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The Law Of Contract

(Study Notes)

Zoha Sirhindi, Esq.


LL.M. (Cornell), Attorney of NYS Bar Association LL.B. (London), Barrister of Lincolns Inn

The Analytical Framework of Contract Law


THE LAW OF OBLIGATIONS

Contract (the law of promises or expectations)

Tort (the law of civil wrongs)

Restitution (the law of unjust enrichment)

Part I How are contracts formed?...................................................................Page 1 - Invitations to treat - Offers - Acceptance - Consideration - Intention to create legal relations - Certainty and completeness - Form

Part II What is the content of contracts?........................................................Page 6 - Terms and representations - Parol evidence rule - Conditions / Warranties / Innominate Terms - Exclusion clauses - UCTA 1979 and UTCCR 1999

Part III Who can enforce contracts?................................................................Page 13 - Rules of privity - Contracts (Rights of Third Parties) Act 1999 - Exceptions to the Privity Doctrine

Part IV How are contracts destroyed?.............................................................Page 17 - Incapacity - Misrepresentation - Mistake - Illegality - Duress and Undue Influence

Part V How do contracts come to an end and what are their consequences?.......................................................Page 23 - Discharge by Performance - Discharge by Breach - Discharge by Agreement - Discharge by Frustration - Damages - Other remedies - Law of Restitution - Deposits and Part Payments - Extinction of remedies

Part I - Formation of Contracts


A contract may be defined simply as a legally binding agreement. Alternatively, it may be defined as a promise or set of promises which the law will enforce. All contracts are agreements but not all agreements are contracts. Contracts may be classified as either bilateral or unilateral. A bilateral contract is one where a promise by one party is exchanged for a promise by the other. The exchange of promises is enough to render them both enforceable. Thus in a contract for the sale of goods, the buyer promises to pay the price and the seller promises to deliver the goods. A unilateral contract is one where one party promises to do something (usually pay a sum of money) in return for an act of the other party, as opposed to a promise. A classic example is a reward case where A promises a reward to anyone who will find his lost dog. The essence of a unilateral contract is that only one party, A, is bound to do anything. No one is bound to search for the lost dog, but if B, having seen the offer, finds the dog and returns it, he is entitled to the reward. The test for the existence of an agreement is objective: Centrovincial Estates v Merchant Investors What matters is not what meaning a party actually intended to convey by his words or conduct but what meaning a reasonable person in the other partys position would have understood him to be conveying. This is called the promisee objectivity test. An offer is a statement by one party of a willingness to enter into a contract on stated terms. An offer has to be communicated to the offeree: Taylor v Laird The distinction between an offer and an invitation to treat is primarily one of intention: did the maker of the statement intend to be bound by an acceptance of his terms without further negotiation or did he only intend his statement to be part of the continuing negotiation process? See Gibson v Manchester City Council cf. Storer v Manchester City Council

Invitations to treat
An invitation to treat is simply an expression of willingness to enter into negotiations which may lead to the conclusion of a contract. A supply of information is a statement that merely provides information to the other party and is not intended to be acted upon: See Harvey v Facey Common types of invitations to treat: Display of Goods: Fisher v Bell & Pharmaceutical Society v Boots Cash Chemists Advertisements: Partridge v Crittenden & Carlill v Carbolic Smoke Ball & Lefkowitz v Minneapolis Stores Auctions: Harris v Nickerson & Barry v Davies Tenders: Harvela v Royal Trust Co. of Canada & Blackpool Aero Club v Blackpool Borough Council Time Tables and Automated Machines: Wilkie v London Transport & Thornton v Shoe Lane Parking

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Methods of terminating an Offer


If the offer is revoked (withdrawn) before acceptance: Routledge v Grant (Knowledge of the revocation may come from a third party rather than the offeror: Dickinson v Dodds) If the offer is rejected or a counter offer is made: Hyde v Wrench (Note that a request for further information is not a counter offer: Stevenson v McLean) On the lapse of set time or reasonable time: Ramsgate Victoria Hotel v Montefiore On the failure of a contingent condition precedent: Financings v Stimpson On the death of the offeree. It also terminates on the death of the offeror if the contract involves a personal element or the offeree has knowledge of the offerors death: Bradbury v Morgan Unilateral offers can be terminated before performance begins: Errington v Errington & Daulia v Millbank & Luxor v Cooper* Unilateral offers to the world-at-large can be terminated before complete performance and their revocation should reach the same audience as the offer (preferably same channel): Shuey v US

Rules of Acceptance
An acceptance is an unqualified expression of assent to the terms proposed by the offeror. Acceptance must be communicated to the offeror: Entores v Miles Far Eastern Corporation Acceptance may be inferred from conduct: Brogden v Metropolitan Railway Acceptance cannot be silence: Felthouse v Bindley Acceptance cannot occur if offeree does not have knowledge of the offer: R v Clarke & Gibbins v Proctor Motive for acceptance is irrelevant: Williams v Cowardine Acceptance must be made by the offeree or his agent: Powell v Lee Acceptance cannot be in the form of a cross offer: Tinn v Hoffman Acceptance must be the last shot in a battle-of-the-forms: Butler Machine Tool v Ex-Cell-O Corporation Complete performance amounts to acceptance in unilateral contracts: Daulia v Millbank Methods of Acceptance: (a) By post: Adams v Lindsell - the postal rule is established Hentorn v Fraser - it must be reasonable for the offeree to use the post Holwell Securities v Hughes - rule does not apply where it would lead to manifest absurdity Household Fire Insurance v Grant - there is a valid acceptance even if letter is lost in the post Byrne v Van Tienhoven - the rule does not apply to letters of revocation (b) By instantaneous mediums: Entores v Miles Far Eastern The Brimnes Allianz Insurance v Aigaion Insurance (c) Prescribed method: Manchester Diosecean Council v Commercial Investments

* It is suggested that this case be confined to agency scenarios Not considered good law

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Consideration
Consideration is defined 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 (per Lush J in Currie v Misa). Consideration is needed for the formation and variation of a contract. There are three forms of consideration: Executory consideration: Consideration is called executory where there is an exchange of promises to perform acts in the future. For example, a bilateral contract for the sale of goods wherein A promises to deliver goods to B at a future date and B promises to pay on delivery. Executed consideration: This arises in unilateral contracts where the act of acceptance is also the consideration. If one party makes a promise in exchange for an act by the other party, when that act is completed, it is executed consideration. However, this label is also used to describe the situation where, in a bilateral contract, one party has performed as per his promise in the above example it would be when A delivers the good to B. Past consideration: Consideration that comes before the promise. If one party voluntarily performs an act and the other party then makes a promise, the consideration for the promise is said to be in the past. Past consideration is not a valid form of consideration.

Consideration must be sufficient (of economic value) but need not be adequate: Chappell v Nestle & White v Bluett

Past consideration is not good consideration: ReMcArdle Exception: Doctrine of implied assumpsit: Lampeigh v Braitwait & Pau On v Lau Long

Consideration must move (come) from the promisee: Tweedle v Atkinson Note there is no equivalent requirement that consideration must move to the promisor: Bolton v Madden

Consideration must not be something the promisee is already bound to do: o Legal Duty: Collins v Godefroy Exception: Performance exceeds legal duty: Glasbrook Ltd v Glamorgan CC o Contractual Duty: Stilk v Myrick Exception 1: Performance exceeds contractual duty: Hartley v Ponsonby Exception 2: Practical benefit: Williams v Roffey The concept of practical benefit does not extend to contracts of debt: Re: Selectmove o But consideration can be something the promisee is bound to do for a third party: Scottson v Pegg

Consideration must not be part payment of a debt: Foakes v Beer Exception: Pinnels Case

Consideration must not be forbearance to sue for an invalid claim: Wade v Simeons & Cook v Wright

Consideration exists when the variation or discharge is capable of benefiting either party: WJ Alan v El Nasr

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Promissory Estoppel
Promissory Estoppel is defined as, Where, by words or conduct, a person makes an unambiguous representation as to his future conduct, intending the representation to be relied on and to affect the legal relations between the parties, and the representee alters his position in reliance on it, the representor will be unable to act inconsistently with the representation if by so doing the representee would be prejudiced. See Central London Property v High Tree House Exam tip: Consider promissory estoppel only after you are unable to find consideration for a particular promise.

Seven conditions must be satisfied: There must be a pre-existing contractual relationship: Hughes v Metropolitan Railways The promise must be unequivocal (but can be implied) as to future conduct: Israel Cocoa v Nigerian Produce Marketing The promisee must have acted in reliance (whether to his detriment or not): WJ Alan v El Nasr It can only suspend not extinguish rights* : Tool Metal v Tungsten Electric It must be inequitable to allow the promisor to go back on his promise: D&C Builders v Rees It can only be used as a defence and not as a cause of action: Combe v Combe The promise must not be prohibited by legislation: Evans v Amicus Healthcare

Doctrine of Waiver: Where one party voluntarily accedes to a request by another to forbear his right to strict performance of the contract, or where he promises another that he will not insist upon his right to strict performance of the contract, the court may hold that he has waived his right to performance as initially contemplated by the parties. See Hickman v Haynes.

Exam tip: Consider the doctrine of waiver if you are being asked to advise a potential claimant. Note that the doctrine of waiver will factually overlap with promissory estoppel where the promisor is waiving a particular condition or obligation of the contract but in such a situation the doctrine of waiver, unlike estoppel, can be used by the promisee as a cause of action. For example, you are asked to advise a contractor in a claim against a home owner. Homeowners duty to make monthly payments is conditioned on the contractor providing an architects certificate that the work done the prior month was acceptable. Homeowner tells the contractor that he will make future payments without a certificate and so the contractor does not provide the certificate the next month; the homeowner then refuses to pay. The contractor will be able to successfully sue the homeowner on the grounds of waiver.

Exam tip: In an essay question asking you to consider the relationship between consideration and promissory estoppel, always cite the analysis of the Australian High Court in Walton Stores v Maher where the court ruled that in appropriate cases promissory estoppel could be used as a cause of action in the absence of a pre-existing legal relationship.

* Arguably this principle applies only to contracts that involve periodic performance say when a tenant has to make monthly rent payments. If the contract stipulates the payment of a single lump sum then the effect can be permanent as in a scenario like the D&C Builders case.

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Intention to create legal relations


The determination of whether or not the parties actually intended to enter into legally binding relations is an objective one and context is all important. The courts will not examine the states of mind of the parties to the agreement (a subjective approach) but will ask whether or not reasonable parties to such an agreement would possess an intention to create legal relations. Although the presumptions can be rebutted by evidence of contrary intention, the presumptions themselves are matters of public policy: that contract law should be confined to the commercial sphere and should not operate in social or domestic situations otherwise the courts would be swamped by trifling domestic disputes.

Social and domestic agreements are presumed not have legal effect: (i) Husband and wife: Balfour v Balfour & Merritt v Merritt (ii) Parent and child: Jones v Padavatton (iii) Friends: Simpkins v Pays & Coward v MIB Rebuttal: (i) Business context: Snelling v John Snelling (ii) Detrimental reliance: Parker v Clark

Commercial and business agreements are presumed to have legal effect: Esso Petroleum v Commissioners of Customs and Excise Edwards v Skyways Rebuttal: (i) Honour clauses: Rose and Frank v J R Crompton and Bros (ii) Subject to contract clause: Tiverton Estates v Wearwell (iii) Comfort letters: Kleinwort Benson v Malaysia Mining

Certainty and Completeness


Uncertainty may be caused by vagueness and/or incompleteness: Scammell v Ouston & Nicolene v Simmonds & Hillas v Arcos

Requirements of Form
Unilateral gratuitous promises contained in a deed are enforceable irrespective of consideration. A deed is a document which (a) bears the word deed, (b) is signed by the maker of the deed, (c) is attested by at least one witness and (d) is delivered i.e. some conduct that shows that the person executing the deed intends to be bound by it. Certain contracts such as those pertaining to the sale or other disposition of an interest in land must be made in writing. At common law, a defect in form renders a contract unenforceable (but not void). This is subject to the equitable doctrine of part performance.

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Part II - Contents of Contracts


Difference between Terms and Representations
A term is a word or phrase that is part of the contract. Terms define the obligations/undertakings of a party. A representation is a statement which simply asserts the truth of a given state of facts. An objective test of intention is used to determine whether a word or phrase is a term or representation Heilbut, Symons & Co. v Buckleton The following factors are considered in determining objective intention: Importance of the Statement: Couchman v Hill Strength of the statement/Need for verification: Schawel v Reade & Ecay v Godfrey Special knowledge and skill: Bentley Productions v Harold Smith Motors & Oscar Chess v Williams Timing of the statement: Routledge v McKay In a written form: Duffy v Newcastle United Football

The Parol Evidence Rule


The parol evidence rule is that where the contract is embodied in a written document, extrinsic evidence is not generally admissible to vary, contradict or interpret the document. The document is the sole repository of the terms of the contract. Entire agreement clauses are often used to, in effect, codify this rule. There are many exceptions to this rule: o o o o o o o o Partially written agreement: Couchman v Hill Operating status of the contract: Pym v Campbell Rectifications Implied terms Evidence about the capacity of parties Aids to construction Proving custom: Hutton v Warren Collateral contracts: City and Westminster Properties v Mudd

Rules regarding Implied Terms


Terms may be implied into a contract: By statute: Sections 12-15 of the Sale of Goods Act 1979 By custom: Hutton v Warren By common law: o Terms implied in fact: Business Efficacy test: The Moorcock; Officious Bystander test: Shirlaw v Southern Foundries Terms implied in law: El Awadi v BCCI lays down two requirements: (i) Contract of a defined type; (ii) The necessity test

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Distinguishing between Conditions / Warranties / Innominate terms


A condition is an essential term of the contract which goes to the root of the contract. A breach of a condition enables the party who is not in breach of contract (the innocent party) either to terminate performance of the contract and obtain damages for any loss suffered as result of breach or to affirm the contract and recover damages for breach. Such promissory conditions should be distinguished from contingent conditions events upon which the existence of the contract is dependent. A contingent condition may be a condition precedent (if), a condition concurrent (as long as) or a condition subsequent (until). A warranty is a lesser, subsidiary term of the contract. A breach of a warranty only enables the innocent party to claim damages; he cannot terminate performance of the contract and must therefore continue to perform his obligations under the contract. Distinguish this meaning from the following: A warranty is an assurance by one party (the warrantor) to the other that certain facts or conditions are true or will happen; the other party is permitted to rely on that assurance and seek some type of remedy if it is not true or followed. This is the sense in which the word is used when giving a lifetime warranty on the sale of a product or when buyers and sellers make representations and warranties in a commercial transaction such as a sale of a business. Terms may be classified into conditions or warranty: (a) By statute: Sections 12-15 of the Sale of Goods Act 1979 (b) By courts: (i) By necessary implication as term goes to the root of the contract: Couchman v Hill (ii) Due to a previous binding authority on the matter: Arcos v Ronaasen (c) By the parties themselves: Lombard North Central v Butterworth & Schuler AG v Wickman Machine Tool

An innominate term can be distinguished from a condition on the ground that breach of an innominate term does not automatically give rise to a right to terminate performance of the contract and it can be distinguished from a warranty as the innocent party is not confined to a remedy in damages. This third classification originated in Hong Kong Fir Shipping v Kawasaki and gives the court an important degree of remedial flexibility. Example: The Hansa Nord The following factors will be looked at in order to assess whether or not the breach was sufficiently serious: (i) Any detriment caused or likely to be caused by the breach (ii) Any delay caused or likely to be caused by the breach (iii) The value of any performance received by or tendered to the party not in breach (iv) The cost of making any performance given or tendered by the party in breach conform with the contract (v) Any offer by the party in breach to remedy the breach (vi) Whether the party in breach has previously breached the contract or is likely to breach it in the future (vii) Whether the party not in breach will be adequately compensated by an award of damages

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Criteria for a valid exclusion clause


An exclusion clause is a clause in a contract or a term in a notice which appears to exclude or restrict a liability or a legal duty which would otherwise arise. Courts have generally treated exclusion clauses as a defence to a breach of an obligation. Exam tip: Remember to follow the three step process below in order to conclusively determine the validity of an exclusion clause. 1) Incorporation is the clause a part of the contract?

(a) Signature: LEstrange v Graucob & Grogan v Robin Defence of Non est factum: Gallie v Lee & United Dominions Trust v Western (b) Reasonable notice: Parker v South Eastern Railway must take reasonable steps to inform claimant Thompson v LMS Railway* exclusion clause inside the railway timetable is good enough Sugar v LMS Railway reference to the exclusion clause obliterated Henderson v Stevenson an exclusion clause should be referred to on the front of the ticket Olley v Marlborough Court the notice should not come after formation of the contract Chapelton v Barry UDC the document must be of a contractual nature Spurling v Bradshaw the red hand rule (c) Previous course of dealing: McCutcheon v David MacBryne Ltd must be regular and consistent Henry Kendall v William Lilico 100 contracts over 3 years is regular and consistent Hollier v Rambler Motors 3 or 4 contracts over 5 years is not regular and consistent (d) Trade usage or custom: British Crane Hire v Ipswich

2) Interpretation does the clause cover the loss that has arisen?

The Contra Proferentum rule: If there is any ambiguity as to the meaning of an exclusion clause the court will construe it contra proferentum i.e. against the party who inserted it into the contract and now seeks to rely upon it. For example: Houghton v Trafalgar Insurance Rules of construction for excluding negligence liability: Canada Steamship v The King Doctrine of Fundamental Breach: Photo Production v Securicor Transport

3) Legal Controls is there any rule of law that would invalidate the clause?

(a) Statutory: Unfair Contract Terms Act 1977 Unfair Terms in Consumer Contracts Regulations 1999 Sale of Goods Act 1979 (b) Common Law: (i) Misrepresenting the effect of the exclusion clause: Curtis v Chemical Cleaning (ii) Inconsistent oral promise: Mendelssohn v Normand

* It is likely that this is no longer good law.

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Unfair Contract Terms Act 1977


UCTA uses two methods of controlling exclusion clauses: declaring them ineffective and making them subject to reasonableness. UCTA does not apply to contracts concerning land, contracts which create or transfer most forms of intellectual property, contracts relating to the formation or dissolution of a company or any contract of insurance. Sections 2 to7 only apply to business liability: s.1(3). Business liability is defined as liability for breach of obligations or duties arising from things done or to be done by a person in the course of a business (whether his own business or anothers). In other words, the party seeking to rely on exclusion clauses covered by ss. 2 - 7 must be acting in the course of a business. Exclusion of Negligence Liability: Section 2 Liability for death or personal injury resulting from negligence cannot be excluded or limited clauses purporting to do so will simply be ineffective. This includes liability for negligence in tort as well as contract. Responsibility for negligence which causes some other type of harm such as economic loss can only be limited or excluded where it is reasonable to do so. As per s.13(1), section 2 also applies to duty defining clauses i.e. clauses that purport to allocate responsibility rather than exclude liability. Phillips Products Ltd. v Hyland & Smith v Eric Bush Exclusion of Contractual Liability: Section 3 Where one party deals as a consumer or on the other partys written standard terms of business, then the other party cannot exclude or restrict his liability for breach of contract, except subject to the requirement of reasonableness. This reasonableness requirement is also extended to terms purporting to entitle the other party to render (i) performance substantially different from that reasonably expected; or (ii) no performance at all. Example: Timeload Ltd v British Telecommunications Section 12 states that a party deals as a consumer if he does not make the contract in the course of business and the other party does. A contract is made in the course of business if it is integral to the business or it forms part of the regular course of dealing of that business: R & B Custom Brokers v United Dominion Trust. Note that this phrase has a different meaning under SGA 1979. Indemnities by consumers: Section 4 An indemnity clause is one which provides that one party will reimburse (indemnify) the other in the event of any loss arising from the contract. The effect of an indemnity clause is often to transfer liability away from the party who would normally be liable. Under s.4 such clauses are only valid if they are reasonable. For example, contracts for the hire of a lorry and a driver sometimes contain a clause by which the hirer promises to indemnify the owner for any injury, loss or damage caused by the negligence of the driver. This section has no application to commercial indemnity clauses. Implied Terms in Sale of Goods contracts: Section 6 Legislation such as the Sale of Goods Act 1979 implies certain terms into contracts for the sale of goods and hirepurchase contracts. Exclusion of these terms is controlled by s.6 of UCTA. The implied condition that the seller has the right to sell the goods in s.12 of SGA can never be excluded. Other terms implied by ss.13-15 of SGA cannot be excluded if one party deals as a consumer. Where neither of the parties is dealing as a consumer the exclusion clause will be subject to a requirement of reasonableness.

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Exclusion of Misrepresentation liability: Section 8 Terms that seek to exempt liability for misrepresentation are subject to a test of reasonableness. The onus lies on the party relying on the exclusion clause to show that it is reasonable. See section 3 of the Misrepresentation Act 1967.

The Reasonableness Test: Section 11 Where a term must satisfy the requirement of reasonableness, the test is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in contemplation of the parties when the contract was made: s.11(1). Once again, the onus lies on the party relying on the exclusion clause to show that it is reasonable. The impugned clause should be looked at as a whole while assessing reasonableness and not only to the part of the clause which is being relied upon as the unreasonable the unreasonable part of the clause cannot be severed: Stewart Gill v Horatio Schedule 2 of the Act provides some guidelines on assessing reasonableness. As per these guidelines, the relevant factors when assessing reasonableness include: The strength of the bargaining positions of the parties Whether the customer received an inducement to agree to the term Whether the customer had the opportunity of entering into a similar contract with others w/o such a term Whether the customer knew or ought reasonably to have known of the existence of the term Whether the goods were manufactured or adapted to the special order of the customer

In addition to the guidelines, the following factors may also be taken into account: Availability of insurance at the time of contract formation: The Flamer Pride Whether the clause undermined an express promise: Lease Management v Purnell Secretarial Enforcement of the clause in practice: George Mitchell v Finney Lock Seeds Whether the clause tries to cover two very different types of loss: Overseas Medical v Orient Transport Limitation clauses are more likely to be considered reasonable than exclusion clauses especially if there is some objective justification for the selection of the figure: St Albans City Council v International Computers

Attempts at evading UCTA: Section 13 and Section 10 Paragraphs (a) to (c) of s.13(1) ensure that clauses which the effect of excluding or restricting liability but in a slightly round about way, are dealt with as if they limited or excluded liability more simply. For example, paragraph (a) covers a clause stating that any claim must be made with a certain time period and paragraph (b) covers a clause which allows recovery of damages but which purports to remove any right to terminate the contract for breach whereas paragraph (c) will nullify a clause stating that signature was proof that the goods delivered met the requirements of the contract. The last part of s.13(1) is similarly a provision to prevent evasion of the Act by exclusion clauses in disguise. It ensures that some clauses which, in form, define the obligation will be identified as exclusion clauses, in nature, for the purposes of ss. 2,5,6,7. The difficulty is that it does not indicate how to determine which clauses are to be treated in this way. Section 10 states that an exclusion clause which is contained in a separate contract rather than in the contract giving rise to the liability, is ineffective in so far as it attempts to take away a right to enforce a liability which under the Act cannot be excluded or restricted. The mischief at which this section is aimed is the practice of seeking to evade the Act by the use of another contract e.g. where a term in a contract between a manufacturer of a product and a purchaser purports to affect the rights of the purchaser against the vendor under the Sale of Goods Act 1979. This section therefore applies to attempts to evade the provisions of UCTA by the introduction of an exclusion clause in a contract with a third party, but does not apply to genuine compromises of existing claims.

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Unfair Terms in Consumer Contracts Regulations 1999


Scope: The regulations apply to unfair terms in contracts (and is not limited to exclusion clauses) concluded between a seller or a supplier and a consumer (reg.4(1)). A consumer is a natural person who is acting for purposes which are outside his trade, business or profession (reg.3(1)). Effect: An unfair term shall not be binding on the consumer; however the contract shall continue to bind the parties if capable of existing without the unfair terms (reg.8(1)&(2)). A contract term that 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 to the detriment of the consumer (reg.5(1)). In Director-General of Fair Trading v First National Bank, it was held that good faith relates to the need for fair and open dealing (the consumer must be given full information - there should be no pitfalls or traps in the contract) whereas significant imbalance arises where a term is so weighted in favour of the supplier that it tilts the contractual rights and obligations significantly in favour of the supplier. In other words, significant imbalance is concerned with substantive fairness, whereas good faith relates to procedural fairness. A term will be regarded as not individually negotiated if drafted in advance and so the consumer has not been able to influence the substance of the term (reg.5(2)). However, even where a specific term has been negotiated, this will not prevent the regulations applying to the rest of the contract if, overall, it is a pre-formulated standard form of contract (reg.5(3)). The burden of proving that a term was individually negotiated falls on the seller or supplier (reg.5(4)). Schedule 2 contains an indicative and non-exhaustive list of terms which may be regarded as unfair. In the case of written contracts, a seller or supplier must ensure that any written term is expressed in plain, intelligible language (reg.7(1)). Exam tip: One of the simplest ways of applying the UTCCR in the exam is to compare the clause in question with the list of unfair terms stated in Schedule 2 of the UTCCR. Core provisions: No assessment shall be made of the fairness of any term which relates to the definition of the main subject matter of the contract or the adequacy of the price or remuneration as against the goods or services supplied so long as that term is in plain, intelligible language (reg.6(2)).

Sale of Goods Act 1979


The Sale of Goods Act 1979 as amended by the Sale and Supply of Goods Act 1994 implies certain terms into a sale of goods contract. A sale of goods contract is defined as the agreement by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price. Thus, the Act applies only to goods sold for money and does not cover other kinds of transaction such as exchanging of goods. Goods has been interpreted broadly. It has been held to include packaging surrounding goods and instructions appearing on the packaging. It does not cover services, which are covered by the Supply of Goods and Services Act 1982. Certain provisions of the SGA apply only when goods are sold in the course of a business. The Court of Appeal in Stevenson v Rogers, gave the phrase a very wide scope and held that all sales of goods made by business met this requirement even if the sale of such goods was not the regular trade of the business. It does not require any regularity of dealing or indeed any previous dealing at all. Title: Section 12 Under s.12(1), a condition is implied into any contract for the sale of goods that the seller has a right to sell the goods and is able to pass good title to the buyer. A breach of this condition amounts to a total failure of consideration and the buyer may claim back the price of the goods even if they have been used for some time. Section 6 of UCTA prevents this section from ever being excluded. - 11 - | P a g e

Sale by description: Section 13 Section 13(1) states that where there is a contract for the sale of goods by description, there is an implied condition that the goods will correspond with the description. In many cases, the implied term as to description will also be an express term of the contract. If a buyer is told that a sweater is cashmere, it is likely to become an express term of the contract alongside the implied term that the good correspond with that description. Since s.13 is not limited to sale in the course of business, it can apply to private sales. Satisfactory quality and Fitness for purpose: Section 14 Section 14(2) requires that goods sold in the course of a business should be of satisfactory quality which means that they should meet the standard that a reasonable person would regard as satisfactory, taking into account their price, description and other relevant circumstances. In assessing the quality of goods, the courts may take into account their fitness for their usual purpose, their appearance and finish, freedom from minor defects, safety and durability. The requirement of satisfactory quality will not apply where any defect or other matter is specifically drawn to the buyers attention before the contract is made, or which ought to have been revealed by the buyers own examination of the good: s.14(2(C)). There is no obligation for a purchaser to examine the goods and a cursory look at them without opening the packaging for example is not expected to reveal defects. On the other hand, where a purchaser does examine the goods before buying, any defects he or she should have spotted will not be covered. Section 14(3) basically states that if a buyer tells the seller the goods are required for a particular purpose and the seller goes ahead and sells them, they must be fit for that purpose even if it is an unusual one. But it must be proved that the buyer was indeed relying on the sellers advice in making his choice. The condition will be implied only when the goods are sold in course of a business. There is often an overlap between the conditions on fitness for purpose and satisfactory quality. Where the purpose for which the buyer claims to want the goods is their ordinary purpose, the ability of those goods to fulfil that purpose may also be a measure of their satisfactory quality. Note the analogous section 13 of the Supply of Goods and Services Act 1982 which provides that a person who supplies a service in the course of business impliedly undertakes to carry out the service with reasonable care and skill. Sale by sample: Section 15 Section 15 provides that where the goods are sold by sample, there is an implied condition that the bulk of the goods will correspond with the sample, that the buyer will have a reasonable opportunity of comparing the bulk with the sample and that the goods will be free from any defect, rendering them unsatisfactory, which would not be apparent on reasonable examination of the sample. Remedies for breach of implied terms The Sale and Supply of Goods Act 1994 amended the Sale of Goods Act 1979, inserting a new s.15A which deems a breach of the conditions implied by ss.13, 14, and 15 to be merely a breach of warranty under certain circumstances. These circumstances are that the buyer does not deal as a consumer and breach is so slight that it would be unreasonable to reject the goods. As a result, the buyer is not allowed to reject the goods, but has only a right to claim damages. In addition, SGA used to provide that once the buyer had accepted goods of them, any breach of the implied terms would only be treated as a breach of warranty so that the buyer could not get back the money paid and could only sue for damages. The new amended SGA attempts to address this problem. Although acceptance will still be deemed to have taken place unless the seller is told otherwise within a reasonable length of time, this length of time is now required to be long enough to give the buyer a reasonable opportunity to examine the goods. In addition, the SGA now provides that doing something which is inconsistent with the sellers ownership of the goods will not mean that the buyer loses the right to reject them until they have had a reasonable opportunity of examining to see if they conform to the contract. Asking for or accepting a repair to defective goods does not amount to acceptance and therefore does not cancel the buyers right to reject the goods.

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Part III - Privity of Contract


There are two rules to the doctrine of privity. The first rule is that the third party can not be made the subject of a burden imposed by the contract. The second rule is that a third party cannot enforce a contract that has the objective of conferring a benefit to him. It is the second rule that was thought to be unfair and now, after reforms, has very limited application. The classical position on the matter can be shown by the case of Beswick v Beswick. There is a very close relationship between the second rule of privity and the rule of consideration that it must move/come from the promisee. However, the courts have stated that privity and consideration constitute two hurdles and not one. The joint promisee example is used to make this point: X makes a promise to Y and Z to pay 100 to Z in exchange for consideration provided by Y. In such a case Z is privy to the contract but can not maintain against X as he has not provided consideration for Xs promise. Compare Tweedle v Atkinson with Dunlop Pneumatic Tyre v Selfridge

Statutory rights: Contracts (Rights of Third Parties) Act 1999


Applicability: Third parties can enforce contractual terms in the following two situations: (i) Express provision: s.1(1) a (ii) The contract purports to confer a benefit: s.1(1) b. This is subject to an important proviso in s.1(2) whereby it will not apply if on the proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party. See Nisshin Shipping v Cleaves Although, it is not necessary for the third party to be specifically named, it is necessary for the third party to be expressly identified in the contract by name, as a member of a class or as answering a particular description s.1(3). See Avraamides v Colwill Enforcement: The right of the third party to enforce a term of the contract is subject to the terms of the contract: s.1(4). This means that the parties to the contract can impose conditions upon the third partys ability to exercise his rights under the contract. For example, they could stipulate that the third party could receive a benefit under the contract only if he applied for it within a certain time period. Third parties have the same remedies as would be available to them if they were contracting parties, including the rights to damages and specific performance: s.1(5). Although the contract is enforceable by the promisee as well as the third party, there cannot be double liability for the promisor: s.5; so any recovery by the promisee would have the effect of reducing any award subsequently made to the third party. Consent to variations: Section 2 deals with the issue of amending and cancelling the contract. This states that, unless the contract provides otherwise, the parties to the contract may not rescind the contract, or vary it so as to extinguish or alter the third partys rights, if the third party has either communicated to the promisor their assent to the relevant term or has relied on the term and the promisor knows of the reliance or can be reasonably expected to have foreseen that reliance. If one of these three situations applies, then any variations or cancellation can only take place with the consent of the third party. The Act permits the contracting parties to vary the circumstances in which a third partys consent is required, or to exclude its requirement altogether: s.2(3). Defences: In an action by the third party, the promisor is able to rely on any defence arising out of the contract which would have been available to him had the claim been by the promisee: s.3. Thus, if the promisee induced the promise by misrepresentation or duress, the promisor can use that as a defence to an action by the third party. N.B. It must be remembered that the main contracting parties are still in control. They can decide that the provisions of the Act should not apply and there will be nothing that the third party can do about it.

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Exceptions to the Privity Doctrine


(a) Agency An agent is a person authorized to negotiate and enter into contracts on behalf of another who is known as the principal. There are three circumstances in which a person will be treated as being the principals agent: (i) where there is express or implied authority (ii) where there is apparent or ostensible authority or (iii) where he has authority by operation of law. The principal will be bound by any contract the agent makes while acting within his authority. Where an agent makes a contract which lies outside the authority granted by the principal, or where the agent in fact has no authority at all, the principal may nevertheless choose to ratify the contract, so long as the agent was purporting to act on the principals behalf at the time the contract was made and the principal had the capacity to make the contract at the time. The ability of a principal to ratify an unauthorized act of his agent is said to be an exception to the doctrine of privity. Another rule that flouts the doctrine of privity is that a principal may, in certain circumstances, sue upon a contract made when the agent did not disclose to the third party that he was acting as an agent for the principal. In these conditions, the third party can find himself in a contractual relationship with a person of whose existence he was unaware of at the time that he entered into the contract. (b) Assignment Exam tip: Look for it in the situation where a third party enters the scene after a contract has been made. In certain circumstances, it is possible to assign (in effect to sell) the benefit (i.e. a contractual right) of a contract without the permission of the other party though normally notice of the transaction must be given. A common example is selling debts to factoring houses. Rights arising from contracts for personal services and those contrary to public interest are incapable of assignment. For example, an employer is not entitled to transfer the benefit of his employees services to a third party. (c) Negotiable Instruments A negotiable instrument is an instrument which may be transferred by delivery and indorsement to a good faith purchaser for value who then takes the instrument free from any defects in the title of the transferor. For example, a cheque is a written order by a person (the drawer) to his bank (the drawee) to pay on demand a stated sum of money to a named person (the payee). The named person, if he so wishes, can transfer the cheque to another party. This new party then becomes the payee and can demand payment from the bank. Note that the payee(s) is not privy to the contract between the drawer and drawee and has not furnished any consideration to the bank. The advantage of a negotiable instrument as compared with an assignment is that a bona fide holder for value who is without notice of any defect in the title of the transferor obtains a good title and is able to demand payment. (d) Collateral Contracts A collateral contract is a second independent and separate contract made between the original parties (in which the consideration will be the entry into the original or associated contract) OR between a third party and an original party - before or at the same time the first or main contract is made. Where one party makes contracts with two other parties, the courts will sometimes use the device of finding a collateral contract between the two other parties (the promisor and the third party) to evade the privity rule. Shanklin Pier v Detel Products & Andrews v Hopkinson

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(e) The Eurymedon Device In Scruttons v Midland, the claimants who were the owners of the goods, entered into a contract with a firm of carriers for their transportation. Under the contract, the carriers limited their liability to $500. Stevedores, who were hired by the carriers, negligently damaged the goods and the claimants brought an action in tort against them. The stevedores sought to rely on the limitation clause contained in the contract between themselves and the carriers but it was held that they could not do so because they were not privy to the same contract. The House of Lords held that English law did not recognize any doctrine of vicarious immunity which would have enabled the stevedores as agents, to claim the benefit of the immunity which had been negotiated by their principals. Besides, the limitation clause only referred to the carriers and so was incapable of providing protection for the stevedores. However, Lord Reid stated that the stevedores might be able to claim the protection of an exclusion clause if four requirements were satisfied. These were: (i) The contract made it clear that the stevedores were intended to receive the protection of the exemption clause. (ii) The contract made it clear that the carrier, in addition to contracting on his own behalf, was also contracting on behalf of the stevedores. (iii) The carrier had authority from the stevedore to enter into the contract on his behalf (or possibly, a later ratification of the contract would suffice). (iv) Any difficulties about consideration moving from the stevedores were overcome. In New Zealand Shipping v Satterthwaite, the factual situation was similar to Midland except that the contract between the consignors and the carriers was much more complex and clearly sought to give the stevedores the benefit of the exclusion clause. The first three of Lord Reids four conditions were satisfied. The contract expressly extended the benefit of the exclusion clause to any agents employed by the carriers. The carriers had also contracted as agents of the stevedores and they were authorized by the stevedores to so act. The principal problem lay in locating the consideration provided by the stevedores for the consignors offer of immunity. The solution adopted proceeded in two stages. First, it was held that when the consignors signed the contract, they made an offer to the world at large that anyone who unloaded their goods would be entitled to the benefit of the exclusion clause. Secondly, that this offer was accepted by the stevedores unloading the goods at the port of discharge and at that moment a binding contract came into existence between the consignors and the stevedores. The consideration supplied by the stevedores was the performance of their contractual duty owed to the carriers. (f) Damages on behalf of third party Where the promisee sues for damages as a result of the promisor failing to confer the promised benefit on a third party, the question arises whether he can recover anything other than nominal damages. Strictly speaking, the promisee will not have suffered any direct loss; it is the third party that was to be the beneficiary of the promise. Nonetheless, in Jackson v Horizon Holidays, it was decided that a contracting party could recover substantial damages for the loss caused by to the third party. The House of Lords disapproved of this in Woodar Investment Development v Wimpey but did not overrule it. They accepted that the ultimate decision was correct but suggested that the loss of enjoyment by Mr. Jacksons family was a loss to Mr. Jackson himself. In The Albazero, the court recognized that when a seller and a carrier contract in contemplation of a second contract with the buyer, the seller can recover substantial damages on behalf of the buyer where the goods are lost or damaged by the carrier. The more recent case of Linden Gardens Trust v Lanseta Sludge Disposals building upon Lord Diplocks judgment in Albazero, allowed the promisee to recover damages on behalf of the third party as the promisor knew that the subject matter of the contract would be acquired by the third party. However, in Panatown v Alfred McAlphine Construction, the House of Lords made it clear that if the contractual arrangement between the parties in fact provided the third party with a direct remedy against the promisor, then the exception in Linden Gardens could not be relied upon.

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(g) Trusts A contracting party can specify that the benefit of the contract is held by him in trust for a third party, in which case that third party will have enforceable rights to the benefit. At one time, the courts seemed willing to imply such a trust even though there was no specific reference to a trust in the contract: Les Affreteurs SA v Leopold Walford. But later onwards, in Vadepitte v Insurance Corporation the Privy Council demanded a definitive intention to create such a trust. Contracting parties will rarely intend to create a trust because it would mean that they are not free to vary the terms of their agreement in the future as it would interfere with the beneficiarys rights. As they are unlikely to intend such a restriction on their right to vary their contractual obligations, this exception is practically of no use. (h) Restrictive covenants A restrictive covenant is a legal obligation imposed in a deed by the seller upon the buyer of real estate to not do something. Such a restriction frequently "runs with the land" and is enforceable on subsequent buyers of the property. See Tulk v Moxhay. ------------------

Arguments in favour of the doctrine of privity: The doctrine clearly defines the ambit and enforceability of contractual obligations. It can ensure that courts do not create a contractual obligation. It operates in tandem with the requirement that consideration must move from the promise and that a gratuitous third party beneficiary should not be given the right to enforce a contractual benefit. It would not be desirable for a promisor to face actions for breach of contract from both the promisee and the third party. If the third party could enforce the contract, this would affect the ability of the parties to vary or terminate the contract.

o o o

o -

Arguments against the doctrine of privity:

o It leads to commercial inconvenience. o It can operate to create great injustices. o It defeats the intentions of the parties to the contract. o It puts English contract law in an anomalous position; the contract law of other countries does recognize third party rights. o It creates uncertainty in contractual relationships given the number of common law devices which exist to circumvent the application of the doctrine.

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Part IV - Vitiating Factors


The presence of a vitiating factor may render a contract void, voidable or unenforceable. A void contract is one where the whole transaction is regarded as a nullity. It means that at no time has there been a contract between the parties. Any goods or money obtained under the agreement must be returned as per the law of restitution (to the extent permitted). Where items have been resold to a third party, they may be recovered by the original owner. A voidable contract is a contract that operates as a valid contract until one of the parties takes steps to avoid it. Anything obtained under the contract must be returned in so far as this is possible using the remedy of rescission. If goods have been resold before the contract was avoided, the original owner will not be able to reclaim them. An unenforceable contract is one that exists but cannot be enforced in the courts if a party refuses to carry out its terms. Items received under the contract cannot usually be reclaimed the loss lies where it fell.

Incapacity
Minors: As a general rule, a contract with a minor is binding only on the other party. Alternatively expressed, such a contract is not enforceable against the minor (unless he ratifies it after attaining majority). Minority acts as a defence to a claim brought against the minor by an adult. The harshness of the rule that a minor can sue but cannot be sued under a contract is mitigated by section 3(1) of the Minors' Contracts Act 1987 which allows for restitutionary recovery against the minor if it is "just and equitable to do so". However, contracts of necessaries (section 3(2) of Sale of Goods Act 1979; Peters v Fleming and Nash v Inman) and contracts of employment for the benefit of the minor (Clements v London Railway and De Francesco v Barnum) are valid and binding on the minor. Note that there is an anomalous category of contracts which are voidable at the option of the minor. This category includes contracts to lease or purchase land, marriage settlements, contracts to purchase shares and contracts of partnership. These contracts are binding on the minor unless he repudiates them during minority or within reasonable time of attaining majority. Also note that a minor cannot be sued in tort if the effect of the tort action would be to undermine the protection afforded by the law of contract. So, for example, a minor cannot be sued for the tort of deceit when he fraudulently misrepresents his age: Leslie v Sheill. Mentally incapacitated persons: As per section 2 of The Mental Incapacity Act 2005, a person lacks capacity in relation to a matter if at the material time he is unable to make a decision for himself because of an impairment of the functioning of the mind; the impairment may be permanent or temporary. Section 7 states that if necessary goods or services are supplied to a person who lacks capacity to contract, he must pay a reasonable price for them. Necessaries are defined to mean suitable to a persons place in society and his actual requirements when the goods or services are supplied. At common law, if the incapacity is known or ought to have been known to the other party, then the contract is set aside: Imperial Loan Co v Stone Where the incapacity is genuinely unknown, the contract can only be set aside in case of an unconscionable bargain: Hart v O Connor Drunkenness is treated in the same manner as mental incapacity. A contract may be set aside by a drunken party where his drunkenness prevented him from understanding the transaction and the other party knew of his incapacity: Gore v Gibson Companies: The rule established in Ashbury Railway Carriage v Riche was that a contract which is ultra vires a company is void. The effect of s. 39(1) of the Companies Act 2006 is virtually to abolish the doctrine of ultra vires in relation to third parties who deal in good faith with the company. - 17 - | P a g e

Misrepresentation
A representation is a statement which simply asserts the truth of a given state of facts. A promise is a statement by which the maker of the statement accepts or appears to accept an obligation to do or not something: Kleinwort Benson Ltd v Malaysia Mining Corporation.

A general duty to disclose does not exist but one should not make active misrepresentations: Keates v Cadogan. But a duty to disclose does arise in certain situations: o o o o o o If the seller is aware that the buyer has misunderstood the terms of his offer i.e. he must disclose the existence of the unilateral mistake: Smith v Hughes If the defendants conduct gives a wrong impression he is under an obligation to correct it: Spice Girls v Aprilia World Service Subsequent falsity: With v OFlanagan Statement literally true but misleading (partial disclosure): Notts Patent Brick v Butler Contracts requiring utmost good faith (Uberrimae Fidei) e.g. insurance contracts Where there is a fiduciary relationship e.g. lawyer-client or trustee-beneficiary

A misrepresentation is an unambiguous false statement of fact which is addressed to the party misled, inducing it to enter the contract. A misrepresentation renders a contract voidable.

The misrepresentation must be a statement of fact: Can be made by conduct: Gordon v Selico Should not be a mere puff: Dimmock v Hallett Should not be merely an opinion: Bisset v Wilkinson Where the representor has greater knowledge than the representee, the courts will imply that the representation must be made with reasonable care and skill: Esso Petroleum v Mardon Misrepresenting ones present intention is a false statement of fact: Edgington v Fitzmaurice

o o o o o

The misrepresentation must have been addressed to the party misled: Commercial Banking v RH Brown

The misrepresentation must have induced the representee into making the contract: If the misrepresentation would have induced a reasonable person to enter into the contract, the court will presume that it did and the onus of proof is then placed on the representor to show that the representee did not in fact rely on the misrepresentation: Museprime properties v Adhill The misrepresentation does not have to be the sole or main factor inducing the representee into the contract: Edgington v Fitzmaurice No inducement if the claimant is unaware of the misrepresentation: Horsfall v Thomas No inducement if the claimant knows the representation to be untrue No inducement if representation does not affect the claimants judgment: Smith v Chadwick No inducement if the representation had been verified by the third party and there was reliance on the verification: Atwood v Small It is irrelevant that the claimant has the opportunity to verify the veracity of the representation but does not take it: Redgrave v Hurd*

o o o o o o

* This principle is in doubt: Smith v Eric Bush

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There are four types of misrepresentations: o o o o Fraudulent misrepresentation (tort of deceit): Derry v Peek Negligent misrepresentation under common law: Hedley Byrne v Heller Negligent misrepresentation under s.2(1) Misrepresentation Act 1967: Howard Marine v Ogden Innocent misrepresentation: Routledge v McKay

Exam tip: Note the three distinct advantages that misrepresentation under statute enjoys: (i) there is no need to prove a special relationship between the parties or for that matter, any form of fraud (as the word negligent should clearly indicate), (ii) the onus of proof is on the misrepresentor and (iii) the measure of damages is the same as that for fraudulent misrepresentation. But also note the distinct limit on the scope of this form of misrepresentation: it has no applicability where the representation is made by a third party who is not a party to the contract an uncommon occurrence on the exam. On balance, misrepresentation under statute will be the form of misrepresentation that you will usually advise the claimant i.e. the representee to sue under.

There are two remedies for misrepresentation and they are available for all types of misrepresentations: (a) Rescission When rescission occurs, the transaction is unwound in order to restore the parties, as far as possible, back to the position in which they were before they entered into the contract (the status quo ante). Notice indicating intention to rescind must be given to relevant third parties: Car and Universal Finance v Caldwell Right to rescission may be lost in four ways: (i) By affirmation: Long v Lloyd (ii) Lapse of time: Leaf v International Galleries (iii) Where restitutio in integrum* is impossible: Vigers v Pike (iv) Where it would affect third party rights: Phillips v Brooks (b) Damages In the law of tort, damages seek to protect the reliance interest. The test for remoteness of damage varies for the different forms of misrepresentation. For fraudulent misrepresentation the defendant is liable for all actual damage flowing directly from the misrepresentation: Doyle v Olby For negligent misrepresentation under statue the test is the same i.e. the defendant is liable for all actual damage flowing directly from the misrepresentation: Royscot Trust Ltd v Rogerson For negligent misrepresentation under common law, the defendant is liable for damages that were reasonably foreseeable. Damages may be available in lieu of rescission in cases of innocent misrepresentation: William Sindall v Cambridge County Council An indemnity payment (a personal restitutionary claim) may be ordered: Whittington v Seale Hayne

Section 3 of the Misrepresentation Act 1967 makes a clause excluding liability for misrepresentation subject to reasonableness as per section 11 of UCTA 1977. An application of this section can be seen in Walker v Boyle. Entire agreement clauses seem to fall within the scope of section 3.

* restoration to the original condition or position Since the law now allows for damages in cases of innocent misrepresentation, it is arguable that this remedy is redundant.

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Mistake
Mistake: One or both of the parties believe that a given set of facts exist and this belief subsequently turns out to be wrong. An operative mistake will render a contract void. The mistake must exist at the time of contract formation: Amalgamated Investment v John Walker A common mistake is one which both parties make regarding the same fact(s). It can be of three types: (a) Mistake as to the existence of the subject matter of the contract (Res Extincta) Couturier v Hastie & McRae v Commonwealth Disposals Commission (b) Mistake as to possibility of performing the contract: Physical impossibility: Sheikh Brothers Ltd v Ochsner Legal impossibility: Cooper v Phibbs Commercial impossibility: Griffith v Brymer (c) Mistake as to quality of the subject matter is usually not a fundamental one: Bell v Lever Bros & Solle v Butcher* & Leaf v International Galleries & Great Peace v Tsavliris Salavage Exception: Nicholson & Venn v Smith-Marriot A mutual mistake occurs where the terms of the offer and acceptance suffer from such latent ambiguity that it is impossible to impute any agreement between the parties and the parties can be said to be at cross purposes. Raffles v Wichelhaus & Scriven Brothers v Hindley A unilateral mistake is one which only one party makes regarding a particular fact. (a) When one party is mistaken as to the terms of the offer and the other party is aware or ought to be aware of it, the aware party will be unable to enforce his version of the contract as he had a duty to disclose the existence of the mistake (snatching a bargain). Hartog v Colin and Shields & Smith v Hughes & Statoil v Louis Dreyfus (b) A unilateral mistake as to the identity of the other party will render the contract void. Case law suggests that a court is more likely to conclude that the contract is void where it has been reduced to writing because in face to face dealings there is a firm presumption that the party intended to deal with the person physically in front of him. Cundy v Lindsay Written contract; rogue assumes identity of real person: contract is void Kings Norton Metal Co v Edridge Written contract; rogue assumes identity of fictional person: contract is not void Phillips v Brooks Face to face dealing; telephone directory irrelevant: not void Lake v Simmonds Face to face dealing; person well known; no steps taken to verify identity: void Ingram v Little Face to face dealing; telephone directory relevant: void Lewis v Avery Face to face dealing; identity card irrelevant: not void Shogun Finance v Hudson Face to face dealing b/w third party and rogue but written contract b/w claimant and rogue: void Exam tip: In spite of the inconsistent case law, in face to face dealings, look for the following four factors before labelling a contract void: (i) the claimant intended to deal with someone else (this is easy to establish if the rogue impersonates an acquaintance); (ii) the party they dealt with knew of this mistake; (iii) the claimant regarded identity as of crucial importance and (iv) the claimant took reasonable steps to verify the identity of the other party.
* Although this decision is no longer good law as mistakes of law are now recognized and the doctrine of mistake in equity no longer exists, it is illustrative of the confusing nature of the topic. This decision is unlikely to be followed.

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Illegality
Illegality may affect a contract in two principal ways: (i) the contract is illegal at the time of formation and (ii) the contract is valid but is performed in an illegal manner.

Illegality in performance: If the illegality arises in the performance of an otherwise valid and enforceable contract, the illegality will not invalidate the contract unless it was the purpose of the statutory or common law rule that a breach committed in the course of the performance of a contract should invalidate the contract: St John Shipping Corp v Joseph Rank & Shaw v Groom. Knowledge of the innocent party is a relevant factor: Archbolds v Spanglett & Ashmore v Dawson

Illegality at formation: A contract is illegal if its formation is expressly or impliedly prohibited by statute or is contrary to public policy. (a) Statutory prohibitions: o o Express statutory prohibition: Section 2(4) Competition Act 1998 Implied statutory prohibition: Re Mahmoud and Ispahani

(b) Common law (public policy) prohibitions: o o o o o o o Contracts to commit a crime, tort or fraud: Alexander v Rayson Contracts promoting sexual immorality: Pearce v Brooks Contracts prejudicial to family life: Lowe v Peers Contracts prejudicial to public safety: Foster v Driscoll Contracts prejudicial to the administration of justice: Elliot v Richardson Contracts promoting corruption in public life: Parkinson v College of Ambulance Contracts in restraint of trade: Nordenfelt v Maxim Nordenfelt

Effects of Illegality: Illegality renders a contract unenforceable* and the courts will not usually permit the recovery of money or property under an illegal contract (as illegality is normally used as a defence to a restitutionary action which would have otherwise succeeded). See Holman v Johnson However, the courts have allowed the recovery of benefits under illegal contracts in three scenarios: (i) Where the parties are not at equal fault (in pari delicto): Oom v Bruce & Hughes v Liverpool Society (ii) Where the claimant has repudiated the illegal purpose in time: Kearley v Thomson (iii) Where the claimant does not found his claim on the illegality: Bowmakers v Barnet Instruments Note that sometimes restitutionary recovery seems to have the same effect as enforcing the contract. Also note that if a statute specifically provides for the consequences of a contract contravening one of its provisions, the express statutory language will prevail.

Severance: Severance involves the court in removing the objectionable parts of a contract whilst enforcing the remainder. Severance of a clause will only be allowed if the clause forms a subsidiary rather than substantial part of the contract. This power is seldom used as it may be considered tantamount to condoning unlawful activities. See Goodinson v Goodinson.

* The labels void and unenforceable are not used with any sort of consistency in this area of the law.

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Duress and Undue Influence


Both the common law doctrine of duress and the equitable doctrine of undue influence render a contract voidable. The following conditions must be satisfied in order for a finding of duress: Physical threats or economic pressure amounting to coercion of the will was exerted on the victim. Whether the victim protested at the time or took steps to avoid the contract once he entered it will be relevant considerations when determining coercion. Barton v Armstrong & The Atlantic Baron & Pau On v Lau Long The claimant had no practical alternative course but to enter or modify the contract: Pao On v Lau Long & The Universe Sentinel & B&S Contracts v Victor Green Publications The pressure was illegitimate. A threat to do an unlawful act such as commit a crime or tort or break a contract will always be illegitimate but lawful acts can also be considered illegitimate in the appropriate circumstances: The Universe Sentinel & CTN Cash and Carry Ltd v Gallaher

Exam tip: Be prepared to discuss economic duress in an essay question on practical benefit.

Undue influence occurs where one party improperly uses their influence over the other to induce them into a transaction.

Two fold classification offered in Barclays Bank v OBrien: (i) Actual Undue Influence: This arises where the claimant can prove that he entered the transaction as result of undue influence from the other party. It tends to be similar to, but falls short of duress. It usually involves some improper conduct, some overreaching, some form of cheating and generally, though not always, some personal advantage is claimed. In a situation of actual undue influence, it is not necessary to show that the transaction was manifestly disadvantageous to the party subject to undue influence. See Lloyds Bank v Bundy (ii) Presumed Undue Influence: This may be presumed where there is a pre-existing relationship of confidence between the two parties to a contract, as result of which one places trust in the other and the contract between them is manifestly disadvantageous to the party who places trust in the other. The defendant can rebut the presumption by showing that the claimant acted independently and that he understood his actions. This is commonly achieved by establishing that independent advice was taken by the claimant. See RBS v Etridge (No. 2)

A third party may be affected by undue influence. For example, a husband may persuade his wife to guarantee his companys overdraft with a bank, using the matrimonial home, of which she is a joint owner, as security for the debt. In such situations, the creditor may be tainted by the undue influence of the intermediary. See CIBC Mortgages v Pitt

Exam tip: Remember: undue influence focuses upon the relationship between the parties whereas duress examines the method used to reach a contract.

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Part V - Discharge and Remedies


Discharge by Performance
The entire obligations rule: starting position is that complete performance of the contract is required to sue on it: Cutter v Powell* But substantial performance allows a party to enforce a contract: Hoenig v Isaacs & Bolton v Mahadeva Partial performance only allows for restitutionary recovery: Sumpter v Hedges If a contract is divisible i.e. capable of severance into separate obligations, a party may claim payment for the performance of a particular obligation: Roberts v Havelock A party can sue if his performance is incomplete due to the actions of the other party: Planche v Colburn Vicarious performance is not permitted where the contract involves the personal skill, judgment or abilities of the party: Davies v Collins Time is usually not of essence in the absence of an express provision; delayed performance only gives the innocent party a right to damages. However, a buyer may make time of the essence after a seller does not deliver on time by calling on him to deliver within a reasonable time on pain of having the goods rejected if this does not happen. Provided the court later agrees with the buyers assessment of what was a reasonable further time for delivery such a notice will be effective: Charles Rickards Ltd. v Oppenheim The order in which obligations are to be performed may depend on whether the various promissory conditions are construed as conditions precedent, conditions concurrent or conditions subsequent: Trans Trust SPRL v Danubian Trading

Discharge by Breach
A breach of contract is committed when a party fails or refuses to perform what is due from him under the contract or performs defectively or incapacitates himself from performing without lawful excuse. Breach of a warranty gives the innocent party the right to claim damages. Breach of a condition or a sufficiently serious breach of an innominate term (a repudiatory breach) gives the innocent party the option to terminate or affirm the contract in addition to the right to claim damages. o o o o o o The decision has to be communicated: Vitol SA v Norelf Ltd The motive for the decision is irrelevant: Arcos v Ronaasen A valid reason for termination which is subsequently discovered is ok: The Milhalis Angelos Acceptance of further performance amounts to affirmation of the contract: Davenport v R The decision cannot be revoked; it is permanent: Johnson v Agnew Decision to terminate operates prospectively i.e. both parties are relieved of their obligations to perform in the future but the contract is not void ab initio: Photo Production v Securicor Transport If the option to terminate is wrongly exercised the party will itself be in breach of contract: Decro-Wall v International Practitioners in Marketing

* Such factual scenarios would now be decided differently as per the Law Reform (Frustrated Contracts) Act 1943 Alternatively described as right of election or right to rescind the latter description is misleading as it connotes a link with the equitable remedy of rescission. Also avoid the discussion of how affirming a contract is a waiver by election.

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Party in breach cannot usually enforce the contract against the innocent party. Exception: Independent obligations or conditions: Taylor v Webb

An anticipatory breach occurs where one party informs the other before the time fixed for performance that he will not perform his obligations under the contract. The renunciation must be such as to prove that the party in breach acted in such a way as to lead a reasonable man to conclude that he did not intend to fulfil his part of the contract. An anticipatory breach entitles the innocent party to terminate performance of the contract immediately damages can be claimed on the date of the acceptance of the breach: Hochster v De La Tour o After affirming the contract, the innocent party may continue to perform even though he knows the performance is not wanted by the other party: White and Carter v McGregor However, the innocent party must have a legitimate interest in continuing performance i.e. it must not act wholly unreasonably: The Alaskan Trader The innocent party cannot compel the party in breach to cooperate with him so that, where the innocent party cannot continue without the cooperation of the party in breach, he will be compelled to accept the breach: Hounslow LBC v Twickenham

There are two potential disadvantages for the innocent party in affirming the contract after an anticipatory breach: Firstly, the innocent party may lose his right to sue for damages completely if the contract is frustrated between the date of the unaccepted anticipatory breach and the date fixed for performance. Secondly, an innocent party who affirms the contract but subsequently breaches the contract himself cannot argue that the unaccepted anticipatory breach excused him from his obligation to perform under the contract.

Discharge by Agreement
In general, an agreed discharge will be binding if it contains the same ingredients that make a contract binding when it was formed. Where performance has not been completed by either party to the contract, there is generally no difficulty in finding consideration because, in voluntarily giving up their rights to compel each other to perform, each party is giving something to the bargain and so consideration is given. But where the contract is wholly executed on side, an agreement to abandon the contract will not be automatically supported by consideration as the discharge is for the benefit of one party only. This new agreement (accord), in order for it to be effective, must be supported by fresh consideration (satisfaction). Note that there will be no need for fresh consideration if the new agreement is in the form of a deed. Moreover, if the doctrine of promissory estoppel or the doctrine of waiver applies, the unilateral discharge will be effective without the need for accord and satisfaction. Exam tip: Variation of an existing contract or waiver of a particular obligation is usually discussed in a question on consideration/estoppel. Novation is a term usually used to describe the act of replacing a party to an agreement with a new party. In contrast to an assignment, which is valid so long as the person receiving the benefit of the contract is given notice, a novation is valid only with the consent of all parties to the original agreement: the obligee must consent to the replacement of the original obligor with the new obligor. A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor. For example, if there exists a contract where A will give 100 to B and another contract where B will give 100 to C then, it is possible to novate both contracts and replace them with a single contract wherein A agrees to give 100 to C. Consideration is still required for the new contract but it is usually assumed to be the discharge of the former contract. When the parties have agreed on the occurrence of a contingent condition subsequent, the contract will be discharged if it indeed occurs. - 24 - | P a g e

Discharge by Frustration
Frustration: A contract is frustrated where, after the contract was concluded, events occurs which make performance of the contract (i) impossible, (ii) illegal or (iii) something radically different from that which was in contemplation of the parties at the time they entered into the contract.

When a frustrating event occurs, a contract is terminated. Obligations cease to exist from that point onwards. The contract is not treated as void ab initio.

Impossibility can arise due to: (a) (b) (c) (d) (e) Destruction or unavailability of something essential: Taylor v Caldwell & Jackson v Union Marine Temporary but prolonged unavailability of the subject matter: The Nema Prescribed method of performance impossible: Nickoll v Ashton Incapacity or unavailability of a party: Robinson v Davis Death of a contracting party providing personal services: Whincup v Hughes

Supervening illegality: Fibrosa v Fairbairn

Purpose of the contract can be defeated by radical change in circumstances: Krell v Henry & Herne Bay Steam Boat Co v Hutton

There are four limits to frustration: (i) Mere economic hardship will not suffice: Davis Contractors Ltd. v Fareham UDC (ii) Express provision: Metropolitan Water Board v Dick, Kerr & Co. (iii) Frustration cannot be a foreseeable event within contemplation: Walton Harvey v Walker (iv) Frustration should not be self induced: The Super Servant Two

Effects of frustration: (a) At common law: Fibrosa v Fairbairn & Appleby v Myers (b) Modern approach: Law Reform (Frustrated Contracts) Act 1943 Section 1(2): The principal effect of the subsection is to (i) entitle a person to recover money paid under a contract prior to the frustrating event, (ii) remove any obligation to pay money that existed prior to the frustrating event and (iii) entitle a payee to set off against the sums so paid, expenses which he has incurred prior to the discharge, in the performance of the contract: Gamerco SA v ICM Section 1(3): If before the frustrating event one party obtains a valuable benefit (other than money) because of something done by the other in performance of the contract, the party receiving the benefit can be ordered to pay a just sum in return for it. This provision has caused the most problems in practice for the courts. First, a court has to identify the valuable benefit i.e. value of the end product; secondly, it has to award a just sum for that benefit: BP Exploration v Hunt

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Damages
The aim of damages is to compensate the injured partys losses and not to punish the party in breach. Punitive damages cannot be imposed even if the defendant calculated that he would make a profit from his breach: Cassel v Broome There are basically three types of interests that damages try to protect i.e. expectation interest, reliance interest and restitution interest. A claimant has a right to choose between expectation or reliance interest: Anglia Television v Reed An award of damages generally seeks to protect the claimants expectation interest: Robinson v Harman Non-pecuniary losses are generally not recoverable: Addis v Gramophone & Hayes v Dodd Exceptions: o Where the purpose of the contract is mainly pleasure: Jarvis v Swan Tours & Farley v Skinner o Where the purpose is to relieve a source of distress: Heywood v Wellers o Where breach leads to mental suffering caused by physical inconvenience: Perry v Sidney o Where breach leads to a loss of reputation: Johnson v Unisys Ltd o Where the contract was for the provision of a pleasurable amenity: Ruxley Construction v Forsyth Expectation loss is calculated or quantified in many ways: (i) (ii) (iii) (iv) Difference in value between claimants expectation and what he received: Ruxley v Forsyth Cost of cure: Ruxley Electronics v Forsyth Loss of opportunity damages: Chaplin v Hicks Market Price rule: Thompson Ltd v Robinson & Lazenby Garages v Wright

Unjust benefit/profit made by the defendant is usually unrecoverable: Surrey CC v Bredero Home & Attorney General v Blake Reliance loss can include pre-contractual expenditure: Anglia Television v Reed but it can not be used to compensate for a bad bargain: Haulage v Middleton. It may be claimed instead of expectation loss where that is too speculative: McRae v Commonwealth Disposals Commission though Chaplin v Hicks states otherwise. There are many limitations on damages for expectation loss: (a) Causation: Quinn v Burch Builders (b) Remoteness of damages: Hadley v Baxendale & Heron II & Victoria v Newman & Parsons v Ingham (c) Mitigation: Brace v Calder & Pilkington v Wood & British Westinghouse v Underground Electric (d) Contributory Negligence: Vesta v Butcher

Damages are to be assessed as at the date of breach: Johnson v Agnew but where the claimant is unaware of the breach, damages will generally be assessed as at the date on which the claimant could, with reasonable diligence, have discovered the breach. Similarly, where it is not reasonable to expect the claimant to take immediate steps to mitigate his loss, the date of assessment will be postponed until such time as it is reasonable to expect the claimant to mitigate his loss: Radford v De Froberville Criteria for differentiating between a liquidated damages clause and a penalty clause: Dunlop Pneumatic Tyre v New Garage & Motor & Phillips Hong Kong v Attorney General of Hong Kong

There are two ways of having a fixed sum payable stipulated in the contract without the clause being considered a penalty clause: (i) The clause merely accelerates an existing liability: Protector Loan v Grice (ii) The amount shall be payable on an event which is not a breach of contract: Alder v Moore - 26 - | P a g e

Other Remedies
Action for an agreed sum (a claim in debt) A contract will often require one party to pay money as the partys performance. If one party has fulfilled all contractual requirements for the money due to him, then if the other party refuses to pay, he may be able to claim the sum due under the contract rather than damages. An action for the sum due under the contract is a form of specific enforcement of the contract but as it involves only the payment of a debt, it does not involve the same restrictions as an action for specific performance or an injunction. In addition, it is not subject to the uncertainty and restrictions of the rules on damages (e.g. the rule of mitigation does not apply).

Specific performance An order for specific performance requires the party in breach to perform his obligations under the contract. It is appropriate only if damages are an inadequate remedy: Cohen v Roche & Johnson v Agnew Where it is extremely difficult to quantify the claimants loss: Decro Wall v Practitioners Where defendants are unable to pay an award of damages: Evans Marshall v Bertola Claimants own conduct must be equitable It must not be impossible to comply with the order It must not cause severe hardship to the defendant: Tito v Waddell It will not be ordered for a contract for personal services: Giles v Morris It will not be ordered where constant supervision will be needed: Co-op Insurance Society v Argyll In lieu of specific performance, damages must construe a true substitute: Wroth v Tyler

o o o o o o o o o

Injunction An injunction is usually sought to enforce a negative stipulation in a contract. Page One Records v Britton & Lumley v Wagner & Warner Bros v Nelson

Rectification This is an order which corrects a mistake in the recording of the agreement. The possibility of rectification exists where a written contract or deed fails to express the common intention of the parties. Frederick Rose v William Pim

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Law of Restitution
Scope: A restitutionary claim arises when (1) the defendant has received a benefit; (2) its receipt was at the plaintiffs expense; and (3) the circumstances are such that it would be unjust for the defendant to retain the benefit. Note that the phrase at the plaintiffs expense does not necessarily mean enrichment by subtraction i.e. the enrichment has arisen through a transfer from the plaintiff, leaving him with a loss corresponding to the defendants gain; it can also mean a gain that was obtained by inflicting a wrong upon the plaintiff.

Applicability: As a practical matter, restitutionary claims usually arise: (1) when a contract has been declared void (e.g. mistake); or (2) when there has been a failure of consideration (e.g. frustration); or (3) when there has been a breach of fiduciary obligations.

Remedies: The most common restitutionary remedies are: (1) Quantum Meruit or Quantum Valebat (2) Money had and received (3) Reasonable Use / License fee (4) Disgorgement / Account of Profits (5) Constructive trust*

Note that there is a debate as to whether rescission is a restitutionary or contractual remedy. If rescission is a restitutionary remedy then it can be said that the act of rescinding a voidable contract is also governed by the law of restitution.

There is limited scope for restitutionary damages where there has been a breach of contract: (a) Total failure of consideration: Whincup v Hughes & White Arrow Express v Lameys Distribution (b) Unjust benefit: Attorney General v Blake & Experience Hendrix LLC v PPX Enterprises Inc.

* This is not expressly recognized as a remedy in English law

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Deposits and Part Payments


A clause in a contract which states that a certain sum of money shall be payable on breach of contract inevitably runs the risk that it will be held to be a penalty clause. It also has the disadvantage that the innocent party has to take the initiative to obtain the money. A preferable alternative might therefore be to obtain payment of a sum of money in advance and then refuse to return it in the event of the other party breaking the contract.

In such a case, can the party in breach recover the prepayment? The answer to that depends upon whether the money was paid as a deposit or as a part payment of the price. A deposit is paid by way of security and is generally irrecoverable, whereas a part payment is paid towards the contract price and is generally recoverable. The difference between the two is a matter of construction. Where the contract is neutral then a payment will generally be interpreted as a part payment: Dies v British Mining.

A critical limit upon the ability of parties to stipulate for excessive deposits was firmly established by the Privy Council in Workers Trust v Dojap Investments. The court held that it was not possible for the parties to attach the incidents of a deposit to the payment of a sum of money unless such sum is reasonable as earnest money.

There is some difficulty in establishing what a reasonable deposit is given that even a reasonable deposit need not represent a genuine pre-estimate of the loss likely to be occasioned by the breach. It is not at all clear how the courts will decide what constitutes a reasonable deposit where there is no objective benchmark prevalent in the industry.

Another point that was decided in Dojab was that in the event of the deposit being declared unreasonable, the court will not rewrite the contract by inserting into it a reasonable deposit. This will provide an incentive to contracting parties to err on the side of caution when deciding the level of any deposit payable - thus placing limits upon the ability of contracting parties to provide for excessive deposits.

In Hyundai v Papadopaulos, it was held that where it is clear from the contract that the payee will have to incur reliance expenditure before completing his performance of the contract, then, in the absence of a stipulation in the contract to the contrary, the part payment will be irrecoverable. A part payment is therefore recoverable only where it is clear from the contract that the payee will not have to incur reliance expenditure before completing his performance of the contract.

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Extinction of Remedies
Where one party has a right to sue for breach of contract, it may be extinguished by agreement between the parties, either under seal or by accord and satisfaction. Such a right can also be extinguished by the passage of time, under the Limitation Act 1980. The Act lays down various time limits for different kinds of action and once these have expired, the claimant is said to be statute-barred or time-barred from claiming.

Contract proceedings should normally be brought within six years of when the cause of action accrued.

Cause of action means the facts giving rise to the action and will usually be when the contract is breached.

An action based on a contract made by deed must be brought within 12 years of the date on which the cause of action accrued.

There are cases where the claimant does not know that there is a cause of action at the time when the situation occurs and may not know for some time afterwards, possibly not even until the ordinary limitation period has passed. The issue is addressed in the Latent Damage Act 1986, which provides that where the cause of action could not be discovered when it arose, the claimant can sue within three years of the time when it could be discovered. In addition, section 32 of the Limitation Act 1980 provides that when a claimant is unaware of the cause of action at the time it accrues because of mistake or fraud by the defendant, the period of limitation does not begin until the claimant has discovered the fraud or mistake or until such time as they could have discovered it by using reasonable diligence.

Where a claimant is under a disability, for example, he is a minor or is of unsound mind at the time when the cause of action accrues, the limitation period does not begin until the disability has ceased to operate. Therefore, a minor can bring proceedings relating to contractual matters that arose while they were a minor, for six years after their eighteenth birthday.

The limitation period may be extended if, before it expires, the defendant acknowledges the claim or pays part of it (s.30). If this happens, the limitation period starts again on the date of the acknowledgement or part payment (s.29). In order for an acknowledgement to have this effect, it must be in writing, signed by the person making it and must clearly acknowledge the debt, not just the fact that a dispute exists.

Section 36 of the Limitation Act 1980 makes it clear that the statutory limitation periods do not apply to claims for specific performance, an injunction or other equitable remedies. Instead, the equitable doctrine of laches (delay) is applied; if taking account of all the circumstances of the case, the court considers that the claimant has been too slow in bringing the action, the equitable remedy sought will be refused.

It is not possible to lay down strict rules on when laches will prevent a claim; in each case, it will depend on the length of the delay, how diligent the court believes the claimant ought to have been and the nature of the contract. Thus, where a defendant is seeking specific performance, a lengthy delay will be less acceptable if the contract concerns goods whose value fluctuates rapidly than in a case where prices remain steady.

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