Law and Ethics

4A Contractual Capacity, Consideration and Contents

Slides available on:

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ord/presentations

Recap on

contract law

so farConcepts looked at in previous lectures

Definition of contract

Bilateral / unilateral

Agreement = offer +

acceptance

Difference between offers

and invitation to treat

Rules of acceptance

Termination of offer

Intention to create legal

relations

By the end of today you will:

● Understand capacity and consideration.

● Discuss the contents of a contract and

identify the various terms of a contract.

● Define an exemption clause and discuss

the rules and legislation on exemption

clauses

2016 EXAM REPORT

1.Capacity

Contract only valid when a person has

capacity.

What are the main

categories without

capacity?

Why is it important?

Hall v Butterfield (1879)“The right of infants, lunatics, persons non compos

mentis, drunkards ... they are considered devoid of that

freedom of will, combined with maturity of reason and

judgment, essential to enable them to give

the assent necessary to make a valid contract.”

1. Minors

Age of Majority Act 1985

Age 18 or lower than 18 but have married

Rationale: To protect the minor

To protect those who enter into contracts

unknowingly with minors

Exceptions for Minors

Where the minor is not being taken advantage of or

disadvantaged

- Contracts for necessaries under Sale of Goods Act.

Where contracts are signed in this case, the minor is bound

by the term.

The court can distinguish between necessaries and luxuries.

Nash v Inman

(1908)

Inman was a minor studying at university. Nash

sold some cloth on credit to Inman for what was

approximately £145. Nash sued to recover the

money, and Inman pleaded infancy.

After hearing evidence, the trial judge held that

Inman was actually a minor and that he already had

enough clothing at the time of sale. For this

reason, the trial judge found that there was no

evidence that the clothing could possibly be

considered to be in the class of necessaries, and

directed the jury to enter judgment in favour of

Nash.

Defining a

“necessary” is

time dependent

Beneficial Contracts for Service

Where contracts are beneficial,

a minor may sign.

Beneficial = where the minor can

gain education or training or

earn a living.

Must not be oppressive

Chaplin v Leslie Frewin

(Publishers) Ltd (1966)

Charlie Chaplin’s minor son,

contracted to write a book about

his father.

Prior to publication he changed

his mind and sought to have the

contract ruled unenforceable as

it wasn’t to his benefit

Court said that contract was

substantially beneficial due to

the substantial advance

Contracts that are always void

Infants Relief Act 1874

Contracts for the repayment of money

Contracts for goods not necessaries

All accounts stating money is owed

Contracts that are valid unless

repudiated

Lease on a property

Offering to buy shares

Entering partnership

Taking out insurance

Marriage settlement

2. Persons of Unsound

Mind

Contracts entered are *valid* unless the mentally

incapacitated can demonstrate

● They were unable to understand the nature and therefore

couldn’t consent

● The other party new of incapacity and sought to use to

their advantage

The law treats unsound mind same as minors where incapacity

is permanent

3. Drunkards

Contracts entered into are valid

unless the intoxicated person can

demonstrate

● They were so drunk they could not

understand the transaction

● The other party knew of the

drunken capacity

White v McCooey (1976-1977)

The defendant agreed to sell pub in

Monaghan. Formal written document followed

verbal agreement.

Plaintiff argued he was at Galway Races and

was so drunk he didn’t have capacity.

Court said he failed to prove that he was

incapable due to drunkenness

4. Convicts

Forfeiture Act 1870 made it impossible

to enter a contract with a convict

O’Connor v Coleman (1947)

Solicitor could not recover legal fees

from convict

Criminal Law Act 1997 conferred full

contractual rights on convicts

5. Some companies

Certain companies, including designated activity and PLCs

have limited contractual capacity

Authorised to create contract in accordance with company

objectives - otherwise ultra vires

Private companies limited by shares have unlimited

contractual capacity

Q - with reference to case

law, which categories are

considered not to have

capacity to enter

contracts?

2. Consideration

Consideration is:

a) essential

b) what each party gives

to the contract

Example of consideration

Where a customer buys groceries from the

shopkeeper, the customer’s consideration is the

money they pay for the groceries and the

shopkeepers consideration is the provision of the

groceries.

Consideration in a contract is either ‘executed’

consideration or ‘executory’ consideration.

Executed consideration: a promise in

return for X

Executory consideration: promise in

return for a promise /// (in the future)

Rules of consideration

1. Consideration must be SUFFICIENT but need not be ADEQUATE

SUFFICIENT = must have some economic value

Important to note this doesn’t need to equate to market value

of the agreement

Thomas v Thomas (1842)

Husband’s will sought wife to remain in his house for the

duration of her life. The executors of the will allowed the

wife to remain in the house provided she paid £1 per year

rent and kept the house in good repair.

Subsequently wife to leave the house as the rent she was

paying was substantially less than the rental value of the

house. The wife sued the executors for breach of contract.

The court stated that although the

wife’s consideration (rental

charge of only £1 per year) was

not adequate in comparison to

the executor’s consideration

(providing a good home for

nominal rent) her consideration

had an economic value and that

was sufficient to create a valid

contract.

Chappell and Co Ltd v Nestle Co

Ltd (1959)

Defendants offered a record to any customer

in exchange for three wrappers and money

Plaintiffs said wrappers were not part of

consideration because no economic value

Court said wrappers were consideration

2. Consideration must NOT be PAST

Past consideration can be defined as an ‘act followed by a

promise.’ Consideration must be present.

Re McArdle (1951)

Widow left life interest in home. Daughter in law carried out

work, and agreement was made in writing after work completed

she would be repaid. When widow died, others refused to pay.

Court ruled act done BEFORE promise made, thus consideration

was past and no obligation to pay.

Morgan v Rainsford

(1845)

In this Irish case it

was held that

improvements made to

a property prior to

the contract were

considered

insufficient

consideration.

3. Consideration must be more than what the party already has to do

A promise to perform an act that you’re legally obliged to do

anyway, will not constitute a new agreement.

Mark contracts with Lady Gaga to write a song. He

agrees to pay her €200,000 on completion, and both

Mark and Lady Gaga agree that the latest date for

completion is Christmas..

Lady Gaga says she cannot complete on time unless

Mark pays her an additional €10,000 to get Katy

Perry on backing vocals. If Mark agrees to this

payment then the Court will not enforce Mark’s

promise as there is no consideration for this

promise – the consideration to complete on time is

in the past (the original payment of €200,000) and

part of an existing contractual obligation and the

promise of the additional payment (€10,000) is not

supported by any new consideration (Mark is

getting nothing new in return for this promise).

Rewrite this example using your

preferred artists

Collins v Godefroy (1831)

Collins was offered 6 guineas to

testify on defendant's behalf.

Defendant never paid.

No consideration because he was

under a legal obligation to attend

anyway

Contents of a Contract

Terms in a contract

“Freedom of contract” allows

parties to choose the terms of

their contractual relations.

Terms will state what each

party is obliged to do. If

they do not comply they may be

sued.

Express Terms

Terms that parties

specifically agree

to in a contract.

An express term may

be the

consideration or

agreed price.

Implied Terms

Implied terms are as important as

express terms

If an implied term conflicts with an

express term, the express term

normally overrides the implied term.

However, if the term is implied by

statute or the Constitution, then the

implied term will override it.

Implied Terms:

1.Custom

2.Legislation

3.Courts

4.Constitution

1. Terms implied by custom

For custom to be recognised it

must be notorious, as in ‘widely

known’ and viewed as obligatory.

E.g. Good Friday - sale of alcohol

law.

Hutton v Warren (1836)

A farm tenant, who lived in

Lincolnshire, claimed that it

was the custom of the country

that the landlord would give a

reasonable allowance for seeds

and labour to keep the land

arable, and that he would leave

manure should the landlord wish

to purchase it.

Custom was implied term.

O’Conaill v Gaelic Echo (1958)

No express term in

employment contract

entitling a person to

holiday pay, the court

implied the term into the

contract as it was common

practice within

journalistic profession.

2. Terms implied by legislation

Employment contracts imply terms concerning holidays, leave,

dismissals.

Contracts can provide in excess of the terms but not lower

terms.

Sale of Goods Act 1893 implies some consumer protection terms

in sales contracts.

3. Terms implied by the courts

Courts may decide parties intended a term due to the *facts*

even if not expressly included

OR where they believe the law implies a term based on

A) The business efficacy test - is it neccessary for the

contract to work?

B) Officious bystander test - what would a reasonable person

assume is part of the contract?

A. Business Efficacy Test

E.G. If a person is implied to be

a cleaner in Dublin Airport, it is

implied they will be given a

security pass

The Moorcock (1889)- ship in warf

case. Implied term reasonable care

would be taken.

B. Officious Bystander Test

Airline tickets imply

certain terms

4. Terms implied by the Constitution

Terms may be implied by

Constitution

Glover v BLN (1973)

Dismissed manager without

hearing

Court held Constitution

implied a right to a fair

trial

Conditions and Warranties

Express and implied

terms are categorised as

conditions or warranties

(but it is not always easy

to say which is which).

Conditions

Most important

Go to root of contract

If breached, other party can

repudiate or sue.

E.g. selling price of a house

Arcos v Ronaasen (1933)

Width of wood delivered

incorrect

Was useable but injured party

within their rights to

repudiate contract

Poussard v Spiers and Pond (1876)

Mrs. Poussard contracted to

Operetta for 3 months.

Illness = substitute

Contract terminated

Poussard sued and lost

Singing on opening night was a

condition of the contract

Warranties

Less vital terms - ancillary terms

No repudiation of contract

Potential entitlement to damages

Example:

Bathroom or no bathroom?

Bettini v Gye (1876)

Contracted to perform in

opera but didn’t attend

rehearsal due to illness

Contract terminated

Court held rehearsals were

breach of warranty not

condition

Schuler AG v Wickman Machine Tools Ltd (1973)

Sales rep contracted to visit a

number of firms

Didn’t attend

House of Lords held that although

contract stated condition, the

parties didn’t intend for it to

terminate contract

Minor breach = no repudiation

Innominate Terms (intermediate)

Innominate term

- Unclassified until

breached

- Depending on nature

of breach may

repudiate

Where a party deprived of

“substantially the whole

benefit” - the courts will treat

as breach of condition

Hong Kong Fir Shipping v Kawasaki Kisen

Kaisha (1962)

Defendants chartered vessel for 2 years “fitted for cargo

service”

Vessel not fitted and defendants terminated contract

Plaintiffs action - wrongful termination

Court held that damage suffered not enough to repudiate

They could still go on voyage so was only breach of warranty

Irish Telephone Rentals Ltd v Irish Civil Service

Building S.

Telephone system broke and was

considered breach in term of contract

that goods would be of merchantable

quality.

Injured party had a right to repudiate

the contract

So what’s the

difference?

A condition is always a

condition. E.g. the

bathroom exists

A warranty is always a

warranty. E.g. the colour

of the bathroom

Innominate term depends on

the consequence of the

breach.

Condition, warranty or innominate term?

5 Minutes

Exemption Clauses

Exemption clause used by party to

exempt (exclusion clause) or restrict

(limitation clause) their liability under

the contract.

Doctrine of

FreedomAllows for clauses that will prevent or restrict an action for a breach

Courts disapprove...

Very often exemption clauses are inserted by

more powerful party.

As a result there are specific rules on when

they are allowed be used.

This is also set out in legislation.

Exemption clause can be

incorporated

1)By signature

2)Reasonable notice

3) In the course of dealing

1) By signature - L’estrange v Graucob Ltd

Exemption clause valid where contract

signed

L’estrange - cigarette vending machine.

Clause said manufacturers disclaimed

liability for malfunction.

Claim for damages

Clause valid (but would be invalid

today under EC Regs

2) By reasonable notice - Chapelton v Barry UD

Council

Courts will look at how notice is given.

Hired two deckchairs, paid and received

ticket. Suffered injury.

Defendant argued terms on ticket were

contract

Court held reasonable person could assume

contract. No advance notice of clause.

3) In course of dealing - J. Spurling v Bradshaw

(1956)

Bradshaw delivered barrels of orange for

storage in Spurlings. S sent contract after

with exemption clause (no liability due to

negligence).

Barrels empty on collection, B refused to pay

and sued.

Court held that clause received after another

contract - dealing over yrs. Clause valid.

Construction of exemption clauses

Subject to common law rules in order to be valid

1. Contra proferentum rule

2. Main purpose rule

3. Fundamental breach rule

4. Exclusionary rule

1. Contra Proferentum Rule - Houghton v

Trafalgar Insurance

Where the clause is unclear, courts will

adopt meaning least favourable to party

seeking enforcement.

Principle is clauses should be clear.

Houghton v Trafalgar - car insurance

contract excluded liability for damage

arising where load in excess.

Judge said clause too ambiguous

Contra Proferentum Rule - EC (Unfair Terms in

Consumer Contracts) Regulations 1995

States that if a clause in a

contract is uncertain, the meaning

that is ‘most favourable to the

consumer shall prevail.”

2. Main Purpose Rule - Sze Hai Tong Bank v

Rambler Cycle

Exemption clause cannot be used for any

purpose other than its main purpose.

Sze Hai Tong - the exemption clause

discharged liability once goods were

released at port.

Held not unless the goods were delivered

to authorised person to receive delivery

3. Fundamental Breach Rule - Clayton Love v B&I

(1970)

Court ruled that the defendants

could not rely on the exemption

clause to avoid paying damages.

B&I Transport transported the goods

at the wrong temperature. The

defendants could not rely on the

exemption clause to protect them

from liability as it attempted to

exclude a core contractual

obligation.

Note:

The courts today may not necessarily apply this rule very

strictly.

They will consider the intention of the parties and other

factors before they decide that the fundamental breach

automatically excludes the reliance on the exemption clause.

4. Exclusionary Rule -

Rule states an exemption clause

that attempts to exclude liability

in a consumer contract for acts of

negligence is in breach of the EC

(Unfair Terms in Consumer

Contracts) Regulations 1995 and

therefore void.

In addition, any attempt to exclude

liability for deliberate acts of

wrongdoing is also void.

Ronan v Midland Railway 1883

Cattle transport case

“... the company … will not be accountable for

any loss caused by delay or injury to livestock

taking place before or at shipment, on the

journey or at or after the landing …. whether

arising from or consequent upon the dangers or

accidents of the seas… or from act of God, the

Queen’s enemies ….improper, careless or unskilful

navigation, or from accidents connected with

machinery or boilers, or from any fault,

negligence or mistake of the master, seamen or

crew of the vessels …”.

Legislation restricting the use of

exemption clauses

Sale of Goods and Supply of Services Act 1980 –

S. 12-15

business dealing with a consumer cannot insert a clause into

the contract exempting liability in relation to the

merchantable quality or fitness for purpose of the

goods/service, or restricting liability where the goods do

not match the description, or match the sample – where they

are sold based on a sample.

Contract between two businesses exemption clauses can be

inserted provided they are both ‘fair and reasonable’.

George Mitchell (Chesterhall) Ltd v Finney Lock

Seeds (1983)

Mitchell ordered cabbage seeds - £192.

Invoice included an exemption clause limiting liability for

any loss to the amount paid for the seeds.

After sowing the seeds the plaintiff discovered that he had

been given the wrong seeds by the defendant. He claimed

damages of £61,500 and the defendants relied on exemption

clause.

Held that the exemption clause could not be considered fair

or reasonable under the terms of the legislation.

European Communities (Unfair Terms in

Consumer Contracts) Regulations, 1995-2013

Regulations define an unfair term

“A contractual term which has not been individually

negotiated shall be regarded as unfair if, contrary to the

requirement of good faith, it causes a significant imbalance

in the parties’ rights and obligations arising under the

contract, to the detriment of the consumer.”

If clause is unfair, it will be void and unenforceable.

Mid-Term Homework:

- Write an essay on the

categories on conditions,

warranties and innominate

terms.

- Read Chapter 3 & 4.

Now you:

● Understand capacity and consideration.

● Can discuss the contents of a contract

and identify the various terms of a

contract.

● Can define an exemption clause and

discuss the rules and legislation on

exemption clauses