open to him The normalresponse to a breach of contract is to sue for damages

Remedies

bull In North Ocean Shipping Co v Hyundai Construction Co TheAtlantic Baron (1979) the court found economic duressbut refused rescission on the ground that the plaintiff hadaffirmed the contract

Undue influence

An equitable doctrine

bull Undue influence is based on the misuse of a relationshipof trust or confidence between the parties Where foundit renders a contract voidable The innocent party willneed to apply to the court for rescission of the contract(see above)

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Pressure not amounting to duress at common lawwhereby a party is excluded from the exercise of

free and independent judgment

Duress renders a contract voidable Rescission willnormally be sought from the courts See above

Contracts where undue influence is presumed

For example

bull Contracts between certain relationships

parent and child

trustee and beneficiary

solicitor and client

doctor and patient

religious adviser and disciple

bull Where there has been a long relationship of confidenceand trust between the parties

For example between husband and wife or where oneparty had been accustomed to rely for guidance andadvice on the other In Lloyds Bank v Bundy (1975) MrBundy an elderly west country farmer on the advice ofthe local Lloyds Bank assistant manager granted a chargeto the bank over the family farm to guarantee his sonrsquos

CA

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90

Contracts where undue influence

is presumed

Contracts where actual undue

influence must be proved

Contracts induced by undue influence are of two kinds

The contract must be manifestly disadvantageous

to the weaker party

Contracts need not be manifestly disadvantageous

to the weaker party

indebtedness to the bank Mr Bundy had all his liferelied on Lloyds Bank for financial advice the court setaside the charge on the ground of undue influence on thepart of the bank

Note ndash a bank will not be presumed to exert undueinfluence in normal circumstances

In Credit Lyonnais Bank Nederland NV v Burch (1997) therelationship between an employer and a junior employee(who was persuaded to put up her own house as securityfor the businessrsquos overdraft) was held to be one of undueinfluence

The stronger party can disprove undue influence byshowing that

bull full disclosure of all material facts was made

bull the consideration was adequate

bull the weaker party was in receipt of independent legaladvice

Contracts where actual undue influence is proved

The burden of proof lies on the claimant to show that suchinfluence did exist and was exerted

Effect of undue influence on a third party

In Barclays Bank v OrsquoBrien (1993) Mrs OrsquoBrien had signed aguarantee which used the jointly owned matrimonial homeas security for a loan made to her husbandrsquos business Herhusband had told her it was for a maximum of pound60000 butin fact it was for pound130000 Mrs OrsquoBrien had not been advisedby the bank to consult an independent solicitor The Houseof Lords held that there was no undue influence in this casebut there was misrepresentation on the part of the husband

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W91

They further held that where there was undue influence ormisrepresentation or other legal wrong then the injuredpartyrsquos right to have the transaction set aside would beenforceable also against the third party provided the thirdparty had actual or constructive notice of the wrong Suchnotice would arise where

bull the parties were in an emotional relationship forexample co-habitees (heterosexual or homosexual) orchild and aged parents

bull one party was undertaking a financial liability on behalfof the other which was not to her or his advantage

The court also held that in the above situation the third partycould discharge his duty by making clear to the partyconcerned the full nature of the risk he or she is taking onfor example

bull by conducting a personal interview or

bull urging independent advice

Note ndash this doctrine of constructive notice applies to sureties(guarantors) but does not apply where a bank makes a jointloan to both parties as the facts in that situation do not meetthe requirements set out in Barclays Bank v OrsquoBrien See CIBCMortgages v Pitt (1993)

Note

bull A failure by a solicitor to give proper advice cannot beheld against a bank (even if the bank knows that thesolicitor is acting for both the borrower (for example thehusband) and the guarantorsurety (for example thewife)) ndash see Royal Bank of Scotland v Etridge (No 2) (1998)

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92

bull Once undue influence or misrepresentation has beenfound the whole contract is avoided it cannot be upheldin part ndash TSB Bank plc v Camfield (1995)

bull Damages are not available as a remedy for duress orundue influence

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W93

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W95

6 Mistake

There is much disagreement concerning the effect ofmistake on a contract There are many reasons for thisconfusion as to which terms to use a large number of caseswhich can be interpreted in different ways no recentdecisive House of Lords decisions on the subject theintervention of equity

Terminology

Different terms are used by Cheshire and Anson to describethe same kind of mistake and you should ascertain whichterms are used in your textbook

The terms used by Cheshire are used in this LawCard

CHESHIRE ANSON Effect

Same mistake Common Mutual May nullifymade by both mistake mistake agreementparties

Parties at Mutual Unilateral Negativescross-purposes mistake mistake agreement

Parties atcross-purposesbut one party Unilateral Unilateral Negativesknows that mistake mistake agreementthe other is mistaken

Effect of a mistake

If the contract is rendered void then the parties will bereturned to their original positions and this may defeat therights of innocent third parties who may have acquired aninterest in the contract

The reluctance of the courts to develop the common lawdoctrine of mistake is probably due to the unfortunateconsequences for third parties that can result from holdinga contract void Equity has however intervened to producemore flexibility as noted below

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96

In common mistakes the parties are agreed but both are mistaken

In mutual and unilateral mistakes the parties may not have reached agreement and these mistakes are sometimes dealt with

under the heading of agreement

The general rule is that a mistake has no effect on a contract but certain mistakes of a fundamental nature sometimes called

operative mistakes may render a contract void at common law

Operative mistakes

Common mistakes

bull At common law this may render the contract void thatis the contract has no legal effect it is unenforcable byeither party and title to property cannot pass under it

bull In equity a more flexible approach has developedcontracts containing certain common mistakes have beentreated as voidable In setting aside such contracts thecourts have a much wider control over the terms it canimpose on the parties

In Bell v Lever Bros (1932) it was stated that to nullify theagreement the lsquomistake must go to the root of the contractrsquo

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W97

Commonmistakes

re a fundamentalmatter for

example resextincta res sua

the quality of the subject matter

Mutualmistakes

re identity ofsubject matter

of contract

Unilateralmistakes

re terms ofcontract re

identity of otherparty to contract

The parties are agreed but they are both under the same misapprehension If this

misapprehension is sufficiently fundamentalit may nullify the agreement

Lever Bros agreed to pay two directors of a subsidiarycompany substantial sums of money in compensation forloss of office while unaware of the fact that they hadengaged in irregular conduct which would have allowedthem to be dismissed without compensation Lever Brosasked the court to order the return the compensation paid onthe ground that it had been paid as a result of a commonmistake The House of Lords held that the common mistakeconcerning the need to pay compensation was notlsquosufficiently fundamentalrsquo to render the contract void

Common mistakes lsquosufficiently fundamentalrsquo to render a

contract void

A common mistake as to the existence of the subject matter(res extincta)bull In Galloway v Galloway (1914) the parties believing they

were married entered into a separation agreement Laterthey discovered that they were not validly married Held ndashthe separation agreement was void for a common mistake

bull In Strickland v Turner (1852) the court declared void onthe grounds of a common mistake a contract to purchasean annuity on the life of a person who had already died

bull In Couturier v Hastie (1856) a buyer bought a cargo ofcorn which both parties believed to be at sea the cargohad however already been disposed of Held ndash thecontract was void

bull Section 6 of the Sale of Goods Act 1979 declares thatlsquoWhere there is a contract for the sale of specific goodsand the goods without the knowledge of the seller haveperished when the contract is made the contract is voidrsquo

CA

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98

However in McRae v Commonwealth Disposals Commission(1951) the commission sold to McRae the right to salvagea tanker lying on a specified reef There was no such reefof that name nor was there any tanker The court foundthat there was a valid contract and that the commissionhad impliedly guaranteed the existence of the tanker Thecase could be distinguished from the Australianequivalent of s 6 on the ground that there never had beena tanker and it had therefore not perished

Whether a contract is void or valid depends on theconstruction of the contract that is even if the subjectmatter does not exist the contract will be valid

if performance was guaranteed or

if it was the purchase of a lsquochancersquo

Otherwise the contract would be void

Mistake as to title ndash res sua ndash that is the thing sold alreadybelongs to the buyerbull In Cooper v Phibbs (1867) Cooper not realising that a

fishery already belonged to him agreed to lease it fromPhibbs Held ndash the contract was void

Mistake as to the possibility of performing the contractbull In Sheik Bros Ltd v Ochsner (1957) a contract was held

void as the land was not capable of growing the cropcontracted for

bull In Griffith v Brymer (1903) a contract to hire a room toview the coronation of Edward VII which was madeafter the procession had been cancelled was held void(Commercial impossibility) C

ON

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99

Mistake as to the quality of the subject matterLords Atkin and Thankerton both insisted in Bell v Lever Brosthat to render a contract void the mistake must go to thelsquoroot of the contractrsquo

bull It has been argued that if the mistake in Bell was notsufficiently fundamental to render a contract void then itis highly unlikely that any mistake concerning qualitywould do so

bull Similarly in Leaf v International Galleries (1950) whereboth parties mistakenly believed that a painting was byConstable the Court of Appeal stated that the contractwas not void for common mistake

bull In Solle v Butcher (1950) the Court of Appeal declined todeclare void a lease which both parties believed was notsubject to the Rent Acts A similar decision was reachedin Grist v Bailey (1967) where the parties both believedthat a house was subject to a protected tenancy

However Lord Justice Steyn in Associated Japanese Bank vCredit du Nord (1988) stated that not enough attention hadbeen paid to speeches in Bell v Lever Bros which did indicatethat a narrow range of mistakes in quality could render acontract void for example Lord Atkinrsquos statement that lsquoacontract may be void if the mistake is as to the existence ofsome quality which makes the thing without that qualityessentially different from the thing it was believed to bersquo Hegave as an example ndash if a horse believed to be sound turnsout to be unsound then the contract remains valid but if ahorse believed to be a racehorse turns out to be a carthorsethen the contract is void

CA

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100

Equity

The role of equity according to this view is supplementarydesigned to relieve the limitations of the common law

bull Rescission on terms was granted by the Court of Appealin Solle v Butcher (1950) (see above) The court rescindedthe lease but gave the tenant the option of staying thereon terms of his paying the extra rent which the landlordcould have charged in view of the improvements

bull Rescission on terms was also granted in Grist v Bailey(1967) where a house was sold in the mistaken belief thatit had a protected tenancy and in Laurence v LexcourtHoldings (1978) where there was a common mistake withregard to planning permission

bull Rescission without terms was granted in Magee v PennineInsurance Co (1969) where an agreement by an insurancecompany to meet a claim was rescinded because theparties were unaware that it was based on a policy whichwas voidable due to a misrepresentation by the assured

bull In William Sindall plc v Cambridgeshire CC (1994) Evans LJsuggested that whereas the common law only recognisedmistakes as to the subject matter of the contract equitywould recognise a lsquowider and perhaps unlimitedcategory of common mistakersquo In Clarion Ltd v NationalProvident Institution (2000) however Rimer J held that

CO

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W101

Lord Justice Steyn in Associated Japanese Bank v Credit du Nord (1988) stated that a court will first examine whether a

contract is void at common law if it is not then itwill examine whether equity will grant rescission

equity would only intervene where the mistake was as tothe terms of the contract or its subject matter Equity didnot provide relief for a lsquobad bargainrsquo

Mutual and unilateral mistakes

The courts adopt an objective test in deciding whetheragreement has been reached It is not enough for one of theparties to allege that he was mistaken

Mistake can negate consent in the following cases

Mutual mistakes concerning the identity of the subject matter

bull In Raffles v Wichelhaus (1864) a consignment of cotton wasbought to arrive lsquoex Peerless from Bombayrsquo Two shipsboth called Peerless were due to leave Bombay at aroundthe same time Held ndash no agreement as the buyer wasthinking of one ship and the seller was referring to theother ship

bull Similarly there was no agreement in Scriven Bros vHindley amp Co Ltd (1913) where the seller sold lsquotowrsquo andthe buyer bought lsquohemprsquo Again there was an ambiguityas both lots were delivered under the same shippingmark and the catalogue was vague

CA

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102

In these cases the parties are at cross-purposesbut there must have been some ambiguity

in the situation before the courts willdeclare the contract void

These mistakes negate consentthat is they prevent the formation of an agreement

bull But in Smith v Hughes (1871) the court refused to declarevoid an agreement whereby the buyer had thought hewas buying old oats when in fact they were new oats asthe contract was for the sale of lsquooatsrsquo The mistake relatedto the quality not the identity of the subject matter

Unilateral mistake concerning the terms of the contract

bull In Hartog v Colin and Shields (1939) the sellers mistakenlyoffered to sell goods at a given price per pound whenthey intended to offer them per piece All the preliminarynegotiations had been on the basis of per piece Thebuyers must have realised that the sellers had made amistake The contract was declared void

bull In Smith v Hughes however the contract was for the saleof lsquooatsrsquo not lsquoold oatsrsquo it would only have been void iflsquoold oatsrsquo had been a term of the contract

Unilateral mistake as to the identity of other parties to the

contract

There are a number of contradictory cases and theoriesunder this heading

Traditionally a distinction is made between mistakes as toidentity and mistakes as to attributes (for example creditworthiness)

bull In Cundy v Lindsay (1878) a Mr Blenkarn ordered goodsfrom Lindsay signing the letter to give the impressionthat the order came from Blenkiron amp Co a firm knownto Lindsay amp Co Held ndash the contract was void Lindsay

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W103

Here one party has taken advantage of the other partyrsquos error

amp Co had only intended to do business with Blenkiron ampCo There was therefore a mistake concerning the identityof the other party to the contract

bull In Kingrsquos Norton Metal Co v Edridge Merrett amp Co Ltd(1872) on the other hand a Mr Wallis ordered goods onimpressive stationery which indicated that the order hadcome from Hallam amp Co an old established firm withbranches all over the country Held ndash the contractbetween Kingrsquos Norton Metal Co and Wallis was notvoid The sellers intended to do business with the writerof the letter they were merely mistaken as to hisattributes that is the size and credit worthiness of hisbusiness

bull In Boulton v Jones (1857) the defendant sent an order forsome goods to a Mr Brocklehurst unaware that he hadsold the business to his foreman the plaintiff Theplaintiff supplied the goods but the defendant refused topay for them as he had only intended to do business withBrocklehurst against whom he had a set off Held ndash therewas a mistake concerning the identity of the other partyand the contract was therefore void

However the cases all concerned contracts negotiated at adistance

CA

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104

From the above three cases it would seem that acontract is void if the mistaken party intended to do

business with another specific person and the identity of that other person was important to him

bull In Phillips v Brooks (1919) a jeweller sold a gold ring anddelivered it on credit to a customer who had come intohis shop and had falsely claimed to be Sir GeorgeBullough a well known and wealthy man Held ndash thecontract was valid The jeweller had intended to dobusiness with the person in his shop

bull In Lewis v Averay (1972) a rogue claimed to be RichardGreene the film actor and produced a pass to Pinewoodstudios to verify this He was allowed to drive away a carin return for a cheque and subsequently resold the car forcash to Averay The cheque bounced and the sellerclaimed the return of the car on the ground that he wasmistaken as to the identity of the buyer Held ndash thecontract was valid The seller must be presumed to haveintended to deal with the person physically in the roomwith him Averay kept the car

There are two cases however where the plaintiffs were ableto establish a mistake as to the identity of a person in theirpresence

bull In Ingram v Little (1961) two sisters sold a car and handedit over against a worthless cheque to a person whoclaimed to be a Mr Hutchinson of Stanstead HouseCaterham They only did so after one of them hadchecked that there was a man of that name who lived atthat address The Court of Appeal held the contract void C

ON

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105

Where the parties negotiate in person the samerules apply but there is a presumption that the inno-cent party intended to do business with the person

physically in his presence

They considered that the sisters had done enough toestablish that they only intended to deal with MrHutchinson

This case has been greatly criticised as it is difficult toreconcile with Phillips v Brooks and Lewis v Averay

bull In Sowler v Potter (1940) the lease of a cafeacute was granted toPotter who had previously been convicted of keeping adisorderly cafe under the name of Robinson The courtheld that the contract was void because of the lessorrsquosmistaken belief that Potter was not Robinson This casehas also been much criticised and doubted as it did notseem that Sowler had intended to do business with anyother identifiable person The contract could in any casehave been set aside for misrepresentation

The contract would in most cases be voidable in any case formisrepresentation where one party has misled the otherwith regard to his identity The advantage of having the contract declared void for mistake is to avoid the bars torescission

See Chapter 5 pp 75ndash76

Mistake as to the nature of the document signed

Defence of non est factum

bull The scope of this defence has been limited since thedecision in Saunders v Anglia Building Society (Gallie v Lee)(1971) where an old lady was persuaded by her nephewto sign a document conveying her house to her nephewrsquosfriend She had believed that she was signing a deed ofgift to her nephew She had not read the documentbecause her glasses were broken It was held that thedocument was valid It was stated that

CA

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106

It is also thought that it will only protect a person who isunder some disability The defence did succeed in LloydsBank v Waterhouse (1990) where the defendant who wasilliterate signed a guarantee of his sonrsquos debt to the bankThe father thought that the guarantee covered the purchaseprice of a farm but in fact it covered all his sonrsquosindebtedness to the bank It was held that the effect of thedocument was fundamentally different from what it wasbelieved to be There was no negligence and the contractwas therefore void

In UDT Ltd v Western (1976) it was held that these samerules applied to cases where a person had signed a formbefore all the details required by the form had been entered

Mistake in equity

The narrow approach taken by the common law towardsremedies for mistake (that is that it renders the contractvoid) is supplemented by the more flexible approach ofequity The following remedies may be available in equity

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W107

Rescission RectificationRefusal of

specificperformance

The signed document must be fundamentally different in effect from what it was thought to be

The signatory must prove that he had not been negligent in signing the document

Rescission

See common mistake (above)

Rectification

Where there has been a mistake not in the actual agreementbut in reducing it to writing equity will order rectification ofthe document so that it coincides with the true agreement ofthe parties

Necessary conditionsbull The document does not represent the intention of both

parties or

bull one party mistakenly believed a term was included in thedocument and the other party knew of this error InRoberts amp Co Ltd v Leicestershire CC (1961) the completiondate of a contract was rectified at the request of one partybecause it was clear that the other party was aware of theerror when the contract was signed

If the document fails to mention a term which one partybut not the other had intended to be a term of thecontract there is no case for rectification

bull There must have been a concluded agreement but notnecessarily a legally enforceable contract In Joscelyne vNissen (1970) a father and daughter agreed that thedaughter should take over the car hire business Inreturn the father would continue to live in the house andthe daughter would pay all the household expenses Thislast provision was not included in the written contractHeld ndash the contract should be rectified to include it

Note ndash a document which accurately records a prioragreement cannot be rectified because the agreement wasmade under some mistake (Rose v Pym above) Equityrectifies documents not agreements

CA

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108

Rectification is an equitable remedy and is available at thediscretion of the court Lapse of time or conflict with thirdparty rights may prevent rectification

Refusal of specific performance

bull In Webster v Cecil (1861) the defendant having previouslyrefused the plaintiffrsquos offer of pound2000 for his land wrote tothe plaintiff offering to sell it to him for pound1250 instead ofpound2250 as he had intended The plaintiff accepted theoffer Specific performance was refused as the plaintiffmust have been aware of the error (unilateral mistake)

bull Where there is no blame on the claimant the situation ismore difficult In Malins v Freeman (1837) the defendanthad mistakenly bought the wrong property at an auctionSpecific performance was refused In Tamplin v James(1879) however the court ordered specific performancewhere the defendant had bid for a property under anerror as to its true extent Presumably being forced to buya totally different property from the one he intendedwould have caused greater hardship than being forced tobuy a property whose dimensions differed from hisexpectations

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W109

Specific performance will be refused when the contract is void at common law Equity may also

refuse specific performance where a contract is validat law but only lsquowhere a hardship amounting toinjustice would have been inflicted upon him by

holding him to his bargainrsquo (Tamplin v James (1879))

7 Illegality and capacity

Illegal contracts are classified in different ways by differentauthorities In this chapter a distinction is drawn betweencontracts which involve the commission of a common lawor statutory offence and those which are void as beingcontrary to public policy

Illegality

The main issue with regard to illegal contracts is the effectof illegality on a contract The most often examined topicwith regard to contracts which are declared void ongrounds of public policy is contracts in restraint of trade

Illegal contracts

Contracts illegal by statute

bull Statute may declare a contract illegal for example theCompetition Act 1998

bull Statute may prohibit an act but declare that it shall noteffect validity of contract for example the ConsumerProtection Act 1987

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W111

Illegal contracts Contracts void

against public policy

Contracts prohibited by statute

Contracts illegal at common law

bull Statute may prohibit an act but not stipulate its effect onthe contract The status of the contract will in this casebe a matter of interpretation for the court In ReMahmoud and Ispahani (1921) the court decided that astatement that lsquoa person shall not buy or otherwise dealin linseed oil without a licencersquo was a prohibition and acontract entered into by a person without a licence wastherefore void

bull The courts are reluctant to imply a prohibition when thisis not clearly indicated in the statute In Hughes v AssetManagers (1995) the court held a contract valid despitethe fact that a document had not been signed by a personauthorised to do so as required by statute

Contracts illegal at common law

bull An agreement to commit a crime a tort or a fraud forexample defraud the rating authority (Allen v Roscous(1676)) to publish a libel (Clay v Yates)

bull An agreement to defraud the Inland Revenue (Napier vBusiness Associates (1951))

bull Contracts damaging to the countryrsquos safety or foreignrelations

bull Contracts interfering with the course of justice forexample contracts to give false evidence

bull Contracts leading to corruption in public life (Parkinson vRoyal College of Ambulance (1925))

bull Contracts tending to promote sexual immorality (Pearcev Brooks (1866))

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112

Effects of illegality

Contracts illegal as formed

In Pearce v Brooks (1866) the owner of a coach of unusualdesign was unable to recover the cost of hire from aprostitute who to his knowledge had hired it in order toattract clients

In Parkinson v Royal College of Ambulance (1925) Parkinsonwas unable to recover the money he had donated to thedefendants on the understanding that they would obtain aknighthood for him

Exceptionsbull Where the parties are not in pari delicto (that is not

equally at fault) for example where one party isunaware of the illegal nature of the contract or has beeninduced to enter into it by fraudulent misrepresentationor is the party the law was attempting to protect forexample a tenant who has paid an illegal premium(Kiriri Cotton Co v Dewani (1960))

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W113

Contracts illegal as formed

Contracts illegal in their performance

Such contracts are void ab initio there can be no action for breach of contract

Money paid or property transferred under the contract cannot be recovered

bull Where the transferor genuinely repents and repudiatesthe contract before performance In Tribe v Tribe (1995)money was transferred to a son in order to avoid thefatherrsquos creditors At the end of the day the creditorswere all paid in full and the father was allowed to cite theoriginal reason for the transfer in order to rebut thepresumption of advancement (which would have meantthat his son could keep the shares) He had withdrawnfrom the illegal purpose before performance

In Bigos v Boustead (1951) however the court was notconvinced that the plaintiff had genuinely repented

bull Where the transferor can frame his claim without relyingon the contract In Bowmakers v Barnet Instruments (1945)the plaintiffs were able to rely on an action in the tort ofconversion to recover goods delivered under an illegalhire purchase contract

Similarly in Tinsley v Milligan (1993) both parties hadcontributed money towards the purchase of a house putin the name of Tinsley alone in order to allow Milligan tomake various social security claims When Milligan suedfor the return of the money it was argued that theagreement had been entered into for an illegal purposeand that the public conscience lsquowould be affronted byrecognising rights created by illegal transactionsrsquo TheHouse of Lords held however that a resulting trust hadbeen created in favour of Milligan by the contribution tothe purchase price Milligan therefore could rely on theresulting trust and had no need to rely on the illegalagreement

This case shows (a) that the rule applies to equity as wellas to common law (b) the test of lsquoaffront to the publicconsciencersquo previously used by the Court of Appeal is nolonger good law

CA

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114

bull Where part of the contract is lawful the court will notsever the good from the bad In Napier v National BusinessAgency (1951) certain payments were described aslsquoexpensesrsquo in order to defraud the Inland Revenue Thecourt refused to enforce payment of the accompanyingsalary as the whole contract was tainted with the illegality

Note ndash property can pass under an illegal contract as in Singv Ali (1960)

Contracts illegal in their performance

A claim by the innocent party to enforce the contract in thesecases is strong

bull In Marles v Philip Trant (1954) the defendant sold winterwheat described as spring wheat without anaccompanying invoice as required by statute Held ndash theplaintiff could sue for damages for breach of contractThe contract was illegal in its performance but not in itsinception

bull In Strongman v Sincock (1955) Sincock failed to getlicences which were needed to modernise some houseswhich belonged to him and refused to pay for the workon the basis that the contracts were illegal Held ndashStrongman could not sue on the illegal contracts butcould sue Sincock on his collateral promise to obtain thelicences

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W115

The illegality may only arise during the performance of a contract for example

a carrier may break the law by exceeding the speed limit whilst delivering goods

belonging to a client He will be punished but the contract will not necessarily be void

bull In Archbolds v Spanglett (1961) Spanglett contracted tocarry Archbolds whisky in a van which was not licensedto carry any goods other than his own Archbold wasunaware of this and could therefore recover damages forbreach of contract

But in Ashmore Benson Pease amp Co v Dawson Ltd (1973)the other party knew of the overloading of the lorry andcould not therefore recover damages He hadparticipated in the illegality

bull Even the guilty party may enforce the contract if theillegality is incidental

In Shaw v Groom (1970) a landlord failed to give histenant a rent book as required by law Held ndash he could suefor the rent The purpose of the statute was to punish thelandlordrsquos failure to provide a rent book not to render thecontract void

In St John Shipping v Rank (1957) a ship owner who hadoverloaded his ship in contravention of a statute was ableto recover freight

Contracts void at common law on grounds of publicpolicy

CA

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116

Contracts damaging to theinstitution of marriage

For example contracts inrestraint of marriage

marriage brokerage contractscontracts for future separation

(pre-nuptial agreements)

Contracts made after orimmediately beforeseparation are valid

Contracts to oust thejurisdiction of the courts

However arbitrationagreements are valid

In Esso Petroleum v Harpers Garage (1968) it was stated thatthe court will consider

bull whether the contract is in restraint of trade A contract isin restraint of trade if it restricts a personrsquos liberty tocarry on his trade or profession Certain restraints havebecome acceptable over the years for example lsquotiedhousesrsquo restrictive covenants in leases sole agency orsole distributorship agreements

bull whether it should nevertheless be enforced because itprotects a legitimate interest and is reasonable Theonus of proving reasonability is on the promisee Arestraint to be permissible must be no wider than isnecessary to protect the relevant interest of thepromisee

Categories of contracts in restraint of trade

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W117

Restraints onemployees

Restraints on thevendors of a business

Exclusive dealingagreements

A contract in restraint of trade is prima facie void but thecourts will now uphold the restriction if it is shown that

bull the restraint protects a legitimate interest

bull the restraint is reasonable between the parties

bull the restraint is reasonable as regards the interest of thepublic

Contracts in restraint of trade

Restraints on employeesThe restraint is void unless the employer can show

bull That it is necessary to protect a proprietary interest forexample the trade secrets of a works manager in Foster vSuggett (1918) the trade connections of a solicitorrsquosmanaging clerk in Fitch v Dewes (1921)

A restraint merely to prevent competition will not beenforced

In Eastham v Newcastle United FC (1964) the courtaccepted that the proper organisation of football was avalid matter for clubs to protect but found the lsquoretainand transfer systemrsquo unreasonable

bull That the restraint is no greater than is necessary toprotect the employerrsquos interest in terms of time andarea

In Scorer v Seymore-Jones (1966) the court upheld arestriction of 10 miles within branch A at which theemployee had worked but held that a similar restraintcovering branch B at which the employee had notworked was unreasonable and void

bull Problems with area can be overcome by using lsquonon-solicitationrsquo clauses instead

In Home Counties Dairies v Skilton (1970) a milkmanagreed that for one year after leaving his present job hewould not sell milk to his employerrsquos customers Held ndashrestraint valid It was necessary to protect the employeragainst loss of customers

bull The validity of the duration of the restraint depends onthe nature of the business to be protected and on thestatus of the employee

CA

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118

In Briggs v Oates (1991) a restriction of five miles for fiveyears on an assistant solicitor was upheld as reasonable

bull A restraint imposed by indirect means for example byloss of pension rights (Bull v Pitney Bowes (1966)) orwhere two companies agreed not to take on the otherrsquosemployees (Kores v Kolok (1959)) will be judged by thesame criteria

Restraints on the vendor of a business

bull In Vancouver Malt and Sake Brewing Co v VancouverBreweries Ltd (1934) a company which was licensed tobrew beer but which had not at any time brewed beerwas sold and agreed not to brew any beer for 15 yearsHeld ndash the restraint was void since there was no goodwillof a beer brewing business to be transferred

bull In British Concrete v Schelff (1921) S sold his localisedbusiness to B who had branches all over the UK andagreed not to open any business within 10 miles of any ofBrsquos branches Held ndash the restriction was void B wasentitled only to protect the business he had bought notthe business which he already owned

bull In Nordenfelt v Maxim Nordenfelt (1894) N a worldwidesupplier of guns sold his worldwide business to M andagreed not to manufacture guns anywhere in the worldfor 25 years Held ndash the restriction was valid C

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119

Such a restraint is valid if it is intended to protectthe purchaserrsquos interest in the goodwill of the

business bought and is reasonable

Exclusive dealing agreements

bull In Esso Petroleum v Harpers Garage (1968) a solusagreement for four years was held reasonable but asolus agreement for 21 years was held unreasonable andtherefore void

bull Solus agreements were distinguished from restrictivecovenants in a lease When an oil company leases afilling station to X inserting a clause that X should buyall its requirements from the company this is not subjectto restraint of trade rules because the tenant is notgiving up a previously held freedom

bull But in Amoco v Rocca Bros (1975) the court held thatrestraint of trade rules did apply to lease and lease backagreements

bull In Alec Lobb (Garages) v Total Oil (1985) in a similar leaseback arrangement a solus agreement for between sevenand 21 years was held reasonable on the ground that thearrangement was a rescue operation benefiting theplaintiffs and there were lsquobreakrsquo clauses in theunderlease

bull In Schroeder Music Publishing Co v Macaulay (1974) itwas held that a contract by which an unknown songwriter undertook to give his exclusive services to apublisher who made no promise to publish his work

CA

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120

Solus agreements whereby A agrees to buy all his re-quirements of a particular commodity from B

Most exclusive services contracts are found in professional sport or entertainment

was subject to the restraint of trade doctrine as it waslsquocapable of enforcement in an oppressive mannerrsquo

bull In Greig v Insole (1978) the MCC banned any cricketerwho played for a cricketing lsquocircusrsquo from playing forEngland The court held that the ban was void as beingin restraint of trade

It has been suggested that the courts will hold exclusivedealing and service contracts to be within the restraint oftrade doctrine if they contain unusual or novel features orif there is disparity in the bargaining power and theagreement is likely to cause hardship to the weaker party

Cartel agreementsThese are now covered by statute for example the FairTrading Act 1973 and the Competition Act 1998 This mayalso fall within Article 81 of the Treaty of the EuropeanCommunities

Effect of a restraint

Two tests must be satisfied

bull The lsquoblue pencilrsquo test It must be possible to sever theillegal part simply by deleting words in the contract Thecourt will not add words substitute one word foranother rearrange words or in any way redraft the

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W121

A void restraint is severable Severance can be operated intwo ways

bull severance of the whole of the objectionable promiseleaving the rest of the contract to be enforced

bull severance of the objectionable part of the promise

contract In Mason v Provident Clothing Co Ltd (1913) theHouse of Lords refused to redraft a promise not to workwithin 25 miles of London But in Goldsoll v Goldman(1915) a dealer in imitation jewellery promised not todeal in real or imitation jewellery either in the UK orabroad Dealing in real jewellery and dealing abroadwere severed

bull Severance of the objectionable part of the contract mustnot alter the nature (as distinct from the extent) of theoriginal contract The illegal restraint will not be severedif it is the the main purpose of the restraint or if to severit would alter entirely the scope and intention of theagreement In Attwood v Lamont (1920) the court refusedto sever restrictions on a tailor from competing with anydepartment of the department store which had employedhim The court stated that this was a covenant lsquowhichmust stand or fall in its unaltered formrsquo

Capacity

Minors

The law pursues two conflicting policies in the case ofminors On the one hand it tries to protect minors from theirown inexperience on the other it tries to ensure that personsdealing with minors are not dealt with in a harsh manner

CA

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122

Minorspersons under 18

Persons of unsound mindand drunken persons

Contracts with minors can be divided into three categories

Valid contracts ndash contracts which can be enforced

against a minor

Necessaries

bull In Nash v Inman (1908) a student purchased 11 silkwaistcoats while still a minor The court held that silkwaistcoats were suitable to the conditions of life of aCambridge undergraduate at that time but they were notsuitable to his actual needs as he already had a sufficientsupply of waistcoats

It is important to distinguish between luxurious goods ofutility and goods of pure luxury The status of the minor canmake the former into necessaries but the latter can never beclassified as necessaries

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W123

Contracts fornecessaries

Beneficial contracts of service

Valid contracts Voidable contracts Other contracts

Necessary goods are defined in the Sale of GoodsAct 1979 as lsquogoods suitable to his conditionin life and to his actual requirements at the

time of sale and deliveryrsquo

The burden of proving that the goods are necessaries is onthe seller

They must satisfy the same tests as necessary goods

Professor Treitel considers that both executed andunexecuted contracts for necessaries can be enforced Hecites Roberts v Gray (1913) Roberts agreed to take Gray aminor on a billiard tour to instruct him in the profession ofbilliard player Gray repudiated the contract The court heldthat Roberts could recover damages despite the fact that thecontract was executory

Cheshire Fifoot and Furmston agree that executorycontracts for necessary services are enforceable as in Robertsv Gray but deny that executory contracts for necessary goodscan be enforced

They cite

bull the actual wording of the Sale of Goods Act which refersto time of lsquosale and deliveryrsquo

bull the minor has to pay a reasonable price for the goods notthe contractual price

These indicate it is argued that liability is based onacceptance of the goods not on agreement

Beneficial contracts of service

CA

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124 These must be for the benefit of the minor

Necessary services include education medical and legal services

bull In De Francesco v Barnum (1890) a contract whose termswere burdensome and harsh on the minor was held void

bull But in White City Stadium v Doyle (1935) where a minorhad forfeited his payment for a fight because ofdisqualification the contract was neverthelessenforceable against him Where a contract is on the wholefor the benefit of a minor it will not be invalidatedbecause one term has operated in a way which is not tohis advantage

bull In Chaplin v Leslie Frewin (Publishers) Ltd (1966) the courtenforced a contract by a minor to publish his memoirs asthis would train him in becoming an author and enablehim to earn a living

bull But trading contracts (involving the minorrsquos capital) willnot be enforced even if it does help the minor earn aliving In Mercantile Union Guarantee Co Ltd v Ball (1937)the court refused to enforce a hire purchase contract for alorry which would enable a minor to trade as a haulagecontractor

Voidable contracts

These comprise contracts of continuing obligation such ascontracts to acquire an interest in land or partly paid sharesor partnership agreements

CO

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W125

They must be contracts of service or similar to a contract of service

Contracts which can be avoided by the minor beforemajority or within a short time afterwards

The minor can free himself from obligations for the futurefor example an obligation to pay rent under a lease but willhave to pay for benefits already received He cannot recovermoney already paid under the contract unless there has beena total failure of consideration (Steinberg v Scala (Leeds) Ltd(1923))

Other contracts

But

bull The minor himself may enforce such contracts

bull Property can pass under such contracts

bull Where the contract has been carried out by the minor hecannot recover any property unless there has been atotal failure of consideration or some other failingwhich would equally apply to an adult

bull The Minors Contracts Act 1987 provides that

a minor may ratify such a contract on majority and itcan thereafter be enforced against him

a guarantee of a minorrsquos debt will not be voidbecause a minorrsquos debt is unenforceable against him

a court may if it considers it is just and equitable to doso order a minor to return property he has receivedunder a void contract or any property representing itIt is not clear whether property transferred under thecontract covers money for example in money lendingcontracts It is argued that as lsquoproperty representing itrsquo

CA

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126

These cannot be enforced against a minor

must cover money it would therefore be illogical toexclude money acquired directly but there is as yet nodecision on this point Property cannot presumably berecovered under this section where the minor hasgiven away the contract property

bull Equity will order restitution of property acquired byfraud But there can be no restitution of money (Leslie vSheill (1914)) and no restitution if the minor has resold theproperty

bull An action may be brought in tort if it does not in any wayrely on the contract But although a minor is fully liablefor all his torts he may not be sued in tort if this is just anindirect way of enforcing a contract In Leslie v Sheill(1914) a minor obtained a loan by fraudulentlymisrepresenting his age Held ndash he could not be sued inthe tort of deceit as this would be an indirect way ofenforcing a contract which was void

Persons of unsound mind and drunken persons

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W127

A person who has been declared a lsquopatientrsquo under the MentalHealth Act 1983 by the Court of Protection is incapable ofentering into a valid contract

Other mentally disordered persons and drunken personswill be bound by their contracts unless

bull they were so disordered or drunk that they did notunderstand the nature of what they were doing and

bull the other party was aware of this

Such contracts may be affirmed during a sober or lucidmoment The Sale of Goods Act requires that wherelsquonecessaries are sold and delivered to a person who byreason of mental incapacity or drunkenness is incompetentto contract he must pay a reasonable price for themrsquo

CA

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128

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W129

8 Discharge

A contract may be discharged by

Performance

Precision of performance

bull In Cutter v Powell (1795) a shiprsquos engineer undertook tosail a ship from Jamaica to Liverpool but died before thevoyage was complete Held ndash nothing could berecovered in respect of his service he had not fulfilled hisobligation

bull In Bolton v Mahadeva (1972) a central heating systemgave out less heat than it should and there were fumesin one room Held the contractor could not claimpayment although the boiler and pipes had beeninstalled they did not fulfill the primary purpose ofheating the house

A contract is lsquodischargedrsquo when there are noobligations outstanding under it

Performance Agreement Breach Frustration

Precision ofperformance

Time ofperformance

Tender ofperformance

To discharge his obligations under a contract aparty must perform exactly what he promised

These are examples of lsquoentirersquo contracts which consist ofone unseverable obligation

bull Where the contract is divisible payment can berecovered for the completed part for example goodsdelivered by instalments

bull Where the promisee accepts partial performance InSumpter v Hedges (1898) however payment for partialperformance was refused as Hedges had been left with ahalf-built house and had been put in a position where hehad no choice but to accept partial performance

bull Where the promisee prevents complete performance forexample in Plancheacute v Colburn (1831) a writer wasallowed payment for the work he had already donewhen the publisher abandoned the series

bull Where the promisor has performed a substantial part ofthe contract In Hoenig v Isaacs (1952) the plaintiffdecorated the defendantrsquos flat but because of faultyworkmanship the defendant had to pay pound50 to anotherfirm to finish the job Held ndash the plaintiff was entitled topound150 (the contract price) minus the pound50 paid to the otherfirm cf Bolton v Mahadeva (1972) where the courtdeclined to find substantial performance

This has become known as the doctrine of substantialperformance In order for the claimant to rely on thisdoctrine the failure to perform must amount only to a

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130

Despite the rule that performance must be exact the law will allow payment to be made on a

quantum meruit basis for incomplete performance in the following circumstances

breach of warranty or a non-fundamental breach of aninnominate term It will not apply to a fundamentalbreach or to a breach of condition

Time of performance

bull It is stipulated in the contract see Lombard North Centralv Butterworth (1987)

bull One party has given reasonable notice during thecurrency of the contract that performance must takeplace within a certain time In Rickards v Oppenheim(1950) a car body which had been ordered from theplaintiffs was late The defendants gave final notice to theplaintiff that unless it was delivered within three monthsthey would cancel the order Held ndash time had been madeof the essence the defendants could cancel the order

bull The nature of the contract makes it imperative thatstipulations as to time should be observed for examplecontracts for the sale of perishable goods

The Law of Property Act 1925 stipulated that terms as tothe time of performance should be interpreted in thesame way at common law as in equity In Rainieri v Miles(1981) the House of Lords held that that meant that lateperformance would not give rise to a right to terminatebut would give rise to damages

Tender of performance

If one party tenders performance which is refused he maysue for breach of contract

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W131

Equity considers that time is not lsquoof the essence of a contractrsquo that is a condition

except in the following circumstances

If payment is tendered and rejected the obligation to tenderpayment is discharged but the obligation to pay remains

Agreement

bull If the contract is wholly executory there is no problemwith consideration as both parties surrender their rightsunder the contract

bull If the contract is partly executed one party hascompleted his performance under the contract ndash to makethe agreement binding there must either be a deed (alsquoreleasersquo) or new consideration (lsquoaccord and satisfactionrsquo)or the doctrine of equitable estoppel or waiver mustapply See Chapter 2

CA

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132

A term in the originalcontract for example acondition subsequent

or method for terminating the contract

A new agreement

A contract may be discharged by

As contracts are created by agreement so they may be discharged by agreement Consideration is

necessary to make the agreement binding

Breach

See classification of terms p 45 above

There are special problems where a party repudiates acontract under a wrong assumption that he has a right to doso

bull In Federal Commerce and Navigation v Molena Alpha (1979)the owners of a ship gave instructions not to issue bills oflading without which the charterers could not operatethe ship They wrongly believed that they had the rightto do so Held ndash their conduct constituted a wrongfulrepudiation of the contract which allowed the other partyto treat the contract as discharged

bull In Woodar Investment Development v Wimpey Construction(1980) the purchaser wrongly repudiated a contract forthe sale of land wrongly believing that he had a right todo so Held ndash a wrongful repudiation made in good faithwould not necessarily allow the other party to treat thecontract as discharged

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W133

A breach of condition

A fundamentalbreach of an

innominate term

A breach does not of itself discharge a contract It may allowthe other other party an option to treat the contract as discharged that is to terminate the contract if the breach is sufficiently serious that is if it is

A repudiatory breach

It is difficult to distinguish these decisions The general viewis that the approach in Molena Alpha is to be preferred so thateven a good faith lsquorepudiatoryrsquo response to a non-repudiatory breach will amount to a breach of contract

Effect of treating the contract as discharged

The obligation of both parties to perform (that is theprimary obligation) is discharged from the date of thetermination

However the party in breach may have to pay damages forany losses past and future caused to the innocent party as aresult of the breach (Lombard North Central v Butterworth ndashChapter 3)

The discharge does not operate retrospectively In PhotoProduction v Securicor (1980) Securicor was able to rely on anexclusion clause in the contract despite the fact that thecontract had been discharged

Note ndash it was held by the House of Lords in Vitol v Norelf(1996) that the defendantrsquos failure to perform his ownobligation could constitute acceptance of the plaintiffrsquos repudiation

The decision to terminate cannot be retracted

Anticipatory breach of contract

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134

Explicit

Hochter v La Tour (1853) atravel courier announced

in advance that he would not be fulfilling

his contract

Implicit

Frost v Knight (1872) aparty disabled himself

from carrying out apromise to marry by

marrying another person

Effect of anticipatory breach

bull The other party may sue for damages immediately Hedoes not have to await the date of performance (Hochsterv De La Tour (1853))

bull The innocent party may refuse to accept the repudiationHe may affirm the contract and continue to perform hisobligations under the contract In White and Carter Ltd vMcGregor (1962) the defendants cancelled a contractshortly after it had been signed The plaintiffs refused toaccept the cancellation carried on with the contract andthen sued for the full contract price Held ndash the plaintiffswere entitled to succeed a repudiation does notautomatically bring a contract to an end the innocentparty has an option either to affirm the contract or toterminate the contract unless

the innocent party needs the co-operation of the other party In Hounslow BC v Twickenham GardenDevelopments Ltd (1971) Hounslow council cancelled acontract to lay out a park It was held that thedefendants could not rely on White and Carter vMcGregor because the work was to be performed oncouncil property

the innocent party had no legitimate interestfinancial or otherwise in performing the contractrather than in claiming damages In The AlaskanTrader (1984) a ship chartered to the defendantsrequired extensive repairs at the end of the first yearwhereupon the defendants repudiated the contractThe plaintiffs however refused to accept therepudiation repaired the ship and kept it fullycrewed ready for the defendantrsquos use Held ndash theplaintiffs had no special interest in keeping the

CO

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W135

contract alive They should have accepted therepudiation and sued for damages

Where a party has affirmed the contract

bull He will have to pay damages for any subsequent breachwhich he commits he cannot argue that the other partyrsquosanticipatory breach excuses him (Fercometal SARL vMediterranean Shipping Co (1988))

bull There is a danger that a supervening event may frustratethe contract and deprive the innocent party of his right todamages as in Avery v Bowden (1855) (below)

Frustration

The doctrine has been kept to narrow limits

The basis of the doctrine and the tests

bull Until the 19th century the courts adhered to a theory oflsquoabsolute contractsrsquo as in Paradine v Jane (1647) It wassaid that if the parties wished to evade liability because of

CA

VE

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136

By the courts whohave insisted that the

supervening event mustdestroy a fundamental

assumption

By business persons who have lsquodrafted outrsquo

the doctrine byforce majeure clauses

Frustration occurs where it is established that due to a subsequent change in circumstances the

contract has become impossible to perform or it hasbeen deprived of its commercial purpose

some supervening event then they should provide forthis in the contract However in Taylor v Caldwell (1863)the courts relented and held that if the contract becameimpossible to perform due to some extraneous cause forwhich neither party was responsible then the contactwould be discharged

bull The modern test was enunciated by Lord Simon inNational Carriers v Panalpina (1981) frustration ariseswhere lsquothere supervenes an event (without default ofeither party and for which the contract makes nosufficient provision) which so significantly changes thenature (not merely the expense or onerousness) of theoutstanding contractual rights andor obligations fromwhat the parties could reasonably have contemplated atthe time of its execution that it would be unjust to holdthem to the literal sense of its stipulations in the newcircumstancesrsquo

bull In Davis Contractors v Fareham UDC (1956) Lord Radcliffstated that frustration occurs where to requireperformance would be to render the obligationsomething lsquoradically differentrsquo from what wasundertaken by the contract

Circumstances in which frustration may occur

bull The subject matter of the contract has been destroyed oris otherwise unavailable

In Taylor v Caldwell (1863) a contract to hire a music hallwas held to be frustrated by the destruction of the musichall by fire (see also s 7 of the Sale of Goods Act 1979)

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W137

Note ndash it is not the circumstances but the nature ofthe obligation which must have changed

bull But the unavailable or destroyed object must have beenintended by both parties to be the subject of the contract

In Blackburn Bobbin Co v Allen (1918) the contract was forthe sale of lsquobirch timberrsquo which the seller intended toobtain from Finland Held ndash the contract was not frustratedwhen it became impossible to obtain timber from FinlandThe subject matter of the contract was birch timber notFinnish birch timber

bull Death or incapacity of a party to a contract of personalservice or a contract where the personality of one partyis important

In Condor v The Baron Knights (1966) a contract between apop group and its drummer was held frustrated whenthe drummer became ill and was unable to fulfill theterms of the contract A claim for unfair dismissal can alsosometimes be defeated by the defence of frustrationwhere an employee has become permanentlyincapacitated or imprisoned for a long period

bull The contract has become illegal to perform eitherbecause of a change in the law or the outbreak of war

In Avery v Bowden (1855) a contract to supply goods toRussia was frustrated when the Crimean War broke out Ithad become an illegal contract ndash trading with the enemy

Note the outbreak of war between two foreign States willnot render a contract illegal but may make it impossibleto perform In Finelvet v Vinava Shipping Co (1983) acontract to deliver goods to Basra did not become illegalon the outbreak of the Iraq-Iran war but was frustratedwhen it became too dangerous to sail to Basra

bull The commercial purpose of the contract has failedCA

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138

Establishing whether a contract is impossible or illegal toperform is relatively straightforward but it is more difficultto decide whether the commercial purpose of the contracthas failed

It may happen in the following circumstances

bull Failure of an event upon which the contract was based

In Krell v Henry (1903) the court held that a contract tohire a room overlooking the proposed route of thecoronation procession was frustrated when thecoronation was postponed The purpose of the contractwas to view the coronation not merely to hire a room Ithas been argued that the fact that the hire of the roomwas a lsquoone offrsquo transaction was important The judge inthe case contrasted it with the hire of a taxi to take theclient to Epsom on Derby day This would be a normalcontractual transaction for the taxi driver thecancellation of the Derby would not therefore frustratethe contract

In the case of Herne Bay Steamboat Co v Hutton (1903) thecourt refused to hold that a contract to hire a boat to seethe king review the fleet was frustrated when the reviewwas cancelled the fleet was still there and could beviewed ndash there was therefore no overall failure of thepurpose of the contract

bull Government interference or delay

In Metropolitan Water Board v Dick Kerr (1918) a contracthad been formed in 1913 to build a reservoir within sixyears In 1915 the government ordered the work to bestopped and the plant sold Held ndash the contract wasfrustrated C

ON

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139

In Jackson v Union Marine Insurance Co (1874) a ship waschartered in November to proceed with all dispatch toNewport The ship did not reach Newport until thefollowing August Held ndash the contract was frustratedsince the ship was not available for the voyage for whichshe had been chartered

In The Nema (1982) a charter party was frustrated when along strike closed the port at which the ship was due toload so that of the six or seven voyages contracted to bemade between April and December only two could bemade

Similar difficult problems arise in the case of contracts ofemployment (illness or imprisonment) and leases

It has been suggested that where the contract is of a fixedduration and the unavailability of the subject matter isonly temporary the court should consider the ratio of thelikely interruption to the duration of the contract

LeasesIt had long been thought that the doctrine of frustration didnot apply to leases (see Paradine v Jane (1647) and CricklewoodInvestments v Leightonrsquos Investments (1945))

bull However in National Carriers v Panalpina (1981) theHouse of Lords declared that in principle a lease couldbe frustrated In that case a street which gave the onlyaccess to a warehouse was closed for 18 months Thelease for the warehouse was for 10 years Held ndash the leasewas not frustrated

bull The House of Lords did state however that where therewas only one purpose for the property leased and thispurpose became impossible then the lease would be

CA

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140

frustrated for example a short term holiday lease It isstill true that it will be very rare for a lease to befrustrated

Limits to the doctrine of frustration

It will not be applied

bull In Davis Contractors LTD v Fareham UDC (1956) thecontractors had agreed to build a council estate at a fixedprice Due to strikes bad weather and shortages oflabour and materials there were considerable delays andthe houses could only be built at a substantial loss Heldndash the contract was not frustrated

bull See also the Suez cases where the courts refused to holdshipping contracts frustrated as a result of the closing ofthe Suez Canal unless the contracts specified a routethrough the canal

But a force majeure clause will be interpreted narrowly asin Metropolitan Water Board v Dick Kerr amp Co (1918) wherea reference to lsquodelaysrsquo was held to refer only to ordinarydelays and not to a delay caused by government decree

CO

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W141

lsquoDoctrine must be kept within narrow limitsrsquo

on the grounds of inconvenience increase in expense loss of profit

Where there is an express provision in thecontract covering the intervening event

(that is a force majeure clause)

A force majeure clause will not in any case be applied to covertrading with an enemy

A contract will not be frustrated if the event makingperformance impossible was the voluntary action of oneof the parties If the party concerned had a choice open tohim and chose to act in such a way as to makeperformance impossible then the frustration will be self-induced and the court will refuse to treat the contract asdischarged

bull In The Superservant Two (1990) one of two barges ownedby the defendants and used to transport oil rigs wassunk They were therefore unable to fulfill their contractto transport an oil rig belonging to the plaintiff as theirother barge (Superservant One) was already allocated toother contracts The court held that the contract was notfrustrated The plaintiffs had another barge available butchose not to allocate it to the contract with the plaintiffs

This case illustrates both the courts reluctance to applythe doctrine of frustration and the advantage of using aforce majeure clause

If by reason of special knowledge the event wasforeseeable by one party then he cannot claimfrustration

bull In Amalgamated Investment and Property Co v John Walker ampSons Ltd (1976) the possibility that a building could belisted was foreseen by the plaintiff who had inquiredabout the matter beforehand A failure to obtain planning

CA

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142

Where the frustration is self-induced

Where the event was foreseeable

permission was also foreseeable and was a normal riskfor property developers The contract was therefore notfrustrated

The effect of frustration

This rule could be very unfair in its operation as in Chandlerv Webster (1904) where the hirer had to pay all the sum duefor the hire of a room to view the coronation despite thecourt holding the contract frustrated by the cancellation ofthe coronation

This rule however would only apply in the event of a totalfailure of consideration and could itself in any case causehardship if the other party had expended a considerableamount of money in connection with the contract

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W143

At common law the loss lay where it fell that isthe date of the frustrating event was all important

Anything paid or payable before that datewould have to be paid Anything payable

after that date need not be paid

In the Fibrosa case (1943) the House of Lordsdid move away from this rule and held that

where there was a total failure of considerationthen any money paid or payable in advance

would have to be returned

Note these two sections are to be applied independently Theexpenses in s 1(2) can only be recovered from lsquosums paid orpayable before the frustrating eventrsquo

Section 1(3) was applied in BP Exploration v Hunt (1982)where it was held that the court must

bull identify and value the lsquobenefit obtainedrsquo

bull assess the lsquojust sumrsquo which it is proper to award

The court also stated that

bull the section was designed to prevent unjust enrichmentnot to apportion the loss or to place the parties in theposition they would be in had the contract beenperformed or to restore them to their pre-contractposition

CA

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144

The Law Reform (Frustrated Contracts) Act 1943was therefore passed to remedy these deficiencies

It provided

s 1(2) ndash all sums paid or payable before the frustratingevent shall be recoverable or cease to be payable but

the court has a discretionary power to allow the payeeto set off against the sum so paid expenses he has

incurred before the frustrating event

s 1(3) ndash where one party has obtained a valuablebenefit before the time of discharge the other

party may recover from him such sums asthe court considers just

bull in assessing the valuable benefit the section requiredreference to the end benefit received by a party not thecost of performance In assessing the end benefit theeffect of the frustrating event had to be taken intoaccount

bull the cost of performance can be taken into account inassessing the just sum

In BP v Hunt (1982) BP were to do the exploration andprovide the necessary finance on an oil concession ownedby Mr Hunt in Libya They were also to provide certainlsquofarm-inrsquo payments in cash and oil In return they were toget a half-share in the concession and 5 of theirexpenditure in reimbursement oil A large field wasdiscovered the oil began to flow then in 1971 the LibyanGovernment nationalised the field

The court held

bull the valuable benefit to Hunt was the net amount of oilreceived plus the compensation payable by the LibyanGovernment which amounted to pound85000000

bull the just sum would cover the work done by BP less thevalue of the reimbursement oil already received Thiswas assessed at pound34000000 As the valuable benefitexceeded the just sum BP recovered their expenses infull The position would have been very differenthowever if the field had been nationalised at an earlierstage and no compensation had been paid

CO

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W145

The Law Reform (Frustrated Contracts) Act 1943 does notapply to

CA

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146

Charter parties Contracts of insurance

Contracts for the sale of specificgoods which have perished

CO

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W147

9 Remedies for breach of contract and restitution

not

If no loss has been suffered then nominal damages onlywill be awarded

bull In Surrey CC v Bredero Homes (1993) the court refused toaward damages against a defendant who had notcomplied with planning permission as there was no lossto the council

Unliquidated damages (that is damages assessed by

the court)

The purpose of unliquidated damages is to compensate the claimant for the loss he has

suffered as a result of a breach

Unliquidateddamages

Equitableremedies

Liquidateddamages

Restitutionor

quasi-contract

to punish the defendantPunitive damages are

not awarded for breachof contract

generally to recoup again made by the

defendant (but cf AG vBlake (2000) below)

bull However in Chaplin v Hicks (1911) damages wereawarded for the loss of a chance to win a competitionalthough there was no certainty that the plaintiff wouldhave been one of the winners

Reliance damages rather than expectation damages may beappropriate where the benefits which would have beenobtained by successful performance are difficult to assess asin

bull McRae v Commonwealth Disposals Commission (1951)where the plaintiff recovered the expenses incurred insearching for a wreck which did not exist

bull Anglia Television v Reed (1972) where the leading actor ina film project withdrew at the last moment The plaintiffswere able to recover all their wasted expenditure on theprogramme including even those incurred before thecontract had been signed

CA

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148

Methods of compensating the claimant

Expectation that is loss ofbargain is the traditional

basis for assessing damagesin contract It aims to putthe claimant in the sameposition as far as money

can do it as if the contracthad been performed

Reliance that is out of pocketor wasted expenditure This

is the normal way ofassessing damages in tort

but can be used in contractas illustrated below

bull But cf Regalian Properties v London Dockland Development(1995) where expenses incurred while negotiations wereexpressly lsquosubject to contractrsquo were not recoverable

It has been held that a claimant may freely choose betweenexpectation and reliance damages unless the difficulty inidentifying profits is because he has made a lsquobad bargainrsquo

bull In C and P Haulage v Middleton (1983) the plaintiff hired agarage for six months on the basis that anyimprovements would become the property of thelandlord He was ejected in breach of contract and suedfor the cost of the improvements Held ndash expenditurewould have been wasted even if the contract had beenperformed

bull It is for the defendant to prove that the claimant hadmade a bad bargain as in CCC Films v Impact QuadrantFilms (1985) where the defendant failed to prove that theplaintiff would not have made a profit from distributingthe films had they been delivered in accordance with thecontract

bull In normal circumstances the claimant will ask fordamages on an expectation basis as this is moreprofitable for him

Restitutionary measure

In Attorney General v Blake (2000) the House of Lords for thefirst time recognised that in some circumstances alsquorestitutionaryrsquo measure of damages requiring thedefendant to pay over the profit made as a result of thebreach of contract may be appropriate The case was anunusual one involving a book published by a member ofthe security services who had spied for Russia The House ofLords regarded the defendant as having been under

CO

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W149

something lsquoakin to a fiduciary obligationrsquo and it is not yetclear how far the principle adopted in this case is likely to beapplied in other situations

Contributory negligence

This is only relevant where the liability in contract isidentical with the liability on tort that is the breach is of acontractual duty to take care (Barclays Bank v FaircloughBuilding (1994))

Quantification of damage

Where lsquoloss of bargainrsquo damages are claimed there are twopossible methods of quantification

The court will normally adopt the most appropriate (RuxleyElectronics and Construction v Forsyth (1995))

Prima facie rules

CA

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150

Sale of goods ndash difference in value

Failure to repair (lease) ndash difference in value

Building contracts ndash cost of cure

Difference in value Cost of cure

Failure to deliver goods

bull In Williams Bros v Agius (1914) the profit which wouldhave been earned on a resale was ignored damagesrepresented the difference between the contract price andthe market price (which was higher than the resale price)

Failure to accept delivery and pay

bull If the seller is a dealer in mass produced goods then thedamage to him will be the loss of profit on onetransaction The claimant had sold one item less than heotherwise would have during the year (Thomson vRobinson (1955))

bull However if the mass produced item is in short supplyand the number of sales is governed by supply not bydemand then there is no loss of profit and damageswould not be awarded (Charter v Sullivan (1957))

bull The damages revert to the difference between thecontract price and market price in the case of secondhand goods even if the seller is a dealer (Lazenby Garagesv Wright (1976))

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W151

The Sale of Goods Act 1979 states thatdamages will represent the difference between

the contract price and the market price

The Sale of Goods Act 1979 states that damages willagain represent the difference between the contract

price and the market price

Limitations on principle of expectation

Although the stated aim of the expectation basis of assessingdamages is to put the claimant in the position he would havebeen in had the contract been performed there are a numberof rules which militate against this result

Remoteness of damage

bull In Hadley v Baxendale (1854) a mill was closed because ofthe delay of a carrier in returning a mill shaft The courtheld that the carrier was not liable for damages for theclosure of the mill as he was not aware that the absenceof a mill shaft would lead to this conclusion

The following damages were said to be recoverable

those arising naturally out of the breach

those which because of special knowledge wouldhave been within the contemplation of the parties

bull In Victoria Laundry v Newman Industries (1949) the rulewas restated and based on knowledge The laundry wasable to recover damages for normal loss of profitC

AV

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S152

Damages cannot be recovered for losses that are tooremote The losses must be lsquowithin the reasonable

contemplationrsquo of the parties

Kind ofloss

CausationDuty of

mitigationRemotenessof damage

following a delay in the delivery of a boiler but not forspecially lucrative dyeing contracts they were offeredduring this time

Damages were said to be recoverable for losses whichwere within the reasonable contemplation of the partiesat the time of the contract either from

imputed knowledge or

actual knowledge

bull In The Heron II (1969) the House of Lords confirmed thata higher degree of foreseeability is required in contractthan in tort Damages were awarded to cover lossesarising from the late delivery of sugar to Basra Theparties must have been aware that the price of sugar inBasra might fluctuate For a loss not to be too remotethere must be

lsquoa real dangerrsquo

lsquoa serious possibilityrsquo

or the loss must be

lsquonot unlikelyrsquo

lsquoliable to resultrsquo

The difference between the tests of remoteness in contractand tort has been criticised but justified on the ground thata contracting party can protect himself against unusual risksby drawing them to the attention of the other party to thecontract

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W153

Application of remoteness rules

bull Imputed knowledge

Hadley v Baxendale (1854) Victoria Laundry v Newman Industries (1949)The Heron II (1967)

bull Actual knowledge

Defendantrsquos knowledge of special circumstances must beprecise This encourages contracting parties to discloseclearly any likely exceptional losses in advance

In Simpson v L amp NWR (1876) the defendant was liable forloss caused to the plaintiff by delivering goods toNewcastle Show Ground the day after the show had finished

In Horne v Midland Railway (1873) defendants were heldnot liable for exceptionally high profit lost by plaintiffthrough late delivery They knew that shoes would haveto be taken back if not delivered on 3 February but notthat the plaintiff would lose an exceptionally high profit

bull In Wroth v Tyler (1974) the defendant was liable for thefull difference between the contract price and the marketprice although the rise in the market price wasexceptional and could not have been foreseen

bull In Parsons (Livestock) Ltd v Uttley Ingham Co Ltd (1978) thedefendants who had supplied inadequately ventilatedhoppers for pig food were held liable for the loss of theplaintiffrsquos pigs even though the disease from which they

CA

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154

Note the test of remoteness determinesentitlement not quantum

died was not foreseeable It was enough that they couldhave contemplated any illness of the pigs (But cf VictoriaLaundry v Newman Industries (1849))

Lord Denning in this case argued that so far as physicaldamage was concerned (not loss of profit) all directlosses should be recoverable as in tort

Lord Scarman has also stated that it would be ridiculousif the amount of damages depended on whether anaction was framed in contract or tort A House of Lordsrsquodecision on these issues is awaited

It is sometimes disputed that the decisions since Hadley vBaxendale have not in any way clarified the rule

Types of loss recognised

This is the normal ground for the award of damages forbreach of contract

However damages for non-pecuniary loss will be awardedin specific cases for example

bull Pain and suffering consequent on physical injury

bull Physical inconvenience

In Watts v Morrow (1991) damages were awarded tocover the inconvenience of living in a house whilst it wasbeing repaired C

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155

Pecuniary loss

Non-pecuniary loss

bull Damage to commercial reputation

In Gibbons v Westminster Bank (1939) damages wereawarded to cover the losses caused by the wrongfulreferring of a cheque

Cf Malik v BCCI (1997) where the House of Lords heldthat compensation was payable for the stigma of havingworked for an organisation which had been run corruptly

bull Distress to claimant

Traditionally damages for injured feelings were notawarded for breach of contract Addis v Gramaphone Co(1909) This general principle has recently been confirmedby the House of Lords in Johnson v Unisys Ltd (2001)

However some limited exceptions to this rule have beenrecognised

Damages for disappointment were awarded againsta holiday company in Jarvis v Swan Tours (1973)where the holiday was not as described

In Hayes v Dodd (1990) the Court of Appealconfirmed that damages for distress are notrecoverable in normal commercial contracts butcould be recovered in contracts

CA

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156

to provide pleasure See Jarvis v Swan Tours Ltd

(1973)

to prevent distress Heywood v Wellers (1976) ndashsolicitorrsquos failure to obtain

an injunction

It has been suggested that damages for distress areparticularly appropriate in lsquoconsumer contractsrsquo

The duty of mitigation

In Payzu v Saunders (1919) the plaintiff had refused the offerof goods at below market price In Brace v Calder (1895) anemployee dismissed by a partnership turned down an offerof similar employment by one of the partners In both casesthe plaintiff was penalised for his failure to mitigate

bull He need not however take lsquounreasonablersquo steps inmitigation

In Pilkington v Wood (1953) it was stated that the plaintiffdid not need to embark on hazardous legal action inmitigation of his loss He should not take unreasonablesteps which would increase losses

bull The claimant cannot recover damages for losses he hasavoided

In British Westinghouse v Underground Electric Railways Co(1912) the plaintiff replaced a defective turbine with anew turbine which was so much more efficient that thesavings exceeded the losses on the defective turbineHeld ndash no loss ndash no damages

bull Note ndash the duty to mitigate does not arise until there hasbeen an actual breach of contract or an anticipatorybreach has been accepted by the other party (see Whiteand Carter v McGregor (above))

CO

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W157

The claimant has a duty to take reasonablesteps to mitigate his loss

Causation (losses which the defendant did not cause)

bull The action of a third party may break the chain ofcausation if it is not foreseeable

In Lambert v Lewis (1981) a farmer continued to use acoupling even though he knew it was broken Held ndash thefarmer was responsible for losses caused by the failure ofthe coupling the manufacturer could not have foreseenthat he would continue to use it knowing it was faulty

bull However where the action is foreseeable the chain ofcausation will not be broken

In Stansbie v Troman (1948) a painter who in breach ofcontract had left a door unlocked was held liable forgoods taken by thieves since this was the kind of loss hehad undertaken to guard against by locking the doors

CA

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158

The breach must have caused the loss as well ashaving preceded the loss

Liquidated damages

Damages set by the parties themselves

The following guidelines for distinguishing between thetwo were suggested in Dunlop Pneumatic Tyre Ltd v NewGarage and Motor Co (1915)

bull a penalty ndash if the sum is extravagant and unconscionable

bull a penalty ndash if a larger sum is payable on the failure to paya smaller sum

bull a penalty ndash if the same sum is payable on major andminor breaches

bull it is no obstacle to the sum being liquidated damages thata precise pre-estimate is almost impossible

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Penalty clauses will not be enforced by the courtInstead the court will award unliquidated damages

The parties may stipulate that a certain sum mustbe paid on a breach of contract

If the sum represents a genuine pre-estimatethen it will be enforced by the court

as liquidated damages

If the sum is not genuine but is an attemptto frighten the other party into performing

then it is a penalty A penalty will not beenforced by the court

The rule against penalties does not apply to

bull Acceleration clauses

Here the whole of a debt becomes payable immediatelyif certain conditions are not observed

bull Deposits

Money paid otherwise than on a breach of contract

Alder v Moore (1961)

Bridge v Campbell Discount Co Ltd (1962)

bull clauses declaring a term to be a condition

Lombard North Central v Butterworth (1987)

Equitable remedies

Specific performance

Traditionally specific performance will only be awardedwhere damages are not an adequate remedy that is

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An order of the court directing the defendant to fulfill his obligations under the contract

Specific performance Injunctions

All equitable remedies are discretionary

The following will be taken into account

bull Mutuality Negative ndash a minor cannot get it because it isnot available against a minor Positive ndash a vendor of landmay obtain it although damages would be an adequateremedy because it is also available to a purchaser of land

bull Supervision The need for constant supervisionprevented the appointment of a resident porter beingordered in Ryan v Mutual Tontine Association (1893) but inPosner v Scott Lewis (1986) a similar order was madebecause the terms of the contract were sufficientlyprecise

bull Impossibility ndash Watts v Spence (1976) ndash land belonged to athird party C

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Where damages are difficult to assessfor example annuities

Where there is no alternative remedy available(Beswick v Beswick (1968)) see above

Where the claimant cannot get a satisfactory substitute for example

contracts for the sale of land or contracts for the sale of goods which cannot be

obtained elsewhere for example antiquesvaluable paintings ndash unless bought as an

investment as in Cohen v Roche (1927)

bull Hardship ndash Patel v Ali (1984) ndash defendant would lose thehelp of supportive neighbours

bull Conduct of the claimant ndash Shell (UK) Ltd v Lostock Garages(1977) ndash Shellrsquos behaviour was unreasonable

bull Vagueness ndash Tito v Waddell (1977) ndash see above

bull Mistake ndash Webster v Cecil (1861) ndash see above

Special problems

bull Contracts of personal service

These are considered to involve personal relationshipsand are therefore not thought suitable for an order of specific performance

However such orders were exceptionally made in Hill vCA Parsons Ltd (1972) and Irani v Southampton AHA(1985) on the ground that in the very unusualcircumstances of those cases the mutual trust betweenthe employer and employee had not been destroyed

bull Building contracts

The courts are reluctant to enforce building contracts onthe grounds that damages are generally an adequateremedy the terms are often vague there are difficultieswith supervision

But it was held in Wolverhampton Corpn v Emmons (1901)that provided the terms were clear the problem ofsupervision would not be an absolute barrier

Injunctions

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These are orders directing the defendant not to do a certain act

Types of injunction

Injunctions are also discretionary remedies and are subject to the similar constraints to orders of specific performance However an injunction will be granted toenforce a negative stipulation in a contract of employmentas long as this is not an indirect way of enforcing thecontract

bull Warner Bros v Nelson (1937)

bull cf Page One Records v Britton (1968)

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Interim injunction

This is designed to regulatethe position of the parties

pending trial

Prohibitory injunction

This is an ordercommanding the

defendant not to dosomething

Mandatory injunction

This orders thedefendant to undosomething he had

agreed not to

A comparison of the remedies for misrepresentation

and for breach of contract

Setting aside contracts

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164

DamagesDamages available as of right Normally assessedon expectation basis Losses must be within thecontemplation of the parties See above

Damages available in tort of deceit negligentstatements and under s 2(1) of the 1967 ActDamages assessed on reliance basis All lossesflowing directly from misrepresentation will becovered whether or not foreseeable in actions indeceit and under s 2(1) of the 1967 Act (Royscot vRogerson (1991)) Losses must be foreseeable inthe tort of negligence No right to damages forinnocent misrepresentation but may be awardedin lieu of rescission at the discretion of the court

Breach

Misrep

Termination or rescission for breach

Available only for breaches of conditionsfundamental breaches of innominate terms and repudiations

Contract discharged from time of breachdischarge not retrospective Innocent party canalso sue for damages (see Chapter 8)

Rescission

Available for all misrepresentations but atdiscretion of court and subject to certain barsContract cancelled prospectively and retrospectivelyparties returned to the position they were in beforethe contract was entered into (see Chapter 6)

Breach

Misrep

Exclusion clauses

See ss 3 6 7 of UCTA

All clauses must be reasonable

Restitution or quasi-contract (based on unjust

enrichment)

It covers

Money may be recovered

bull Where there is a total failure of consideration (see Fibrosacase (frustration))

In Rowland v Divall (1923) the plaintiff had bought a carwhich turned out to be stolen property and which wasrecovered by the owner Despite the fact that the plaintiffhad had the use of the car for a considerable time and ithad fallen in value during this time the plaintiff was ableto recover the full purchase price of the car from thedefendant There had been a total failure of consideration

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Breach

Misrep

recovery of money payment for work done

Restitution may be available where parties arenot in a contractual relationship

It is based on the principle of unjust enrichment it allows the injured party to

recover money paid or the value of benefitsconferred where it would be unjust to allow the

other party to retain the benefit

bull Money paid under a mistake of fact is recoverableprovided the mistake is as to a fact which if true wouldhave legally or morally obliged the claimant to pay themoney or is sufficiently serious to require payment forexample

In Kleinwort Benson Ltd v Lincoln City Council (1998) theHouse of Lords held that in certain circumstances moneypaid under a mistake of law could also be recovered if itwould be unjust to allow the recipient to retain the money(See also Nurdin and Peacock plc v DB Ramsden amp Co Ltd(1999))

bull Money paid under a void contract

For example contracts void

bull In Westdeutche Landesbank v Islington LBC (1994) thecouncil had entered into a rate swapping arrangementwith the bank under which the bank had paid pound2500000to the council in advance The council had paidapproximately pound1200000 to the bank by instalment andargued that since there was not a total failure ofconsideration it should not have to pay the bank theremaining pound1300000 The Court of Appeal held that theprinciple upon which money must be repaid under a

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166

because ultra vires

as against public policy

for a commonmistake

Mistaken payments underinsurance policies

Mistaken payments intoa bank account

void contract is different from that on a total failure ofconsideration Recovery of money under a void contractis allowed if there is no legal basis for such a payment

bull Note ndash money paid under contract which is void forillegality cannot be recovered unless the action can beframed without relying on the contract

Parkinson v Royal College of Ambulance (1925)Bowmakers v Barnet Instruments (1945) Tinsley v Milligan (1993)

bull Note ndash recovery under these heads will not be possible if

In Lipkin Gorman v Karpnale Ltd (1992) a partner in a firmof solicitors was a compulsive gambler who regularlygambled at a casino run by the defendants In order tofinance his gambling he had drawn cheques on clientaccounts where he was the sole signatory He had spentat least pound154000 of this money at the defendantrsquos casinoand the plaintiff sued for the return of the money as ithad been received under a contract which was void(declared void by statute) Held ndash where the true ownerof stolen money sought to recover it from an innocentthird party the recipient was under an obligation toreturn it where he had given no consideration for itunless he could show that he had altered his position ingood faith In this case the plaintiff was able to recoverthe pound154000 less the winnings paid to the partner The

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the payer hadintended the

payee tobenefit in any

event

there is goodconsiderationfor exampledischarge of

a debt

the payee haschanged

position as aresult of the

payment

casino had altered their position on each gamble in thatthey had become vulnerable to a loss

However in South Tyneside Metropolitan Borough Council vSvenska International (1994) the House of Lords allowedthe council to recover approximately pound200000 it had paidto a bank under a rate swap agreement which had beendeclared ultra vires and void The court rejected thebankrsquos claim that it had changed its position in that it hadentered into financial arrangements with otherorganisations in order to hedge its losses

bull Money paid to a third party for the benefit of thedefendant provided the claimant was not acting as avolunteer (for example a mother paying off a sonrsquos debt)but was acting under some constraint

In Macclesfield Corpn v Great Central Railway (1911) theplaintiffs carried out repairs to a bridge which thedefendants were legally obliged (but had refused) tomaintain They were regarded as purely volunteers andcould not therefore recover the money However in Exallv Partridge (1799) the plaintiff paid off arrears of rentowed by the defendant in order to avoid seizure of theplaintiffrsquos carriage which was kept on the defendantrsquospremises The plaintiff was acting under a constraint andcould therefore recover the money

Payment for work done

bull Where the claimant has prevented performance of thecontract (see Plancheacute v Colburn (1831))

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168

Here the claimant is seeking compensationon a quantum meruit basis (cf s 1(3) of the

Law Reform (Frustrated Contracts) Act 1943)

bull Where work has been carried out under a void contractIn Craven Ellis v Canons Ltd (1936) the plaintiff hadcarried out a great deal of work on behalf of a companyon the understanding that he had been appointedmanaging director It was later discovered that he hadnot properly been appointed managing director Thecourt held that he should be paid on a quantum meruitbasis for the work he had done

bull Where agreement has not been reached and

the work was requested by the defendants InWilliam Lacey v Davis (1957) the plaintiffs hadsubmitted the lowest tender for a building contractand had been led to believe that they would beawarded it At the defendantsrsquo request they thenprepared various plans and estimates Thedefendants then decided not to proceed The courtordered the defendants to pay a reasonable sum on aquantum meruit basis for the work that had beendone on analogy with Craven Ellis v Cannons or

the work had been freely accepted In British SteelCorpn v Cleveland Bridge Engineering Co (1984) a letterof intent was issued by the defendants indicating thatthey intended to enter into a contract with theplaintiffs for the construction and delivery of cast-steel lsquonodesrsquo However it proved impossible to reachagreement on a number of major items Despite this anumber of lsquonodesrsquo were eventually constructed andaccepted by the defendants It was held by the courtthat the defendants should pay for the nodes they hadaccepted

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W169

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10 Privity of contract

Introduction

The traditional approach to the doctrine of privity is that

Privity of contract is closely associated with the rule thatconsideration must move from the promisee See Dunlop vSelfridge (above)

Only a party to a contractcan sue on a contract

Only a party to a contractcan be sued on a contract

In Tweddle v Atkinson(1861) the plaintiff had

married Mr Guyrsquosdaughter The plaintiffrsquosfather and Mr Guy had

agreed together that theywould each pay a sum ofmoney to the plaintiff Mr

Guy died before themoney was paid and the

plaintiff sued hisexecutors The action wasdismissed ndash the plaintiffwas not a party to thecontract which wasmade between the

two fathersSee also

Beswick v Beswick (1968)

In Dunlop v Selfridge(1915) Dew amp Co at the

instigation of Dunlophad placed a minimum

resale price in theircontract with Selfridge

Held ndash Dunlop could notsue Selfridge for breach of contract they were

not parties to the contract nor had they

given consideration to Selfridge

Matters relevant to the doctrine of privity

One part of the traditional approach that is that relating toconferring benefits has recently been significantly changedby legislation which is discussed below In addition thereare a number of situations which fall outside the scope ofthe doctrine

Matters outside the doctrine

It has been argued that it is only because English law hasdeclared many transactions not to be subject to the doctrineof privity that the doctrine itself has survived so long

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172

AssignmentRights can be assignedprovided that certain

formalities are followed

AgencyA principal can sue and

be sued on contractsmade by an agent

on his behalf

TrustsWhere a trust has beencreated the beneficiaryunder the trust can suethe trustees even if hewas not a party to the

original agreement

Multi-partite agreementsIn Clarke v Dunraven(1897) entrants in a

yacht race were allowedto sue each other TheCompanies Act 1985allows shareholders

to sue each other

Land law recognises a number of exceptions

Statutory exceptions

bull Price maintenance agreements

bull Various insurance contracts

bull For example Married Womanrsquos Property Act

bull Law of Property Act 1925 s 56

bull Negotiable instruments

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W173

Collateral contractsIn limited cases the court will find a separate

(collateral) contract between the promisor and the third party

(Shanklin Pier v Detel Products (1951))

LeasesThe benefits and

obligations under a lease can be transferred

to third parties

Law of Property Act 1925 s 56

See below

Restrictive covenantsThese can bind a third party under the rule in

Tulk v Moxhay (1848)

Conferring benefits on a third party

Statutory intervention

The common law rule preventing a third party fromenforcing a contract was much criticised and has now beenreformed by legislation that is the Contracts (Rights ofThird Parties) Act 1999 based on recommendations from theLaw Commission

Main effectA third party will be able to enforce a contractual provisionpurporting to confer a benefit on him or her if both of twoconditions are satisfied (s 1)

Right to vary the contract

Unless they have provided otherwise the contractingparties will lose the right to vary or cancel the provisionbenefiting the third party if (s 2)

bull the third party has communicated his assent or

bull the third party has relied on the term and the promisor isaware of this or

bull the third party has relied on the term and the promisorcould be reasonably expected to have foreseen this

on its proper constructionthe contract is intended to

give the third party a legallyenforceable right

the contract expresslyprovides that the third party

may benefit

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174

DefencesThe promisor can raise against the third party any defencesthat could have been raised against the promisee (forexample misrepresentation duress) (s 3)

The promisor can also rely on defences set-offs orcounterclaims arising from prior dealings with the thirdparty

ExceptionsThere cannot be double liability that is as against thepromisee and the third party (s 5)

Some contracts are excluded from the Act (s 6)

bull contracts on a bill of exchange or promissory note

bull terms of a contract of employment as against anemployee

bull contracts for the carriage of goods by sea or if subject toan international transport convention by road rail or air

The exception for carriage of goods by sea does not apply toreliance on an exclusion clause (as in The Eurymedon (1975)for example)

Note also that the main contracting parties are in control ndashthey can decide that the provisions of the new Act shouldnot apply and there will be nothing that the third party cando about it

The Act does not affect the other part of the privity doctrinendash relating to the imposition of obligations on third parties ndashwhich remains governed by the common law

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W175

The common law approach

The common law developed a number of devices to allow athird party to receive the benefit of contract by

These devices will be of much less importance now that theContracts (Rights of Third Parties) Act 1999 is in force Theymay still be used however particularly in situations wherefor one reason or another the 1999 Act does not apply

Attempts to allow the third party to sue

bull Attempts to extend the use of lsquotrustsrsquo

In Walfordrsquos case (1919) under a charterparty theship owner promised the charterer to pay a broker acommission Held ndash the charterer was trustee of thispromise for the broker who could thus enforce itagainst the ship owner

However in Re Schebsman (1944) a contract betweenSchebsman and X Ltd that in certain circumstanceshis wife and daughter should be paid a lump sumwas held not to create a trust

The trust as a device to outflank privity was limited bythe courts presumably because of concern that theirrevocable nature of the trust may prevent thecontracting parties from changing their minds Thecourts no longer go out of their way to find that theparties intended to create a trust

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176

Allowing the thirdparty to sue

Allowing the promiseeto sue on behalf of the

third party

bull Lord Denning launched a campaign against privity andargued that s 56 of the Law of Property Act 1925 intendedto destroy doctrine altogether This was finally rejected bythe House of Lords in Beswick v Beswick (1968) theyacknowledged that the wording was wide enough tosupport Lord Denningrsquos view but insisted neverthelessthat it must be restricted to contracts concerning land asthe purpose of the Act was to consolidate the law relatingto real property

bull Agency

Agency has been used to allow a third party to takeadvantage of an exclusion clause in a contract to whichhe was not a party

The House of Lords refused to allow stevedores torely on an exclusion clause in a contract between thecarriers and the cargo owner in Scruttons v MidlandSilicones (1962) on the basis that only a party to thecontract could claim the benefit of the contract that isthe exclusion clause

However in The Eurymedon (1975) the Privy Councilon similar facts held that the carriers had negotiateda second contract (a collateral contract) as agents ofthe stevedores and the stevedores could claim thebenefit of the exclusion clause in this contract

But in Southern Water Authority v Carey (1985) sub-contractors sought to rely on a limitation of liabilityclause in a main contract Held ndash they must havespecific authority to negotiate on behalf of a thirdparty before this device could work

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W177

In Norwich City Council v Harvey (1989) instead ofusing an exclusion clause the contract placed the riskof loss or damage by fire on the owner and thisprotected both main contractor and sub-contractor

Attempts to allow the promisee to enforce the contract onbehalf of the third party

bull Specific performance

In Beswick v Beswick (1968) Peter Beswick had transferredhis business to his nephew in return for his nephewrsquospromise to pay his uncle a pension and after his deathan annuity to his widow The nephew paid his uncle thepension but only one payment of the annuity was madeThe widow as administratrix of her husbandrsquos estatesuccessfully sued her nephew for specific performance ofthe contract to pay the annuity although the House ofLords implied that she would not have succeeded if shehad been suing in her own right

bull Injunction

Similarly an injunction may be awarded to restrain abreach of a negative promise on a suit brought by thepromisee for example A promised B not to compete withC or by a stay of proceedings

In Snelling v Snelling Ltd (1973) three brothers lent moneyto a family company and agreed not to reclaim themoney for a certain period A stay of proceedings wasgranted to one of the brothers to stop another brotherfrom breaking his promise and suing the company for thereturn of his money

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178

bull Damages

Damages to cover the disappointment of a third partywas sanctioned by Lord Denning in Jackson v HorizonHolidays Ltd (1975) where the plaintiff entered into acontract with a holiday firm for a holiday for his familyand himself in Ceylon The holiday was a disaster Theplaintiff recovered damages for pound500 for lsquomental stressrsquoOn appeal the court confirmed the amount on theground that witnessing the distress of his family hadincreased the plaintiffrsquos own distress Lord Denninghowever stated that the sum was excessive for theplaintiffrsquos own distress but upheld the award on theground that the plaintiff had made the contract on behalfof himself and of his wife and children and that he couldrecover in respect of their loss as well as their own

This statement by Lord Denning was disapproved by theHouse of Lords in Woodar Investment Development Ltd vWimpey Construction (UK) Ltd (1980) They stated thatdamages should not generally be recovered on behalf ofa third party

Lord Wilberforce however did suggest that there was aspecial category of contracts which called for specialtreatment That is where one party contracted for abenefit to be shared equally between a group forexample family holidays ordering meals in restaurantsfor a party hiring taxis for a group The decision inJackson could therefore be supported on this ground Afurther exception was identified by the House of Lords inLinden Gardens Trust v Lenesta Sludge Disposals Ltd (1993)where in a construction contract the original propertyowner may be able to sue the contractor for damagesresulting from defects in the work even though theproperty has been transferred to a third party The

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W179

damages would be held in trust for the third party Thisexception was again confirmed by the House of Lords inAlfred McAlpine Construction Ltd v Panatown Ltd (2000) inorder to avoid the situation where otherwise no onewould be able to sue the contractor although on the factsthe exception did not apply (because a separatearrangement had been made under which the contractorwas directly liable to the third party)

Attempts to impose obligations on third parties

bull Restrictive covenants inserted into a contract for the saleof land may bind subsequent purchasers provided

they are negative in nature the subsequent purchaser has notice of the covenants

the person claiming the benefit has land capable ofbenefiting from its enforcement (Tulk v Moxhay (1848))

bull The courts extended the rule in Tulk v Moxhay to personalproperty for example a ship in The Strathcona (1926)where the plaintiffs had chartered The Strathcona forcertain months each year The ship was sold to thedefendant who refused to allow the plaintiffs to use theship The plaintiffs sought an injunction on the groundthat the doctrine in Tulk v Moxhay should be extendedfrom land to ships The court granted an injunction

This decision was criticised in Port Line Ltd v Ben Line Ltd(1958) where a ship chartered to the plaintiffs was sold tothe defendants The ship was requisitioned during theSuez war and compensation was paid to the defendantsThis compensation was claimed by the plaintiffs Held ndasheven if The Strathcona case was rightly decided it couldC

AV

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S180

not be applied in this case as (a) the defendants were notin breach of any duty and (b) the plaintiffs had notsought an injunction but financial compensation whichwas outside Tulk v Moxhay

The decision in The Strathcona has been widely criticisedbecause

a contract of hire creates personal not proprietaryrights in the hired object

the retention of land which can benefit from thecovenant is a necessary condition of the doctrine inTulk v Moxhay

bull However in Swiss Bank Corpn v Lloyds Bank (1979)Browne-Wilkinson J considered that the decision in TheStrathcona was correct He suggested however that thetort of inducing a breach of contract or knowinglyinterfering with a contract would be a more suitable basisfor the decision than Tulk v Moxhay He stated that in hisjudgment a person proposing to deal with property insuch a way as to cause a breach of a contract affecting thatproperty will be restrained by injunction from doing so ifwhen he acquired that property he had actualknowledge of the contract

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• Book Cover
• Title
• Copyright
• Contents
• 1 Agreement
• 2 Consideration and intention
• 3 Contents of a contract
• 4 Exemption (exclusion or
• 5 Vitiating elements which render
• 6 Mistake
• 7 Illegality and capacity
• 8 Discharge
• 9 Remedies for breach of contract
• 10 Privity of contract

Auctions

bull An auctioneerrsquos request for bids in Payne v Cave (1789)was held to be an invitation to treat The offer was madeby the bidder (cf Sale of Goods Act 1979 s 57(2))

bull A notice of an auction In Harris v Nickerson (1873) it washeld that a notice that an auction would be held on acertain date was not an offer which then could beaccepted by turning up at the stated time It was astatement of intention

If the auction is stated to be lsquowithout reserversquo then there isstill no necessity to hold an auction but if the auction isheld lots must be sold to the highest bidder (Barry vHeathcote Ball (2001) confirming obiter dicta in Warlow vHarrison (1859)) The phrase lsquowithout reserversquo constitutes aunilateral offer which can be accepted by turning up andsubmitting the highest bid

Tenders

A request for tenders is normally an invitation to treat

bull However it was held in Harvela Ltd v Royal Trust ofCanada (1985) that if the request is made to specifiedparties and it is stated that the contract will be awardedto the lowest or the highest bidder then this will bebinding as an implied unilateral offer It was also held inthat case that a referential bid for example lsquothe highestother bid plus 10rsquo was not a valid bid

bull It was also held in Blackpool and Fylde Aero Club v BlackpoolBC (1990) that if the request is addressed to specifiedparties this amounts to a unilateral offer thatconsideration will be given to each tender which isproperly submitted C

ON

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5

Subject to contract

The words lsquosubject to contractrsquo may be placed on top of a letter in order to indicate that an offer is not to be legallybinding (Walford v Miles (1992))

Termination of the offer

Revocation (termination by the offeror)

An offeror may withdraw an offer at any time before it hasbeen accepted

bull The revocation must be communicated to the offereebefore acceptance In Byrne v van Tienhoven (1880) thewithdrawal of an offer sent by telegram was held to becommunicated only when the telegram was received

bull Communication need not be made by the offerorcommunication through a third party will suffice InDickinson v Dodds (1876) the plaintiff was told by aneighbour that a property which had been offered to himhad been sold to a third party Held ndash the offer had beenvalidly revoked

bull An offer to keep an offer open for a certain length of timecan be withdrawn like any other unless an option hasbeen purchased for example consideration has beengiven to keep the offer open (Routledge v Grant (1828))

Unilateral offersbull Communication of the revocation is difficult if the offer

was to the whole world It was suggested however inthe American case of Shuey v USA (1875) that

CA

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6

Revocation Lapse Rejection

communication will be assumed if the offeror takesreasonable steps to inform the public for example placesan advertisement in the same newspaper

bull It now seems established that revocation cannot takeplace if the offeree has started to perform In Errington vErrington (1952) a father promised his daughter and son-in-law that if they paid off the mortgage on a house heowned he would give it to them The young couple dulypaid the instalments but the offer was withdrawnshortly before the whole debt was paid Held ndash there wasan implied term in the offer that it was irrevocable onceperformance had begun This is also supported by dictain Daulia v Four Millbank Nominees (1978)

Lapse (termination by operation of law)

An offer may lapse and thus be incapable of being acceptedbecause of

bull Passage of time

at the end of a stipulated time (if any) or

if no time is stipulated after a reasonable time InRamsgate Victoria Hotel Co v Montefiore (1866) anattempt to accept an offer to buy shares after fivemonths failed as the offer had clearly lapsed

bull Death

of the offeror if the offer was of a personal nature

of the offeree

bull Failure of a condition

an express condition or CO

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W7

an implied condition In Financings Ltd v Stimson(1962) it was held that an offer to buy a car lapsedwhen the car was badly damaged on the ground thatthe offer contained an implied term that the carwould remain in the same condition as when the offer was made

Rejection (termination by the offeree)

A rejection may be

bull express

bull implied

A counter offer is an implied rejectionbull Traditionally an acceptance must be a mirror image of

the offer If any alteration is made or anything addedthen this will be a counter offer and will terminate theoffer In Hyde v Wrench (1840) the defendant offered tosell a farm for pound1000 The plaintiff said he would givepound950 for it Held ndash this was a counter offer whichterminated the original offer which was therefore nolonger open for acceptance In Brogden v MetropolitanRailway (1877) the defendant sent to the plaintiff forsignature a written agreement which they hadnegotiated The plaintiff signed the agreement andentered in the name of an arbitrator on a space which hadbeen left empty for this purpose Held ndash the returneddocument was not an acceptance but a counter offer

bull This is particularly important for businesses whocontract by means of sales forms and purchase forms forexample if an order placed by the buyerrsquos purchase formis lsquoacceptedrsquo on the sellerrsquos sales form and the conditionson the back of the two forms are not identical (which theyare very unlikely to be) then the lsquoacceptancersquo is a counter

CA

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8

offer and an implied rejection In Butler Machine Tool CoLtd v Ex-Cell-O Corpn Ltd (1979) the sellers offered to sella machine tool to the buyers for pound75535 on their ownconditions of sale which were stated to prevail over anyconditions in the buyersrsquo order form and whichcontained a price variation clause The buyers lsquoacceptedrsquothe offer on their own order form which stated that theprice was a fixed price and which contained a tear offslip which said lsquowe accept your order on the terms andconditions stated thereonrsquo This was in effect a lsquocounterofferrsquo The sellers signed and returned the slip togetherwith a letter which stated that they were carrying out theorder in accordance with their original offer When theydelivered the machine they claimed the price hadincreased by pound2892 The buyers refused to pay the extrasum Held ndash the contract was concluded on the buyersrsquoterms the signing and returning of the tear-off slip wasconclusive that the sellers had accepted the buyersrsquocounter offer The court analysed the transaction bylooking for matching offer and acceptance

Note ndash a request for further information is not a counteroffer In Stevenson v McLean (1880) the defendant offered tosell to the plaintiff iron at 40s a ton The plaintiff telegraphedto inquire whether he could pay by instalments Held ndash thiswas a mere inquiry for information not a counter offer andso the original offer was not rejected

A conditional acceptance

A conditional acceptance may be a counter offer capable ofacceptance for example I will pay pound500 for your car if youpaint it red If the owner agrees to this condition a contractwill be formed CO

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W9

A valid acceptance must

bull be made while the offer is still in force (see termination ofoffer above)

bull be made by the offeree

bull exactly match the terms of the offer (see counter offersabove)

bull be written oral or implied from conduct In Brogden vMetropolitan Railway (1877) (above) the returneddocument was held to be a counter offer which thedefendants then accepted either by ordering coal fromBrogden or by accepting delivery of the coal (see alsolsquoThe Battle of the Formsrsquo)

However the offeror may require the acceptance to be madein a certain way If the requirement is mandatory it must befollowed

If the requirement is not mandatory then another equallyeffective method will suffice In Manchester Diocesan Councilfor Education v Commercial and General Investments Ltd (1969)an invitation to tender stated that the person whose bid was

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10

The fact of acceptance

An acceptance is a final and unqualified assent to all the terms of the offer

The fact of acceptance

Acceptance

Communication ofacceptance

accepted would be informed by a letter to the address givenin the tender The acceptance was eventually sent not to thisaddress but to the defendantrsquos surveyor Held ndash thestatement in the tender was not mandatory the tender hadtherefore been validly accepted

bull Where the offer is made in alternative terms theacceptance must make it clear to which set of terms itrelates

bull A person cannot accept an offer of which he has noknowledge (Clarke (1927) (Australia))

But a personrsquos motive in accepting the offer is irrelevantIn Williams v Carwardine (1833) (Australia) the plaintiffknew of the offer of a reward in exchange forinformation but her motive was to salve her conscienceHeld ndash she was entitled to the reward

bull lsquoCross-offersrsquo do not constitute an agreement (Tinn vHoffman amp Co (1873))

Communication of acceptance

Acceptance must be communicated by the offeree or hisagent In Powell v Lee (1908) an unauthorised communicationby one of the managers that the Board of Managers hadselected a particular candidate for a headship was held notto be a valid acceptance

Silence as communication

An offeror may not stipulate that silence of the offeree is toamount to acceptance In Felthouse v Bindley (1862) the

CO

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W11

Acceptance must be communicated

plaintiff wrote to his nephew offering to buy a horse andadding lsquoIf I hear no more I will take it that the horse isminersquo The nephew did not reply to this letter Held ndash nocontract Acceptance had not been communicated to theofferor

It has been suggested that this does not mean that silencecan never amount to acceptance for example if in Felthousev Bindley the offeree had relied on the offerorrsquos statementthat he need not communicate his acceptance and wished toclaim acceptance on that basis the court could decide thatthe need for acceptance had been waived by the offeror (seebelow)

Exceptions to the rule that acceptance must be

communicated

bull In a unilateral contract where communication isexpressly or impliedly waived (see Carlill v CarbolicSmoke Ball Co Ltd (above))

bull Possibly where failure of communication is the fault ofthe offeror This was suggested by Lord Denning inEntores Ltd v Miles Far East Corpn (1955)

bull Where the post is deemed to be the proper method ofcommunication In Adams v Lindsell (1818) thedefendants wrote to the plaintiffs offering to sell them aquantity of wool and requiring acceptance by post Theplaintiffs immediately posted an acceptance on 5December Held ndash the contract was completed on 5December

CA

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12

The postal rule

bull Adams v Lindsell (1818) above

bull Acceptance is effective on posting even when the letter islost in the post In Household Fire Insurance Co Ltd v Grant(1879) the defendant offered to buy shares in theplaintiffrsquos company A letter of allotment was posted tothe defendant but it never reached him Held ndash thecontract was completed when the letter was posted

bull Note the difference between acceptance and revocationof an offer by post

Acceptance of an offer takes place when a letter isposted

Revocation of an offer takes place when the letter isreceived

bull Byrne v van Tienhoven (1880) above

Limitations to the postal rule

bull It only applies to acceptances and not to any other typeof communication (for example an offer or a revocation)

bull It only applies to letters and telegrams It does not applyto instantaneous methods of communication such astelex or probably fax or email

bull It must be reasonable to use the post as the means ofcommunication (for example an offer by telephone or byfax might indicate that a rapid method of response wasrequired)

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W13

Acceptance takes place when a letter is postednot when it is received

bull Letters of acceptance must be properly addressed andstamped

bull The rule is easily displaced for example it may beexcluded by the offeror either expressly or impliedly InHolwell Securities Ltd v Hughes (1974) it was excluded bythe offeror requiring lsquonotice in writingrsquo It was alsosuggested by the court that the postal rule would not beused where it would lead to manifest inconvenience

There is no direct English authority on this point

CA

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14

Arguments againstLogic ndash once a letter is posted the offer is accepted there isno provision in law for revoking an acceptance

bull The lsquologicalrsquo view is supported by the New Zealand caseof Wenckheim v Arndt (1878) and the South African case ofA to Z Bazaars (Pty) Ltd v Minister of Agriculture (1974)

Fairness ndash

bull Cheshire argues that it would be unfair to the offeror whowould be bound as soon as the letter was posted whereasthe offeree could keep his options open

Query ndash can a letter of acceptance be cancelled byactual communication before the letter is delivered

Communication by instantaneouselectronic means

bull The rules on telephones and telex were laid down inEntores v Miles (above) and confirmed in Brinkibon Ltd vStahag Stahl (1983) where it was suggested that duringnormal office hours acceptance takes place when themessage is printed out not when it is read The House ofLords however accepted that communication by telexmay not always be instantaneous for example whenreceived at night or when the office is closed

bull Lord Wilberforce stated

lsquoNo universal rule could cover all such cases theymust be resolved by reference to the intention of theparties by sound business practice and in some casesby a judgment of where the risk should liersquo

CO

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W15

Arguments forThere is some support for allowing recall in the Scottishcase of Countess of Dunmore v Alexander (1830)

bull It is argued that actual prior communication of rejectionwould not necessarily prejudice the offeror who bydefinition will be unaware of the lsquoacceptancersquo

bull It is also argued that it would be absurd to insist onenforcing a contract when both parties have acted on therecall This however could be interpreted as anagreement to discharge

Acceptance takes place when and where the message is received

bull It has been suggested that a message sent outsidebusiness hours should be lsquocommunicatedrsquo when it isexpected that it would be read for example at the nextopening of business It is generally accepted that thesame rules should apply to faxes and email as to telex

bull There is no direct authority on telephone answeringmachines It might well be argued that the presence of ananswering machine indicates that communication is notinstantaneous there is a delay between sending andreceiving messages It would then follow that the basicrule should apply that is that acceptance must becommunicated Acceptance therefore would take placewhen the message is actually heard by the offeror

Certainty of terms

The courts will not enforce

CA

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16

Vague agreementsfor example

Scammell v Ouston (1941)

The courts refused toenforce a sale stated to bemade lsquoon hire purchase

termsrsquo neither the rate ofinterest nor the period of

repayment nor the numberof instalments were stated

Incomplete agreementsfor example

lsquoan agreement to make anagreementrsquo will be void

In Walford v Miles (1992) thecourt refused to enforce anlsquoagreement to negotiate in

good faithrsquo

See also May and Butcher v R (1934)

It is for the parties to make their intentions clear

But the uncertainty may be cured by

bull a trade custom where a word has a specific meaning

bull previous dealings between the parties whereby a word orphrase has acquired a specific meaning for exampletimber of lsquofair specificationrsquo in Hillas v Arcos (1932)

bull the contract itself which provides a method for resolvingan uncertainty In Foley v Classique Coaches (1934) therewas an executed contract where the vagueness of lsquoat aprice to be agreedrsquo was cured by a provision in thecontract referring disputes to arbitration Cf May andButcher v R an unexecuted contract where the courtrefused to allow a similar arbitration clause to cure theuncertainty

The courts will strive to find a contract valid where it hasbeen executed

bull The Sale of Goods Act 1979 provides that if no price ormechanism for fixing the price is provided then thebuyer must pay a lsquoreasonable pricersquo but this provisionwill not apply where the contract states that the price islsquoto be agreed between the partiesrsquo

bull Note a lsquolock-out agreementrsquo for example an agreementnot to negotiate with any one else is valid provided it isclearly stated and for a specific length of time This wasapplied by the Court of Appeal in Pitt v PHH AssetManagement (1993) where a promise not to negotiate withany third party for two weeks was enforced

CO

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W17

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W19

2 Consideration and intention

Consideration

Most legal systems will only enforce promises where thereis something to indicate that the promisor intended to bebound that is there is some

Consideration is the normal lsquobadge of enforceabilityrsquo inEnglish law

ReciprocityConsideration

RelianceLord Denning tried to

introduce reliance as basisfor enforcing promisesthrough the doctrine of

promissory estoppel

FormFor example writing English

law will enforce promiseswhich are contained in a

deed (A deed is a document which

is signed and attested andindicates on its face

that it is a deed)

lsquoBadge of

enforceabilityrsquo

Definitions of consideration

Shorter version

Limitation of the definition

bull It makes no mention of why the promisee incurs adetriment or confers a benefit or that the element of abargain is central to the classical notion of considerationFor example in Combe v Combe (1951) it was held thatthere was no consideration for the defendantrsquos promiseto pay his ex-wife pound100 per year even though in relianceon that promise she had not applied to the divorce courtfor maintenance and in that sense she had suffered adetriment The reason why the detriment did notconstitute consideration was that there was no request bythe husband express or implied that she should forbearfrom applying for maintenance There was nolsquoexchangersquo

bull Some writers have preferred to emphasise this elementof bargain and have defined consideration as

CA

VE

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20

A valuable consideration in the eyes of the law mayconsist of (Currie v Misa (1875))

bull either some right interest profit or benefit to oneparty or

bull some forbearance detriment loss orresponsibility given suffered or undertaken bythe other

A benefit to one party or a detriment to the other

lsquothe element of exchange in a contractrsquoor

lsquothe price paid for a promisersquo

bull These definitions however are vague and despite itslimitation the benefitdetriment definition is mostcommonly used

Consideration and condition

Consideration must be distinguished from the fulfilment ofa condition If A says to B lsquoI will give you pound500 if you shouldbreak a legrsquo there is no contract but simply a gratuitouspromise subject to a condition In Carlill v Carbolic Smoke BallCo (1893) the plaintiff provided consideration for thedefendantrsquos promise by using the smoke ball Catchinginfluenza was only a condition of her entitlement to enforcethe promise

Kinds of consideration

bull In Roscorla v Thomas (1842) the defendant promised theplaintiff that a horse which had been bought by him wassound and free from vice It was held that since thispromise was made after the sale had been completedthere was no consideration for it and it could not beenforced In Re McArdle (1951) a promise made lsquoin

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W21

Past consideration that is something already completed before the promise is made cannot

generally amount to consideration

Executed considerationAn act wholly

performed as part of a contract

Executory ConsiderationA promise to do something

in the future

consideration of your carrying out certain improvementsto the propertyrsquo was held by the Court of Appeal to beunenforceable as all the work had been done before thepromise was made

Exceptions to this rule

bull The modern requirements were laid down by LordScarman in Pao On v Lau Yiu Long (1980) Where a serviceis rendered

at the request of the promisor (as in Lampleigh vBraithwait (1615))

on the understanding that a payment will be made (asin Re Caseyrsquos Patents (1892)) and

if the payment would have been legally enforceableif it had been promised in advance

then a subsequent promise to pay a certain sum will beenforced

Note ndash the lsquoinferredrsquo intention to pay makes this a veryflexible exception

Consideration must move from the promisee

bull See Chapter 10 ndash Privity of contract

Consideration need not be adequate

CA

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22

Only a person who has provided consideration for a promise can enforce that promise

The consideration provided by one party need not equal in value the

consideration provided by the other party

It is for the parties themselves to make their own bargainThe consideration need only have lsquosome value in the eyes ofthe lawrsquo (See lsquoConsideration must be sufficientrsquo p 24below)

bull The value may be slight In Chappell Co Ltd v Nestleacute Co Ltd(1960) three wrappers from the defendantrsquos chocolatebars were held to be part of the consideration InMountford v Scott (1975) pound1 was held to be goodconsideration for an option to buy a house

bull Withdrawal of threatened legal proceedings will amountto consideration even if the claim is found to have nolegal basis provided that the parties themselves believethat the claim is valid (Callisher v Bischoffstein (1870))

bull In Pitt v PHH Asset Management (1993) the defendantagreed to a lock-out agreement in return for Pittdropping his claim for an injunction against them Theclaim for an injunction had no merit but had a nuisancevalue and dropping it was therefore good consideration

bull In Alliance Bank v Broome (1964) the bankrsquos forbearance tosue was held to be consideration for the defendantrsquospromise to provide security for a loan

bull In Edmonds v Lawson (2000) it was held that the generalbenefits to chambers of operating a pupillage system wassufficient to provide consideration for contracts withindividual pupils

There is no consideration however where the promises arevague for example lsquoto stop being a nuisance to his fatherrsquo(White v Bluett (1853) but cf Ward v Byham (1956) below) orillusory for example to do something impossible or merelygood for example to show love or affection or gratitude CO

NT

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W23

It has been argued that because the latter are invalidconsideration must have some economic value Buteconomic value is extremely difficult to discern in the othercases cited above Since consideration is a lsquobadge ofenforceabilityrsquo it is argued that nominal consideration isadequate it is only designed to show that the promise isintended to be legally enforceable ndash whether it creates anyeconomic advantage is therefore irrelevant

Consideration must be sufficient

Traditionally the following have no value in the eyes of thelaw

Performing a duty imposed by law

bull For example promising not to commit a crime orpromising to appear in court after being subpoenaed InCollins v Godefroy (1831) a promise to pay a fee to awitness who has been properly subpoenaed to attend a

CA

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24

The consideration must have some value in the eyes of the law

Consideration therefore is found when a person receives whatever he requests

in return for a promise whether or not it has aneconomic value provided it is not too vague

Performing a duty imposed

by law

Performing an existingcontractual duty owed

to the other party

trial was held to have been made without considerationThe witness had a public duty to attend

bull But if a person does or promises to do more than he isrequired to do by law then he is providing considerationIn Glasbrook Bros v Glamorgan CC (1925) the council aspolice authority on the insistence of a colliery owner andin return for a promise of payment provided protectionover and above that required by law Held ndash they hadprovided consideration for the promise to pay

bull In Ward v Byham (1956) the father of an illegitimate childpromised to pay the mother an allowance of pound1 per weekif she proved that the child was lsquowell looked after andhappyrsquo Held ndash the mother was entitled to enforce thepromise because in undertaking to see that the child waslsquowell looked after and happyrsquo she was doing more thanher legal obligation Lord Denning however based hisdecision on the ground that the mother providedconsideration by performing her legal duty to maintainthe child

Treitel agreed with Denning that performance of a dutyimposed by the law can be consideration for a promise Heargues that it is public policy which accounts for the refusalof the law in certain circumstances to enforce promises toperform existing duties Where there are no grounds ofpublic policy involved then a promise given inconsideration of a public duty can be enforced

He cites

bull promises to pay rewards for information leading to thearrest of a felon See Sykes v DPP (1961)

bull Ward v Byham (above) CO

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W25

In most cases it would make no difference whether the courtproceeded on the basis that the matter was one of publicpolicy or a lack of consideration But the former ground doesallow a greater degree of flexibility

Performing an existing contractual duty

Where the duty is owed to the other party this cannot beconsideration for

A request for extra payment

bull In Stilk v Myrick (1809) the captain promised the rest ofcrew extra wages if they would sail the ship back homeafter two sailors had deserted Held ndash the crew werealready bound by their contract to meet the normalemergencies of the voyage and were doing no more thantheir original contractual duty in working the ship home

bull Where the promisor however performs more than hehad originally promised then there can be considerationIn Hartley v Ponsonby (1857) nearly half the crewdeserted This discharged the contracts of the remainingsailors as it was dangerous to sail the ship home withonly half the crew The sailors were therefore free to makea new bargain so the captainrsquos promise to pay themadditional wages was enforceable

Exceptions to the rule in Stilk v Myrick

Factual advantages obtained by the promisorIn Williams v Roffey Bros (1991) the defendants (the maincontractors) were refurbishing a block of flats They sub-

CA

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26

A request for extra payment

A request to avoid part of a debt

contracted the carpentry work to the plaintiff The plaintiffran into financial difficulties whereupon the defendantsagreed to pay the plaintiff an additional sum if theycompleted the work on time Held ndash where a party to anexisting contract later agrees to pay an lsquoextra bonusrsquo in orderthat the other party performs his obligations under theoriginal contract then the new agreement is binding if theparty agreeing to pay the bonus has thereby obtained somenew practical advantage or avoided a disadvantage In thisparticular case the advantage was the avoidance of apenalty clause and the expense of finding new carpenters

bull Note ndash Stilk v Myrick (above) recognises as considerationonly those acts which the promisee was not under a legalobligation to perform Williams v Roffey Bros (above) addsto these factual advantages obtained by the promisor

bull This decision pushes to the fore the principles ofeconomic duress as a means of distinguishing enforceableand unenforceable modifications to a contract (seeChapter 5 on economic duress p 87)

Duties owed to third partyWhere a duty is owed to a third party its performance canalso be consideration for a promise by another It is clear thatthe third party is getting something more than he is entitledto

bull In Shadwell v Shadwell (1860) an uncle promised to pay anannual sum to his nephew on hearing of his intendedmarriage The fact of the marriage providedconsideration although the nephew was already legallycontracted to marry his fianceacutee

bull In Scotson v Pegg (1861) A agreed to deliver coal to Brsquosorder B ordered A to deliver coal to C who promised A to

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W27

unload it Held ndash A could enforce Crsquos promise as Arsquosdelivery of the coal was good considerationnotwithstanding that he was already bound to do so byhis contract with B

bull In New Zealand Shipping Co v Satterthwaite amp Co Ltd TheEurymedon (1975) it was held by the Privy Council thatwhere a stevedore at the request of the consignee ofcertain goods removed the goods from a ship this wasconsideration for the promise by the consignee to give thestevedore the benefit of an exclusion clause although thestevedore in removing the goods was only performingcontractual duties he owed to the carrier

A request to avoid part of a debt

If a creditor is owed pound100 and agrees to accept pound90 in fullsettlement he can later insist on the remaining pound10 beingpaid as there is no consideration for his promise to waive thepound10 (the rule in Pinnelrsquos Case (1602))

bull This rule was confirmed by the House of Lords in Foakesv Beer (1884) Dr Foakes was indebted to Mrs Beer on ajudgment sum of pound2090 It was agreed by Mrs Beer thatif Foakes paid her pound500 in cash and the balance of pound1590in instalments she would not take lsquoany proceedingswhatsoeverrsquo on the judgment Foakes paid the moneyexactly as requested but Mrs Beer then proceeded toclaim an additional pound360 as interest on the judgment debtFoakes refused and when sued pleaded that his duty topay interest had been discharged by the promise not tosue Their Lordships deferred as to whether on its trueconstruction the agreement merely gave Foakes time to

CA

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28

Basic rule payment of a smaller sum will not discharge the duty to pay a higher sum

pay or was intended to cover interest as well But theyheld even on the latter construction there was noconsideration for the promise and that Foakes was stillbound to pay the additional sum

There are situations however where payment of a smallersum will discharge the liability for the higher sum

bull where the promise to accept a smaller sum in fullsettlement is made by deed or in return forconsideration

bull where the original claim was not for a fixed sum or theamount is disputed in good faith

bull where the debtor does something different for examplewhere payment is made at the creditorrsquos request

at an earlier time

at a different place

by a different method (it was held in D amp C BuildersLtd v Rees (1966) that payment by cheque is notpayment by a different method)

bull where payment is accompanied by a benefit of somekind

bull in a composition agreement with creditors

bull where payment is made by a third party (see HirachandPunachand v Temple (1911))

It has been argued that to allow the creditor to sue for theremaining debt would be a fraud on the third parties in thelast two cases above

Note ndash the doctrine of promissory estoppel under certaincircumstances may allow payment of smaller sum todischarge liability for the larger sum

CO

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W29

In Re Selectmove (1995) the Court of Appeal refused toextend the principle laid down in Williams v Roffey Bros topart payment of a debt The company had offered to pay itsarrears by instalments to the Inland Revenue who said thatthey would let them know if this was acceptable They heardnothing further but paid some instalments and thenreceived a threat of being wound up if the full arrears werenot paid immediately The court was not prepared to allowWilliams v Roffey Bros to overturn a rule laid down by theHouse of Lords in Foakes v Beer

Promissory estoppel

There are problems with regard to

Origins

bull It was introduced (obiter) by Lord Denning in the CentralLondon Property Trust Ltd v High Trees House Ltd (1947)where owners of a block of flats had promised to acceptreduced rents in 1939 There was no consideration fortheir promise but Lord Denning nevertheless stated thathe would estop them from recovering any arrears Hebased his statement on the decision in Hughes vMetropolitan Railway (1877)

CA

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30

If a promise intended to be binding andintended to be acted upon is acted upon then the court will not allow the promisor

to go back on his promise

the origins ofthe doctrine

the scope ofthe doctrine

the effect of the doctrine

bull It would however seem to conflict with the House ofLordsrsquo decision in Jorden v Money (1854) where it wasstated that estoppel applied only to statements of fact andnot to promises and also with the decision in Foakes vBeer (1884) where the House of Lords confirmed thatpayment of a smaller sum will not discharge the liabilityfor a larger sum

Scope

bull It only applies to the modification or discharge of anexisting contractual obligation It cannot create a newcontract See Combe v Combe (1951) above (However itwas used to create a new right of action in the Australiancase of Waltons v Maher (1988))

bull It can be used only as a lsquoshield and not a swordrsquo

bull The promise not to enforce rights must be clear andunequivocal In The Scaptrade (1983) the mere fact of nothaving enforced onersquos full rights in the past was notsufficient

bull It must be inequitable for the promisor to go back on hispromise In D amp C Builders v Rees (1966) Mrs Rees had forced the builders to accept her cheque by inequitable means and so could not rely on promissory estoppel

bull The promisee must have acted in reliance on the promisealthough not necessarily to his detriment (Alan amp Co Ltdv El-Nasr Export and Import Co (1972))

CO

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W31

The exact scope of the doctrine is a matter ofdebate but certain requirements must be met

Effect of the doctrine

bull In Tool Metal Manufacturing Co v Tungsten Electric Co(1955) the owner of a patent promised to suspendperiodic payments during the war It was held by theCourt of Appeal that the promise was binding for theduration of the war but the owners could on givingreasonable notice at he end of the war revert to theiroriginal legal entitlements

bull In Ajayi v Briscoe (1964) the Privy Council stated that thepromisee could resile from his promise on givingreasonable notice which allowed the promisee areasonable opportunity of resuming his position but thatthe promise would become final if the promisee could notresume his former position

On one interpretation these cases show that as regardsexisting or past obligations it is extinctive but as regardsfuture obligations it is suspensory

On another interpretation the correct approach is to look atthe nature of the promise If it was intended to bepermanent then the promiseersquos liability will beextinguished

Lord Denning consistently asserted that promissoryestoppel can extinguish debts However this view iscontrary to Foakes v Beer

The view that promissory estoppel is suspensory onlywould reconcile it with the decisions in Jorden v Money

CA

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32

It is not clear whether the doctrine extinguishesrights or merely suspends them

Foakes v Beer and Pinnelrsquos Case but it would deprive it of mostof its usefulness

The question of whether the doctrine is suspensory orextinctive is particularly important with regard to singlepayments

Intention to be legally bound

This presumption may be rebutted but the onus of proof ison the party seeking to exclude legal relations In EssoPetroleum Co Ltd v Commissioners of Customs and Excise (1976)Esso promised to give one world cup coin with every fourgallons of petrol sold A majority of the House of Lordsbelieved that the presumption in favour of legal relationshad not been rebutted

Examples of rebuttals

bull lsquoThis arrangement is not entered into as a formal orlegal agreement and shall not be subject to legaljurisdiction in the law courtsrsquo (Rose and Frank v CromptonBros (1925))

bull Agreement to be binding lsquoin honour onlyrsquo (Jones v VernonPools (1939))

CO

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W33

Commercial andbusiness

agreements

Social anddomestic

agreements

In commercial and business agreements there is a presumption that the parties

intend to create legal relations

bull Letters of comfort for example statements to encouragelending to an associated company It was held inKleinwort Benson Ltd v Malaysia Mining Corpn (1989) thatthe defendantrsquos statement that lsquoit is our policy to ensurethat the business is at all times in a position to meet itsliabilities to yoursquo was a statement of present fact and nota promise for the future As such it was not intended tocreate legal relations

bull Collective agreements are declared not to be legallybinding by the Trade Unions and Labour Relations(Consolidation) Act 1992 unless expressly stated inwriting to be so

This can be rebutted by evidence to the contrary forexample

bull Agreements between husband and wife In Balfour vBalfour (1919) the court refused to enforce a promise bythe husband to give his wife pound50 per month whilst he wasworking abroad However the court will enforce a clearagreement where the parties are separating or separated(Merritt v Merritt (1970))

bull Agreements between members of a family In Jones vPadavatton (1969) Mrs Jones offered a monthly allowanceto her daughter if she would come to England to read forthe Bar Her daughter agreed but was not very successfulMrs Jones stopped paying the monthly allowance butallowed her daughter to live in her house and receive therents from other tenants Mrs Jones later sued forpossession The daughter counterclaimed for breach of

CA

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34

In social and domestic agreements there is a presumption against legal relations

the agreement to pay the monthly allowance andor for accommodation Held (a) the first agreement may havebeen made with the intention of creating legal relationsbut was for a reasonable time and would in any case havelapsed (b) the second agreement was a familyarrangement without an intention to create legalrelations It was very vague and uncertain

bull An intention to be legally bound may be inferred where

one party has acted to his detriment on theagreement (Parker v Clark (1960)) or

a business arrangement is involved (Snelling vSnelling (1973)) or

there is mutuality (Simpkins v Pays (1955))

But in all such cases the agreement must be clear

CO

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RA

CT

LA

W35

CO

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W37

3 Contents of a contract

Once a contract has been formed it is necessary to explorethe scope of the obligations which each party incurs

(Incorporation of terms is covered in Chapter 4)

The distinction between terms and mere

representations

Is a statement part of the contract Statements made duringnegotiations leading to a contract may be either

bull Terms

that is statements which form the express terms of thecontract As such they constitute promises as to thepresent truth of the statement or as to future action Ifsuch a promise is broken (for example because thestatement is untrue) this will involve a breach of contractor

Different weighting may be given to different terms

Distinction between termsand mere representations

Interpretation of expressterms

Identification of impliedterms

This involves

bull Mere representations

that is statements which do not form part of the contractbut which helped to induce the contract If these areuntrue they are lsquomisrepresentationsrsquo

Now that damages can be awarded for negligent misrepresentation the distinction has lost much of itsformer significance but there are still some importantconsequences

In trying to ascertain such intention the court may take intoaccount the following factors

The importance of the statement to the parties

bull In Bannerman v White (1861) the buyer stated lsquoif sulphurhas been used I do not want to know the pricersquo Held ndasha term Similarly in Couchman v Hill (1947) the buyerasked if the cow was in calf stating that if she was hewould not bid The auctioneerrsquos reply that she was not incalf was held to be a term overriding the printedconditions which stated that no warranty was given

The respective knowledge of the parties

bull In Oscar Chess Ltd v Williams (1957) it was held that astatement by a member of the public (a non expert) to agarage (an expert) with regard to the age of a car was amere representation not a term On the other hand astatement made by a garage (an expert) to a member ofthe public (a non-expert) concerning the mileage of a carwas held to be a term (Dick Bentley Productions Ltd vHarold Smith (Motors) Ltd (1965))

CA

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ND

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38

Whether a statement has become a term of thecontract depends on the intention of the parties

The manner of the statement

bull For example if it suggests verification (Ecay v Godfrey(1947)) it is unlikely to be a term If it discouragesverification lsquoIf there was anything wrong with the horseI would tell yoursquo (Schawel v Reade (1913)) it is more likelyto be a term

Where a contract has been reduced to writing

The terms will normally be the statements incorporated intothe written contract (Routledge v McKay (1954))

bull But a contract may be partly oral and partly written (seeCouchman v Hill (1947) above) In Evans amp Sons Ltd vAndrea Merzario Ltd (1976) an oral assurance thatmachinery would be stowed under not on the deck washeld to be a term of a contract although it was notincorporated into the written terms The court held thatthe contract was partly oral and partly written and insuch hybrid circumstances the court was entitled to lookat all the circumstances

bull Note ndash the discovery of a collateral contract mayovercome the difficulties of oral warranties in writtencontracts In City of Westminster Properties v Mudd (1959)a tenant signed a lease containing a covenant to use thepremises for business premises only He was induced tosign by a statement that this clause did not apply to himand that he could continue to sleep on the premises Thecourt found that his signing the contract was con-sideration for this promise thus creating a collateralcontract In Evans amp Son Ltd v Andrea Merzario Ltd (1976)Lord Denning considered the oral statement to be acollateral contract In Esso Petroleum Co v Mardon (1976)the court held that the statement by a representative of C

ON

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39

Esso with regard to the throughput of a petrol station wascovered by an implied collateral warranty that thestatement had been made with due care and skill

bull The use of a collateral contract will not be possiblehowever if the main contract contains an appropriatelyworded lsquoentire agreementrsquo clause (The Inntrepreneur PubCo (GL) v East Crown Ltd (2000))

Identification of express terms

bull See incorporation of terms in Chapter 4 p 54

Interpretation of express terms of a contract

Oral contracts

The contents is a matter of evidence for the judge Theinterpretation will be undertaken by applying an objectivetest that is what would a reasonable person haveunderstood to have been meant by the words used (Thake vMaurice (1986))

Written contracts

If a contract is reduced to writing then under the lsquoparolevidencersquo rule oral or other evidence extrinsic to thedocument is not normally admissible to lsquoadd to vary orcontradictrsquo (Jacobs v Batavia and General Plantations Trust(1924)) the terms of the written agreement

Exceptions to the parol evidence rule

bull to show that the contract is not legally binding forexample because of mistake or misrepresentation

bull to show that the contract is subject to a lsquoconditionprecedentrsquo In Pym v Campbell (1856) oral evidence was

CA

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40

admitted to show that a contract was not to come intooperation unless a patent was approved by a third party

bull to establish a custom or trade usage (Hutton v Warren(1836) see below)

bull to establish that the written contract is not the wholecontract It is presumed that lsquoa document which lookslike a contract is the whole contractrsquo but this isrebuttable See Couchman v Hill (1947) and Evans v AndreaMerzario (above)

bull a contract may be contained in more than one document(Jacobs v Batavia Plantation Trust Ltd (1924))

bull to establish a collateral contract (City of WestminsterProperties Ltd v Mudd (1959) Evans amp Son Ltd v AndreaMerzario Ltd (1976))

The Law Commission recommended in 1976 that the lsquoparolevidencersquo rule be abolished However in view of the wideexceptions to the rule it recommended in 1986 that no actionneed be taken

Identification of implied terms

In addition to the terms which the parties have expresslyagreed a court may be prepared to hold that other termsmust be implied into the contract Such terms may beimplied by

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W41

Custom Statute The courts

Custom

A contract may be deemed to incorporate any relevantcustom of the market trade or locality in which the contractis made In Hutton v Warren (1836) a tenant established aright to fair allowance for improvements to the land througha local custom

Statute

Parliament as a matter of public policy has in variousinstances seen fit to imply terms into contracts for example

Terms implied into all sales

bull that the seller has the right to sell the goods

bull that goods sold by description correspond with thedescription

Terms implied only into sales by way of business

bull that the goods are of satisfactory quality

Goods are of a satisfactory quality if they meet thestandard that a reasonable person would regard assatisfactory taking account of any description of thegoods the price if relevant and all other relevantcircumstances In particular it will be necessary toconsider their

fitness for all purposes for which goods of that kindare commonly supplied

appearance and finish

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42

The Sale of Goods Act 1979 which impliesthe following terms into contracts

for the sale of goods

freedom from minor defects

safety and

durability

This term does not apply to matters specifically drawn tothe buyerrsquos attention before the contract is made orwhere the buyer examines the goods defects which thatexamination should have revealed

bull that the goods are fit for any special purpose madeknown to the seller

bull that goods sold by sample correspond with the sample

bull In contracts of service there is an implied term that theservice will be carried out with reasonable care and skillwithin a reasonable time and for a reasonable price

In Wilson v Best (1993) it was held that the duty of a travelagent under this provision extended to checking that thelocal safety regulations had been complied with It did notrequire them to ensure that they complied with UKregulations

The courts

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W43

Terms implied in fact Terms implied in law

The Supply of Goods and Services Act 1982implies similar terms into contracts of hire contracts for work and materials and other

contracts not covered by the Sale of Goods Act

Terms implied in fact

When interpreting terms implied in fact the court seeks togive effect to the unexpressed intention of the parties Thereare two tests A term may be implied because

bull It is necessary to give business efficacy to the contract InThe Moorcock (1889) a term was implied that the riverbedwas in a condition that would not damage a shipunloading at the jetty

bull It satisfies the lsquoofficious bystanderrsquo test that is if abystander suggested a term the parties would respondwith a common lsquoof coursersquo In Spring v NASDS (1956) theunion tried to imply the lsquoBridlington Agreementrsquo Thecourt refused on the basis that if an lsquoofficious bystanderhad suggested this the plaintiff would have repliedldquoWhatrsquos thatrdquorsquo

The Moorcock doctrine is used in order to make the contractworkable or where it was so obvious that the parties musthave intended it to apply to the agreement It will not beused merely because it was reasonable or because it wouldimprove the contract

It was suggested in Shell UK Ltd v Lostock Garages Ltd (1977)that the courts will be reluctant to imply a term where theparties have entered into a detailed and carefully draftedwritten agreement

Terms implied in law

bull When terms are implied in law they are implied into allcontracts of a particular kind Here the court is not tryingto put into effect the parties intention but is imposing anobligation on one party often as a matter of public policyFor example the court implies into all contracts ofC

AV

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S44

employment a term that the employee will carry out hiswork with reasonable care and skill and will indemnifyhis employer against any loss caused by his negligence(Lister v Romford Ice Cold Storage Co (1957))

bull In these cases the implication is not based on thepresumed intention of the parties but on the courtrsquosperception of the nature of the relationship between theparties and whether such an implied term wasreasonable

bull In Liverpool CC v Irwin (1977) the tenants of a block ofcouncil flats failed to persuade the court to imply a termthat the council should be responsible for the commonparts of the building on the Moorcock or lsquoofficiousbystanderrsquo test but succeeded on the basis of the Listertest that is the term should be implied in law in that theagreement was incomplete it involved the relationshipof landlord and tenant and it would be reasonable toexpect the landlord to be responsible for the commonparts of the building

Classification of terms

There is a very important distinction between those terms ofa contract which entitle an innocent party to terminate(rescind or treat as discharged) a contract in the event of a

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W45

Conditions Warranties Innominate terms

breach and those which merely enable a person to claimdamages

Traditionally a distinction has been made in English lawbetween

Conditions

bull The Sale of Goods Act 1979 designates certain impliedterms for example re satisfactory quality as conditions ndashthe breach of which entitles the buyer to terminate (ortreat as discharged) the contract

bull In Poussard v Spiers and Pond (1876) a singer failed to takeup a role in an opera until a week after the season hadstarted Held ndash her promise to perform as from the firstperformance was a condition ndash and its breach entitled themanagement to treat the contract as discharged

Warranties

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46

Contractual terms concerning the less importantor subsidiary statements of facts or promisesIf a warranty is broken this does not entitle

the other party to terminate (or treat asdischarged) the contract it merely entitles

him to sue for damages

Statements of fact or promises which form theessential terms of the contract If the statement is not true or the promise is not fulfilled the

injured party may terminate (or treat as discharged) the contract and claim damages

bull The Sale of Goods Act 1979 designates certain terms aswarranties breach of which do not allow the buyer totreat the contract as discharged but merely to sue fordamages for example the right to quiet enjoyment

bull In Bettini v Gye (1876) a singer was engaged to sing for awhole season and to arrive six days in advance to takepart in rehearsals He only arrived three days in advanceHeld ndash the rehearsal clause was subsidiary to the mainclause It was only a warranty The management wastherefore not entitled to treat the contract as dischargedThey should have kept to the original contract andsought damages for the three daysrsquo delay

Innominate or intermediate terms

bull In Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha(1962) it was suggested by the Court of Appeal that itwas not enough to classify terms into conditions andwarranties Regard should also be had to the characterand nature of the breach which has occurred In HongKong Fir the defendants chartered the vessel Hong KongFir to the plaintiffs for 24 months the charter partyprovided that the ship was lsquofitted in every way forordinary cargo servicersquo The vessel spent less than nineweeks of the first seven months at sea because ofbreakdowns and the consequent repairs which werenecessary

CO

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W47

On the facts this was not the case because the charter partystill had a substantial time to run

After the Hong Kong Fir case in 1962 there was someconfusion as to whether the breach based test which appliedto innominate terms had replaced the term based test whichrelied on the distinction between conditions and warrantiesor merely added to it an alternative in certain circumstances

bull In the Mihalis Angelos (1970) the Court of Appeal revertedto the term based test The owners of a vessel stated thatthe vessel was lsquoexpected ready to loadrsquo on or about 1 JulyIt was discovered that this was not so Held ndash the termwas a condition ndash the charterers could treat the contract as discharged

In 1976 two cases were decided on the breach based principle

bull In Cehave v Bremer Handelsgesellshaft MBH The Hansa Nord(1976) the seller had sold a cargo of citrus pellets with aterm in the contract that the shipment be made in goodcondition The buyer rejected the cargo on the basis thatthis term had been broken The defect however was notserious and the court held that although the Sale ofGoods Act had classified some terms as conditions andwarranties it did not follow that all the terms had to be soclassified Accordingly the court could consider the effect

CA

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48

Held ndash the term was neither a condition nor awarranty and in determining whether the

defendants could terminate the contract it wasnecessary to look at the consequences of the

breach to see if it deprived the innocent party ofsubstantially the whole benefit he should

have received under the contract

of the breach since this was not serious the buyer hadnot been entitled to reject

bull In Reardon Smith v Hansen Tangen (1976) an oil tanker wasdescribed as lsquoOsaka No 354rsquo where in fact it was lsquoOshimaNo 004rsquo but was otherwise exactly as specified Becausethe market for oil tankers had collapsed the chartererssought to argue that the number was a condition whichwould enable them to repudiate the contract The Houseof Lords rejected this argument Held ndash the statement wasan innominate term not a condition since the effect ofthe breach was trivial it did not justify termination of thecontract

bull Note ndash the time for determining whether a clause was acondition or an innominate term is at the time ofcontracting ndash not after the breach

Traditionally a term is a condition if it has been establishedas such

bull By statute ndash for example the Sale of Goods Act 1979

bull By precedent after a judicial decision In The MihalisAngelos (1970) the Court of Appeal held that thelsquoexpected readinessrsquo clause in a charter party is acondition

bull By the intention of the parties The court must ascertainthe intention of the parties If the wording clearly revealsthat the parties intended that breach of a particular termshould give rise to a right to rescind that term will beregarded as a condition In Lombard North Central vButterworth (1987) the Court of Appeal held thatcontracting parties can provide expressly in the contractthat lsquospecific breaches could terminate the contractrsquo Inthat case the contract included an express clause that the

CO

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W49

time for payment of instalments was lsquoof the essence of thecontractrsquo An accountant had contracted to hire acomputer for five years agreeing to make an initialpayment and 19 quarterly rental payments He was latein paying some instalments and the owners terminatedthe agreement recovered possession of the computerand claimed damages not only for the arrears but also forloss of future instalments The claim succeeded becausethe contract specifically stated that the time of paymentof each instalment was to be of the essence of the contract

Note the mere use of the word lsquoconditionrsquo is not conclusive

In Schuler v Wickman Tool Sales Ltd (1974) the House of Lordsheld that breach of a lsquoconditionrsquo that a distributor shouldvisit six customers every week could not have been intendedto allow rescission The word lsquoconditionrsquo had not been usedin this particular sense There was in the contract a separateclause which indicated when and how the contract could beterminated

bull By the court ndash deciding according to the subject matter ofthe contract (see Poussard v Spiers (1876) and Bettini v Gye(1876) above)

CA

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50

If a term is not a condition then the lsquowait and seersquotechnique can be used to decide if the gravity of

the breach is such that it deprivedthe innocent party of substantially the whole

benefit of the contract If so ndash then the innocentparty can terminate the contract

(innominate or intermediate term)

Certainty and flexibility

Certainty

bull The term based test is alleged to have the advantage ofpredictability and certainty It is important for the partiesto know their legal rights and liabilities as regards theavailability of termination The character of all terms isascertainable at the moment the contract is concludedNothing that happens after its formation can change thestatus of a term If the term is a condition then the partieswill know that its breach allows the other party toterminate But there can still be uncertainty where theparties have to await the courtrsquos decision on the nature ofthe term

bull The advantage of certainty is however balanced by thefact that it is possible to terminate a contract on atechnicality for sometimes a very minor breach

Flexibility

bull The breach based test is stated to bring flexibility to thelaw Instead of saying that the innocent party can in thecase of a condition always terminate or in the case of awarranty never terminate innominate terms allow thecourts to permit termination where the circumstancesjustify it and the consequences are sufficiently serious

bull It is however more difficult for the innocent party toknow when he has the right to terminate or for the partyin breach to realise in advance the consequence of hisaction

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W51

Note the distinction between the different types of contract terms remains of

considerable importance

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W53

4 Exemption (exclusion or limitation) clauses

A total exclusion is referred to as an exclusion clause apartial exclusion is known as a limitation clause

Exemption clauses are most commonly found in standardform contracts

To be valid an exemption clause must satisfy the tests set bythe

Common law requirements

A clause which purports to exclude wholly or inpart liability for a breach of contract or a tort

Common lawUnfair Contract

Terms Act (UCTA)1977

Regulations onUnfair Terms in ConsumerContracts 1999

The term must be incorporated into the

contract

The wording mustcover what actually

happened

Incorporation

bull This requirement applies to all terms but has beeninterpreted strictly in the case of exemption clauses

A term may be incorporated into a contract by being

Contained in a signed document

In LrsquoEacutestrange v Graucob Ltd (1934) the plaintiff had signed acontract of sale without reading it Held ndash she was bound bythe terms which contained an exemption clause

ExceptionsWhere the offeree has been induced to sign as a result ofmisrepresentation

bull In Curtis v Chemical Cleaning Co (1951) the plaintiffsigned a lsquoreceiptrsquo when she took a dress to be cleaned onbeing told that it was to protect the cleaners in case ofdamage to the sequins In fact the clause excludedliability for all damage Held ndash the cleaners were notprotected for damage to the dress the extent of theclause had been misrepresented and therefore thecleaners could not rely on it

bull lsquoNon est factumrsquo (see p 106 below)

Contained in an unsigned document (ticket cases)

bull This must be seen to be a contractual document

In Chapelton v Barry UDC (1940) on hiring a deckchair the plaintiff was given a ticket with only alarge black 3d on the face of the ticket and exclusionclauses on the back Held ndash the defendants could notrely on the exclusion clauses as it was not apparenton the face of it that the ticket was a contractualdocument rather than just a receipt

CA

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54

bull Reasonable notice of the term must be given

In Parker v South Eastern Railway Co (1877) theplaintiff received a ticket which stated on the facelsquosee backrsquo Held ndash as long as the railway companyhad given reasonable notice of the exemptionclausersquos existence it did not matter that the plaintiffhad not read the clause

In Thompson v London Midland and Scottish Railway(1930) the ticket indicated that the conditions of thecontract could be seen at the station masterrsquos office oron the timetable The exemption clause was in clause552 of the timetable which cost sixpence ndash the ticketitself only cost two and sixpence In the circumstancesnevertheless reasonable notice had been given

The test is objective and it is irrelevant that the partyaffected by the exemption clause is blind or illiterateor otherwise unable to understand it (Thompson vLMS above)

But in Geir v Kujawa (1970) a notice in English wasstuck on the windscreen of a car stating thatpassengers travelled at their own risk A Germanpassenger who was known to speak no English washeld not to be bound by the clause as reasonable carehad not been taken to bring it to his attention

bull Attention must be drawn to any unusual clause

In Thornton v Shoe Lane Parking (1971) it was statedthat a person who drives his car into a car park mightexpect to find in his contract a clause excludingliability for loss or damage to the car but specialnotice should have been given of a clause purportingto exclude liability for personal injury

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W55

In Interfoto Picture Library v Stiletto Visual Programmes(1989) the Court of Appeal confirmed that onerousconditions required special measures to bring them tothe attention of the defendant The clause in that casewas not an exemption clause but a clause imposingcharges 10 times higher than normal The Court ofAppeal stated that the more unusual the clause thegreater the notice required

bull Notice of the term must be communicated to the otherparty before or at the time that the contract is enteredinto

In Thornton v Shoe Lane Parking Ltd (1971) the plaintiffmade his contract with the car company when heinserted a coin in the ticket machine The ticket wasissued afterwards and in any case referred toconditions displayed inside the car park which hecould see only after entry Notice therefore came toolate

bull The rules of offer and acceptance and the distinctionsbetween offers and invitations to treat must be consultedin order to ascertain when the contract was madeProblems with regard to incorporation can arise in atypical lsquoBattle of the Formsrsquo problem See Butler MachineTool Ltd v Ex-Cell-O Corpn (Chapter 1)

Notice by display

Notices exhibited in premises seeking to exclude liability forloss or damage are common for example lsquocar parked atownerrsquos riskrsquo and must be seen before or at the time of entryinto contract

bull In Olley v Marlborough Court Hotel (1949) Mr and MrsOlley saw a notice on the hotel bedroom wall which

CA

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56

stated lsquothe proprietors will not hold themselvesresponsible for articles lost or stolen unless handed tothe manageress for safe keepingrsquo The contract had beenentered into on registration and the clause was thereforenot incorporated into the contract and could not protectthe proprietors

Notice by a lsquocourse of dealingrsquo

bull If there has been a course of dealing between the partiesthe usual terms may be incorporated into the contractalthough not specifically drawn to the attention of theparties each time a contract is made

In Spurling v Bradshaw (1956) Bradshaw deposited someorange juice in Spurlingrsquos warehouse The contractualdocument excluding liability for loss or damage was notsent to Spurling until several days after the contract Held ndashthe exclusion clauses were valid as the parties had alwaysdone business with each other on this basis

bull Note ndash the transactions must be sufficiently numerous toconstitute a course of dealings The established course ofdealings must be consistent The established course ofdealings must not have been deviated from on the occasion in question

In Hollier v Rambler Motors (1972) the Court of Appeal heldthat bringing a car to be serviced or repaired at a garage onthree or four occasions over a period of five years did notestablish a course of dealings

Notice through patent knowledge

bull In British Crane Hire Corpn v Ipswich Plant Hire (1975) theowner of a crane hired it out to a contractor who was alsoengaged in the same business It was held that the hirer

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W57

was bound by the ownerrsquos usual terms though they werenot actually communicated at the time of the contractThey were however based on a model supplied by atrade association to which both parties belonged It wasstated that they were reasonable and were well known inthe trade

Oral contracts

bull Whether a clause has been incorporated into an oralcontract is a matter of evidence for the court (McCutcheonv MacBrayne (1964))

On a proper construction the clause covers the loss

in question

bull An exclusion clause is interpreted contra proferentem thatis any ambiguity in the clause will be interpreted againstthe party seeking to rely on it

in Houghton v Trafalgar Insurance Co Ltd (1954) it washeld that the word lsquoloadrsquo could not refer to people

in Andrews Bros v Singer amp Co Ltd (1934) an exclusionreferring to implied terms was not allowed to cover aterm that the car was new as this was an express term

It was however suggested by the House of Lords inPhoto Production Ltd v Securicor Ltd (1980) that any needfor a strained and distorted interpretation of contracts inorder to control the effect of exemption clauses had beenreduced by the UCTA

bull Especially clear words must be used in order to excludeliability for negligence for example the use of the wordlsquonegligencersquo or the phrase lsquohowsoever causedrsquo (Smith vSouth Wales Switchgear Ltd (1978))

CA

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58

But if these words are not used provided the wording iswide enough to cover negligence and there is no otherliability to which they can apply then it is assumed thatthey must have been intended to cover negligence(Canada Steamship Lines v The King (1952))

bull It was stated in Ailsa Craig Fishing Co v Malvern Fishing Co(1983) that limitation clauses may be interpreted lessrigidly than exclusion clauses

bull Only a party to a contract can rely on an exclusion clause(See Chapter 10)

bull Especially clear words are required when the breach is ofa fundamental nature In the past Lord Denning andothers argued that it was not possible to exclude breachesof contract which were deemed to be fundamental byany exclusion clause however widely and clearlydrafted

However the House of Lords confirmed in Photo ProductionLtd v Securicor Ltd (1980) that the doctrine of fundamentalbreach was a rule of construction not a rule of law that isliability for a fundamental breach could be excluded if thewords were sufficiently clear and precise

The House also stated that

bull the decision in Harbuttrsquos Plasticine Ltd v Wayne Tank andPump Co (1970) was not good law In that case the Courtof Appeal had held that as a fundamental breach broughta contract to an end there was no exclusion clause left toprotect the perpetrator of the breach

bull there is no difference between a lsquofundamental termrsquo anda lsquoconditionrsquo C

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59

bull a strained construction should not be put on words in anexclusion clause which are clearly and fairly susceptibleof only one meaning

bull where the parties are bargaining on equal terms theyshould be free to apportion risks as they wish

bull the courts should be wary of interfering with the settledpractices of business people as an exclusion clause oftenserves to identify who should insure against a particularloss

Unfair Contract Terms Act 1977

Note ndash the title is misleading

bull The Act does not cover all unfair contract terms onlyexemption clauses

bull The Act covers certain tortious liability as well ascontractual liability The following must be examined

CA

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60

Clauses whichare void

Clauses which are valid only if reasonable

The meaning of lsquoreasonablersquo

Scope of the Act

Scope of the Act

bull s 1 ndash the Act applies to contracts made after 1 February1978 which arise in the course of business lsquoBusinessrsquoincludes a profession and the activities of anygovernment department andor public or localauthority

bull s 5 ndash contracts specifically excluded include contracts ofinsurance contracts for the transfer of land andinternational commercial contracts

bull s 13 ndash the Act limits the effectiveness of clauses thatexclude or restrict liability It also covers clauses whichmake it difficult to enforce a contract for example byimposing restrictive time limits or which excludeparticular remedies In Stewart Gill v Horatio Myer and Co(1992) it was held that a clause restricting a right of set-off or counterclaim was subject to the Act It was alsoheld in Smith v Bush (1990) that it covered lsquodisclaimerswhich restrictively defined a partyrsquos obligation under acontractrsquo In that case a valuation was stated to be givenlsquowithout any acceptance of liability for its accuracyrsquo

Negligence

bull The Act covers contractual tortious and statutory (that isunder the Occupiersrsquo Liability Act 1957) negligence

bull The difference between excluding liability for negligenceand transferring liability for negligence is seen in PhillipsProducts v Hyland Bros (1987) where the contracttransferred liability for the negligence of the driver of ahired excavator to the hirer The driver negligentlydamaged property belonging to the hirer Held ndash theclause was an exclusion clause and was subject to UCTA

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W61

bull In Thompson v Lohan (Plant Hire) (1987) on the otherhand an excavator and driver were hired under the sameconditions The driver negligently killed a third partyHeld ndash the clause transferring liability to the hirer was notan exclusion clause in this case as the third party was ableto sue the hirer It was merely a clause transferring liability

Misrepresentation

bull The difference between excluding liability formisrepresentation and defining the powers of an agent isseen in Cremdean Properties v Nash (1977) where a clausein the special conditions of sale stating that thelsquoparticulars were believed to be correct but theiraccuracy is not guaranteedrsquo was held to be an exclusionclause

bull In Collins v Howell Jones (1980) however the Court ofAppeal held a statement that the lsquovendor does not makeor give any representation or warranty and neither theestate agent or any person in their employment has anyauthority to make or give a representation or warrantywhatsoever in relation to the propertyrsquo had the effect ofdefining or limiting the scope of the agentrsquos authority

Effect of the Act

Clauses which are void

Exclusions of liability

bull for death or personal injury caused by negligence (s 2)

bull in a manufacturerrsquos guarantee for loss or damage causedby negligence (s 5)

bull for the statutory guarantee of title in contracts for the saleof goods or hire purchase (s 6)

CA

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62

bull for the other statutory guarantees in consumer contractsfor the sale of goods or hire purchase (descriptionsatisfactory quality fitness for purpose) (s 6)

bull for similar statutory guarantees in other consumercontracts for the supply of goods for example contractsof hire (s 7)

Clauses which are valid only if reasonable

Clauses excluding liability

bull for loss or damage to property caused by negligence (s 2)

bull for breach of contract in a consumer or standard formcontract (s 3) This includes clauses in such contractsclaiming to render a substantially different performancefrom that reasonably expected or to render noperformance at all (s 3)

bull for statutory guarantees (other than those concerningtitle) in inter-business contracts for the sale of goods andhire purchase (description satisfactory quality andfitness for purpose) (s 6)

bull for statutory guarantees concerning title or possession inother contracts for the supply of goods (for examplehire) (s 7)

bull for other statutory guarantees (description satisfactoryquality fitness for purpose) in other inter-businesscontracts for the supply of goods (s 7)

bull for misrepresentation in all contracts

Note

lsquoConsumer transactionrsquo ndash a person is a lsquoconsumerrsquo where hedoes not make or hold himself out as making the contract in

CO

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W63

the course of business and the other party does make thecontract in the course of business In contracts for the sale ofgoods the goods must also be of a type normally sold forprivate use

bull A controversial interpretation of a lsquoconsumerrsquo was madeby the Court of Appeal in R and B Customs v UnitedDominion Trust (1988) where a car was bought by aprivate company for the business and private use of itsdirectors It was held by the Court of Appeal that it wasnot bought lsquoin the course of a businessrsquo Buying cars wasincidental not central to the business of the company If itis incidental only then the purchase would only be lsquoin thecourse of a businessrsquo if it was one made with sufficientregularity

Note however that in Stevenson v Rogers (1999) the Courtof Appeal refused to apply the R and B Customs Brokersapproach to the question of whether a sale was in the courseof a business for the purpose of s 14(12) of the Sale of GoodsAct 1979

A lsquostandard form contractrsquo occurs when the parties deal onthe basis of a standard form provided by one of them

Reasonableness

In assessing reasonableness the following matters should beconsidered

CA

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64

It is for the person relying on the clause to prove that the clause is reasonable

Section 11 of UCTA 1977

bull Contract terms are to be adjudged reasonable or notaccording to the circumstances which were or oughtreasonably to have been known to the parties when thecontract was made

bull Where a person seeks to restrict liability to a specifiedsum of money regard should be had to the resourceswhich he could expect to be available to him for thepurpose of meeting the liability and as to how far it wasopen to him to cover himself by insurance

bull In determining for the purpose of s 6 or s 7 whether acontract term satisfies the requirement of reasonablenessregard shall be had to

the strength of the bargaining position of the partiesrelative to each other

whether the customer received an inducement toagree to the term and had an opportunity of enteringinto a similar contract with other persons butwithout having to accept similar terms

whether the customer knew or ought reasonably tohave known of the existence and extent of the term

where the exclusion is conditional whether it wasreasonable to expect that compliance with thatcondition would be practicable

whether the goods were manufactured processed oradapted to the special order of the customer(Sched 2)

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W65

Decisions of the courts

In Smith v Bush (1990) and Harris v Wyre Forest DC (1989) theHouse of Lords dealt with two cases involving the validity ofan exclusion clause protecting surveyors who had carriedout valuations of a house The House of Lords decided thatthe clauses were exclusion clauses designed to protect thesurveyors against claims for negligence Lord Griffithsdeclared that there were four matters which should alwaysbe considered

bull were the parties of equal bargaining power

bull in the case of advice would it have been reasonable toobtain advice from another source

bull was the task being undertaken a difficult one for whichthe protection of an exclusion clause was necessary

bull what would be the practical consequences for the partiesof the decision on reasonableness For example wouldthe defendant normally be insured Would the plaintiffhave to bear the cost himself

In inter-business contracts the practices of business peopleare considered

bull In Photo Production v Securicor (1980) the House of Lordsstated that the courts should be reluctant to interfere withthe settled practices of businesses They pointed out thatthe function of an exclusion clause was often to indicatewho should insure against a particular risk

bull In Green v Cade Bros (1983) it was decided that a clauserequiring notice of rejection within three days of deliveryof seed potatoes was unreasonable as a defect could nothave been discovered by inspection within this time buta clause limiting damages to the contract price was

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66

upheld ndash as it had been negotiated by organisationsrepresenting the buyers and sellers and lsquocertifiedrsquopotatoes had been available for a small extra charge (thatis Sched 2 was applied)

bull However in George Mitchell v Finney Lock Seeds Ltd (1983)the buyers suffered losses of pound61000 due to the supply ofthe wrong variety of cabbage seeds The contract limitedthe liability of the seller to a refund of the price paid(pound192) Held ndash the clause was not reasonable Matterstaken into consideration

the clause was inserted unilaterally ndash there was nonegotiation

loss was caused by the negligence of the seller

the seller could have insured against his liability

the sellers implied that they themselves consideredthe clause unreasonable by accepting liability inprevious cases

bull In Overland Shoes Ltd v Schenkers Ltd (1998) the Court ofAppeal upheld a judgersquos ruling that a clause preventingreliance on a lsquoset-offrsquo was not unreasonable on the basisthat it formed part of a set of standard trading conditionsused widely in the shipping industry They had arisenfrom careful negotiation and were generally recognisedin the industry as lsquofair and reasonablersquo

bull In Overseas Medical Supplies Ltd v Orient Transport ServicesLtd (1999) the Court of Appeal summarised the variousfactors which should be looked at in considering the testof reasonableness It confirmed that the lsquoGuidelinesrsquocontained in Sched 2 to UCTA although specificallyintended for consumer contracts for the sale of goods

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W67

should be regarded as relevant wherever the test ofreasonableness is applied

In many of the cases the appeal courts have emphasised thatthe decision on lsquoreasonablenessrsquo is best made by the trialjudge and that the appeal courts should be reluctant tointerfere with the conclusion arrived at at first instance

Unfair Terms in Consumer Contracts Regulations 1999

Based on EU Directive on Unfair Terms in ConsumerContracts The 1999 regulations replaced earlier regulationsmade in 1994

Coverage

The regulations apply to

This will be so even if some other parts of the contract havenot been drafted in advance

bull The regulations do not apply to contracts which relate toemployment family law or succession rights companiesor partnerships terms included in order to comply withlegislation or an international convention

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68

Coverage Fairness Remedies

lsquoany term in a contract between a seller or supplier and a consumer where

the term has not been individually negotiatedrsquo thatis it has been drafted in advance

bull They do however cover insurance policies and contractsrelating to land

bull A lsquobusinessrsquo is defined to include a trade or professionand the activities of any government department or localor public authority

bull A lsquo consumerrsquo means a natural person who is acting for apurpose outside his business

Note ndash they are wider than UCTA in that they cover allterms not only exclusion clauses for example harsh termsconcerning unauthorised overdrafts The regulations arenarrower than UCTA in that they only cover clauses inconsumer contracts which have not been individuallynegotiated The definition of a consumer is also narrower cfR and B Customs v UDT (1988)

Unfairness

Regard must be had to the nature of the goods and servicesprovided the other terms of the contract and all thecircumstances relating to its conclusion

The definition of the main subject matter and the adequacyof the price or remuneration are not subject to the test offairness

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W69

The clause is unfair if contrary to the requirementsof good faith it creates a significant imbalance

in the partiesrsquo rights and obligations to thedetriment of the consumer

lsquoGood faithrsquo is not defined and unlike the earlier (1994)regulations the 1999 regulations do not spell out anyrelevant factors

In Director General of Fair Trading v First National Bank plc(2000) the Court of Appeal emphasised the need foropenness and information which will enable the consumerto make a properly informed choice about entering into thecontract In this case a clause imposing a lsquosurprisingrsquorequirement as to the payment of interest on a loan whichhad been the subject of a court order did not meet therequirement of good faith

The regulations contain a long indicative list of clauses likelyto be unfair These include not only exemption clauses butalso clauses which give the sellersupplier rights withoutcompensating rights for the consumer for example

bull enabling the sellersupplier to raise the price withoutgiving the buyer a chance to back out if the price rise istoo high

bull enabling the sellersupplier to cancel the agreementwithout penalty without also allowing the customer asimilar right

bull automatically extending the duration of the contractunless the customer indicates otherwise within an unreasonably brief period of time

Note also that all terms (including those defining thesubject matter or the price) should be expressed in plainEnglish and any ambiguity should be interpreted in theconsumerrsquos favour

CA

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70

Effect of an unfair term

bull The term itself shall not be binding on the consumer butthe rest of the contract may be enforced

bull The Director General of Fair Trading has a duty toconsider any complaint made to him that a term is unfairHe is empowered to bring proceedings for an injunctionagainst any business using an unfair term It was thispower that was used in the first reported case on theregulations Director General of Fair Trading v FirstNational Bank plc (2000) discussed above For the firsttime a similar power to apply for such an injunction isgiven to certain other lsquoqualifying bodiesrsquo including theData Protection Registrar various Directors General (ofgas supply electricity supply telecommunicationswater services) and the Consumersrsquo Association

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W71

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W73

5 Vitiating elements which render a contract voidable

Significance of a contract being voidable

Thus

bull The innocent party may if he wishes affirm the contract

bull Where the innocent party has not performed thecontract he may refuse to perform and rely on themisrepresentation as a defence

bull The misled party may rescind the contract by

informing the other party or

where a fraudulent party cannot be traced byinforming the police (Car and Universal Finance Co vCaldwell (1965)) or

bringing legal proceedings

The innocent party may set the contractaside if he so wishes

Misrepresentation Duress Undue influence

Certain mistakes (see Chapter 6)

bull It was stated in TSB v Camfield (1995) that the right torescind is that of the representee not the court All thecourt can do is decide whether the representee haslawfully exercised the right to rescind It is not thereforean exercise of equitable relief by the court

Rescission

bull But in Cheese v Thomas (1993) the court declared that thecourt must look at all the circumstances to do what waslsquofair and justrsquo In that case a house which had beenjointly bought had to be sold afterwards at aconsiderable loss The agreement between the twoparties for the purchase of the house was rescinded butthe court held that it was not necessary for the guiltyparty to bear the whole of the loss It was fair and justthat the proceeds should be divided according to thepartiesrsquo respective contributions

bull This contrasts with the normal situation where aproperty has diminished in value and the misled partywould get all his money returned (Erlanger v NewSombrero Phosphate Co (1878))

bull As part of this restoration equity may order a sum ofmoney to be paid to the misled person to indemnify himagainst any obligations necessarily created by the contract

In Whittington v Seale-Hayne (1900) the plaintiffsbreeders of prize poultry were induced to take a lease ofthe defendants premises by his innocent

CA

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74

Restoring the parties as far as is possible to the position they were in before they

entered into the contract

misrepresentation that the premises were in a sanitarycondition Under the lease the plaintiffs covenanted toexecute all works required by any local or publicauthority Owing to the insanitary conditions of thepremises the water supply was poisoned the plaintiffsrsquomanager and his family became very ill and the poultrybecame valueless for breeding purposes or died Inaddition the local authority required the drains to berenewed The plaintiffs sought an indemnity for all theirlosses The court rescinded the lease and held that theplaintiffs could recover an indemnity for what they hadspent on rates rent and repairs under the covenants inthe lease because these expenses arose necessarily out ofthe contract It refused to award compensation for otherlosses since to do so would be to award damages not anindemnity there being no obligation created by thecontract to carry on a poultry farm on the premises or toemploy a manager etc

bull Note ndash rescission even if enforced by the court is alwaysthe act of the defrauded party It is effective from the dateit is communicated to the representor or the police (seeabove) and not from the date of any judgment insubsequent litigation

Rescission is subject to certain barsC

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75

Affirmation of the contract

Lapse of time

Restitution mustbe possible

Third party rights

Affirmation of the contractThe representee may not rescind if he has affirmed thecontract after learning of the misrepresentation either bydeclaring his intention to proceed with the contract or byperforming some act from which such an intention can beinferred In Long v Lloyd (1958) the buyer of a lorryundertook a long journey after discovering serious defects inthe lorry Held ndash he had affirmed the contract

Lapse of timeThis can provide evidence of affirmation where themisrepresentee fails to rescind for a considerable time afterdiscovering the falsity

In cases of innocent misrepresentation lapse of time canoperate as a separate bar to rescission In Leaf v InternationalGalleries (1950) the plaintiff bought a picture which the sellerhad innocently misrepresented to be by Constable Fiveyears later the plaintiff discovered it was not by Constableand immediately sought to rescind the contract Held ndashbarred by lapse of time

Restitution must be possibleA person seeking to rescind the contract must be able andwilling to restore what he has received under it Howeverrescission is an equitable remedy and the court will notallow minor failures in the restoration to the originalposition to stand in the way In Erlanger v New SombreroPhosphate Co (1878) the purchaser had worked phosphatemines briefly Held ndash he could rescind by restoring propertyand accounting for any profit derived from it

CA

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76

Third party rightsThere can be no rescission if third parties have acquiredrights in the subject matter of the contract See Phillips vBrooks (1919) and Lewis v Averay (1972) ndash Chapter 6

Misrepresentation

Representations and terms of a contract

Material statements made during negotiations leading to acontact may be either

bull terms of the contract If these are untrue the untruthconstitutes a breach of contract

bull statements which helped to induce the contractthat is lsquomere representationsrsquo If untrue ndash they arelsquomisrepresentationsrsquo

(For distinctions between terms and lsquomere representationsrsquosee Chapter 3)

Requirements of misrepresentation

It must be

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W77

An untrue statement of fact made by one party tothe contract (representor) to the other (representee)which induces the other to enter into the contract

The requirements ofmisrepresentation

Remedies formisrepresentation

A statement of fact

bull Not a lsquomere puffrsquo that is a statement so vague as to bewithout effect for example describing a house as alsquodesirable residencersquo

bull Not a promise A promise to do something in the futureis only actionable if the promise amounts to a bindingcontract (Kleinwort Benson Ltd v Malaysian Mining CorpnBhd (1989))

bull Not a statement of opinion for example in Bisset vWilkinson (1927) the vendor of a farm which had neverbeen used as a sheep farm stated that in his judgment thefarm would support 2000 sheep Held ndash a statement ofopinion

But a statement expressed as an opinion may be treatedas a statement of fact if the person making the statementwas in a position to know the true facts In Smith v Landand House Prop Corpn (1884) the vendor of a hoteldescribed it as lsquolet to a most desirable tenantrsquo when thetenant had for a long time been in arrears with the rentThe Court of Appeal held there was a misrepresentationof fact

bull Not a statement of intention But if the representor didnot have that intention then it is a misstatement of fact asin Edgington v Fitzmaurice (1885) where the directorsissued a prospectus claiming that the money raised was tobe used to improve the companyrsquos buildings and toexpand its business Their real intention was to pay off thecompanyrsquos debts Held ndash fraudulent misrepresentation

bull Not a statement of law

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78

An active representation

bull The statement will normally be in words but other formsof communication which misrepresent the facts willsuffice as in Horsfall v Thomas (1862) (below)

bull Failure to make a statement however or the non-disclosure of facts will not generally qualify asmisrepresentation

Exceptionsbull Where facts have been selected to give a misleading

impression as in Dimmock v Hallett (1866) where avendor of land stated that farms were let but omitted tosay that the tenants had given notice to quit

bull Where circumstances have changed since arepresentation was made then the representor has a dutyto correct the statement In With v OrsquoFlanagan (1936) itwas stated correctly that a medical practice was worthpound2000 a year but by the time the practice changedhands it was practically worthless Held ndash there was aduty to disclose the changed circumstances

bull Contracts uberrimae fidei (lsquoof the utmost good faithrsquo) forexample

Contract of insurance Material facts must bedisclosed that is facts which would influence aninsurer in deciding whether to accept the proposalor to fix the amount of the premium for example apolicy of life insurance has been avoided because itwas not disclosed that the proposer had already beenturned down by other insurers

Family arrangements In Gordon v Gordon (1816ndash19)a division of property based on the proposition thatthe elder son was illegitimate was set aside upon

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W79

proof that the younger son had concealed hisknowledge of a private marriage ceremonysolemnised before the birth of this brother

Analogous contracts Where there is a duty todisclose not material but unusual facts for examplecontracts of suretyship

It must have been a material inducement

A statement likely to induce a person to contract willnormally be assumed to have done so Moreover if theclaimant can show that he was in fact induced it is nodefence to argue that a reasonable person would have beeninfluenced by the misrepresentation (Museprime PropertiesLtd v Adhill (1990)) There is no inducement however where

bull the misrepresentee or his agent actually knew the truth

bull the misrepresentee was ignorant of the misrepresentationwhen the contract was made In Horsfall v Thomas (1862)the vendor of a gun concealed a defect in the gun(misrepresentation by conduct) The buyer howeverbought the gun without examining it Held ndash theattempted misrepresentation had not induced thecontract

bull the misrepresentee did not allow the representation toaffect his judgment In Attwood v Small (1838) a buyerappointed an agent to check the statement made by theseller as to the reserves in a mine Held ndash not actionablemisrepresentation The buyer had relied on his ownagentrsquos statements not that of the vendor

Note however that

bull provided that the representation was one of theinducements it need not be the sole inducement

CA

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80

bull the fact that the representee did not take advantage of anopportunity to check the statement is no bar to an actionfor misrepresentation

In Redgrave v Hurd (1881) a solicitor was induced topurchase a house and practice by the innocentmisrepresentation of the seller Held ndash he was entitled torescission although he did not examine the documentswhich were available to him and which would haveindicated to him the true state of affairs

bull neither is it contributory negligence not to check astatement made by a vendor (Gran Gelato v Richcliff(1992))

Remedies for misrepresentation

Rescission

Misrepresentation renders a contract voidable ndash see aboveThe Misrepresentation Act 1967 provides that rescission isavailable in relation to

bull lsquoexecutedrsquo contracts for the sale of goods andconveyances of property

bull representations which have been incorporated as a termof the contract

Rescission was not available in these circumstances before1967

Damages

bull There are five ways in which damages may be claimedfor misrepresentation It seems likely that in future thenormal ground for damages will be the

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W81

Misrepresentation Act 1967 but there are still cases wheredamages can only be claimed at common law if at all

bull Note ndash rescission and damages are alternative remediesin many cases but if the victim of fraudulent ornegligent misrepresentation has suffered consequentialloss he may rescind and sue for damages

bull Damages can be claimed on different bases according tothe kind of misrepresentation that was committed

Damages in the tort of deceit for fraudulent misrepresentationIt is up to the misled party to prove that themisrepresentation was made fraudulently that isknowingly without belief in its truth or recklessly as towhether it be true or false (Derry v Peek (1889))

The burden of proof on the misled party is a heavy one

Damages in the tort of negligence Victims of negligent misrepresentation may be able to sueunder Hedley Byrne v Heller amp Partners (1963) Themisrepresentee must prove (1) that the misrepresentorowed him a duty to take reasonable care in making therepresentation that is there must be a lsquospecial relationshiprsquo(2) that the statement had been made negligently

Damages under s 2(1) of the Misrepresentation Act 1967Section 2(1) of the Misrepresentation Act 1967 provides thatwhere a person has entered into a contract after amisrepresentation has been made to him by another partythereto and as a result of it has suffered loss lsquothen if themisrepresentor would be liable for damages if it had beenmade fraudulently he will be so liable notwithstanding thatthe misrepresentation was not made fraudulently unless heproves that he had reasonable grounds to believe and did

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82

believe up to the time the contract was made that the factsrepresented were truersquo

Note that this is a more beneficial remedy for themisrepresentee as he only need prove that the statement isuntrue It is for the misrepresentor to prove that he had goodgrounds for making the statement and the burden of proofis a heavy one In Howard Marine and Dredging Co Ltd vOgden (1978) the owner of two barges told the hirer that thecapacity of the barges was 1600 tons He obtained thesefigures from the Lloydrsquos list but in this case the Lloydrsquos listwas incorrect The court held that he did not have goodgrounds for this statement he should have consulted themanufacturerrsquos specifications which should have been in hispossession

Assessment of damages

The Court of Appeal confirmed in Royscot Trust v Rogerson(1991) that damages under s 2(1) of the MisrepresentationAct should also be awarded on the reliance basis because ofthe lsquofiction of fraudrsquo in the wording of the Act

Remoteness of damage

The Court of Appeal also held in that case because of thelsquofiction of fraudrsquo that the rules of remoteness whichnormally apply only to the tort of deceit should be appliedunder s 2(1)

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W83

Damages in the tort of deceit and the tortof negligence are assessed on the tortious basis of reliance that is the claimant is entitled to be

put in the position he was in before the tort was committed

(In contract and in all torts other than deceit the losses mustbe lsquoreasonably foreseeablersquo)

bull In Royscot Trust v Rogerson (1991) a customer arranged toacquire a car on hire purchase from a car dealer Thefinance was to be provided by a finance company theRoyscot Trust which insisted on a deposit of 20 Thedealer falsified the figures in order to indicate a deposit of20 as required Some months later the customerwrongfully sold the car thus depriving the financecompany of its property The finance company sued thedealer under s 2(1) of the Misrepresentation Act It washeld by the Court of Appeal that the finance companycould recover damages from the car dealer to cover theloss of the car since the loss followed themisrepresentation The remoteness rules applicable to thetort of deceit would be applied and the loss did not needto be foreseeable

Controversy has followed this decision as the tort ofdeceit to which this rule only previously applied isdifficult to establish and involves moral culpability onthe part of the defendant It has now been extended to anaction which is relatively easy to establish (see HowardMarine and Dredging v Ogden) and may only involvecarelessness Some doubts as to whether this was thecorrect approach were expressed obiter by the House ofLords in Smith New Court Securities Ltd v ScrimgeourVickers (Asset Management) Ltd (1996) but for the timebeing Royscot v Rogerson remains good law

CA

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84

That is damages would be awarded to coverall losses which flow directly from the

untrue statement whether or not those losses were foreseeable

bull Further problems are caused by the decision of the Courtof Appeal in East v Maurer (1991) a case in the tort ofdeceit where it was held that lsquoall damages flowingdirectly from the fraudrsquo would cover damages for somedegree of loss of profit ndash a heading previously consideredto be appropriate only to expectation damages incontract It is a matter for speculation whether the courtswill apply this decision to cases under theMisrepresentation Act and bring loss of profit under theheading of reliance loss on the basis that all losses whichflow directly from the misrepresentation should berecoverable

bull A generous interpretation of s 2(1) of the 1967 Act hadalso been applied by the court in Naughton v OrsquoCallaghan(1990) where reliance damages had been awarded tocover not only the difference between the value of the coltand the value it would have had if the statements madeabout it were correct (the quantification rule for breach ofcontract) but also the cost of its maintenance since thesale

It has been alleged that these three cases swell the amount ofdamages which can be awarded under the MisrepresentationAct to a greater extent than intended by Parliament and thatthe damages available for misrepresentation can nowexceed those available for breach of contract

Damages for wholly innocent misrepresentationDamages cannot be claimed for a misrepresentation whichis not fraudulent or negligent but

bull an indemnity may be awarded (see above)

bull damages in lieu of rescission may be awarded under s 2(2) of the Misrepresentation Act 1967 C

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85

In William Sindall v Cambridgeshire CC (1994) the Court ofAppeal stated (obiter) that where the court is consideringwhether to award damages in lieu of rescission threematters should be taken into consideration

the nature of the misrepresentation

the loss which would be caused to the representee ifthe contract were upheld

the hardship caused to the misrepresentor if the con-tract were rescinded The Court of Appeal also statedthat the damages should resemble damages forbreach of warranty

bull lsquodamages in lieursquo can it seems be awarded even if one ofthe bars to recision apply (Thomas Witter Ltd v TBPIndustries (1996))

bull where the misrepresentation has become a term of thecontract the misrepresentee can sue for damages forbreach of contract as an alternative to damages formisrepresentation

Duress

A common law doctrine

Duress to the person

This requires actual or threatened violence to the personOriginally it was the only form of duress recognised by thelaw

CA

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86

Duress involves coercion

Duress to goods

bull Threat of damage to goods ndash traditionally this has notbeen recognised by the law but in view of thedevelopment of economic duress it is assumed thatduress to goods would today be a ground for relief

Economic duress

Requires

Economic duress led to rescission of a contract in UniverseTankships of Monrovia v ITWF (1983) where a union hadlsquoblackedrsquo a tanker and refused to let it leave port untilcertain moneys had been paid The House of Lordsconsidered that this amounted to economic duress andordered return of the money

It has been stated that economic duress requires

Compulsion or coercion of the will

In Pau On v Lau Yiu Long (1980) Lord Scarman listed thefollowing indications of compulsion or coercion of the will

bull did the party coerced have an alternative course open tohim

bull did the party coerced protest

bull did the party coerced have independent advice

bull did the party coerced take steps to avoid the contract

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W87

Compulsion of the will An illegitimate threat

Illegitimate pressure

There must be some element of illegitimacy in the pressureexerted for example a threatened breach of contract Theillegitimacy will normally arise from the fact that what isthreatened is unlawful In CTN Cash and Carry v Gallaher(1994) however the Court of Appeal accepted obiter that anoutrageous but technically lawful threat could amount toduress This possibility has not so far been developed in anylater cases

Economic duress is often pleaded together with lack ofconsideration in cases where a breach of contract isthreatened by the promisor unless he receives additionalpayment

bull In Atlas Express v Kafco (1989) Kafco a small companywhich imported and distributed basketware had acontract to supply Woolworths They contracted withAtlas for delivery of the basketware to Woolworths Thecontract commenced then Atlas discovered they hadunderpriced the contract and told Kafco that unless theypaid a minimum sum for each consignment they wouldcease to deliver Kafco were heavily dependent on theWoolworths contract and knew that a failure to deliverwould lead both to the loss of the contract and an actionfor damages At that time of the year they could not findan alternative carrier and agreed under protest to makethe extra payments Atlas sued for Kafkorsquos non-paymentHeld ndash the agreement was invalid for economic duressand also for lack of consideration

bull Cf Williams v Roffey Bros (1989) ndash Chapter 2

The following threats are probably not illegitimate (subjectto the possibility raised by CTN Cash and Carry v Gallaher(1994) discussed above)

CA

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88

bull a threat not to enter into a contract

bull a threat to institute civil proceedings

bull a threat to call the police

Note ndash not all threatened breaches of contract will amount toeconomic duress It will only do so when the threatenedparty has no reasonable alternative open to him The normalresponse to a breach of contract is to sue for damages

Remedies

bull In North Ocean Shipping Co v Hyundai Construction Co TheAtlantic Baron (1979) the court found economic duressbut refused rescission on the ground that the plaintiff hadaffirmed the contract

Undue influence

An equitable doctrine

bull Undue influence is based on the misuse of a relationshipof trust or confidence between the parties Where foundit renders a contract voidable The innocent party willneed to apply to the court for rescission of the contract(see above)

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W89

Pressure not amounting to duress at common lawwhereby a party is excluded from the exercise of

free and independent judgment

Duress renders a contract voidable Rescission willnormally be sought from the courts See above

Contracts where undue influence is presumed

For example

bull Contracts between certain relationships

parent and child

trustee and beneficiary

solicitor and client

doctor and patient

religious adviser and disciple

bull Where there has been a long relationship of confidenceand trust between the parties

For example between husband and wife or where oneparty had been accustomed to rely for guidance andadvice on the other In Lloyds Bank v Bundy (1975) MrBundy an elderly west country farmer on the advice ofthe local Lloyds Bank assistant manager granted a chargeto the bank over the family farm to guarantee his sonrsquos

CA

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90

Contracts where undue influence

is presumed

Contracts where actual undue

influence must be proved

Contracts induced by undue influence are of two kinds

The contract must be manifestly disadvantageous

to the weaker party

Contracts need not be manifestly disadvantageous

to the weaker party

indebtedness to the bank Mr Bundy had all his liferelied on Lloyds Bank for financial advice the court setaside the charge on the ground of undue influence on thepart of the bank

Note ndash a bank will not be presumed to exert undueinfluence in normal circumstances

In Credit Lyonnais Bank Nederland NV v Burch (1997) therelationship between an employer and a junior employee(who was persuaded to put up her own house as securityfor the businessrsquos overdraft) was held to be one of undueinfluence

The stronger party can disprove undue influence byshowing that

bull full disclosure of all material facts was made

bull the consideration was adequate

bull the weaker party was in receipt of independent legaladvice

Contracts where actual undue influence is proved

The burden of proof lies on the claimant to show that suchinfluence did exist and was exerted

Effect of undue influence on a third party

In Barclays Bank v OrsquoBrien (1993) Mrs OrsquoBrien had signed aguarantee which used the jointly owned matrimonial homeas security for a loan made to her husbandrsquos business Herhusband had told her it was for a maximum of pound60000 butin fact it was for pound130000 Mrs OrsquoBrien had not been advisedby the bank to consult an independent solicitor The Houseof Lords held that there was no undue influence in this casebut there was misrepresentation on the part of the husband

CO

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W91

They further held that where there was undue influence ormisrepresentation or other legal wrong then the injuredpartyrsquos right to have the transaction set aside would beenforceable also against the third party provided the thirdparty had actual or constructive notice of the wrong Suchnotice would arise where

bull the parties were in an emotional relationship forexample co-habitees (heterosexual or homosexual) orchild and aged parents

bull one party was undertaking a financial liability on behalfof the other which was not to her or his advantage

The court also held that in the above situation the third partycould discharge his duty by making clear to the partyconcerned the full nature of the risk he or she is taking onfor example

bull by conducting a personal interview or

bull urging independent advice

Note ndash this doctrine of constructive notice applies to sureties(guarantors) but does not apply where a bank makes a jointloan to both parties as the facts in that situation do not meetthe requirements set out in Barclays Bank v OrsquoBrien See CIBCMortgages v Pitt (1993)

Note

bull A failure by a solicitor to give proper advice cannot beheld against a bank (even if the bank knows that thesolicitor is acting for both the borrower (for example thehusband) and the guarantorsurety (for example thewife)) ndash see Royal Bank of Scotland v Etridge (No 2) (1998)

CA

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92

bull Once undue influence or misrepresentation has beenfound the whole contract is avoided it cannot be upheldin part ndash TSB Bank plc v Camfield (1995)

bull Damages are not available as a remedy for duress orundue influence

CO

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W93

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W95

6 Mistake

There is much disagreement concerning the effect ofmistake on a contract There are many reasons for thisconfusion as to which terms to use a large number of caseswhich can be interpreted in different ways no recentdecisive House of Lords decisions on the subject theintervention of equity

Terminology

Different terms are used by Cheshire and Anson to describethe same kind of mistake and you should ascertain whichterms are used in your textbook

The terms used by Cheshire are used in this LawCard

CHESHIRE ANSON Effect

Same mistake Common Mutual May nullifymade by both mistake mistake agreementparties

Parties at Mutual Unilateral Negativescross-purposes mistake mistake agreement

Parties atcross-purposesbut one party Unilateral Unilateral Negativesknows that mistake mistake agreementthe other is mistaken

Effect of a mistake

If the contract is rendered void then the parties will bereturned to their original positions and this may defeat therights of innocent third parties who may have acquired aninterest in the contract

The reluctance of the courts to develop the common lawdoctrine of mistake is probably due to the unfortunateconsequences for third parties that can result from holdinga contract void Equity has however intervened to producemore flexibility as noted below

CA

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96

In common mistakes the parties are agreed but both are mistaken

In mutual and unilateral mistakes the parties may not have reached agreement and these mistakes are sometimes dealt with

under the heading of agreement

The general rule is that a mistake has no effect on a contract but certain mistakes of a fundamental nature sometimes called

operative mistakes may render a contract void at common law

Operative mistakes

Common mistakes

bull At common law this may render the contract void thatis the contract has no legal effect it is unenforcable byeither party and title to property cannot pass under it

bull In equity a more flexible approach has developedcontracts containing certain common mistakes have beentreated as voidable In setting aside such contracts thecourts have a much wider control over the terms it canimpose on the parties

In Bell v Lever Bros (1932) it was stated that to nullify theagreement the lsquomistake must go to the root of the contractrsquo

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W97

Commonmistakes

re a fundamentalmatter for

example resextincta res sua

the quality of the subject matter

Mutualmistakes

re identity ofsubject matter

of contract

Unilateralmistakes

re terms ofcontract re

identity of otherparty to contract

The parties are agreed but they are both under the same misapprehension If this

misapprehension is sufficiently fundamentalit may nullify the agreement

Lever Bros agreed to pay two directors of a subsidiarycompany substantial sums of money in compensation forloss of office while unaware of the fact that they hadengaged in irregular conduct which would have allowedthem to be dismissed without compensation Lever Brosasked the court to order the return the compensation paid onthe ground that it had been paid as a result of a commonmistake The House of Lords held that the common mistakeconcerning the need to pay compensation was notlsquosufficiently fundamentalrsquo to render the contract void

Common mistakes lsquosufficiently fundamentalrsquo to render a

contract void

A common mistake as to the existence of the subject matter(res extincta)bull In Galloway v Galloway (1914) the parties believing they

were married entered into a separation agreement Laterthey discovered that they were not validly married Held ndashthe separation agreement was void for a common mistake

bull In Strickland v Turner (1852) the court declared void onthe grounds of a common mistake a contract to purchasean annuity on the life of a person who had already died

bull In Couturier v Hastie (1856) a buyer bought a cargo ofcorn which both parties believed to be at sea the cargohad however already been disposed of Held ndash thecontract was void

bull Section 6 of the Sale of Goods Act 1979 declares thatlsquoWhere there is a contract for the sale of specific goodsand the goods without the knowledge of the seller haveperished when the contract is made the contract is voidrsquo

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98

However in McRae v Commonwealth Disposals Commission(1951) the commission sold to McRae the right to salvagea tanker lying on a specified reef There was no such reefof that name nor was there any tanker The court foundthat there was a valid contract and that the commissionhad impliedly guaranteed the existence of the tanker Thecase could be distinguished from the Australianequivalent of s 6 on the ground that there never had beena tanker and it had therefore not perished

Whether a contract is void or valid depends on theconstruction of the contract that is even if the subjectmatter does not exist the contract will be valid

if performance was guaranteed or

if it was the purchase of a lsquochancersquo

Otherwise the contract would be void

Mistake as to title ndash res sua ndash that is the thing sold alreadybelongs to the buyerbull In Cooper v Phibbs (1867) Cooper not realising that a

fishery already belonged to him agreed to lease it fromPhibbs Held ndash the contract was void

Mistake as to the possibility of performing the contractbull In Sheik Bros Ltd v Ochsner (1957) a contract was held

void as the land was not capable of growing the cropcontracted for

bull In Griffith v Brymer (1903) a contract to hire a room toview the coronation of Edward VII which was madeafter the procession had been cancelled was held void(Commercial impossibility) C

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99

Mistake as to the quality of the subject matterLords Atkin and Thankerton both insisted in Bell v Lever Brosthat to render a contract void the mistake must go to thelsquoroot of the contractrsquo

bull It has been argued that if the mistake in Bell was notsufficiently fundamental to render a contract void then itis highly unlikely that any mistake concerning qualitywould do so

bull Similarly in Leaf v International Galleries (1950) whereboth parties mistakenly believed that a painting was byConstable the Court of Appeal stated that the contractwas not void for common mistake

bull In Solle v Butcher (1950) the Court of Appeal declined todeclare void a lease which both parties believed was notsubject to the Rent Acts A similar decision was reachedin Grist v Bailey (1967) where the parties both believedthat a house was subject to a protected tenancy

However Lord Justice Steyn in Associated Japanese Bank vCredit du Nord (1988) stated that not enough attention hadbeen paid to speeches in Bell v Lever Bros which did indicatethat a narrow range of mistakes in quality could render acontract void for example Lord Atkinrsquos statement that lsquoacontract may be void if the mistake is as to the existence ofsome quality which makes the thing without that qualityessentially different from the thing it was believed to bersquo Hegave as an example ndash if a horse believed to be sound turnsout to be unsound then the contract remains valid but if ahorse believed to be a racehorse turns out to be a carthorsethen the contract is void

CA

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100

Equity

The role of equity according to this view is supplementarydesigned to relieve the limitations of the common law

bull Rescission on terms was granted by the Court of Appealin Solle v Butcher (1950) (see above) The court rescindedthe lease but gave the tenant the option of staying thereon terms of his paying the extra rent which the landlordcould have charged in view of the improvements

bull Rescission on terms was also granted in Grist v Bailey(1967) where a house was sold in the mistaken belief thatit had a protected tenancy and in Laurence v LexcourtHoldings (1978) where there was a common mistake withregard to planning permission

bull Rescission without terms was granted in Magee v PennineInsurance Co (1969) where an agreement by an insurancecompany to meet a claim was rescinded because theparties were unaware that it was based on a policy whichwas voidable due to a misrepresentation by the assured

bull In William Sindall plc v Cambridgeshire CC (1994) Evans LJsuggested that whereas the common law only recognisedmistakes as to the subject matter of the contract equitywould recognise a lsquowider and perhaps unlimitedcategory of common mistakersquo In Clarion Ltd v NationalProvident Institution (2000) however Rimer J held that

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W101

Lord Justice Steyn in Associated Japanese Bank v Credit du Nord (1988) stated that a court will first examine whether a

contract is void at common law if it is not then itwill examine whether equity will grant rescission

equity would only intervene where the mistake was as tothe terms of the contract or its subject matter Equity didnot provide relief for a lsquobad bargainrsquo

Mutual and unilateral mistakes

The courts adopt an objective test in deciding whetheragreement has been reached It is not enough for one of theparties to allege that he was mistaken

Mistake can negate consent in the following cases

Mutual mistakes concerning the identity of the subject matter

bull In Raffles v Wichelhaus (1864) a consignment of cotton wasbought to arrive lsquoex Peerless from Bombayrsquo Two shipsboth called Peerless were due to leave Bombay at aroundthe same time Held ndash no agreement as the buyer wasthinking of one ship and the seller was referring to theother ship

bull Similarly there was no agreement in Scriven Bros vHindley amp Co Ltd (1913) where the seller sold lsquotowrsquo andthe buyer bought lsquohemprsquo Again there was an ambiguityas both lots were delivered under the same shippingmark and the catalogue was vague

CA

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102

In these cases the parties are at cross-purposesbut there must have been some ambiguity

in the situation before the courts willdeclare the contract void

These mistakes negate consentthat is they prevent the formation of an agreement

bull But in Smith v Hughes (1871) the court refused to declarevoid an agreement whereby the buyer had thought hewas buying old oats when in fact they were new oats asthe contract was for the sale of lsquooatsrsquo The mistake relatedto the quality not the identity of the subject matter

Unilateral mistake concerning the terms of the contract

bull In Hartog v Colin and Shields (1939) the sellers mistakenlyoffered to sell goods at a given price per pound whenthey intended to offer them per piece All the preliminarynegotiations had been on the basis of per piece Thebuyers must have realised that the sellers had made amistake The contract was declared void

bull In Smith v Hughes however the contract was for the saleof lsquooatsrsquo not lsquoold oatsrsquo it would only have been void iflsquoold oatsrsquo had been a term of the contract

Unilateral mistake as to the identity of other parties to the

contract

There are a number of contradictory cases and theoriesunder this heading

Traditionally a distinction is made between mistakes as toidentity and mistakes as to attributes (for example creditworthiness)

bull In Cundy v Lindsay (1878) a Mr Blenkarn ordered goodsfrom Lindsay signing the letter to give the impressionthat the order came from Blenkiron amp Co a firm knownto Lindsay amp Co Held ndash the contract was void Lindsay

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W103

Here one party has taken advantage of the other partyrsquos error

amp Co had only intended to do business with Blenkiron ampCo There was therefore a mistake concerning the identityof the other party to the contract

bull In Kingrsquos Norton Metal Co v Edridge Merrett amp Co Ltd(1872) on the other hand a Mr Wallis ordered goods onimpressive stationery which indicated that the order hadcome from Hallam amp Co an old established firm withbranches all over the country Held ndash the contractbetween Kingrsquos Norton Metal Co and Wallis was notvoid The sellers intended to do business with the writerof the letter they were merely mistaken as to hisattributes that is the size and credit worthiness of hisbusiness

bull In Boulton v Jones (1857) the defendant sent an order forsome goods to a Mr Brocklehurst unaware that he hadsold the business to his foreman the plaintiff Theplaintiff supplied the goods but the defendant refused topay for them as he had only intended to do business withBrocklehurst against whom he had a set off Held ndash therewas a mistake concerning the identity of the other partyand the contract was therefore void

However the cases all concerned contracts negotiated at adistance

CA

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104

From the above three cases it would seem that acontract is void if the mistaken party intended to do

business with another specific person and the identity of that other person was important to him

bull In Phillips v Brooks (1919) a jeweller sold a gold ring anddelivered it on credit to a customer who had come intohis shop and had falsely claimed to be Sir GeorgeBullough a well known and wealthy man Held ndash thecontract was valid The jeweller had intended to dobusiness with the person in his shop

bull In Lewis v Averay (1972) a rogue claimed to be RichardGreene the film actor and produced a pass to Pinewoodstudios to verify this He was allowed to drive away a carin return for a cheque and subsequently resold the car forcash to Averay The cheque bounced and the sellerclaimed the return of the car on the ground that he wasmistaken as to the identity of the buyer Held ndash thecontract was valid The seller must be presumed to haveintended to deal with the person physically in the roomwith him Averay kept the car

There are two cases however where the plaintiffs were ableto establish a mistake as to the identity of a person in theirpresence

bull In Ingram v Little (1961) two sisters sold a car and handedit over against a worthless cheque to a person whoclaimed to be a Mr Hutchinson of Stanstead HouseCaterham They only did so after one of them hadchecked that there was a man of that name who lived atthat address The Court of Appeal held the contract void C

ON

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105

Where the parties negotiate in person the samerules apply but there is a presumption that the inno-cent party intended to do business with the person

physically in his presence

They considered that the sisters had done enough toestablish that they only intended to deal with MrHutchinson

This case has been greatly criticised as it is difficult toreconcile with Phillips v Brooks and Lewis v Averay

bull In Sowler v Potter (1940) the lease of a cafeacute was granted toPotter who had previously been convicted of keeping adisorderly cafe under the name of Robinson The courtheld that the contract was void because of the lessorrsquosmistaken belief that Potter was not Robinson This casehas also been much criticised and doubted as it did notseem that Sowler had intended to do business with anyother identifiable person The contract could in any casehave been set aside for misrepresentation

The contract would in most cases be voidable in any case formisrepresentation where one party has misled the otherwith regard to his identity The advantage of having the contract declared void for mistake is to avoid the bars torescission

See Chapter 5 pp 75ndash76

Mistake as to the nature of the document signed

Defence of non est factum

bull The scope of this defence has been limited since thedecision in Saunders v Anglia Building Society (Gallie v Lee)(1971) where an old lady was persuaded by her nephewto sign a document conveying her house to her nephewrsquosfriend She had believed that she was signing a deed ofgift to her nephew She had not read the documentbecause her glasses were broken It was held that thedocument was valid It was stated that

CA

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106

It is also thought that it will only protect a person who isunder some disability The defence did succeed in LloydsBank v Waterhouse (1990) where the defendant who wasilliterate signed a guarantee of his sonrsquos debt to the bankThe father thought that the guarantee covered the purchaseprice of a farm but in fact it covered all his sonrsquosindebtedness to the bank It was held that the effect of thedocument was fundamentally different from what it wasbelieved to be There was no negligence and the contractwas therefore void

In UDT Ltd v Western (1976) it was held that these samerules applied to cases where a person had signed a formbefore all the details required by the form had been entered

Mistake in equity

The narrow approach taken by the common law towardsremedies for mistake (that is that it renders the contractvoid) is supplemented by the more flexible approach ofequity The following remedies may be available in equity

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W107

Rescission RectificationRefusal of

specificperformance

The signed document must be fundamentally different in effect from what it was thought to be

The signatory must prove that he had not been negligent in signing the document

Rescission

See common mistake (above)

Rectification

Where there has been a mistake not in the actual agreementbut in reducing it to writing equity will order rectification ofthe document so that it coincides with the true agreement ofthe parties

Necessary conditionsbull The document does not represent the intention of both

parties or

bull one party mistakenly believed a term was included in thedocument and the other party knew of this error InRoberts amp Co Ltd v Leicestershire CC (1961) the completiondate of a contract was rectified at the request of one partybecause it was clear that the other party was aware of theerror when the contract was signed

If the document fails to mention a term which one partybut not the other had intended to be a term of thecontract there is no case for rectification

bull There must have been a concluded agreement but notnecessarily a legally enforceable contract In Joscelyne vNissen (1970) a father and daughter agreed that thedaughter should take over the car hire business Inreturn the father would continue to live in the house andthe daughter would pay all the household expenses Thislast provision was not included in the written contractHeld ndash the contract should be rectified to include it

Note ndash a document which accurately records a prioragreement cannot be rectified because the agreement wasmade under some mistake (Rose v Pym above) Equityrectifies documents not agreements

CA

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108

Rectification is an equitable remedy and is available at thediscretion of the court Lapse of time or conflict with thirdparty rights may prevent rectification

Refusal of specific performance

bull In Webster v Cecil (1861) the defendant having previouslyrefused the plaintiffrsquos offer of pound2000 for his land wrote tothe plaintiff offering to sell it to him for pound1250 instead ofpound2250 as he had intended The plaintiff accepted theoffer Specific performance was refused as the plaintiffmust have been aware of the error (unilateral mistake)

bull Where there is no blame on the claimant the situation ismore difficult In Malins v Freeman (1837) the defendanthad mistakenly bought the wrong property at an auctionSpecific performance was refused In Tamplin v James(1879) however the court ordered specific performancewhere the defendant had bid for a property under anerror as to its true extent Presumably being forced to buya totally different property from the one he intendedwould have caused greater hardship than being forced tobuy a property whose dimensions differed from hisexpectations

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W109

Specific performance will be refused when the contract is void at common law Equity may also

refuse specific performance where a contract is validat law but only lsquowhere a hardship amounting toinjustice would have been inflicted upon him by

holding him to his bargainrsquo (Tamplin v James (1879))

7 Illegality and capacity

Illegal contracts are classified in different ways by differentauthorities In this chapter a distinction is drawn betweencontracts which involve the commission of a common lawor statutory offence and those which are void as beingcontrary to public policy

Illegality

The main issue with regard to illegal contracts is the effectof illegality on a contract The most often examined topicwith regard to contracts which are declared void ongrounds of public policy is contracts in restraint of trade

Illegal contracts

Contracts illegal by statute

bull Statute may declare a contract illegal for example theCompetition Act 1998

bull Statute may prohibit an act but declare that it shall noteffect validity of contract for example the ConsumerProtection Act 1987

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Illegal contracts Contracts void

against public policy

Contracts prohibited by statute

Contracts illegal at common law

bull Statute may prohibit an act but not stipulate its effect onthe contract The status of the contract will in this casebe a matter of interpretation for the court In ReMahmoud and Ispahani (1921) the court decided that astatement that lsquoa person shall not buy or otherwise dealin linseed oil without a licencersquo was a prohibition and acontract entered into by a person without a licence wastherefore void

bull The courts are reluctant to imply a prohibition when thisis not clearly indicated in the statute In Hughes v AssetManagers (1995) the court held a contract valid despitethe fact that a document had not been signed by a personauthorised to do so as required by statute

Contracts illegal at common law

bull An agreement to commit a crime a tort or a fraud forexample defraud the rating authority (Allen v Roscous(1676)) to publish a libel (Clay v Yates)

bull An agreement to defraud the Inland Revenue (Napier vBusiness Associates (1951))

bull Contracts damaging to the countryrsquos safety or foreignrelations

bull Contracts interfering with the course of justice forexample contracts to give false evidence

bull Contracts leading to corruption in public life (Parkinson vRoyal College of Ambulance (1925))

bull Contracts tending to promote sexual immorality (Pearcev Brooks (1866))

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112

Effects of illegality

Contracts illegal as formed

In Pearce v Brooks (1866) the owner of a coach of unusualdesign was unable to recover the cost of hire from aprostitute who to his knowledge had hired it in order toattract clients

In Parkinson v Royal College of Ambulance (1925) Parkinsonwas unable to recover the money he had donated to thedefendants on the understanding that they would obtain aknighthood for him

Exceptionsbull Where the parties are not in pari delicto (that is not

equally at fault) for example where one party isunaware of the illegal nature of the contract or has beeninduced to enter into it by fraudulent misrepresentationor is the party the law was attempting to protect forexample a tenant who has paid an illegal premium(Kiriri Cotton Co v Dewani (1960))

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Contracts illegal as formed

Contracts illegal in their performance

Such contracts are void ab initio there can be no action for breach of contract

Money paid or property transferred under the contract cannot be recovered

bull Where the transferor genuinely repents and repudiatesthe contract before performance In Tribe v Tribe (1995)money was transferred to a son in order to avoid thefatherrsquos creditors At the end of the day the creditorswere all paid in full and the father was allowed to cite theoriginal reason for the transfer in order to rebut thepresumption of advancement (which would have meantthat his son could keep the shares) He had withdrawnfrom the illegal purpose before performance

In Bigos v Boustead (1951) however the court was notconvinced that the plaintiff had genuinely repented

bull Where the transferor can frame his claim without relyingon the contract In Bowmakers v Barnet Instruments (1945)the plaintiffs were able to rely on an action in the tort ofconversion to recover goods delivered under an illegalhire purchase contract

Similarly in Tinsley v Milligan (1993) both parties hadcontributed money towards the purchase of a house putin the name of Tinsley alone in order to allow Milligan tomake various social security claims When Milligan suedfor the return of the money it was argued that theagreement had been entered into for an illegal purposeand that the public conscience lsquowould be affronted byrecognising rights created by illegal transactionsrsquo TheHouse of Lords held however that a resulting trust hadbeen created in favour of Milligan by the contribution tothe purchase price Milligan therefore could rely on theresulting trust and had no need to rely on the illegalagreement

This case shows (a) that the rule applies to equity as wellas to common law (b) the test of lsquoaffront to the publicconsciencersquo previously used by the Court of Appeal is nolonger good law

CA

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114

bull Where part of the contract is lawful the court will notsever the good from the bad In Napier v National BusinessAgency (1951) certain payments were described aslsquoexpensesrsquo in order to defraud the Inland Revenue Thecourt refused to enforce payment of the accompanyingsalary as the whole contract was tainted with the illegality

Note ndash property can pass under an illegal contract as in Singv Ali (1960)

Contracts illegal in their performance

A claim by the innocent party to enforce the contract in thesecases is strong

bull In Marles v Philip Trant (1954) the defendant sold winterwheat described as spring wheat without anaccompanying invoice as required by statute Held ndash theplaintiff could sue for damages for breach of contractThe contract was illegal in its performance but not in itsinception

bull In Strongman v Sincock (1955) Sincock failed to getlicences which were needed to modernise some houseswhich belonged to him and refused to pay for the workon the basis that the contracts were illegal Held ndashStrongman could not sue on the illegal contracts butcould sue Sincock on his collateral promise to obtain thelicences

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W115

The illegality may only arise during the performance of a contract for example

a carrier may break the law by exceeding the speed limit whilst delivering goods

belonging to a client He will be punished but the contract will not necessarily be void

bull In Archbolds v Spanglett (1961) Spanglett contracted tocarry Archbolds whisky in a van which was not licensedto carry any goods other than his own Archbold wasunaware of this and could therefore recover damages forbreach of contract

But in Ashmore Benson Pease amp Co v Dawson Ltd (1973)the other party knew of the overloading of the lorry andcould not therefore recover damages He hadparticipated in the illegality

bull Even the guilty party may enforce the contract if theillegality is incidental

In Shaw v Groom (1970) a landlord failed to give histenant a rent book as required by law Held ndash he could suefor the rent The purpose of the statute was to punish thelandlordrsquos failure to provide a rent book not to render thecontract void

In St John Shipping v Rank (1957) a ship owner who hadoverloaded his ship in contravention of a statute was ableto recover freight

Contracts void at common law on grounds of publicpolicy

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116

Contracts damaging to theinstitution of marriage

For example contracts inrestraint of marriage

marriage brokerage contractscontracts for future separation

(pre-nuptial agreements)

Contracts made after orimmediately beforeseparation are valid

Contracts to oust thejurisdiction of the courts

However arbitrationagreements are valid

In Esso Petroleum v Harpers Garage (1968) it was stated thatthe court will consider

bull whether the contract is in restraint of trade A contract isin restraint of trade if it restricts a personrsquos liberty tocarry on his trade or profession Certain restraints havebecome acceptable over the years for example lsquotiedhousesrsquo restrictive covenants in leases sole agency orsole distributorship agreements

bull whether it should nevertheless be enforced because itprotects a legitimate interest and is reasonable Theonus of proving reasonability is on the promisee Arestraint to be permissible must be no wider than isnecessary to protect the relevant interest of thepromisee

Categories of contracts in restraint of trade

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W117

Restraints onemployees

Restraints on thevendors of a business

Exclusive dealingagreements

A contract in restraint of trade is prima facie void but thecourts will now uphold the restriction if it is shown that

bull the restraint protects a legitimate interest

bull the restraint is reasonable between the parties

bull the restraint is reasonable as regards the interest of thepublic

Contracts in restraint of trade

Restraints on employeesThe restraint is void unless the employer can show

bull That it is necessary to protect a proprietary interest forexample the trade secrets of a works manager in Foster vSuggett (1918) the trade connections of a solicitorrsquosmanaging clerk in Fitch v Dewes (1921)

A restraint merely to prevent competition will not beenforced

In Eastham v Newcastle United FC (1964) the courtaccepted that the proper organisation of football was avalid matter for clubs to protect but found the lsquoretainand transfer systemrsquo unreasonable

bull That the restraint is no greater than is necessary toprotect the employerrsquos interest in terms of time andarea

In Scorer v Seymore-Jones (1966) the court upheld arestriction of 10 miles within branch A at which theemployee had worked but held that a similar restraintcovering branch B at which the employee had notworked was unreasonable and void

bull Problems with area can be overcome by using lsquonon-solicitationrsquo clauses instead

In Home Counties Dairies v Skilton (1970) a milkmanagreed that for one year after leaving his present job hewould not sell milk to his employerrsquos customers Held ndashrestraint valid It was necessary to protect the employeragainst loss of customers

bull The validity of the duration of the restraint depends onthe nature of the business to be protected and on thestatus of the employee

CA

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118

In Briggs v Oates (1991) a restriction of five miles for fiveyears on an assistant solicitor was upheld as reasonable

bull A restraint imposed by indirect means for example byloss of pension rights (Bull v Pitney Bowes (1966)) orwhere two companies agreed not to take on the otherrsquosemployees (Kores v Kolok (1959)) will be judged by thesame criteria

Restraints on the vendor of a business

bull In Vancouver Malt and Sake Brewing Co v VancouverBreweries Ltd (1934) a company which was licensed tobrew beer but which had not at any time brewed beerwas sold and agreed not to brew any beer for 15 yearsHeld ndash the restraint was void since there was no goodwillof a beer brewing business to be transferred

bull In British Concrete v Schelff (1921) S sold his localisedbusiness to B who had branches all over the UK andagreed not to open any business within 10 miles of any ofBrsquos branches Held ndash the restriction was void B wasentitled only to protect the business he had bought notthe business which he already owned

bull In Nordenfelt v Maxim Nordenfelt (1894) N a worldwidesupplier of guns sold his worldwide business to M andagreed not to manufacture guns anywhere in the worldfor 25 years Held ndash the restriction was valid C

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119

Such a restraint is valid if it is intended to protectthe purchaserrsquos interest in the goodwill of the

business bought and is reasonable

Exclusive dealing agreements

bull In Esso Petroleum v Harpers Garage (1968) a solusagreement for four years was held reasonable but asolus agreement for 21 years was held unreasonable andtherefore void

bull Solus agreements were distinguished from restrictivecovenants in a lease When an oil company leases afilling station to X inserting a clause that X should buyall its requirements from the company this is not subjectto restraint of trade rules because the tenant is notgiving up a previously held freedom

bull But in Amoco v Rocca Bros (1975) the court held thatrestraint of trade rules did apply to lease and lease backagreements

bull In Alec Lobb (Garages) v Total Oil (1985) in a similar leaseback arrangement a solus agreement for between sevenand 21 years was held reasonable on the ground that thearrangement was a rescue operation benefiting theplaintiffs and there were lsquobreakrsquo clauses in theunderlease

bull In Schroeder Music Publishing Co v Macaulay (1974) itwas held that a contract by which an unknown songwriter undertook to give his exclusive services to apublisher who made no promise to publish his work

CA

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120

Solus agreements whereby A agrees to buy all his re-quirements of a particular commodity from B

Most exclusive services contracts are found in professional sport or entertainment

was subject to the restraint of trade doctrine as it waslsquocapable of enforcement in an oppressive mannerrsquo

bull In Greig v Insole (1978) the MCC banned any cricketerwho played for a cricketing lsquocircusrsquo from playing forEngland The court held that the ban was void as beingin restraint of trade

It has been suggested that the courts will hold exclusivedealing and service contracts to be within the restraint oftrade doctrine if they contain unusual or novel features orif there is disparity in the bargaining power and theagreement is likely to cause hardship to the weaker party

Cartel agreementsThese are now covered by statute for example the FairTrading Act 1973 and the Competition Act 1998 This mayalso fall within Article 81 of the Treaty of the EuropeanCommunities

Effect of a restraint

Two tests must be satisfied

bull The lsquoblue pencilrsquo test It must be possible to sever theillegal part simply by deleting words in the contract Thecourt will not add words substitute one word foranother rearrange words or in any way redraft the

CO

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W121

A void restraint is severable Severance can be operated intwo ways

bull severance of the whole of the objectionable promiseleaving the rest of the contract to be enforced

bull severance of the objectionable part of the promise

contract In Mason v Provident Clothing Co Ltd (1913) theHouse of Lords refused to redraft a promise not to workwithin 25 miles of London But in Goldsoll v Goldman(1915) a dealer in imitation jewellery promised not todeal in real or imitation jewellery either in the UK orabroad Dealing in real jewellery and dealing abroadwere severed

bull Severance of the objectionable part of the contract mustnot alter the nature (as distinct from the extent) of theoriginal contract The illegal restraint will not be severedif it is the the main purpose of the restraint or if to severit would alter entirely the scope and intention of theagreement In Attwood v Lamont (1920) the court refusedto sever restrictions on a tailor from competing with anydepartment of the department store which had employedhim The court stated that this was a covenant lsquowhichmust stand or fall in its unaltered formrsquo

Capacity

Minors

The law pursues two conflicting policies in the case ofminors On the one hand it tries to protect minors from theirown inexperience on the other it tries to ensure that personsdealing with minors are not dealt with in a harsh manner

CA

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122

Minorspersons under 18

Persons of unsound mindand drunken persons

Contracts with minors can be divided into three categories

Valid contracts ndash contracts which can be enforced

against a minor

Necessaries

bull In Nash v Inman (1908) a student purchased 11 silkwaistcoats while still a minor The court held that silkwaistcoats were suitable to the conditions of life of aCambridge undergraduate at that time but they were notsuitable to his actual needs as he already had a sufficientsupply of waistcoats

It is important to distinguish between luxurious goods ofutility and goods of pure luxury The status of the minor canmake the former into necessaries but the latter can never beclassified as necessaries

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W123

Contracts fornecessaries

Beneficial contracts of service

Valid contracts Voidable contracts Other contracts

Necessary goods are defined in the Sale of GoodsAct 1979 as lsquogoods suitable to his conditionin life and to his actual requirements at the

time of sale and deliveryrsquo

The burden of proving that the goods are necessaries is onthe seller

They must satisfy the same tests as necessary goods

Professor Treitel considers that both executed andunexecuted contracts for necessaries can be enforced Hecites Roberts v Gray (1913) Roberts agreed to take Gray aminor on a billiard tour to instruct him in the profession ofbilliard player Gray repudiated the contract The court heldthat Roberts could recover damages despite the fact that thecontract was executory

Cheshire Fifoot and Furmston agree that executorycontracts for necessary services are enforceable as in Robertsv Gray but deny that executory contracts for necessary goodscan be enforced

They cite

bull the actual wording of the Sale of Goods Act which refersto time of lsquosale and deliveryrsquo

bull the minor has to pay a reasonable price for the goods notthe contractual price

These indicate it is argued that liability is based onacceptance of the goods not on agreement

Beneficial contracts of service

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124 These must be for the benefit of the minor

Necessary services include education medical and legal services

bull In De Francesco v Barnum (1890) a contract whose termswere burdensome and harsh on the minor was held void

bull But in White City Stadium v Doyle (1935) where a minorhad forfeited his payment for a fight because ofdisqualification the contract was neverthelessenforceable against him Where a contract is on the wholefor the benefit of a minor it will not be invalidatedbecause one term has operated in a way which is not tohis advantage

bull In Chaplin v Leslie Frewin (Publishers) Ltd (1966) the courtenforced a contract by a minor to publish his memoirs asthis would train him in becoming an author and enablehim to earn a living

bull But trading contracts (involving the minorrsquos capital) willnot be enforced even if it does help the minor earn aliving In Mercantile Union Guarantee Co Ltd v Ball (1937)the court refused to enforce a hire purchase contract for alorry which would enable a minor to trade as a haulagecontractor

Voidable contracts

These comprise contracts of continuing obligation such ascontracts to acquire an interest in land or partly paid sharesor partnership agreements

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W125

They must be contracts of service or similar to a contract of service

Contracts which can be avoided by the minor beforemajority or within a short time afterwards

The minor can free himself from obligations for the futurefor example an obligation to pay rent under a lease but willhave to pay for benefits already received He cannot recovermoney already paid under the contract unless there has beena total failure of consideration (Steinberg v Scala (Leeds) Ltd(1923))

Other contracts

But

bull The minor himself may enforce such contracts

bull Property can pass under such contracts

bull Where the contract has been carried out by the minor hecannot recover any property unless there has been atotal failure of consideration or some other failingwhich would equally apply to an adult

bull The Minors Contracts Act 1987 provides that

a minor may ratify such a contract on majority and itcan thereafter be enforced against him

a guarantee of a minorrsquos debt will not be voidbecause a minorrsquos debt is unenforceable against him

a court may if it considers it is just and equitable to doso order a minor to return property he has receivedunder a void contract or any property representing itIt is not clear whether property transferred under thecontract covers money for example in money lendingcontracts It is argued that as lsquoproperty representing itrsquo

CA

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126

These cannot be enforced against a minor

must cover money it would therefore be illogical toexclude money acquired directly but there is as yet nodecision on this point Property cannot presumably berecovered under this section where the minor hasgiven away the contract property

bull Equity will order restitution of property acquired byfraud But there can be no restitution of money (Leslie vSheill (1914)) and no restitution if the minor has resold theproperty

bull An action may be brought in tort if it does not in any wayrely on the contract But although a minor is fully liablefor all his torts he may not be sued in tort if this is just anindirect way of enforcing a contract In Leslie v Sheill(1914) a minor obtained a loan by fraudulentlymisrepresenting his age Held ndash he could not be sued inthe tort of deceit as this would be an indirect way ofenforcing a contract which was void

Persons of unsound mind and drunken persons

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W127

A person who has been declared a lsquopatientrsquo under the MentalHealth Act 1983 by the Court of Protection is incapable ofentering into a valid contract

Other mentally disordered persons and drunken personswill be bound by their contracts unless

bull they were so disordered or drunk that they did notunderstand the nature of what they were doing and

bull the other party was aware of this

Such contracts may be affirmed during a sober or lucidmoment The Sale of Goods Act requires that wherelsquonecessaries are sold and delivered to a person who byreason of mental incapacity or drunkenness is incompetentto contract he must pay a reasonable price for themrsquo

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128

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W129

8 Discharge

A contract may be discharged by

Performance

Precision of performance

bull In Cutter v Powell (1795) a shiprsquos engineer undertook tosail a ship from Jamaica to Liverpool but died before thevoyage was complete Held ndash nothing could berecovered in respect of his service he had not fulfilled hisobligation

bull In Bolton v Mahadeva (1972) a central heating systemgave out less heat than it should and there were fumesin one room Held the contractor could not claimpayment although the boiler and pipes had beeninstalled they did not fulfill the primary purpose ofheating the house

A contract is lsquodischargedrsquo when there are noobligations outstanding under it

Performance Agreement Breach Frustration

Precision ofperformance

Time ofperformance

Tender ofperformance

To discharge his obligations under a contract aparty must perform exactly what he promised

These are examples of lsquoentirersquo contracts which consist ofone unseverable obligation

bull Where the contract is divisible payment can berecovered for the completed part for example goodsdelivered by instalments

bull Where the promisee accepts partial performance InSumpter v Hedges (1898) however payment for partialperformance was refused as Hedges had been left with ahalf-built house and had been put in a position where hehad no choice but to accept partial performance

bull Where the promisee prevents complete performance forexample in Plancheacute v Colburn (1831) a writer wasallowed payment for the work he had already donewhen the publisher abandoned the series

bull Where the promisor has performed a substantial part ofthe contract In Hoenig v Isaacs (1952) the plaintiffdecorated the defendantrsquos flat but because of faultyworkmanship the defendant had to pay pound50 to anotherfirm to finish the job Held ndash the plaintiff was entitled topound150 (the contract price) minus the pound50 paid to the otherfirm cf Bolton v Mahadeva (1972) where the courtdeclined to find substantial performance

This has become known as the doctrine of substantialperformance In order for the claimant to rely on thisdoctrine the failure to perform must amount only to a

CA

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130

Despite the rule that performance must be exact the law will allow payment to be made on a

quantum meruit basis for incomplete performance in the following circumstances

breach of warranty or a non-fundamental breach of aninnominate term It will not apply to a fundamentalbreach or to a breach of condition

Time of performance

bull It is stipulated in the contract see Lombard North Centralv Butterworth (1987)

bull One party has given reasonable notice during thecurrency of the contract that performance must takeplace within a certain time In Rickards v Oppenheim(1950) a car body which had been ordered from theplaintiffs was late The defendants gave final notice to theplaintiff that unless it was delivered within three monthsthey would cancel the order Held ndash time had been madeof the essence the defendants could cancel the order

bull The nature of the contract makes it imperative thatstipulations as to time should be observed for examplecontracts for the sale of perishable goods

The Law of Property Act 1925 stipulated that terms as tothe time of performance should be interpreted in thesame way at common law as in equity In Rainieri v Miles(1981) the House of Lords held that that meant that lateperformance would not give rise to a right to terminatebut would give rise to damages

Tender of performance

If one party tenders performance which is refused he maysue for breach of contract

CO

NT

RA

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W131

Equity considers that time is not lsquoof the essence of a contractrsquo that is a condition

except in the following circumstances

If payment is tendered and rejected the obligation to tenderpayment is discharged but the obligation to pay remains

Agreement

bull If the contract is wholly executory there is no problemwith consideration as both parties surrender their rightsunder the contract

bull If the contract is partly executed one party hascompleted his performance under the contract ndash to makethe agreement binding there must either be a deed (alsquoreleasersquo) or new consideration (lsquoaccord and satisfactionrsquo)or the doctrine of equitable estoppel or waiver mustapply See Chapter 2

CA

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132

A term in the originalcontract for example acondition subsequent

or method for terminating the contract

A new agreement

A contract may be discharged by

As contracts are created by agreement so they may be discharged by agreement Consideration is

necessary to make the agreement binding

Breach

See classification of terms p 45 above

There are special problems where a party repudiates acontract under a wrong assumption that he has a right to doso

bull In Federal Commerce and Navigation v Molena Alpha (1979)the owners of a ship gave instructions not to issue bills oflading without which the charterers could not operatethe ship They wrongly believed that they had the rightto do so Held ndash their conduct constituted a wrongfulrepudiation of the contract which allowed the other partyto treat the contract as discharged

bull In Woodar Investment Development v Wimpey Construction(1980) the purchaser wrongly repudiated a contract forthe sale of land wrongly believing that he had a right todo so Held ndash a wrongful repudiation made in good faithwould not necessarily allow the other party to treat thecontract as discharged

CO

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W133

A breach of condition

A fundamentalbreach of an

innominate term

A breach does not of itself discharge a contract It may allowthe other other party an option to treat the contract as discharged that is to terminate the contract if the breach is sufficiently serious that is if it is

A repudiatory breach

It is difficult to distinguish these decisions The general viewis that the approach in Molena Alpha is to be preferred so thateven a good faith lsquorepudiatoryrsquo response to a non-repudiatory breach will amount to a breach of contract

Effect of treating the contract as discharged

The obligation of both parties to perform (that is theprimary obligation) is discharged from the date of thetermination

However the party in breach may have to pay damages forany losses past and future caused to the innocent party as aresult of the breach (Lombard North Central v Butterworth ndashChapter 3)

The discharge does not operate retrospectively In PhotoProduction v Securicor (1980) Securicor was able to rely on anexclusion clause in the contract despite the fact that thecontract had been discharged

Note ndash it was held by the House of Lords in Vitol v Norelf(1996) that the defendantrsquos failure to perform his ownobligation could constitute acceptance of the plaintiffrsquos repudiation

The decision to terminate cannot be retracted

Anticipatory breach of contract

CA

VE

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134

Explicit

Hochter v La Tour (1853) atravel courier announced

in advance that he would not be fulfilling

his contract

Implicit

Frost v Knight (1872) aparty disabled himself

from carrying out apromise to marry by

marrying another person

Effect of anticipatory breach

bull The other party may sue for damages immediately Hedoes not have to await the date of performance (Hochsterv De La Tour (1853))

bull The innocent party may refuse to accept the repudiationHe may affirm the contract and continue to perform hisobligations under the contract In White and Carter Ltd vMcGregor (1962) the defendants cancelled a contractshortly after it had been signed The plaintiffs refused toaccept the cancellation carried on with the contract andthen sued for the full contract price Held ndash the plaintiffswere entitled to succeed a repudiation does notautomatically bring a contract to an end the innocentparty has an option either to affirm the contract or toterminate the contract unless

the innocent party needs the co-operation of the other party In Hounslow BC v Twickenham GardenDevelopments Ltd (1971) Hounslow council cancelled acontract to lay out a park It was held that thedefendants could not rely on White and Carter vMcGregor because the work was to be performed oncouncil property

the innocent party had no legitimate interestfinancial or otherwise in performing the contractrather than in claiming damages In The AlaskanTrader (1984) a ship chartered to the defendantsrequired extensive repairs at the end of the first yearwhereupon the defendants repudiated the contractThe plaintiffs however refused to accept therepudiation repaired the ship and kept it fullycrewed ready for the defendantrsquos use Held ndash theplaintiffs had no special interest in keeping the

CO

NT

RA

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LA

W135

contract alive They should have accepted therepudiation and sued for damages

Where a party has affirmed the contract

bull He will have to pay damages for any subsequent breachwhich he commits he cannot argue that the other partyrsquosanticipatory breach excuses him (Fercometal SARL vMediterranean Shipping Co (1988))

bull There is a danger that a supervening event may frustratethe contract and deprive the innocent party of his right todamages as in Avery v Bowden (1855) (below)

Frustration

The doctrine has been kept to narrow limits

The basis of the doctrine and the tests

bull Until the 19th century the courts adhered to a theory oflsquoabsolute contractsrsquo as in Paradine v Jane (1647) It wassaid that if the parties wished to evade liability because of

CA

VE

ND

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LA

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136

By the courts whohave insisted that the

supervening event mustdestroy a fundamental

assumption

By business persons who have lsquodrafted outrsquo

the doctrine byforce majeure clauses

Frustration occurs where it is established that due to a subsequent change in circumstances the

contract has become impossible to perform or it hasbeen deprived of its commercial purpose

some supervening event then they should provide forthis in the contract However in Taylor v Caldwell (1863)the courts relented and held that if the contract becameimpossible to perform due to some extraneous cause forwhich neither party was responsible then the contactwould be discharged

bull The modern test was enunciated by Lord Simon inNational Carriers v Panalpina (1981) frustration ariseswhere lsquothere supervenes an event (without default ofeither party and for which the contract makes nosufficient provision) which so significantly changes thenature (not merely the expense or onerousness) of theoutstanding contractual rights andor obligations fromwhat the parties could reasonably have contemplated atthe time of its execution that it would be unjust to holdthem to the literal sense of its stipulations in the newcircumstancesrsquo

bull In Davis Contractors v Fareham UDC (1956) Lord Radcliffstated that frustration occurs where to requireperformance would be to render the obligationsomething lsquoradically differentrsquo from what wasundertaken by the contract

Circumstances in which frustration may occur

bull The subject matter of the contract has been destroyed oris otherwise unavailable

In Taylor v Caldwell (1863) a contract to hire a music hallwas held to be frustrated by the destruction of the musichall by fire (see also s 7 of the Sale of Goods Act 1979)

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W137

Note ndash it is not the circumstances but the nature ofthe obligation which must have changed

bull But the unavailable or destroyed object must have beenintended by both parties to be the subject of the contract

In Blackburn Bobbin Co v Allen (1918) the contract was forthe sale of lsquobirch timberrsquo which the seller intended toobtain from Finland Held ndash the contract was not frustratedwhen it became impossible to obtain timber from FinlandThe subject matter of the contract was birch timber notFinnish birch timber

bull Death or incapacity of a party to a contract of personalservice or a contract where the personality of one partyis important

In Condor v The Baron Knights (1966) a contract between apop group and its drummer was held frustrated whenthe drummer became ill and was unable to fulfill theterms of the contract A claim for unfair dismissal can alsosometimes be defeated by the defence of frustrationwhere an employee has become permanentlyincapacitated or imprisoned for a long period

bull The contract has become illegal to perform eitherbecause of a change in the law or the outbreak of war

In Avery v Bowden (1855) a contract to supply goods toRussia was frustrated when the Crimean War broke out Ithad become an illegal contract ndash trading with the enemy

Note the outbreak of war between two foreign States willnot render a contract illegal but may make it impossibleto perform In Finelvet v Vinava Shipping Co (1983) acontract to deliver goods to Basra did not become illegalon the outbreak of the Iraq-Iran war but was frustratedwhen it became too dangerous to sail to Basra

bull The commercial purpose of the contract has failedCA

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138

Establishing whether a contract is impossible or illegal toperform is relatively straightforward but it is more difficultto decide whether the commercial purpose of the contracthas failed

It may happen in the following circumstances

bull Failure of an event upon which the contract was based

In Krell v Henry (1903) the court held that a contract tohire a room overlooking the proposed route of thecoronation procession was frustrated when thecoronation was postponed The purpose of the contractwas to view the coronation not merely to hire a room Ithas been argued that the fact that the hire of the roomwas a lsquoone offrsquo transaction was important The judge inthe case contrasted it with the hire of a taxi to take theclient to Epsom on Derby day This would be a normalcontractual transaction for the taxi driver thecancellation of the Derby would not therefore frustratethe contract

In the case of Herne Bay Steamboat Co v Hutton (1903) thecourt refused to hold that a contract to hire a boat to seethe king review the fleet was frustrated when the reviewwas cancelled the fleet was still there and could beviewed ndash there was therefore no overall failure of thepurpose of the contract

bull Government interference or delay

In Metropolitan Water Board v Dick Kerr (1918) a contracthad been formed in 1913 to build a reservoir within sixyears In 1915 the government ordered the work to bestopped and the plant sold Held ndash the contract wasfrustrated C

ON

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AW

139

In Jackson v Union Marine Insurance Co (1874) a ship waschartered in November to proceed with all dispatch toNewport The ship did not reach Newport until thefollowing August Held ndash the contract was frustratedsince the ship was not available for the voyage for whichshe had been chartered

In The Nema (1982) a charter party was frustrated when along strike closed the port at which the ship was due toload so that of the six or seven voyages contracted to bemade between April and December only two could bemade

Similar difficult problems arise in the case of contracts ofemployment (illness or imprisonment) and leases

It has been suggested that where the contract is of a fixedduration and the unavailability of the subject matter isonly temporary the court should consider the ratio of thelikely interruption to the duration of the contract

LeasesIt had long been thought that the doctrine of frustration didnot apply to leases (see Paradine v Jane (1647) and CricklewoodInvestments v Leightonrsquos Investments (1945))

bull However in National Carriers v Panalpina (1981) theHouse of Lords declared that in principle a lease couldbe frustrated In that case a street which gave the onlyaccess to a warehouse was closed for 18 months Thelease for the warehouse was for 10 years Held ndash the leasewas not frustrated

bull The House of Lords did state however that where therewas only one purpose for the property leased and thispurpose became impossible then the lease would be

CA

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140

frustrated for example a short term holiday lease It isstill true that it will be very rare for a lease to befrustrated

Limits to the doctrine of frustration

It will not be applied

bull In Davis Contractors LTD v Fareham UDC (1956) thecontractors had agreed to build a council estate at a fixedprice Due to strikes bad weather and shortages oflabour and materials there were considerable delays andthe houses could only be built at a substantial loss Heldndash the contract was not frustrated

bull See also the Suez cases where the courts refused to holdshipping contracts frustrated as a result of the closing ofthe Suez Canal unless the contracts specified a routethrough the canal

But a force majeure clause will be interpreted narrowly asin Metropolitan Water Board v Dick Kerr amp Co (1918) wherea reference to lsquodelaysrsquo was held to refer only to ordinarydelays and not to a delay caused by government decree

CO

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W141

lsquoDoctrine must be kept within narrow limitsrsquo

on the grounds of inconvenience increase in expense loss of profit

Where there is an express provision in thecontract covering the intervening event

(that is a force majeure clause)

A force majeure clause will not in any case be applied to covertrading with an enemy

A contract will not be frustrated if the event makingperformance impossible was the voluntary action of oneof the parties If the party concerned had a choice open tohim and chose to act in such a way as to makeperformance impossible then the frustration will be self-induced and the court will refuse to treat the contract asdischarged

bull In The Superservant Two (1990) one of two barges ownedby the defendants and used to transport oil rigs wassunk They were therefore unable to fulfill their contractto transport an oil rig belonging to the plaintiff as theirother barge (Superservant One) was already allocated toother contracts The court held that the contract was notfrustrated The plaintiffs had another barge available butchose not to allocate it to the contract with the plaintiffs

This case illustrates both the courts reluctance to applythe doctrine of frustration and the advantage of using aforce majeure clause

If by reason of special knowledge the event wasforeseeable by one party then he cannot claimfrustration

bull In Amalgamated Investment and Property Co v John Walker ampSons Ltd (1976) the possibility that a building could belisted was foreseen by the plaintiff who had inquiredabout the matter beforehand A failure to obtain planning

CA

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142

Where the frustration is self-induced

Where the event was foreseeable

permission was also foreseeable and was a normal riskfor property developers The contract was therefore notfrustrated

The effect of frustration

This rule could be very unfair in its operation as in Chandlerv Webster (1904) where the hirer had to pay all the sum duefor the hire of a room to view the coronation despite thecourt holding the contract frustrated by the cancellation ofthe coronation

This rule however would only apply in the event of a totalfailure of consideration and could itself in any case causehardship if the other party had expended a considerableamount of money in connection with the contract

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W143

At common law the loss lay where it fell that isthe date of the frustrating event was all important

Anything paid or payable before that datewould have to be paid Anything payable

after that date need not be paid

In the Fibrosa case (1943) the House of Lordsdid move away from this rule and held that

where there was a total failure of considerationthen any money paid or payable in advance

would have to be returned

Note these two sections are to be applied independently Theexpenses in s 1(2) can only be recovered from lsquosums paid orpayable before the frustrating eventrsquo

Section 1(3) was applied in BP Exploration v Hunt (1982)where it was held that the court must

bull identify and value the lsquobenefit obtainedrsquo

bull assess the lsquojust sumrsquo which it is proper to award

The court also stated that

bull the section was designed to prevent unjust enrichmentnot to apportion the loss or to place the parties in theposition they would be in had the contract beenperformed or to restore them to their pre-contractposition

CA

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144

The Law Reform (Frustrated Contracts) Act 1943was therefore passed to remedy these deficiencies

It provided

s 1(2) ndash all sums paid or payable before the frustratingevent shall be recoverable or cease to be payable but

the court has a discretionary power to allow the payeeto set off against the sum so paid expenses he has

incurred before the frustrating event

s 1(3) ndash where one party has obtained a valuablebenefit before the time of discharge the other

party may recover from him such sums asthe court considers just

bull in assessing the valuable benefit the section requiredreference to the end benefit received by a party not thecost of performance In assessing the end benefit theeffect of the frustrating event had to be taken intoaccount

bull the cost of performance can be taken into account inassessing the just sum

In BP v Hunt (1982) BP were to do the exploration andprovide the necessary finance on an oil concession ownedby Mr Hunt in Libya They were also to provide certainlsquofarm-inrsquo payments in cash and oil In return they were toget a half-share in the concession and 5 of theirexpenditure in reimbursement oil A large field wasdiscovered the oil began to flow then in 1971 the LibyanGovernment nationalised the field

The court held

bull the valuable benefit to Hunt was the net amount of oilreceived plus the compensation payable by the LibyanGovernment which amounted to pound85000000

bull the just sum would cover the work done by BP less thevalue of the reimbursement oil already received Thiswas assessed at pound34000000 As the valuable benefitexceeded the just sum BP recovered their expenses infull The position would have been very differenthowever if the field had been nationalised at an earlierstage and no compensation had been paid

CO

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W145

The Law Reform (Frustrated Contracts) Act 1943 does notapply to

CA

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146

Charter parties Contracts of insurance

Contracts for the sale of specificgoods which have perished

CO

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W147

9 Remedies for breach of contract and restitution

not

If no loss has been suffered then nominal damages onlywill be awarded

bull In Surrey CC v Bredero Homes (1993) the court refused toaward damages against a defendant who had notcomplied with planning permission as there was no lossto the council

Unliquidated damages (that is damages assessed by

the court)

The purpose of unliquidated damages is to compensate the claimant for the loss he has

suffered as a result of a breach

Unliquidateddamages

Equitableremedies

Liquidateddamages

Restitutionor

quasi-contract

to punish the defendantPunitive damages are

not awarded for breachof contract

generally to recoup again made by the

defendant (but cf AG vBlake (2000) below)

bull However in Chaplin v Hicks (1911) damages wereawarded for the loss of a chance to win a competitionalthough there was no certainty that the plaintiff wouldhave been one of the winners

Reliance damages rather than expectation damages may beappropriate where the benefits which would have beenobtained by successful performance are difficult to assess asin

bull McRae v Commonwealth Disposals Commission (1951)where the plaintiff recovered the expenses incurred insearching for a wreck which did not exist

bull Anglia Television v Reed (1972) where the leading actor ina film project withdrew at the last moment The plaintiffswere able to recover all their wasted expenditure on theprogramme including even those incurred before thecontract had been signed

CA

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148

Methods of compensating the claimant

Expectation that is loss ofbargain is the traditional

basis for assessing damagesin contract It aims to putthe claimant in the sameposition as far as money

can do it as if the contracthad been performed

Reliance that is out of pocketor wasted expenditure This

is the normal way ofassessing damages in tort

but can be used in contractas illustrated below

bull But cf Regalian Properties v London Dockland Development(1995) where expenses incurred while negotiations wereexpressly lsquosubject to contractrsquo were not recoverable

It has been held that a claimant may freely choose betweenexpectation and reliance damages unless the difficulty inidentifying profits is because he has made a lsquobad bargainrsquo

bull In C and P Haulage v Middleton (1983) the plaintiff hired agarage for six months on the basis that anyimprovements would become the property of thelandlord He was ejected in breach of contract and suedfor the cost of the improvements Held ndash expenditurewould have been wasted even if the contract had beenperformed

bull It is for the defendant to prove that the claimant hadmade a bad bargain as in CCC Films v Impact QuadrantFilms (1985) where the defendant failed to prove that theplaintiff would not have made a profit from distributingthe films had they been delivered in accordance with thecontract

bull In normal circumstances the claimant will ask fordamages on an expectation basis as this is moreprofitable for him

Restitutionary measure

In Attorney General v Blake (2000) the House of Lords for thefirst time recognised that in some circumstances alsquorestitutionaryrsquo measure of damages requiring thedefendant to pay over the profit made as a result of thebreach of contract may be appropriate The case was anunusual one involving a book published by a member ofthe security services who had spied for Russia The House ofLords regarded the defendant as having been under

CO

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W149

something lsquoakin to a fiduciary obligationrsquo and it is not yetclear how far the principle adopted in this case is likely to beapplied in other situations

Contributory negligence

This is only relevant where the liability in contract isidentical with the liability on tort that is the breach is of acontractual duty to take care (Barclays Bank v FaircloughBuilding (1994))

Quantification of damage

Where lsquoloss of bargainrsquo damages are claimed there are twopossible methods of quantification

The court will normally adopt the most appropriate (RuxleyElectronics and Construction v Forsyth (1995))

Prima facie rules

CA

VE

ND

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150

Sale of goods ndash difference in value

Failure to repair (lease) ndash difference in value

Building contracts ndash cost of cure

Difference in value Cost of cure

Failure to deliver goods

bull In Williams Bros v Agius (1914) the profit which wouldhave been earned on a resale was ignored damagesrepresented the difference between the contract price andthe market price (which was higher than the resale price)

Failure to accept delivery and pay

bull If the seller is a dealer in mass produced goods then thedamage to him will be the loss of profit on onetransaction The claimant had sold one item less than heotherwise would have during the year (Thomson vRobinson (1955))

bull However if the mass produced item is in short supplyand the number of sales is governed by supply not bydemand then there is no loss of profit and damageswould not be awarded (Charter v Sullivan (1957))

bull The damages revert to the difference between thecontract price and market price in the case of secondhand goods even if the seller is a dealer (Lazenby Garagesv Wright (1976))

CO

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W151

The Sale of Goods Act 1979 states thatdamages will represent the difference between

the contract price and the market price

The Sale of Goods Act 1979 states that damages willagain represent the difference between the contract

price and the market price

Limitations on principle of expectation

Although the stated aim of the expectation basis of assessingdamages is to put the claimant in the position he would havebeen in had the contract been performed there are a numberof rules which militate against this result

Remoteness of damage

bull In Hadley v Baxendale (1854) a mill was closed because ofthe delay of a carrier in returning a mill shaft The courtheld that the carrier was not liable for damages for theclosure of the mill as he was not aware that the absenceof a mill shaft would lead to this conclusion

The following damages were said to be recoverable

those arising naturally out of the breach

those which because of special knowledge wouldhave been within the contemplation of the parties

bull In Victoria Laundry v Newman Industries (1949) the rulewas restated and based on knowledge The laundry wasable to recover damages for normal loss of profitC

AV

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DIS

HL

AW

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RD

S152

Damages cannot be recovered for losses that are tooremote The losses must be lsquowithin the reasonable

contemplationrsquo of the parties

Kind ofloss

CausationDuty of

mitigationRemotenessof damage

following a delay in the delivery of a boiler but not forspecially lucrative dyeing contracts they were offeredduring this time

Damages were said to be recoverable for losses whichwere within the reasonable contemplation of the partiesat the time of the contract either from

imputed knowledge or

actual knowledge

bull In The Heron II (1969) the House of Lords confirmed thata higher degree of foreseeability is required in contractthan in tort Damages were awarded to cover lossesarising from the late delivery of sugar to Basra Theparties must have been aware that the price of sugar inBasra might fluctuate For a loss not to be too remotethere must be

lsquoa real dangerrsquo

lsquoa serious possibilityrsquo

or the loss must be

lsquonot unlikelyrsquo

lsquoliable to resultrsquo

The difference between the tests of remoteness in contractand tort has been criticised but justified on the ground thata contracting party can protect himself against unusual risksby drawing them to the attention of the other party to thecontract

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Application of remoteness rules

bull Imputed knowledge

Hadley v Baxendale (1854) Victoria Laundry v Newman Industries (1949)The Heron II (1967)

bull Actual knowledge

Defendantrsquos knowledge of special circumstances must beprecise This encourages contracting parties to discloseclearly any likely exceptional losses in advance

In Simpson v L amp NWR (1876) the defendant was liable forloss caused to the plaintiff by delivering goods toNewcastle Show Ground the day after the show had finished

In Horne v Midland Railway (1873) defendants were heldnot liable for exceptionally high profit lost by plaintiffthrough late delivery They knew that shoes would haveto be taken back if not delivered on 3 February but notthat the plaintiff would lose an exceptionally high profit

bull In Wroth v Tyler (1974) the defendant was liable for thefull difference between the contract price and the marketprice although the rise in the market price wasexceptional and could not have been foreseen

bull In Parsons (Livestock) Ltd v Uttley Ingham Co Ltd (1978) thedefendants who had supplied inadequately ventilatedhoppers for pig food were held liable for the loss of theplaintiffrsquos pigs even though the disease from which they

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Note the test of remoteness determinesentitlement not quantum

died was not foreseeable It was enough that they couldhave contemplated any illness of the pigs (But cf VictoriaLaundry v Newman Industries (1849))

Lord Denning in this case argued that so far as physicaldamage was concerned (not loss of profit) all directlosses should be recoverable as in tort

Lord Scarman has also stated that it would be ridiculousif the amount of damages depended on whether anaction was framed in contract or tort A House of Lordsrsquodecision on these issues is awaited

It is sometimes disputed that the decisions since Hadley vBaxendale have not in any way clarified the rule

Types of loss recognised

This is the normal ground for the award of damages forbreach of contract

However damages for non-pecuniary loss will be awardedin specific cases for example

bull Pain and suffering consequent on physical injury

bull Physical inconvenience

In Watts v Morrow (1991) damages were awarded tocover the inconvenience of living in a house whilst it wasbeing repaired C

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155

Pecuniary loss

Non-pecuniary loss

bull Damage to commercial reputation

In Gibbons v Westminster Bank (1939) damages wereawarded to cover the losses caused by the wrongfulreferring of a cheque

Cf Malik v BCCI (1997) where the House of Lords heldthat compensation was payable for the stigma of havingworked for an organisation which had been run corruptly

bull Distress to claimant

Traditionally damages for injured feelings were notawarded for breach of contract Addis v Gramaphone Co(1909) This general principle has recently been confirmedby the House of Lords in Johnson v Unisys Ltd (2001)

However some limited exceptions to this rule have beenrecognised

Damages for disappointment were awarded againsta holiday company in Jarvis v Swan Tours (1973)where the holiday was not as described

In Hayes v Dodd (1990) the Court of Appealconfirmed that damages for distress are notrecoverable in normal commercial contracts butcould be recovered in contracts

CA

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156

to provide pleasure See Jarvis v Swan Tours Ltd

(1973)

to prevent distress Heywood v Wellers (1976) ndashsolicitorrsquos failure to obtain

an injunction

It has been suggested that damages for distress areparticularly appropriate in lsquoconsumer contractsrsquo

The duty of mitigation

In Payzu v Saunders (1919) the plaintiff had refused the offerof goods at below market price In Brace v Calder (1895) anemployee dismissed by a partnership turned down an offerof similar employment by one of the partners In both casesthe plaintiff was penalised for his failure to mitigate

bull He need not however take lsquounreasonablersquo steps inmitigation

In Pilkington v Wood (1953) it was stated that the plaintiffdid not need to embark on hazardous legal action inmitigation of his loss He should not take unreasonablesteps which would increase losses

bull The claimant cannot recover damages for losses he hasavoided

In British Westinghouse v Underground Electric Railways Co(1912) the plaintiff replaced a defective turbine with anew turbine which was so much more efficient that thesavings exceeded the losses on the defective turbineHeld ndash no loss ndash no damages

bull Note ndash the duty to mitigate does not arise until there hasbeen an actual breach of contract or an anticipatorybreach has been accepted by the other party (see Whiteand Carter v McGregor (above))

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The claimant has a duty to take reasonablesteps to mitigate his loss

Causation (losses which the defendant did not cause)

bull The action of a third party may break the chain ofcausation if it is not foreseeable

In Lambert v Lewis (1981) a farmer continued to use acoupling even though he knew it was broken Held ndash thefarmer was responsible for losses caused by the failure ofthe coupling the manufacturer could not have foreseenthat he would continue to use it knowing it was faulty

bull However where the action is foreseeable the chain ofcausation will not be broken

In Stansbie v Troman (1948) a painter who in breach ofcontract had left a door unlocked was held liable forgoods taken by thieves since this was the kind of loss hehad undertaken to guard against by locking the doors

CA

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158

The breach must have caused the loss as well ashaving preceded the loss

Liquidated damages

Damages set by the parties themselves

The following guidelines for distinguishing between thetwo were suggested in Dunlop Pneumatic Tyre Ltd v NewGarage and Motor Co (1915)

bull a penalty ndash if the sum is extravagant and unconscionable

bull a penalty ndash if a larger sum is payable on the failure to paya smaller sum

bull a penalty ndash if the same sum is payable on major andminor breaches

bull it is no obstacle to the sum being liquidated damages thata precise pre-estimate is almost impossible

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Penalty clauses will not be enforced by the courtInstead the court will award unliquidated damages

The parties may stipulate that a certain sum mustbe paid on a breach of contract

If the sum represents a genuine pre-estimatethen it will be enforced by the court

as liquidated damages

If the sum is not genuine but is an attemptto frighten the other party into performing

then it is a penalty A penalty will not beenforced by the court

The rule against penalties does not apply to

bull Acceleration clauses

Here the whole of a debt becomes payable immediatelyif certain conditions are not observed

bull Deposits

Money paid otherwise than on a breach of contract

Alder v Moore (1961)

Bridge v Campbell Discount Co Ltd (1962)

bull clauses declaring a term to be a condition

Lombard North Central v Butterworth (1987)

Equitable remedies

Specific performance

Traditionally specific performance will only be awardedwhere damages are not an adequate remedy that is

CA

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160

An order of the court directing the defendant to fulfill his obligations under the contract

Specific performance Injunctions

All equitable remedies are discretionary

The following will be taken into account

bull Mutuality Negative ndash a minor cannot get it because it isnot available against a minor Positive ndash a vendor of landmay obtain it although damages would be an adequateremedy because it is also available to a purchaser of land

bull Supervision The need for constant supervisionprevented the appointment of a resident porter beingordered in Ryan v Mutual Tontine Association (1893) but inPosner v Scott Lewis (1986) a similar order was madebecause the terms of the contract were sufficientlyprecise

bull Impossibility ndash Watts v Spence (1976) ndash land belonged to athird party C

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161

Where damages are difficult to assessfor example annuities

Where there is no alternative remedy available(Beswick v Beswick (1968)) see above

Where the claimant cannot get a satisfactory substitute for example

contracts for the sale of land or contracts for the sale of goods which cannot be

obtained elsewhere for example antiquesvaluable paintings ndash unless bought as an

investment as in Cohen v Roche (1927)

bull Hardship ndash Patel v Ali (1984) ndash defendant would lose thehelp of supportive neighbours

bull Conduct of the claimant ndash Shell (UK) Ltd v Lostock Garages(1977) ndash Shellrsquos behaviour was unreasonable

bull Vagueness ndash Tito v Waddell (1977) ndash see above

bull Mistake ndash Webster v Cecil (1861) ndash see above

Special problems

bull Contracts of personal service

These are considered to involve personal relationshipsand are therefore not thought suitable for an order of specific performance

However such orders were exceptionally made in Hill vCA Parsons Ltd (1972) and Irani v Southampton AHA(1985) on the ground that in the very unusualcircumstances of those cases the mutual trust betweenthe employer and employee had not been destroyed

bull Building contracts

The courts are reluctant to enforce building contracts onthe grounds that damages are generally an adequateremedy the terms are often vague there are difficultieswith supervision

But it was held in Wolverhampton Corpn v Emmons (1901)that provided the terms were clear the problem ofsupervision would not be an absolute barrier

Injunctions

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162

These are orders directing the defendant not to do a certain act

Types of injunction

Injunctions are also discretionary remedies and are subject to the similar constraints to orders of specific performance However an injunction will be granted toenforce a negative stipulation in a contract of employmentas long as this is not an indirect way of enforcing thecontract

bull Warner Bros v Nelson (1937)

bull cf Page One Records v Britton (1968)

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Interim injunction

This is designed to regulatethe position of the parties

pending trial

Prohibitory injunction

This is an ordercommanding the

defendant not to dosomething

Mandatory injunction

This orders thedefendant to undosomething he had

agreed not to

A comparison of the remedies for misrepresentation

and for breach of contract

Setting aside contracts

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164

DamagesDamages available as of right Normally assessedon expectation basis Losses must be within thecontemplation of the parties See above

Damages available in tort of deceit negligentstatements and under s 2(1) of the 1967 ActDamages assessed on reliance basis All lossesflowing directly from misrepresentation will becovered whether or not foreseeable in actions indeceit and under s 2(1) of the 1967 Act (Royscot vRogerson (1991)) Losses must be foreseeable inthe tort of negligence No right to damages forinnocent misrepresentation but may be awardedin lieu of rescission at the discretion of the court

Breach

Misrep

Termination or rescission for breach

Available only for breaches of conditionsfundamental breaches of innominate terms and repudiations

Contract discharged from time of breachdischarge not retrospective Innocent party canalso sue for damages (see Chapter 8)

Rescission

Available for all misrepresentations but atdiscretion of court and subject to certain barsContract cancelled prospectively and retrospectivelyparties returned to the position they were in beforethe contract was entered into (see Chapter 6)

Breach

Misrep

Exclusion clauses

See ss 3 6 7 of UCTA

All clauses must be reasonable

Restitution or quasi-contract (based on unjust

enrichment)

It covers

Money may be recovered

bull Where there is a total failure of consideration (see Fibrosacase (frustration))

In Rowland v Divall (1923) the plaintiff had bought a carwhich turned out to be stolen property and which wasrecovered by the owner Despite the fact that the plaintiffhad had the use of the car for a considerable time and ithad fallen in value during this time the plaintiff was ableto recover the full purchase price of the car from thedefendant There had been a total failure of consideration

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Breach

Misrep

recovery of money payment for work done

Restitution may be available where parties arenot in a contractual relationship

It is based on the principle of unjust enrichment it allows the injured party to

recover money paid or the value of benefitsconferred where it would be unjust to allow the

other party to retain the benefit

bull Money paid under a mistake of fact is recoverableprovided the mistake is as to a fact which if true wouldhave legally or morally obliged the claimant to pay themoney or is sufficiently serious to require payment forexample

In Kleinwort Benson Ltd v Lincoln City Council (1998) theHouse of Lords held that in certain circumstances moneypaid under a mistake of law could also be recovered if itwould be unjust to allow the recipient to retain the money(See also Nurdin and Peacock plc v DB Ramsden amp Co Ltd(1999))

bull Money paid under a void contract

For example contracts void

bull In Westdeutche Landesbank v Islington LBC (1994) thecouncil had entered into a rate swapping arrangementwith the bank under which the bank had paid pound2500000to the council in advance The council had paidapproximately pound1200000 to the bank by instalment andargued that since there was not a total failure ofconsideration it should not have to pay the bank theremaining pound1300000 The Court of Appeal held that theprinciple upon which money must be repaid under a

CA

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166

because ultra vires

as against public policy

for a commonmistake

Mistaken payments underinsurance policies

Mistaken payments intoa bank account

void contract is different from that on a total failure ofconsideration Recovery of money under a void contractis allowed if there is no legal basis for such a payment

bull Note ndash money paid under contract which is void forillegality cannot be recovered unless the action can beframed without relying on the contract

Parkinson v Royal College of Ambulance (1925)Bowmakers v Barnet Instruments (1945) Tinsley v Milligan (1993)

bull Note ndash recovery under these heads will not be possible if

In Lipkin Gorman v Karpnale Ltd (1992) a partner in a firmof solicitors was a compulsive gambler who regularlygambled at a casino run by the defendants In order tofinance his gambling he had drawn cheques on clientaccounts where he was the sole signatory He had spentat least pound154000 of this money at the defendantrsquos casinoand the plaintiff sued for the return of the money as ithad been received under a contract which was void(declared void by statute) Held ndash where the true ownerof stolen money sought to recover it from an innocentthird party the recipient was under an obligation toreturn it where he had given no consideration for itunless he could show that he had altered his position ingood faith In this case the plaintiff was able to recoverthe pound154000 less the winnings paid to the partner The

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the payer hadintended the

payee tobenefit in any

event

there is goodconsiderationfor exampledischarge of

a debt

the payee haschanged

position as aresult of the

payment

casino had altered their position on each gamble in thatthey had become vulnerable to a loss

However in South Tyneside Metropolitan Borough Council vSvenska International (1994) the House of Lords allowedthe council to recover approximately pound200000 it had paidto a bank under a rate swap agreement which had beendeclared ultra vires and void The court rejected thebankrsquos claim that it had changed its position in that it hadentered into financial arrangements with otherorganisations in order to hedge its losses

bull Money paid to a third party for the benefit of thedefendant provided the claimant was not acting as avolunteer (for example a mother paying off a sonrsquos debt)but was acting under some constraint

In Macclesfield Corpn v Great Central Railway (1911) theplaintiffs carried out repairs to a bridge which thedefendants were legally obliged (but had refused) tomaintain They were regarded as purely volunteers andcould not therefore recover the money However in Exallv Partridge (1799) the plaintiff paid off arrears of rentowed by the defendant in order to avoid seizure of theplaintiffrsquos carriage which was kept on the defendantrsquospremises The plaintiff was acting under a constraint andcould therefore recover the money

Payment for work done

bull Where the claimant has prevented performance of thecontract (see Plancheacute v Colburn (1831))

CA

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168

Here the claimant is seeking compensationon a quantum meruit basis (cf s 1(3) of the

Law Reform (Frustrated Contracts) Act 1943)

bull Where work has been carried out under a void contractIn Craven Ellis v Canons Ltd (1936) the plaintiff hadcarried out a great deal of work on behalf of a companyon the understanding that he had been appointedmanaging director It was later discovered that he hadnot properly been appointed managing director Thecourt held that he should be paid on a quantum meruitbasis for the work he had done

bull Where agreement has not been reached and

the work was requested by the defendants InWilliam Lacey v Davis (1957) the plaintiffs hadsubmitted the lowest tender for a building contractand had been led to believe that they would beawarded it At the defendantsrsquo request they thenprepared various plans and estimates Thedefendants then decided not to proceed The courtordered the defendants to pay a reasonable sum on aquantum meruit basis for the work that had beendone on analogy with Craven Ellis v Cannons or

the work had been freely accepted In British SteelCorpn v Cleveland Bridge Engineering Co (1984) a letterof intent was issued by the defendants indicating thatthey intended to enter into a contract with theplaintiffs for the construction and delivery of cast-steel lsquonodesrsquo However it proved impossible to reachagreement on a number of major items Despite this anumber of lsquonodesrsquo were eventually constructed andaccepted by the defendants It was held by the courtthat the defendants should pay for the nodes they hadaccepted

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10 Privity of contract

Introduction

The traditional approach to the doctrine of privity is that

Privity of contract is closely associated with the rule thatconsideration must move from the promisee See Dunlop vSelfridge (above)

Only a party to a contractcan sue on a contract

Only a party to a contractcan be sued on a contract

In Tweddle v Atkinson(1861) the plaintiff had

married Mr Guyrsquosdaughter The plaintiffrsquosfather and Mr Guy had

agreed together that theywould each pay a sum ofmoney to the plaintiff Mr

Guy died before themoney was paid and the

plaintiff sued hisexecutors The action wasdismissed ndash the plaintiffwas not a party to thecontract which wasmade between the

two fathersSee also

Beswick v Beswick (1968)

In Dunlop v Selfridge(1915) Dew amp Co at the

instigation of Dunlophad placed a minimum

resale price in theircontract with Selfridge

Held ndash Dunlop could notsue Selfridge for breach of contract they were

not parties to the contract nor had they

given consideration to Selfridge

Matters relevant to the doctrine of privity

One part of the traditional approach that is that relating toconferring benefits has recently been significantly changedby legislation which is discussed below In addition thereare a number of situations which fall outside the scope ofthe doctrine

Matters outside the doctrine

It has been argued that it is only because English law hasdeclared many transactions not to be subject to the doctrineof privity that the doctrine itself has survived so long

CA

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172

AssignmentRights can be assignedprovided that certain

formalities are followed

AgencyA principal can sue and

be sued on contractsmade by an agent

on his behalf

TrustsWhere a trust has beencreated the beneficiaryunder the trust can suethe trustees even if hewas not a party to the

original agreement

Multi-partite agreementsIn Clarke v Dunraven(1897) entrants in a

yacht race were allowedto sue each other TheCompanies Act 1985allows shareholders

to sue each other

Land law recognises a number of exceptions

Statutory exceptions

bull Price maintenance agreements

bull Various insurance contracts

bull For example Married Womanrsquos Property Act

bull Law of Property Act 1925 s 56

bull Negotiable instruments

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W173

Collateral contractsIn limited cases the court will find a separate

(collateral) contract between the promisor and the third party

(Shanklin Pier v Detel Products (1951))

LeasesThe benefits and

obligations under a lease can be transferred

to third parties

Law of Property Act 1925 s 56

See below

Restrictive covenantsThese can bind a third party under the rule in

Tulk v Moxhay (1848)

Conferring benefits on a third party

Statutory intervention

The common law rule preventing a third party fromenforcing a contract was much criticised and has now beenreformed by legislation that is the Contracts (Rights ofThird Parties) Act 1999 based on recommendations from theLaw Commission

Main effectA third party will be able to enforce a contractual provisionpurporting to confer a benefit on him or her if both of twoconditions are satisfied (s 1)

Right to vary the contract

Unless they have provided otherwise the contractingparties will lose the right to vary or cancel the provisionbenefiting the third party if (s 2)

bull the third party has communicated his assent or

bull the third party has relied on the term and the promisor isaware of this or

bull the third party has relied on the term and the promisorcould be reasonably expected to have foreseen this

on its proper constructionthe contract is intended to

give the third party a legallyenforceable right

the contract expresslyprovides that the third party

may benefit

CA

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174

DefencesThe promisor can raise against the third party any defencesthat could have been raised against the promisee (forexample misrepresentation duress) (s 3)

The promisor can also rely on defences set-offs orcounterclaims arising from prior dealings with the thirdparty

ExceptionsThere cannot be double liability that is as against thepromisee and the third party (s 5)

Some contracts are excluded from the Act (s 6)

bull contracts on a bill of exchange or promissory note

bull terms of a contract of employment as against anemployee

bull contracts for the carriage of goods by sea or if subject toan international transport convention by road rail or air

The exception for carriage of goods by sea does not apply toreliance on an exclusion clause (as in The Eurymedon (1975)for example)

Note also that the main contracting parties are in control ndashthey can decide that the provisions of the new Act shouldnot apply and there will be nothing that the third party cando about it

The Act does not affect the other part of the privity doctrinendash relating to the imposition of obligations on third parties ndashwhich remains governed by the common law

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The common law approach

The common law developed a number of devices to allow athird party to receive the benefit of contract by

These devices will be of much less importance now that theContracts (Rights of Third Parties) Act 1999 is in force Theymay still be used however particularly in situations wherefor one reason or another the 1999 Act does not apply

Attempts to allow the third party to sue

bull Attempts to extend the use of lsquotrustsrsquo

In Walfordrsquos case (1919) under a charterparty theship owner promised the charterer to pay a broker acommission Held ndash the charterer was trustee of thispromise for the broker who could thus enforce itagainst the ship owner

However in Re Schebsman (1944) a contract betweenSchebsman and X Ltd that in certain circumstanceshis wife and daughter should be paid a lump sumwas held not to create a trust

The trust as a device to outflank privity was limited bythe courts presumably because of concern that theirrevocable nature of the trust may prevent thecontracting parties from changing their minds Thecourts no longer go out of their way to find that theparties intended to create a trust

CA

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176

Allowing the thirdparty to sue

Allowing the promiseeto sue on behalf of the

third party

bull Lord Denning launched a campaign against privity andargued that s 56 of the Law of Property Act 1925 intendedto destroy doctrine altogether This was finally rejected bythe House of Lords in Beswick v Beswick (1968) theyacknowledged that the wording was wide enough tosupport Lord Denningrsquos view but insisted neverthelessthat it must be restricted to contracts concerning land asthe purpose of the Act was to consolidate the law relatingto real property

bull Agency

Agency has been used to allow a third party to takeadvantage of an exclusion clause in a contract to whichhe was not a party

The House of Lords refused to allow stevedores torely on an exclusion clause in a contract between thecarriers and the cargo owner in Scruttons v MidlandSilicones (1962) on the basis that only a party to thecontract could claim the benefit of the contract that isthe exclusion clause

However in The Eurymedon (1975) the Privy Councilon similar facts held that the carriers had negotiateda second contract (a collateral contract) as agents ofthe stevedores and the stevedores could claim thebenefit of the exclusion clause in this contract

But in Southern Water Authority v Carey (1985) sub-contractors sought to rely on a limitation of liabilityclause in a main contract Held ndash they must havespecific authority to negotiate on behalf of a thirdparty before this device could work

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W177

In Norwich City Council v Harvey (1989) instead ofusing an exclusion clause the contract placed the riskof loss or damage by fire on the owner and thisprotected both main contractor and sub-contractor

Attempts to allow the promisee to enforce the contract onbehalf of the third party

bull Specific performance

In Beswick v Beswick (1968) Peter Beswick had transferredhis business to his nephew in return for his nephewrsquospromise to pay his uncle a pension and after his deathan annuity to his widow The nephew paid his uncle thepension but only one payment of the annuity was madeThe widow as administratrix of her husbandrsquos estatesuccessfully sued her nephew for specific performance ofthe contract to pay the annuity although the House ofLords implied that she would not have succeeded if shehad been suing in her own right

bull Injunction

Similarly an injunction may be awarded to restrain abreach of a negative promise on a suit brought by thepromisee for example A promised B not to compete withC or by a stay of proceedings

In Snelling v Snelling Ltd (1973) three brothers lent moneyto a family company and agreed not to reclaim themoney for a certain period A stay of proceedings wasgranted to one of the brothers to stop another brotherfrom breaking his promise and suing the company for thereturn of his money

CA

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178

bull Damages

Damages to cover the disappointment of a third partywas sanctioned by Lord Denning in Jackson v HorizonHolidays Ltd (1975) where the plaintiff entered into acontract with a holiday firm for a holiday for his familyand himself in Ceylon The holiday was a disaster Theplaintiff recovered damages for pound500 for lsquomental stressrsquoOn appeal the court confirmed the amount on theground that witnessing the distress of his family hadincreased the plaintiffrsquos own distress Lord Denninghowever stated that the sum was excessive for theplaintiffrsquos own distress but upheld the award on theground that the plaintiff had made the contract on behalfof himself and of his wife and children and that he couldrecover in respect of their loss as well as their own

This statement by Lord Denning was disapproved by theHouse of Lords in Woodar Investment Development Ltd vWimpey Construction (UK) Ltd (1980) They stated thatdamages should not generally be recovered on behalf ofa third party

Lord Wilberforce however did suggest that there was aspecial category of contracts which called for specialtreatment That is where one party contracted for abenefit to be shared equally between a group forexample family holidays ordering meals in restaurantsfor a party hiring taxis for a group The decision inJackson could therefore be supported on this ground Afurther exception was identified by the House of Lords inLinden Gardens Trust v Lenesta Sludge Disposals Ltd (1993)where in a construction contract the original propertyowner may be able to sue the contractor for damagesresulting from defects in the work even though theproperty has been transferred to a third party The

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W179

damages would be held in trust for the third party Thisexception was again confirmed by the House of Lords inAlfred McAlpine Construction Ltd v Panatown Ltd (2000) inorder to avoid the situation where otherwise no onewould be able to sue the contractor although on the factsthe exception did not apply (because a separatearrangement had been made under which the contractorwas directly liable to the third party)

Attempts to impose obligations on third parties

bull Restrictive covenants inserted into a contract for the saleof land may bind subsequent purchasers provided

they are negative in nature the subsequent purchaser has notice of the covenants

the person claiming the benefit has land capable ofbenefiting from its enforcement (Tulk v Moxhay (1848))

bull The courts extended the rule in Tulk v Moxhay to personalproperty for example a ship in The Strathcona (1926)where the plaintiffs had chartered The Strathcona forcertain months each year The ship was sold to thedefendant who refused to allow the plaintiffs to use theship The plaintiffs sought an injunction on the groundthat the doctrine in Tulk v Moxhay should be extendedfrom land to ships The court granted an injunction

This decision was criticised in Port Line Ltd v Ben Line Ltd(1958) where a ship chartered to the plaintiffs was sold tothe defendants The ship was requisitioned during theSuez war and compensation was paid to the defendantsThis compensation was claimed by the plaintiffs Held ndasheven if The Strathcona case was rightly decided it couldC

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S180

not be applied in this case as (a) the defendants were notin breach of any duty and (b) the plaintiffs had notsought an injunction but financial compensation whichwas outside Tulk v Moxhay

The decision in The Strathcona has been widely criticisedbecause

a contract of hire creates personal not proprietaryrights in the hired object

the retention of land which can benefit from thecovenant is a necessary condition of the doctrine inTulk v Moxhay

bull However in Swiss Bank Corpn v Lloyds Bank (1979)Browne-Wilkinson J considered that the decision in TheStrathcona was correct He suggested however that thetort of inducing a breach of contract or knowinglyinterfering with a contract would be a more suitable basisfor the decision than Tulk v Moxhay He stated that in hisjudgment a person proposing to deal with property insuch a way as to cause a breach of a contract affecting thatproperty will be restrained by injunction from doing so ifwhen he acquired that property he had actualknowledge of the contract

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• Book Cover
• Title
• Copyright
• Contents
• 1 Agreement
• 2 Consideration and intention
• 3 Contents of a contract
• 4 Exemption (exclusion or
• 5 Vitiating elements which render
• 6 Mistake
• 7 Illegality and capacity
• 8 Discharge
• 9 Remedies for breach of contract
• 10 Privity of contract