First Two ingredients: Question 1: Ade, a keen pottery collector, saw a notice for an auction of Bede pottery in the

January edition of Antiques News. He travelled 300 kilometres to attend the auction in order to bid for a particularly rare example of Bede pottery, specifically mentioned in the lists of items to be auctioned. However, when he got to the auction site he found a notice outside, stating that the auction had been cancelled. Ade went into a nearby antique shop and saw an example of the type of pottery he had come to bid for. The price ticket stated that it was 500, but Ade said he was only willing to pay 350 for it. The shopkeeper, Chip, said he would sell it for 400 and as Ade said he would like time to think about it over lunch, Chip agreed not to sell it before Ade returned. However, when Ade returned to buy the pottery, he found that Chip had already sold it to someone else, who had paid 450 for it. Required: In the context of contract law, advise Ade whether he can take action against: (a) the auctioneers, for the expense of his travel to the auction; and (b) Chip, for not selling the pottery to him. (10 marks)

Answer
Amongst the essential elements of a binding agreement are offer, acceptance, consideration, and an intention to create legal relations. This question requires candidates to demonstrate their understanding of the way in which contractual agreements can be entered into, and the consequences of entering into such agreements. In particular it asks candidates to distinguish between offers and invitations to treat, and offers and counter offers. It also requires some consideration of the consequences of entering into a binding contract. An offer is a promise to be bound on particular terms which is capable of acceptance. The offer sets out the terms upon which the offeror is willing to enter into contractual relations with the offeree, and if the latter party accepts those terms then the result is a legally enforceable contract which can be enforced through legal action. It is important, however, to distinguish offers from other statements which do not provide the basis of an enforceable contract. For example, a mere statement of intention cannot form the basis of a contract even though the party to whom it was made acts on it (Re Fickus (1900)). Nor can a mere supply of information amount to an offer (Harvey v Facey (1893)). The most important non-offer, however, is the invitation to treat. This is an invitation to others to make offers. The person extending the invitation is not bound to accept any offers made to them. Common examples involving invitations to treat are: the display of goods in a shop window. The classic case in this area is Fisher v Bell (1961), in which a shopkeeper was prosecuted for offering offensive weapons for sale, by having flick-knives on display in his window. It was held that the shopkeeper was not guilty as the display in the shop window was not an offer for sale but only an invitation to treat. the display of goods on the shelf of a self-service shop. In this instance the exemplary case is Pharmaceutical Society of

Great Britain v Boots Cash Chemists (1953). The defendants were charged with breaking a law which provided that certain drugs could only be sold under the supervision of a qualified pharmacist. It was held that Boots were not guilty as the display of goods on their shelves was only an invitation to treat. In law, the customer offered to buy the goods at the cash desk where the pharmacist was stationed a public advertisement. Thus in Partridge v Crittenden (1968) a person was charged with offering a wild bird for sale contrary to Protection of Birds Act 1954, after he had placed an advert relating to the sale of such birds in a magazine. It was held that he could not be guilty of offering the bird for sale as the advert amounted to no more than an invitation to treat. Acceptance is necessary for the formation of a contract. Once the offeree has agreed to the terms offered, a contract comes into effect. Both parties are bound, and can enforce the terms of the agreement through the courts. However, if an offeree expressly rejects an offer made to them, then such rejection has the effect of bringing the offer to an end. The effect of this is that they cannot subsequently retract their rejection and purport to accept the original offer. A similar consequence follows from a counter-offer, which is treated as an implicit rejection of the original offer. In order to form a binding agreement acceptance must correspond with the terms of the offer, so it is not open to the offeree to unilaterally alter the terms of the offer. The effect of any such alteration is to bring the original offer to an end, and once again the offeree cannot accept the original offer. The classic case is Hyde v Wrench (1840) in which Wrench offered to sell his farm for 1,000. Hyde counter-offered 950, which Wrench rejected. Hyde then informed Wrench that he accepted the original offer. It was held that there was no contract. Hydes counter-offer had effectively ended the original offer and it was no longer open to him to accept it. A counter-offer must not be confused with a request for information. This does not end the offer, which can still be accepted after the new information has been elicited (Stevenson v McLean (1880)). Where a promise agrees to keep an offer open for a period, such a promise is only binding where there is a separate contract to that effect, supported by independent consideration. Without such an option contract the promisor is at liberty to withdraw the offer at any time before the promisee actually accepts the offer. Applying the foregoing general statement of law to the situation in the problem: (a) it is immediately apparent that Ade has no cause of action against the auctioneers, as their advert did not amount to an offer capable of acceptance. His situation is similar to that of the plaintiff in Harris v Nickerson (1873) who failed in his attempt to recover damages for his costs in attending a cancelled auction. In deciding against him the court held that he was attempting to make a mere declaration of intention a binding contact. (b) as regards his dealings with the shopkeeper, Chip, it is equally unlikely that Ade would have any action against him. The original price on the ticket in the window was no more than an invitation to treat. Ade made an offer of 350, which Chip declined to accept. Chip in turn made a counter-offer of 400, which Ade could have accepted, to form a contract. Ade, however, did not accept the offer at the time it was made, and when he subsequently tried to accept it, he found out that the pottery had already been sold. As Ade had not provided any consideration for Chip to keep the offer open, he has no grounds for complaint against the shopkeeper.

Last two ingredients Question 2:

In January 2009, Amy started a business as an independent website designer. To give her a start in her career, her brother Ben, who ran a retail business, said he would give her 1,000 if she updated his business website. At the same time, her friend Che asked her to do work for his business, also for a set fee of 1,000. However, by the time Amy had completed the two projects her design business had become a huge success and she had lots of other clients. When Ben and Che discovered how successful Amys business had become they both felt that they should not be asked to pay for the work they had commissioned. Ben said he would not pay anything as he had only offered the work to help his sister out. Che said he would not pay anything either, on the basis that he had only given her work to do on the basis of their friendship. Required: Advise Amy as to whether she can insist on Ben and Che paying the full amounts of their initial promises. (10 marks) 9 Dee and Eff are major shareholders in, and the directors of, the public company, Fan plc. For the year ended 30 April 2009 Fan plcs financial statements showed a loss of 2,000 for the year. For the year ended 30 April 2010 Fan plc made a profit of 3,000 and, due to a revaluation, the value of its land and buildings increased by 5,000. As a consequence, Dee and Eff recommended, and the shareholders approved, the payment of 4,000 in dividends. Required: Advise Dee and Eff as to: (a) the legality of the dividend payment; and (6 marks) (b) any potential legal liability in regard to the dividend payment. (4 marks) (10 marks)

Answer
This question relates to the issue of whether the parties to an agreement can enforce its terms through court action. By definition, a contract is a binding agreement, but the important thing for this question is that not all agreements are contracts. In order to limit the number of cases that might otherwise be brought, the courts will only enforce those agreements, which the parties intended to have legal effect. Although expressed in terms of the parties intentions, the test for the presence of such intention is an objective, rather than a subjective, one. For the purposes of this question in regard to intention to create legal relations, agreements can be divided into two categories, in which different presumptions apply. Domestic and social agreements In domestic and social agreements, there is a presumption that the parties do not intend to create legal relations. In Balfour v Balfour (1919), a husband returned to Ceylon to take up his employment and he promised his wife, who could not return with him due to health problems, that he would pay her 30 per month as maintenance. When the marriage later ended

in divorce, the wife sued for the promised maintenance. It was held that the parties had not intended the original promise to be binding and therefore it was not legally enforceable. Another situation where it held that there was no intention to create legal relations can be seen in Jones v Pandavatton (1969), in which a mother was not held liable to maintain an agreement to pay her daughter a promised allowance. It should be emphasised, however, that the presumption against the intention to create legal relations in such relationships is only that, a presumption and that, as with all presumptions, it may be rebutted by the actual facts and circumstances of a particular case as may be seen in Merritt v Merritt (1970). After a husband had left the matrimonial home, he met his wife and promised to pay her 40 per month, from which she undertook to pay the outstanding mortgage on their house. The husband, at the wifes insistence, signed a note agreeing to transfer the house into the wifes sole name when the mortgage was paid off. The wife paid off the mortgage but the husband refused to transfer the house. It was held that the agreement was enforceable as in the circumstances the parties had clearly intended to enter into a legally enforceable agreement. Commercial agreements In commercial situations, the strong presumption is that the parties intend to enter into a legally binding relationship in consequence of their dealings. In Edwards v Skyways (1964), employers undertook to make an ex gratia payment to an employee whom they had made redundant. It was held that in such a situation the use of the term ex gratia was not sufficient to rebut the presumption that the establishment of legal relations had been intended. The former employee, therefore, was entitled to the payment promised. As with other presumptions, this one is open to rebuttal. In commercial situations, however, the presumption is so strong that it will usually take express wording to the contrary to avoid its operation. An example can be found in Rose and Frank Co v Crompton Bros (1925) in which it was held that an express clause stating that no legal relations were to be created by a business transaction was effective. Applying the above law to the facts in the problem scenario provides the following conclusions: Amy and Ben Although they are brother and sister it is clear from the facts of the situation that they entered into a business relationship with regard to the provision of the updating of the web site. Amy was to do the work for Bens business and Ben was expected to, and indeed agreed to pay 1,000. In such circumstances there was a clear intention to create legal relations and Ben cannot avoid his liability to pay Amy on the basis of their familial relationship. He may have wanted to help his sister, but he did so by entering into a business contract with her; one which she can enforce against him. Che The position in this instance is even stronger in Amys favour. Even if he did have the motive to benefit Amy as his friend, Che can hardly claim that his agreement with her was a purely social one. It was clearly a business transaction and as such he is bound to comply with the original terms of the contract and pay the full contractual price of 1,000. Last Part of consideration: Question 3:

Ari operates a business as a designer of internet web pages for a variety of business clients. Unfortunately he has had some difficulty in recovering his full fees from a number of clients as follows: (a) Bi, a newly qualified accountant, told Ari that although she could only raise the cash to pay half of the

outstanding fees she would, as an alternative to paying the other half, do all of Aris accountancy work for the coming year. Ari reluctantly agreed to this proposal. (b) Cas, a self-employed musician, told Ari that she could not pay any of the money she owed him. However, her father offered to pay Ari, but could only manage half of the total amount owed. Once again Ari reluctantly agreed to accept the fathers payment of the reduced sum. (c) Dex, a self-employed car mechanic, without contacting Ari, simply sent him a cheque for half of his fees stating that he, Dex, could not pay any more and that the cheque was in full settlement of his outstanding debt. Ari himself is now in financial difficulty and needs additional cash to maintain his business operation. Required: Advise Ari whether, in the context of contract law, he can recover any of the outstanding money from Bi, Cas and Dex. (10 marks)

Answer
This question asks candidates to analyse the problem scenario in terms of the rules relating to the waiver of existing contractual rights. However, it is initially necessary to establish that the parties are, in law, in a binding contractual relationship. English law does not enforce gratuitous promises unless they are made by deed. Consideration has to be provided as the price of a promise. This is equally the case where a party promises to give up some existing rights that they have. Thus, at common law, if A owes B 10, but B agrees to accept 5 in full settlement of the debt, Bs promise to give up existing rights must be supported by consideration on the part of A. This principle, that a payment of a lesser sum cannot be any satisfaction for the whole, was originally stated in Pinnels case (1602), and reaffirmed in Foakes v Beer (1884). This principle has been reconfirmed in the more recent case of Re Selectmove Ltd (1994). In this latter case, the company owed the Inland Revenue outstanding taxes. After some negotiation, the company agreed to pay off the debt by instalments. The company started paying but, before completion, it received a demand from the Revenue that the total be paid off immediately. The company relied on the authority of Williams v Roffey Bros (1990), which had established that the performance of an existing duty could, under particular circumstances, amount to valid consideration for a new promise. On that basis it was argued that its payment of the tax debt was sufficient consideration for the promise of the Revenue to accept it in instalments. The Court of Appeal held, however, that situations relating to the payment of debt were distinguishable from those relating to the supply of goods and services, and that in the case of the former the court was bound to follow the clear authority of the House of Lords in Foakes v Beer. However, there are a number of situations in which the rule in Pinnels case does not apply. The following will operate to fully discharge an outstanding debt: (i) payment in kind Consideration can take the form of money or moneys worth. In other words, something or action may adequately support a promise, and A may clear an existing debt if B agrees to accept something else instead of money. It is important to note that

payment by cheque is no longer treated as substitute payment in this respect (See D & C Builders Ltd v Rees (1966)). (ii) payment of a lesser sum before the due date of payment Such payment has of course to be acceptable to the party to whom the debt is owed. (iii) payment of a lesser sum by a third party Where a third party intervenes to pay off the existing debt, albeit with a lesser sum, then the original creditor is not allowed to break their agreement with that party by taking subsequent action against the original debtor (Welby v Drake (1825)). (iv) a composition arrangement This is an agreement between creditors to the effect that they will accept part-payment of their debts. As they have entered into a binding agreement to that effect, the individual creditors cannot subsequently seek to recover the unpaid element of the debt (Good v Cheesman (1831)). (v) promissory estoppel The equitable doctrine of promissory estoppel sometimes can be relied upon to prevent promisors from going back on their promises. The doctrine first appeared in Hughes v Metropolitan Railway Co (1877) and was revived by Lord Denning in the High Trees case (Central London Property Trust Ltd v High Trees House Ltd (1947)). Applying the foregoing to the facts of the problem leads to the following results: Bi As Ari agreed to accept Bis offer to do his accounts as part payment of his outstanding debt there is nothing further he can do to recover any more money. By accepting payment in kind his situation is covered by exception (i) above to the rule in Pinnels case. Cas By accepting lesser payment from a third party, i.e. Cass father, Ari is covered by exception (iii) above to the rule in Pinnels case and he can take no further action against Cas Dex Dex acted unilaterally and did nothing additional to compensate Ari for his part payment. Consequently Dex is covered by the general rule in Pinnels case and remains liable to pay Ari the remaining half of his bill (D & C Builders v Rees and Re Selectmove Ltd).

Remedies Question 4:

In January 2008 Arti entered in a contractual agreement with Bee Ltd to write a study manual for an international accountancy bodys award. The manual was to cover the period from September 2008 till June 2009, and it was a term of the contract that the text be supplied by 30 June 2008 so that it could be printed in time for September. By 30 May, Arti had not yet started on the text and indeed he had written to Bee Ltd stating that he was too busy to write the text. Bee Ltd was extremely perturbed by the news, especially as it had acquired the contract to supply all of the

accountancy bodys study manuals and had already incurred extensive preliminary expenses in relation to the publication of the new manual. Required: In the context of the law of contract, advise Bee Ltd whether they can take any action against Arti. (10 marks) Answer

The essential issues to be disentangled from the problem scenario relate to breach of contract and the remedies available for such breach. There seems to be no doubt that there is a contractual agreement between Arti and Bee Ltd. Normally breach of a contract occurs where one of the parties to the agreement fails to comply, either completely or satisfactorily, with their obligations under it. However, such a definition does not appear to apply in this case as the time has not yet come when Arti has to produce the text. He has merely indicated that he has no intention of doing so. This is an example of the operation of the doctrine of anticipatory breach. This arises precisely where one party, prior to the actual due date of performance, demonstrates an intention not to perform their contractual obligations. The intention not to fulfil the contract can be either express or implied. Express anticipatory breach occurs where a party actually states that they will not perform their contractual obligations (Hochster v De La Tour (1853)). Implied anticipatory breach occurs where a party carries out some act which makes performance impossible Omnium Enterprises v Sutherland (1919)). When anticipatory breach takes place the innocent party can sue for damages immediately on receipt of the notification of the other partys intention to repudiate the contract, without waiting for the actual contractual date of performance as in Hochster v De La Tour. Alternatively, they can wait until the actual time for performance before taking action. In the latter instance, they are entitled to make preparations for performance, and claim the agreed contract price (White and Carter (Councils) v McGregor (1961)). It would appear that Artis action is clearly an instance of express anticipatory breach and that Bee Ltd has the right either to accept the repudiation immediately or affirm the contract and take action against Arti at the time for performance (Vitol SA v Norelf Ltd (1996)). In any event Arti is bound to complete his contractual promise or suffer the consequences of his breach of contract. Remedies for breach of contract (i) Specific performance It will sometimes suit a party to break their contractual obligations, even if they have to pay damages. In such circumstances the court can make an order for specific performance to require the party in breach to complete their part of the contract. However, as specific performance is not available in respect of contracts of employment or personal service Arti cannot be legally required to write the book for Bee Ltd (Ryan v Mutual Tontine Westminster Chambers Association (1893)). This means that the only remedy against Arti lies in the award of damages. (ii) Damages A breach of contract will result in the innocent party being able to sue for damages. Bee Ltd, therefore, can sue Bob for damages, but the important issue relates to the extent of such damages. The estimation of what damages are to be paid by a party in breach of contract can be divided into two parts: remoteness and measure.

Remoteness of damage The rule in Hadley v Baxendale (1845) states that damages will only be awarded in respect of losses which arise naturally, or which both parties may reasonably be supposed to have contemplated when the contract was made, as a probable result of its breach. The effect of the first part of the rule in Hadley v Baxendale is that the party in breach is deemed to expect the normal consequences of the breach, whether they actually expected them or not. Under the second part of the rule, however, the party in breach can only be held liable for abnormal consequences where they have actual knowledge that the abnormal consequences might follow (Victoria Laundry Ltd v Newham Industries Ltd (1949)). Measure of damages Damages in contract are intended to compensate an injured party for any financial loss sustained as a consequence of another partys breach. The object is not to punish the party in breach, so the amount of damages awarded can never be greater than the actual loss suffered. The aim is to put the injured party in the same position they would have been in had the contract been properly performed. In order to achieve this end the claimant is placed under a duty to mitigate losses. This means that the injured party has to take all reasonable steps to minimise their loss (Payzu v Saunders (1919)). Although such a duty did not appear to apply in relation to anticipatory breach as decided in White and Carter (Councils) v McGregor (1961) (above). Applying these rules to the fact situation in the problem it is evident that as Arti has effected an anticipatory breach of his contract with Bee Ltd he will be liable to them for damages suffered as a consequence, if indeed they suffer damage as a result of his breach. As Bee Ltd will be under a duty to mitigate their losses, they will have to commit their best endeavours to find someone else to produce the required text on time. If they can do so at no further cost then they would suffer no loss, but any additional costs in producing the text will have to be borne by Arti. However, if Bee Ltd is unable to produce the required text on time the situation becomes more complicated. (i) As regards the profits from the contract to supply the accountancy body with all its text, the issue would be as to whether this was normal profit or amounted to an unexpected gain, as it was not part of Bee Ltds normal market when the contract was signed. If Victoria Laundry Ltd v Newham Industries Ltd were to be applied it is unlikely that Bee Ltd would be able to claim that loss of profit from Arti. However, it is equally plausible that the contract was an ordinary commercial one and that Arti would have to recompense Bee Ltd for any losses suffered from its failure to complete contractual performance. (ii) As for the extensive preliminary expenses Arti would certainly be liable for them, as long as they were in the ordinary course of Bee Ltds business and were not excessive (Anglia Television v Reed (1972)).

Exclusion clause Question 5:

Whilst at work Andy always parked his car in a car park operated by Bash Ltd. On the entry to the car park just in front of the payment machine there is a large sign in fl uorescent red paint which states: These premises are not staffed by our employees and may be dangerous. Clients use these facilities strictly at their own

risk and Bash Ltd accept no liability whatsoever for any damage or injury sustained by either those using this facility or their vehicles or property, no matter how caused. Andy was aware of the sign, but had never paid much attention to it. However, one day he returned to his car to fi nd that it had been badly damaged by a towing vehicle driven by an employee of Bash Ltd. Whilst on his way to the car park offi ce to complain he was hit by the same towing vehicle, which was clearly being driven dangerously by one of Bash Ltds employees. As a result, not only was his car severely damaged, but he suffered a broken leg and was off work for eight weeks. Bash Ltd has accepted that its employee was negligent on both counts but denies any liability, relying on the exclusion clause. Required: On the understanding that the clause excluding Bash Ltds liability was incorporated into its contract with Andy, advise Andy whether there is any action he can take against Bash Ltd. (10 marks) Answer
Given that the question scenario clearly states that the exclusion clause was incorporated into the contract between Andy and Bash Ltd (and there can be no doubt that it is), it is only necessary to consider the effect of the clause. On the basis of the clear wording, it would appear that the wording of the exclusion clause is suffi ciently clear and specifi c to cover Bash Ltds negligence. As a consequence, it only remains to consider how the legislation governing exclusion clauses would be likely to deal with this particular clause in the context of the question. The Unfair Contract Terms Act 1977 (UCTA) is the original statutory attempt to control exclusion clauses. The original Unfair Terms in Consumer Contracts Regulations (UTCCR) were enacted in 1994 to implement the European Unfair Contract Terms Directive and were subsequently replaced by the current regulations in 1999. Section 2(1) of UCTA provides an absolute prohibition on exemption clauses in relation to liability in negligence resulting in death or injury. It is therefore apparent that Bash Ltd cannot avoid responsibility for the injury sustained by Andy and will be liable for the injuries and the consequential loss he suffered. Section 2 also provides that any exemption clauses relating to liability for other damage caused by negligence will only be enforced to the extent that they satisfy the requirement of reasonableness; and s.11 provides that the requirement of reasonableness means fair and reasonable ... having regard to the circumstances .... In looking at the circumstances of the case the court will take into account matters relating to the relative strength of bargaining power: inducements to accept the restrictions: whether the customer knew or ought to have known of the exclusion: whether the goods involved were specially made or adapted. The fi nal outcome, therefore, is dependent on judicial interpretation. The onus of showing reasonableness rests with the party relying on the clause (St Albans CDC v International Computers Ltd (1994)). If one were to ask the question: Was it reasonable for Bash Ltd to deny responsibility for the consequence of their negligence in this case? the answer is likely to be no. Consequently Bash Ltd is likely to be liable for all the damages consequent upon its vicarious

negligence, and the exclusion clause to have no effect (see George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd (1983) and Smith v Bush (1989)). Although the Unfair Terms in Consumer Contracts Regulations 1999 do not affect the outcome of the situation in any material way, it is worth mentioning them at this point. The regulations are potentially wider in scope than UCTA, in that they cover all terms and not just exclusion clauses. Regulation 3(1) states that it applies to any term in a contract concluded between a seller or supplier and a consumer where the term has not been individually negotiated. Under regulation 4(i), a term is unfair if contrary to the requirements of good faith, it causes a signifi cant imbalance in the parties rights and obligations arising under the contract to the detriment of the consumer. Consequently reg.5(1) provides that if a term is found to be unfair it will not be binding on