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Course Notes 8
LAW
Of
CONTRACT
TABLE OF CONTENTS
UNIT ONE
1 www.lecture.me.uk for the online teaching resources by
Robert Mackay
Law of Contract with Robert Mackay 200
Course Notes 8
COPYRIGHT NOTICE Robert Mackay has prepared these course materials incorporating the
information provided on their website by St Brendans College, Bristol. For information on restrictions imposed
on further copying or use of the copyrighted part of the materials please see their website.
UNIT ONE
FORMATION OF A CONTRACT
A simple contract (that is, a contract made not under seal) requires an offer
made by one party and accepted by the other, valuable consideration given by
either side, or a common intention that the agreement should be legally binding.
the statute and said he had committed no offence: the display was an
invitation to treat, not an offer to sell.
This analysis of the transaction leaves both parties free to change their minds.
The shopkeeper can refuse to sell to a customer whom he does not like (for
example, one who is under age or drunk), and the customer having taken goods
from a supermarket shelf can return them if he changes his mind before going to
the till.
At an auction sale, s.57(2) of the Sale of Goods Act 1979 confirms the
common law rule that a prospective buyer makes an offer by bidding, which the
auctioneer accepts when he drops his hammer. Thus a buyer may withdraw his
bid until the hammer falls, or an item may be withdrawn from the sale even after
bidding has begun. The special rules for auctions, however, mean that the lot
cannot legally be sold at the auction to anyone other than the highest bidder.
The growth of internet shopping has led to further developments in this area of
law. Where a company advertises goods or services on its web site this is
normally (depending on the wording used) an invitation to treat, and the
customer makes an offer by sending in an order. So far, so good. If the company
sets up an automatic e-mail reply system, this (again depending on its wording)
may amount to an acceptance of the offer, and this may have unfortunate
consequences for the company if there is any error (e.g. £100 as a misprint for
£1000) in the published details.
Public authorities are required by law to invite tenders for many services, and
some other bodies do so even when not so required. The offer in such cases is
clearly made by the tender or and accepted by the authority, but the situation is
more complex than it might seem.
that PP had merely made an offer which they (for whatever reasons) had
not accepted, but the Court of Appeal said there was an implied collateral
warranty. The Council had selected the parties invited to tender and thus
knew them all, and had set out in detail the procedure to be followed; this
implied that any invitee conforming with that procedure would be entitled
to have his tender properly considered.
WITHDRAWL
As a general rule, an offer can be withdrawn at any time before it has been
accepted; any purported acceptance after withdrawal is ineffective.
Withdrawal must normally be communicated to the offeree, and does not take
effect until such communication is received: the special rule for postal
acceptances (below) does not apply to withdrawals.
cancelling the reward, and this was published in a similar manner. Five
months after that, P (who was aware of the original advertisement but not
that the reward had been cancelled) identified one of the wanted men and
claimed the reward. The Supreme Court said that since the offer had been
made by general advertisement rather than to him personally, he should
have realised that it might be withdrawn in the same way.
A father bought a house for his son and daughter-in-law DD to live in,
paying £250 in cash and borrowing the other £500 from a building society.
The house was put into the father's name, but he said that as long as DD
paid the instalments he would transfer it to them as soon as the mortgage
was discharged. After some fifteen years the father died, and his widow P
sued for possession of the house. The Court of Appeal said there was a
unilateral contract: DD were not bound to go on paying, but if they did so
that father was bound to transfer the house to them in accordance with
his promise. Denning LJ said (perhaps obiter) that a unilateral contract
cannot be revoked once the potential acceptor has embarked upon
performance.
ACCEPTANCE
No contract comes into existence until an offer is accepted and, in most cases,
that acceptance is communicated to the offeror.
Although the offeror cannot stipulate that the offeree's silence is to be taken as a
sign of his acceptance of the offer, he can generally specify the method by which
acceptance is to be communicated.
COUNTER OFFERS
A counter-offer is not an acceptance, and actually kills the original offer. The
majority of the court in Tinn v Hoffman above thought this would be true even
where the counter-offer contains exactly the same terms as the original offer,
though a minority dictum of Honeyman J suggests the contrary.
D wrote to P offering to sell some wool, and asked for a reply "in course of
post". This offer was delayed two days in the post, and consequently P's
acceptance was late in coming back. On the day before it arrived (but
after it had been expected), D sold the wool elsewhere. The court said P
was entitled to damages: his acceptance was complete when his letter
was posted, before the wool was sold to the third party.
been made outside the jurisdiction (i.e. in Vienna), and the House of Lords
agreed. Lord Wilberforce said there was no general rule that could cover
all the possible situations that might arise with the use of Telex machines:
each case must be resolved by reference to the intention of the parties, to
sound business practice, and in some cases to a judgment as to where the
risks should lie.
The growth of electronic communication has raised new (and as yet unanswered)
questions about the applicability of the postal rule to communications by e-mail
and via the world-wide web. On the one hand, there are those who argue that e-
mail is virtually simultaneous and that the postal rule should not apply, but this
takes no account of the fact that e-mail messages are sometimes rejected by the
server and that the recipient may not read the message immediately it arrives.
The majority of academic commentators have therefore tended to the view that
e-mail should be treated as a form of mail to which the postal rule should
normally apply (subject to its exclusion by the parties' clear intention).
Where the offeror sets up a web site that includes a reply form, this comes closer
to instantaneous communication because the offeree can tell at once whether
his acceptance has been received. There is a substantial body of opinion to the
effect that the postal rule should not apply here (and a quite sustainable view
that a web page, like a shop window, normally constitutes an invitation to treat
rather than an offer). But given the speed at which electronic communication is
still developing, there are strong policy reasons for ensuring that the rules for
electronic acceptance are the same no matter which particular form of software
is being used.
CONSIDERATION
A contract not made under seal must be supported by valuable consideration. In
Currie v Misa (1875) LR 10 Exch 153 Lush J defined this as "some right, interest,
profit or benefit accruing to one party, or some forbearance, detriment, loss or
responsibility given, suffered or undertaken by the other". Consideration must be
of some value, but the courts have consistently refused to look at its adequacy.
promised to pay for this work. When they did not do so the occupants
sued, but without success: the consideration for that promise was past
and there was no contract.
counterclaimed for the cost of feeding and housing the police at the
colliery. Affirming the decision of Bailhache J and the Court of Appeal, the
House of Lords said the police undoubtedly have a general duty to do
what they think necessary to keep the peace and prevent crime, and no
one can be made to pay extra for that. But when individuals desire special
services which although not within the obligations of the police can most
effectively be rendered by them, the police authorities may "lend" the
services of constables for that purpose in consideration of payment. If the
inspector believed in good faith that the garrison at the colliery was
unnecessary and agreed to provide it only to meet AA's request, they were
entitled to treat that as a special duty and charge for it.
Special problems arise when a debtor (with his creditor's agreement) seeks to
settle a debt by part payment. He has given no consideration for the creditor's
promise to cancel the balance of the debt, and so cannot enforce this promise if
the creditor subsequently changes his mind.
generally assume without enquiring too deeply that the creditor derived
some benefit from the change sufficient to provide consideration for his
agreement to forgive the balance of the debt.
In Alan v El Nasr [1972] 2 All ER 127, a rather complicated commercial case, Lord
Denning MR said the principle of waiver (that is, promissory estoppel under
another name) is that if one party by his conduct leads another to believe that
the strict rights arising under the contract will not be insisted upon, intending
that the other should act on that belief, and he does act upon it, then the first
party will not afterwards be allowed to insist on the strict legal rights when it
would be inequitable for him to do so. Stephenson LJ, concurring in the decision
on the facts, left open the question whether the other party's action could be any
alteration of his position or must be to his detriment.
PRIVITY
It is a fundamental principle of English law that no one can derive rights or
obligations from a contract to which he has given no consideration and is hence
not a party. This doctrine, known as privity of contract, is still substantially valid
but has been modified in various ways.
Certain statutes create exceptions to the doctrine. The Road Traffic Act 1972
allows an injured third party in certain circumstances to claim directly on the
contract between a negligent driver and his insurance company. Similarly, the
Married Women's Property Act 1882 allows a widow or orphan to enforce
against the company a life assurance contract taken out for her benefit by her
husband or father.
A party to a contract may assign to a third party his right to enforce the contract
and so obtain the benefits there under: the right thereby transferred is known as
a "chose in action". Assignment takes place automatically when a person dies -
the contracts to which he is party can (with a few exceptions) be enforced by or
against his personal representatives - or when he becomes bankrupt and most of
his contractual rights devolve upon his trustee in bankruptcy.
Covenants over land may operate in favour of (or against) future owners of the
land involved, and s.56 of the Law of Property Act 1925 provides that a
person may take an ... interest in land or other property ... although he may not
be named as a party to the conveyance or other interest. This consolidates some
of the earlier common law rules relating to real property, which clearly saw
certain rights and obligations as belonging to the land rather than to any
individual.
Smith & Snipes Hall v River Douglas Catchment Board [1949] 2 All
ER 179, CA
D had contracted with the former owners of a piece of land to keep the
river banks in good repair; the Court of Appeal allowed the new owner and
lessee of the land to enforce this agreement, since it was clearly intended
to attach to the land rather than to the individual who originally made it.
Several cases have turned on the question of the validity or otherwise of a third
party exclusion clause.
The Contracts (Rights of Third Parties) Act 1999 now provides that a third
party has the right to enforce a contract if the contract expressly states that it is
to be enforceable by that third party or if it purports to confer a benefit on him,
and that the third party's right to enforce cannot be taken away without his
consent once he has informed the contracting parties of his acceptance of the
contract or has acted in reliance on the contract. The third party's rights are
subject to the same defences as the parties have against one another, but
otherwise are additional to, and not in substitution for, existing third-party rights.
which they were placed and asks whether reasonable people would regard
this agreement as one intended to be binding.
Even if there were an agreement, X's obligation was merely to make a will
in P's favour, not to refrain from revoking it. And in any case, there was no
intention to create a legal relationship.
UNIT TWO
FORM OF CONTRACT
FORM
Although there are some exceptions (e.g. contracts relating to interests in land,
of beneficial interests under a trust) the terms of a contract may be written, or
oral, or a mixture. A written contract was traditionally regarded as complete in
itself, but the modern tendency is to admit evidence of other oral terms where
this is appropriate.
A final year law student P was offered employment with a firm of solicitors
DD, to begin when he completed his studies. He failed his final exams and
DD refused to take him on. The Court of Appeal declined to imply a term in
the agreement that the offer was conditional on his passing the
examinations, even though such a clause was reasonable and quite usual,
because it could have been that the parties had they considered the point
would have made some other equally reasonable arrangement.
Terms may also be implied by the custom of a particular trade, and a series of
contracts between the same two parties, always on the same terms, will usually
lead the court to imply the same terms (insofar as they are not inconsistent with
the express terms) in the present contract.
12(1) In a contract of sale there is an implied condition that the seller has
a right to sell the goods.
13(1) Where there is a contract for the sale of goods by description, there
is an implied term that the goods will correspond with the description.
14(2) Where the seller sells goods in the course of a business, there is an
implied term that the goods supplied under the contract are of a
satisfactory quality.
14(2A) Goods are of satisfactory quality if they meet the standard that a
reasonable person would regard as satisfactory, taking account of any
description of the goods, the price (if relevant) and all the other relevant
circumstances.
14(2B) The quality of goods includes their state and condition and the
following (among others) are in appropriate cases aspects of the quality of
the goods: (a) fitness for all the purposes for which goods of the kind in
question are commonly supplied; (b) appearance and finish; (c) freedom
from minor defects; (d) safety; and (e) durability.
14(2C) The term implied by subsection (2) above does not extend to any
matter making the quality of goods unsatisfactory -
(a) which is specifically drawn to the buyer's attention before the contract
is made, or
(b) where the buyer examines the goods before the contract, which that
examination ought to reveal, or
(c) in the case of a sale by sample, which would have been apparent on a
reasonable examination of the sample.
14(3) Where the buyer sells goods in the course of a business and the
buyer, expressly or by implication, makes known any particular purpose
for which the goods are being bought, there is an implied condition that
the goods are reasonably fit for that purpose.
Sections 8-11 of the Supply of Goods (Implied Terms) Act 1973 apply
ss.12-15 of the 1979 Act above mutatis mutandis to hire purchase contracts.
Part I of the Supply of Goods and Services Act 1982 applies ss.12-15 of the
1979 Act above mutatis mutandis to hire contracts and to other contracts under
which goods are to be transferred. Part II includes three further implied terms in
contracts for services.
14(1) Where the time for the service to be carried out is not fixed by the
contract, there is an implied term that the supplier will carry out the
service within a reasonable time.
15(1) Where the consideration for the service is not determined by the
contract or by the course of dealing there is an implied term that the party
will pay a reasonable charge.
The concept of satisfactory quality was introduced by the Sale and Supply of
Goods Act 1994, and replaces the older notion of "merchantable quality".
Goods were considered to be of merchantable quality ... if they were as fit for the
purpose or purposes for which goods of that kind are commonly bought as it is
reasonable to expect having regard to any description applied to them, the price
(if relevant) and all the other relevant circumstances. One disadvantage of this
definition was that if it became known that goods of a certain type were
commonly shoddy, it would arguably be unreasonable to expect otherwise. A
new case law on "satisfactory quality" will no doubt develop in due course; until
it does, some of the older cases on merchantable quality may still be relevant if
treated with some caution.
claim: since DD had not been made aware of the vessel's peculiarities,
they could not exercise care and skill to deal with them. There was no
breach of the implied condition of fitness for purpose.
misrepresentation was innocent of any fault, but here the dealer should
have known better.
Clearly no exclusion clause is valid if it is not part of the contract, and it is not
part of the contract unless both parties agreed to it at the time.
which he did not read. When he came to collect the barrels he found them
empty, but PP pointed to an exemption clause on the receipt. D argued
that this clause could not be part of the contract because he had not been
sent it until. The Court of Appeal said there had been a consistent course
of dealing, and terms from the previous contracts could be implied in the
present case as long as they were not inconsistent with express
provisions.
Contra proferentem
of PP. The policy covered all sums awarded "as compensation", and this
was open to more than one interpretation. In cases of ambiguity where
other rules of construction fail, an instrument should be construed more
strongly against its maker.
Fundamental breach
No exclusion clause can protect a party who is "in fundamental breach" of the
contract. In consumer contracts this common-law rule has been strengthened by
s.3(2) of the Unfair Contract Terms Act 1977 (below), but in purely
commercial contracts the courts are inclined to take a broader view if they are
satisfied that the clause represents the parties' true intentions.
STATUTORY RESTRICTIONS
Various statutory provisions invalidate or limit purported exclusion clauses. The
most important parts of the Unfair Contract Terms Act 1977 (which in spite of
its name applies to tort as well as contract), apply only to business liability. This
includes government departments and other public authorities, but international
contracts, marine contracts, contracts for insurance, land, patents and
copyrights, or for the formation of companies, is largely excluded. It deals with
both exclusion and limitation clauses, including those which impose restrictive
conditions such as clauses which deny liability unless notice of any complaint is
given within a specified time.
Much of the Act is concerned with the protection of consumers, and a consumer
is defined in s.12 as amended as a legal person who does not make the contract
in the course of business, nor purport to do so, while the other party does. In the
case of an individual that is enough; where the buyer is a corporate body the
goods must be of a type normally supplied for private consumption. The
definition excludes a person (even an individual) buying second-hand goods at
public auction, as well as a person who obtains goods (even for private use) by
using a cash-and-carry card at a wholesale warehouse.
5(1) Where loss or damage arises from goods proving defective while in
consumer use, liability cannot be excluded or restricted by reference to a
guarantee of the goods.
6(1) Liability for breach of the obligations arising from s.12 of the Sale of
Goods Act 1979 [or the corresponding term in relation to hire purchase]
cannot be excluded by reference to any contract term.
Other terms may be ineffective unless the party seeking to rely on them can
satisfy the court that in the circumstances they are reasonable.
not clearly wrong, and added that in deciding whether a clause was
reasonable the courts would look at its effect rather than its form.
EUROPEAN LAW
The Directive on Unfair Terms in Consumer Contracts (Directive 93/13)
came into effect on 1 January 1995, and the relevant UK regulations took effect
six months later. However, it subsequently appeared that the original regulations
had not properly implemented the Directive, and revised regulations (the Unfair
Terms in Consumer Contracts Regulations 1999, SI 1999/2083) were
made to replace them.
The Directive and the domestic Regulations are limited to consumer contracts
(including oral contracts) for the supply of goods and services, including financial
services (subject to some limitations), insurance and real property. They are
wider than UCTA in that they apply to all types of clause, not only exclusion and
limitation clauses, but narrower inasmuch as they apply only to consumer
contracts - a consumer is defined as a natural person acting for purposes outside
his trade, business or profession - and only to terms that have not been
individually negotiated.
A term is regarded as not having been individually negotiated when it has been
drafted (by the non-consumer) in advance and the consumer has therefore not
been able to influence its content, particularly in the context of a standard form
contract. The fact that some terms of a contract may have been individually
negotiated will not protect the rest if an overall assessment shows that the
contract as a whole is a standard form contract. A term that has not been
individually negotiated is automatically 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.
Terms that define the main subject matter of the contract, and the adequacy of
the price in relation to the goods or services supplied, are outside the scope of
the regulations so long as they are expressed in plain intelligible language: value
for money is not the law's concern. But the definition and value for money can be
taken into account in determining whether other terms may be unfair: if second-
hand or slightly damaged goods are sold cheaply, a limited warranty may well be
regarded as fair. A term identified as unfair is not binding on the consumer, but if
the rest of the contract is capable of operating without the unfair term it will
continue to bind both parties.
UNIT THREE
VITIATING FACTORS
Even when a contract has apparently been properly made, and its terms are
clear, it may for various reasons be void or voidable or unenforceable. On this
page we consider the reasons why such a thing might happen, and the
consequences of any such occurrence.
A contract may be illegal either by statute or at common law. The Gaming Act
1845 makes all gaming and wagering contracts void, and illegal too unless the
chances are fair. The Restrictive Trade Practices Act 1976 extends the common-
law limitation on contracts in restraint of trade, making restrictive trading
contracts void unless they are approved by the Director General of Fair Trading.
RESTRAINT OF TRADE
A contract is "in restraint of trade" if one party restricts his future liberty to carry
on his trade, business or profession in such manner or with such persons as he
may choose, and such a contract may be void under some circumstances. The
most common examples of such contracts occur where a skilled employee
undertakes not to set up his own business in competition with his former
employers, and where the seller of a business undertakes not to compete with
the buyer.
A boxer made a contract giving his manager exclusive control over the
selection of his fights. This was held to be an unreasonable restraint on his
right to work, particularly with a potential conflict of interest between the
manager's role as such and his role as a fight promoter.
CONSEQUENCES OF ILLEGALITY
Where a contract is illegal from the beginning, because it requires one party to
do an illegal act, or where both parties intend that it shall be performed in an
illegal way or for an illegal purpose, then it is wholly illegal and void. Neither
party can generally assert any right or remedy under such a contract - money
paid cannot be recovered, for example, and the court will veto any attempt at
enforcement even though the defendant may be just as guilty as the plaintiff.
Where a contract is prima facie lawful, however, and one party (unknown to the
other) executes it for an illegal purpose or in an illegal way, the remedies of the
innocent party are preserved. The guilty party loses any legal rights and
remedies he might have sought under the contract, but the innocent party is
protected in respect of anything he does before learning of the illegality. Even a
guilty party may not always be wholly without remedies.
UNENFORCEABLE CONTRACTS
There are certain types of contract - principally third party guarantees, consumer
credit agreements and contracts for the sale of land - which, even though they
are quite valid and theoretically binding, will not be enforced by the courts
unless in the proper form. All contracts for the sale of land (or interests in land)
must be made in writing and signed by both parties, and following the Statute
of Frauds 1677 as amended, a special promise to answer for the debt or
default of another person - a "guarantee" in modern terms - must be supported
by evidence in writing. A promise not thus supported is unenforceable rather
than void, however, and even though it is itself unenforceable its validity may be
important in some other case. Moreover, the contract itself need not normally be
set down in writing as long as there is a written note or memorandum
incorporating the essential details.
The Consumer Credit Act 1974 makes hire purchase and credit sale
agreements generally unenforceable unless they are "properly executed", the
consumer having signed and having received a copy together with notice of his
rights to cancel. Once again the agreement not in due form is unenforceable
rather than void - it can be enforced by a court order, but such is unlikely to be
given unless the formal defect is trivial - but this time the agreement itself must
be in writing and a mere memorandum is insufficient.
All credit agreements must be in writing using approved forms; if not, the
agreement is unenforceable. Where the agreement is signed outside trade
premises (e.g. at the consumer's home), the consumer has a five-day "cooling-
off period" within which he may change his mind and cancel the agreement. If
the terms of a credit agreement are "grossly extortionate", the court has a
discretionary power to amend the terms to what it considers fair.
If the consumer does not keep up the repayments, the lender must warn him and
allow him seven days to make good the default before taking steps to repossess
the goods; where one-third or more of the total amount has already been paid,
the lender cannot repossess without a court order. If the consumer voluntarily
returns the goods, he need not pay more than half the agreed total price.
CONTRACTS BY MINORS
A minor in law is a young person under the age of 18, but earlier case law dating
from the time when legal infancy ended at 21 is still relevant. A contract made
by a minor may be valid and enforceable, if it is for the supply of "necessary"
goods or services or is a "beneficial contract of service", or may alternatively be
voidable at the minor's option in any other case. The Infants' Relief Act 1874
made certain classes of contract "absolutely void", but this was repealed by the
Minors' Contracts Act 1987 and such contracts are now merely voidable.
claim failed: although it might have been necessary for P to hire a car to
collect his luggage, it was not necessary for him to enter a contract
containing such an onerous clause as this, and accordingly the contract
was voidable. (Note that it is the entire contract which is voidable, and not
merely the offending clause.)
All other contracts entered into by a minor are valid initially (and can be enforced
by either party), but may be repudiated by the minor (not by the other party) at
any time during minority or "within a reasonable time" after attaining the age of
18. However, the minor may be ordered (if the court thinks it just and equitable)
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to restore any property acquired under the contract, or property representing it,
and cannot recover any money he has paid over unless there has been a total
failure of consideration by the other party.
MISREPRESENTATION
Statutes such as the Trade Descriptions Act 1968 and the Property
Misdescriptions Act 1991 create offences relating to certain types of
misrepresentation in the course of business, but our concern here is with the civil
rather than the criminal consequences. A misrepresentation is a untrue
statement of fact which induces a party to enter a contract, but which is not
itself part of the contract. There must therefore be a statement of some kind,
although a representation need not always be verbal: payment by cheque
implies a representation that the bank will honour the cheque. Mere silence
cannot constitute misrepresentation even when it is obvious that the other party
is mistaken as to the facts, subject to three qualifications.
First, where the contract requires uberrima fides (utmost good faith) the party is
bound to disclose all material facts. The best-known uberrima fides contracts are
those of insurance, where the insured party is required to disclose all material
facts whether or not he is asked about them. A company is in a similar position in
respect of the sale of shares, and in potential "undue influence" cases (see
below) similar good faith is required of the party supposed to be in the stronger
position.
Types of misrepresentation
Fraudulent misrepresentation occurs when a party makes a false statement
without honestly believing it to be true: it may be a deliberate lie, or it may be a
statement made recklessly. In such a case the innocent party may affirm the
contract and claim damages for consequential loss, suing for the tort of deceit;
or repudiate the contract and claim damages and/or rescission.
no sufficient proximity to give rise to a duty of care where the loss was
purely economic.
Innocent misrepresentation occurs when neither of the other two applies and the
misrepresentation was made without any fault.
MISTAKE
Various mistakes may occur in the negotiations leading to the formation of a
contract, and they are not all treated the same. We distinguish three kinds of
mistake, though different writers use different names and different
classifications. A common mistake, we shall say, occurs when both parties make
the same mistake (eg as to the existence, ownership or nature of the subject-
matter of the contract). A mutual mistake occurs when each party is mistaken as
to the intentions of the other in respect of the contract, and a unilateral mistake
occurs when just one party is mistaken as to the identity or intention of the
other, or as to the nature of a document being signed.
Common mistake
Two kinds of common mistake render the contract void. If the contract concerns
res extincta - that is, subject matter which at the time of the contract no longer
exists, or which never existed at all - the contract is void.
A contract involving a common mistake as to res sua, where the subject matter
already belongs to the supposed buyer, is also void. The "seller" is giving no
value for the consideration given by the "buyer".
In general, any other common mistake - as to the quality of goods sold, for
example - will not invalidate a contract even if it relates to a matter of
fundamental importance.
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It was formerly thought that the courts' equitable discretion might be called into
play to relieve the hardship of the common law in cases where a common
mistake is not enough to invalidate the contract. Specific performance might be
refused, for example, or rescission ordered on such terms as the court considers
just. However, a recent decision of the Court of Appeal casts grave doubt on this.
continuing it at the agreed rent as soon as this had been legitimated. [But
see now Great Peace below.]
Mutual mistake
Where each party is mistaken as to the intentions of the other, there is no
consensus ad idem and hence no contract: a mutual mistake of this kind may be
distinguished from a unilateral mistake (below) by the absence of any objective
right answer.
Unilateral mistake
A unilateral mistake occurs when just one party is mistaken as to some aspect of
the contract, and the other is or is presumed to be aware of this mistake. Such a
mistake may be the result of misrepresentation or may be a mere error by the
mistaken party. At common law, in the absence of any misrepresentation, a
unilateral mistake does not generally invalidate a contract, but the courts have
increasing used equity to set aside a contract where the other party took unfair
advantage.
A ship owned by PP, carrying arms exported by DD, was delayed in port
while it was searched by Nigerian officials. DD accepted liability for the
delay and offered $155k in compensation, but PP refused. DD's solicitors
then sent a letter offering £150k, which PP accepted; this was a double
error, as the letter should have repeated the original offer of $155k. PP
sued for the agreed payment, and the judge said equitable relief was
available in principle in cases such as this, particularly where the results
were grave. But in the instant case, the error was not so obvious as to
make the contract void.
Mistaken identity
A special situation arises where one party makes a unilateral mistake as to the
identity of the other because of a deliberate deception. Although remedies for
misrepresentation may then be available, the law has imposed a fairly stringent
test in order to protect an innocent third party to whom the goods in question
may have been resold. A party seeking to avoid a contract on grounds of
mistaken identity, even as a misrepresentation, must therefore show that he
intended to contract with some particular person other than the one with whom
he contracted in fact - a mere false name is not sufficient; that the other was
aware of this intention, although in cases of deception this is usually fairly
obvious; that at the time of the contract he regarded this matter of identity as
being of crucial importance; and that he took reasonable steps to verify the
other's identity.
It is in respect of the third requirement that avoidance most often fails. Where
the contract is one involving some particular skill (eg ability as a painter) then it
is fairly easy to show that it was considered important to contract with Picasso
and no one else, but in most contracts for the sale of goods the seller will sell
happily to anyone who is prepared to pay the price. Five cases show the
difficulties the courts have encountered in this area.
and then allowed X to take the jewellery. X (a rogue) then vanished and
the cheque bounced: P sought to recover the jewellery from D, who had
bought it from X in good faith, but failed. The judge distinguished Cundy v
Lindsay as dealing with contracts made by post; in the instant case P had
intended to sell to X face-to-face, even though he was mistaken as to X's
identity, and property had therefore passed.
As Lord Denning MR pointed out in Lewis v Averay, frauds of this sort almost
always result in a conflict between two quite innocent parties, and there will
always be hard cases. Sedley LJ (dissenting in Shogun v Hudson) said the law is
still unclear: this is evidently true, and it is wrong that the courts should resort to
very technical distinctions to decide essentially similar cases in different ways.
The law should be clear one way or the other, and that cannot happen unless the
doctrine of stare decisis is properly applied.
D signed a document partly covered with blotting paper, under the belief
that he was witnessing to a deed executed by someone else. In fact he
had signed four promissory notes, which P now sought to enforce. The
court said the notes were void: D had believed (without negligence on his
part) that the document he was signing was wholly other than what it
really was.
Dimskal Shipping v ITWF (The Evia Luck) (No.2) [1990] 1 Lloyds Rep
319, HL
A ship in a Swedish dock was visited by representatives of the ITWF, who
threatened to "black" the ship and its cargo unless the captain and owners
agreed to certain conditions including new contracts for the crew and
payments to the ITWF. The owners reluctantly agreed, but once at sea
sought a declaration that the contracts were void and orders for
repayment and additional damages. Having established that English law
applied to the situation (because of the terms of the disputed
"agreement"), the House of Lords said that although industrial action of
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Even given a manifestly disadvantageous contract, the weaker party must show
that the other did in fact exert undue influence upon him. The burden of proof is
generally on him, but he is powerfully assisted by a rebuttable presumption of
undue influence in cases where a confidential relationship exists in which the
other party is clearly dominant. Once given the manifest disadvantage, for
The rule therefore appears to be that a contract will be set aside for undue
influence where actual undue influence can be proved, or where undue influence
is rebuttably presumed because of a relationship such as solicitor/client or
doctor/patient, or because of a demonstrable relationship of actual trust and
confidence.
UNIT FOUR
DISCHARGE OF A CONTRACT
A contract may provide or imply that performance is due from each party at a
certain time. In the case of an executed contract, of course, one party has
already performed his obligations and it only remains for the other to
reciprocate, but with an executory contract there may be room for manoeuvre.
In a contract of employment, for example, the employer's obligation to provide
safe working conditions comes before the employee's duty to do the work, which
in turn precedes the employer's duty to pay wages.
Where a party fails to perform his obligations, he may offer one of a number of
excuses which will prevent his being in breach of contract. He may claim, for
example, that the contract has been discharged or varied by agreement between
the parties, or that it has been frustrated, or has become impossible to perform
in circumstances falling short of frustration (e.g. when an employee is
temporarily too sick to attend work), or that there is an express contractual
provision allowing non-performance, or that he has exercised his right to
terminate the contract in view of the other party's prior or anticipated breach.
PERFORMANCE
The old common-law rule is that one party to a contract is entitled to insist on
the other's performing his obligations to the letter.
A contract was made for the supply of barrel staves half an inch thick. The
staves were about 9/16 inch thick when delivered, and the House of Lords
held the purchaser (who could by then have got the staves more cheaply
elsewhere) was entitled to reject the consignment even though the extra
sixteenth would make no difference to the staves' usefulness. Lord Atkin
said that while the law might ignore microscopic deviations, "half an inch"
did not mean "about half an inch", and if a seller wanted a margin he
should stipulate for it.
A contract for the sale of soya bean meal provided for a delivery to be
made in June, the buyers giving fifteen days' notice of their readiness to
collect it. They gave such notice on 17 June, and the sellers claimed the
right to repudiate for breach of an essential term. The House of Lords said
that although s.41 of the Law of Property Act 1925 says a stipulation as to
the time of performance is not to be regarded as being of the essence of
the contract, there are exceptions where the contract itself expressly
stipulates that time conditions must be strictly complied with, this being
the parties' intention, or where the nature of the subject matter or the
surrounding circumstances show clearly that time should be of the
essence (which will commonly be the case in mercantile contracts), or
where a party who has been subjected to unreasonable delay gives notice
to the party in default, making time of the essence from that point on.
Note, however, that s.29(5) of the Sale of Goods Act 1979 provides that tender
of delivery, to be effective, must be made at "a reasonable hour", what is
reasonable being a matter of fact.
Partial performance
It may be, of course, that a party performs part of his obligation but fails to
complete it. Once again, the common-law rule in such cases is that he cannot
claim any payment or performance from the other party.
A builder P contracted to install central heating in D's house, but the work
when completed was seriously defective. The Court of Appeal set aside
the trial judge's order for payment subject to a deduction for the cost of
putting right the defects: a plaintiff's right to recover subject to set-off,
they said, was limited to cases where the contract had been substantially
performed. Here the system simply did not heat the house adequately,
and the estimated cost of repairs being about a quarter of the total price,
it was impossible to describe the contract as having been substantially
performed, and D had not had a realistic opportunity of accepting or
rejecting the incomplete performance offered.
D owed a debt to P and was due to pay £8-10-0 [£8.50]in November; at P's
request he paid £5-2-2 [£5.11] in October and P accepted this in full
settlement. P then sued for the balance and succeeded on a technicality of
pleading, but the whole court made some further points of importance.
Payment of a lesser sum on the day of satisfaction of a greater, cannot
satisfy the debt as a whole; but where payment is made in a different form
(e.g. goods instead of cash) or at an earlier time or a different place from
that previously specified, with the creditor's agreement, the court will
generally assume without enquiring too deeply that the creditor derived
some benefit from the change sufficient to provide consideration for his
agreement to forgive the balance of the debt.
consideration for D's promise not to make such a claim, and D could not
be held to that promise.
PP were a small firm in some financial difficulties, who were owed nearly
£500 by D for work they had done. Eventually D's wife offered to pay £300
in full settlement, saying that if this was not accepted nothing would be
paid. PP reluctantly agreed, but subsequently sued for the balance. The
Court of Appeal upheld their claim, distinguishing Sibree v Tripp and
disapproving some later decisions, and saying that a cheque was no
different from cash. Where a genuine agreement was reached that the
creditor would accept a lesser sum in settlement of a debt, said Lord
Denning MR, equity might then intervene to prevent his insisting on his full
legal rights if it would be unjust and unreasonable for him to do so, but
this was not such a case.
A building firm PP sent D an invoice for work done; D considered the bill
too high and sent a cheque for a lower amount "in full and final
settlement". PP cashed the cheque but then informed D that they would
not accept it as a full and final settlement, and the Court of Appeal upheld
their right to claim the balance. Although a contract can be discharged by
accord and satisfaction, it must be shown that the creditor undertook (for
valuable consideration) to accept less than the full amount due; the test
was what the creditor had led the debtor as a reasonable person to
believe.
FRUSTRATION
The old common law, as illustrated in Paradine v Jane (1647) 82 ER 897, had a
doctrine of absolute contract under which contractual obligations were binding
no matter what might occur. The fact that land was occupied by a foreign army
during the English Civil War did not excuse the tenant from his obligation to pay
rent for the land. The doctrine of frustration was developed as a way of easing
the hardship this rule might cause in cases where the contract could not be
properly fulfilled through no fault of either party. The original theory was that
frustration discharged the contract through an implied term to that effect, but
the modern view is that the parties' actual intentions are irrelevant and that it is
up to the courts to impose a just and reasonable solution.
PP agreed to hire DD's music hall for a series of concerts on certain dates,
but before those dates arrived the hall was destroyed by fire. The judge
said there was an implied term of the contract that it would be discharged
by the destruction of the hall, and PP could not recover damages for non-
completion.
A ship was chartered to proceed with all dispatch, dangers and accidents
of navigation excepted, from Liverpool to Newport and thence to San
Francisco with cargo. The day after sailing the ship ran aground, and six
weeks later (with the ship still aground) the charterers repudiated the
contract. The court held that while the express words of the exception
might cover the interruption, the length of the delay (which in fact
continued for another six months) was beyond what the parties would
have contemplated and frustrated the contract. A voyage made after the
ship had been repaired would have been a quite different enterprise from
that originally contracted for.
was not the sole foundation of the agreement and the cruise around the
fleet could still have taken place.
D agreed to hire briefly from P a flat in Pall Mall, intending to use it with
friends to watch the coronation procession as it passed. The coronation
was postponed at short notice owing to the King's illness, but P sought to
recover the agreed hiring fee. The Court of Appeal turned down the claim
and said the contract had been frustrated; although the purpose of the
hire had not been stipulated in the contract, the circumstances were such
that both parties clearly knew it, and the sole foundation of the contract
had been destroyed.
A ship was chartered for six or seven voyages between Canada and
Europe during a nine-month period, but a lengthy strike at the loading port
in Canada reduced the maximum number of voyages to two. The House of
Lords upheld the arbitrator's decision that the contract had been
frustrated; the extent to which it was capable of being performed was
inordinately small compared with that contracted for.
PP leased a warehouse from DD for a term of ten years, but the street
forming the only access to the warehouse was closed for almost two years
of that period because of the dangerous condition and subsequently the
demolition of another building. The House of Lords said this did not
constitute frustration; although there could in some circumstances be
frustration when it was impossible to use premises for the specific purpose
originally envisaged, a loss of use for two years out of ten was not serious
enough to amount to a frustrating event.
PP chartered a trawler from DD to use for otter fishing, knowing that they
would need to obtain a licence for this use. They applied for five licences
and were granted three, which they allocated to three other vessels. The
Privy Council said PP's claim that the contract had been frustrated could
not succeed; the lack of a licence for the chartered boat was a matter of
PP's own choice, and a party cannot rely on frustration that is wholly or
partly self-induced.
PP agreed to build some houses for the Council, within eight months and
at a pre-determined price. Through no fault of PP, an unexpected national
shortage of skilled labour meant that the contract took 22 months to
complete and cost considerably more than had been envisaged. PP
claimed the original contract had been frustrated and sought a quantum
meruit payment over and above the contract price. The House of Lords
said there had been no frustration; the contract had not become
impossible to perform, and the rise in costs was a risk that PP must have
accepted when making the contract.
BREACH OF CONTRACT
In contracts for the sale or supply of goods, the buyer has the right to reject the
goods and terminate the contract if the goods supplied are not up to standard. If
he accepts the goods, however, the right to reject is lost and the buyer is limited
to damages. Acceptance is deemed to take place when the buyer intimates to
the seller that he has accepted the goods, or when the goods have been
delivered to him and he does any act in relation to them which is inconsistent
with the ownership of the seller, or when after the lapse of a reasonable time the
buyer retains the goods without intimating to the seller that he has rejected
them. Deemed acceptance does not occur, however, unless the buyer has had a
reasonable opportunity to examine the goods or (if the contract is for sale by
sample) to compare the bulk with the sample.
P bought a new car, and over the next three weeks made two or three
short trips totalling 140 miles to try it out. The engine then seized up
because of a drop of sealant that had got into the lubrication system when
the car was being assembled. The judge said P had accepted the vehicle
by keeping it for three weeks without sending it back; a reasonable time
for inspection and trying out the vehicle had passed. What was reasonable
timewise, he added, depended on the nature of the goods: longer would
be needed for a nuclear submarine than for a bicycle.
CC bought a yacht from DD, but found it was not of satisfactory quality.
They complained to DD, and after some inconclusive discussions as to the
work that would be needed to rectify the faults, CC rejected the yacht
three weeks later and sought return of their money. The Court of Appeal
said that if goods are not of satisfactory quality, the buyer's rejection does
not have to be reasonable: he can reject for any reason at all, and the only
question is whether he has lost that right by accepting the goods. As to
that, the time taken in ascertaining what repairs would be needed is to be
taken into account in determining "a reasonable time". Bernstein v
Pamsons has been much criticised and was decided before the Act was
amended in 1994: it no longer represents the law.
Acceptance is not deemed merely because the buyer has asked for or agreed to
the repairing of the goods by or under an arrangement with the seller. Moreover,
since 1995 the buyer can reject just part of a consignment and accept the rest:
specifically, he can reject all the goods, or accept those which conform with the
contract and reject the rest, or accept those which conform and some of those
which do not, and reject the rest, or accept all the goods.
C bought an agricultural seed drill and harrow from DD. It soon became
apparent that it was faulty, and C took it back to DD for repair. DD
repaired it by replacing two missing bearings; they told C it was now of
"factory gate standard", but would not give any further details. C (who was
concerned that he would not be able to test it properly until the same time
next year) now sought to reject it even though in fact it was now in good
working order. The House of Lords implied a term entitling C to know what
the fault had been - without that information he could not make a properly
informed choice - and said that in these circumstances C was entitled to
reject the goods.
Where one party repudiates the contract before full performance, indicating by
his words or deeds that he has no intention of honouring his future obligations,
the other has the same choice as before and (if choosing termination) need not
wait for an actual breach but can act at once.
The charterers of a ship deducted certain disputed sums from their hire
payments, and the owners retaliated by instructing the ship's master not
to issue pre-paid bills of lading, thus making the ship practically useless to
the charterers. They mistakenly thought they were entitled to do this, but
the House said the owners' action was a wrongful repudiation of the
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contract for which the charterers were entitled to damages. The owners'
subjective desire to maintain the contract was irrelevant: it was the overt
act amounting to repudiation that counted.
The terms of a land contract gave Wimpey the right to rescind the
contract under certain circumstances; they honestly but mistakenly
believed those circumstances had arisen and purported to exercise their
right. Woodar sought damages, but a bare majority in the House of Lords
distinguished Molena Alpha and said there was no repudiation. If Wimpey
honestly believed they were exercising a contractual right, said their
Lordships, they were not disregarding the requirements of the contract
and could not be said to have repudiated it.
The innocent party's decision to terminate for anticipatory breach must be clear,
and must be communicated to the other party, though this communication may
be by conduct.
P ordered goods worth £270k and paid £100k in advance. P then refused
delivery, and DD elected to terminate the contract and claimed to keep
the advance. P sued for the return of his advance, and the judge said he
should succeed, subject to an appropriate deduction to represent the
damages to which DD were entitled. No executed consideration had been
given for this payment, so DD were not entitled to keep it.
UNIT FIVE
REMEDIES FOR BREACH OF CONTRACT
Where one party is in breach of his contractual obligations, the remedies open to
the other depend in part on the seriousness of the breach. An action for
damages is possible in almost every case, and in some cases an order for
specific performance, but where the breach is serious the innocent party may
prefer to abandon the contract altogether. There is also the possibility of
rescission in some cases of mistake or misrepresentation.
DAMAGES
Where an innocent party has suffered financial loss following another's breach of
contract, the court must decide whether the breach actually caused the loss,
whether the party at fault is legally liable for it (which is not the same thing), and
how much compensation is payable. Causation is largely a matter of fact, and
the rules in contract are similar (but not identical) to those in tort.
Even with causation, a party in breach of contract is not always legally liable for
the entire loss.
Once D's liability for P's losses has been established, the court must then
consider an appropriate measure of damages. Three possible measures are
applicable: expectation damages putting P in the position he would have been
had the contract been completed, reliance damages restoring P to the position
he would have been in had the contract never been made, or restitution
damages compelling D to restore any benefits he may have received from P.
Contract law generally awards damages for P's loss of expectation. If P pays
£100 for a painting worth £200, and D fails to deliver it, he is liable in damages
for the value of the painting rather than for the amount paid; the same is true if
the painting is found to be worth only £50. In cases such as this, the valuation
normally applied is the open market price at the time of the breach, or a
previously agreed resale price if there is no open market. But where an expected
profit is incalculable, or in any case where it seems just and reasonable, the
judge may award reliance damages instead. Restitution damages are not
generally awarded in contract.
without actual loss does not entitle the innocent party to more than
nominal damages. An equitable claim in quasi-contract might be possible,
but PP2's claim in contract could not stand.
If P agrees to sell his car for £500 to a buyer who then refuses to go through with
the deal, P's damages are usually limited to the difference between £500 and the
market price of the car (if that is lower), since he is presumed to be able to sell
to another buyer and has a duty to try to do so. If the market price is £500 or
above, P has lost nothing except perhaps his out-of-pocket expenses and will be
awarded very little. If P is a dealer who relies on trade for his living, the situation
may be a little different.
misrepresented at the time of the sale, and the judge decided that had the
colt been correctly described its value at that time would have been
£24700. PP claimed rescission of the contract together with all expenses
incurred in the care and training of the horse; DD offered only the
difference between the actual and proper sale prices. The judge said the
animal sold was "altogether different" from that contracted for, and
awarded damages equal to the difference between the original price and
the horse's present value.
In matters other than direct financial loss, a valuation must often be little more
than a shot in the dark, though now contract claims are no longer tried by juries
there is greater chance of consistency.
The general rule is that contract damages cannot be awarded for any mental
distress associated with the breach of contract, and the exceptions to this rule
are limited.
A contract may provide for payments in the event of a breach, and such a
provision is prima facie a valid and enforceable term of the contract. Insofar as
such payments represent a genuine estimate at the date of the contract of the
loss likely to be suffered by the innocent party, they are treated as liquidated
damages and will be enforced irrespective of the actual loss suffered. Where
they are clearly in excess of the actual loss, however, they are treated as a
penalty and the court has an equitable jurisdiction to reduce them if it thinks it
desirable.
EQUITABLE REMEDIES
Specific performance
There are a limited number of cases in which a breach of contract cannot
adequately be compensated by purely monetary damages. It is in such cases
that the equitable decree of specific performance comes into play, whereby the
offending party is ordered (on pain of imprisonment) to fulfil his part of the
bargain.
A farmer P sold part of his land to DD, but retained for himself a right of
way over a track on the land sold giving access to his retained land. DD
covenanted that they would not raise the level of the track above the level
of the surrounding land, but when they surfaced the track they actually
raised it by several inches and thus interfered with the use of P's farm
machinery. P sued for an injunction requiring DD to remove the surfacing,
and DD (admitting liability) offered damages in lieu. The judge said that
although P should not be denied a legitimate remedy merely because it
would be disadvantageous to D, he should not be entitled to insist on a
form of relief that would be materially detrimental to D while conferring no
appreciable benefit on himself. In this case he took the unusual step of
granting an injunction suspended it for three years, during which time DD
might undertake other remedial work to resolve the problem.
Rectification
Where it can be shown clearly that a document such as a will or a contract does
not reflect the true intentions of the parties (or where one party to a contract
took unfair advantage of a mistake made by the other) the court has power to
rectify the document to make it show the true position.
reference to arbitration, and the Court of Appeal agreed: where one party
knows the document does not reflect both parties' intention, he is
estopped from resisting rectification to take advantage of the other's
error.
Rescission
If a contract is rescinded, then it is as if it had never existed, and the parties are
restored to their original positions. A party discovering a relevant mistake, or the
victim of a misrepresentation, may affirm or rescind the contract, explicitly or by
his conduct, but this decision once made is irrevocable.
Since the effect of rescission is to nullify the contract, it is available only where
restitutio in integrum is possible and the parties can be restored to their original
positions. The courts interpret this fairly widely, however, as is appropriate in
matters of equity, and are prepared to make consequential orders as necessary.
The right to rescind for misrepresentation is lost if the representee has affirmed
the contract, if restitutio in integrum is impossible, if too much time has elapsed
Section 2(1) of the Misrepresentation Act 1967 now provides for an award of
damages for loss resulting from a misrepresentation made not fraudulently but
without reasonable grounds for belief in its truth. The burden of proving the
existence of "reasonable grounds" is on the representor. A plaintiff party to the
relevant contract is therefore usually well advised to follow this line rather than
seek damages in tort, where he would have the burden of showing negligence.
Under s.2(2) of the Misrepresentation Act 1967 the courts have a further
power in cases of non-fraudulent misrepresentation to award damages in lieu of
rescission if it would be equitable to do so, and may refuse rescission unless it
can be shown to be fair and equitable. This may include even cases of innocent
misrepresentation, where damages would not otherwise be available.
RIGHT TO REJECT
In contracts for the sale or supply of goods, the buyer has the right to reject the
goods and terminate the contract if the goods supplied are not up to standard. If
he accepts the goods, however, the right to reject is lost and the buyer is limited
to damages. Acceptance is deemed to take place when the buyer intimates to
the seller that he has accepted the goods, or when the goods have been
delivered to him and he does any act in relation to them which is inconsistent
with the ownership of the seller, or when, after the lapse of a reasonable time,
the buyer retains the goods without intimating to the seller that he has rejected
them. Deemed acceptance does not occur, however, unless the buyer has had a
reasonable opportunity to examine the goods or (if the contract is for sale by
sample) to compare the bulk with the sample.
purported to reject the car on the grounds that it was not of merchantable
quality and the court of Appeal said they were entitled to do so: the
expectations of the purchaser of a Range Rover were higher than those of
the purchaser of an ordinary car.
Acceptance is not deemed merely because the buyer has asked for or agreed to
the repairing of the goods by or under an arrangement with the seller. Moreover,
since 1995 the buyer can reject just part of a consignment and accept the rest:
specifically, he can reject all the goods, or accept those which conform with the
contract and reject the rest, or accept those which conform and some of those
which do not, and reject the rest, or accept all the goods. But the buyer must still
reject within "a reasonable time", the duration of which is a matter of fact in
each case.
EXTINCTION OF REMEDIES
The remedies for breach of contract are extinguished by accord and satisfaction,
where one party agrees (for valuable consideration) not to enforce his rights
against the other; or by a release under seal; or by lapse of time.