The Law of Contract in UK

Elements of the law of contract

Catharine MacMillanRichard Stone

This subject guide was prepared for the University of London International Programmes by:

u Catharine MacMillan BA (Victoria), LLB (Queen’s, Canada), LLM (Cantab), Lecturer in Law, School of Law, Queen Mary, University of London

and

u Richard Stone LLB (Soton), LLM (Hull), Barrister, Professor and Head of Law, Lincoln Law School, University of Lincoln.

In the 2004 edition of this guide Catharine MacMillan was primarily responsible for Chapters 1–2, 4–5, 7–8, 10–14 and 16–17. Richard Stone was primarily responsible for Chapters 3, 6, 9 and 15. Catharine MacMillan was responsible for the 2009 revision.

This is one of a series of subject guides published by the University. We regret that owing to pressure of work the authors are unable to enter into any correspondence relating to, or arising from, the guide. If you have any comments on this subject guide, favourable or unfavourable, please use the form at the back of this guide.

Acknowledgements

Figure 15.1 has been reproduced by kind permission of:

u Figure 15.1: © Illustrated London News Picture Library.

Photographs © C. MacMillan, 2003

Publications Office University of London International Programmes Stewart House 32 Russell Square London WC1B 5DN United Kingdom

www.londoninternational.ac.uk

© University of London 2009. Reprinted 2011.

All rights reserved. No part of this work may be reproduced in any form, or by any means, without permission in writing from the publisher.

Elements of the law of contract page i

Contents

1 Introductionandgeneralprinciples 1

Introduction 2

1 1 Studying the law of contract 3

1 2 Reading 4

1 3 Method of working 7

1 4 Some issues in the law of contract 8

1 5 Plan of the subject guide 9

1 6 Format of the examination paper 10

Part I Requirements for the making of a contract

2 Offerandacceptance 13

Introduction 14

2 1 The offer 15

2 2 Communication of the offer 18

2 3 Acceptance of the offer 18

2 4 Communication of the acceptance 19

2 5 Exceptions to the need for communication of the acceptance 20

2 6 Method of acceptance 22

2 7 The end of an unaccepted offer 23

Reflect and review 28

3 Consideration 29

Introduction 30

3 1 Consideration 31

3 2 Promissory estoppel 37


4 Otherformativerequirements:intention,certaintyandcompleteness 43

Introduction 44

4 1 The intention to create legal relations 45

4 2 Certainty of terms and vagueness 47

4 3 A complete agreement 48


Part II Content of a contract and regulation of terms

5 Thetermsofthecontract 53

Introduction 54

5 1 Is a statement or assurance a term of the contract? 55

5 2 The use of implied terms 57

5 3 The classification of terms into minor undertakings and major undertakings 60


6 Theregulationofthetermsofthecontract 67

Introduction 68

6 1 Common law controls 69

6 2 The Unfair Contract Terms Act 1977 73

6 3 The Unfair Terms in Consumer Contracts Regulations 1999 78


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Part III The capacity to contract – minors

7 Contractsmadebyminors 83

Introduction 84

7 1 Contracts for necessaries 85

7 2 Beneficial contracts of service 85

7 3 Voidable contracts 86

7 4 Recovery of property 86


Part IV Vitiating elements in the formation of a contract

8 Mistake 89

Introduction 90

8 1 Some guidelines on mistake 91

8 2 Bilateral mistakes 92

8 3 Unilateral mistakes 97

8 4 Mistake in equity 102


9 Misrepresentation 109

Introduction 110

9 1 Definition of misrepresentation 111

9 2 Remedies for misrepresentation 114

9 3 Exclusion of liability 118


10Duressandundueinfluence 121

Introduction 122

10 1 Duress 123

10 2 Undue influence 126


Part V Who can enforce the terms of a contract?

11Privityofcontract 133

Introduction 134

11 1 The doctrine of privity 135

11 2 The Contracts (Rights of Third Parties) Act 1999 137

11 3 Rights conferred on third parties at common law 139

11 4 Liability imposed upon third parties 145


Part VI Illegality and public policy

12Illegality

Introduction 150

12 1 Statutory illegality 151

12 2 Common law illegality 153

12 3 The effects of illegality 154


Elements of the law of contract page iii

13Restraintoftrade 159

Introduction 160

13 1 General principles 161

13 2 Employment contracts 161

13 3 The sale of a business 163

13 4 Other agreements 164


Part VII The discharge of a contract

14Performanceandbreach 169

Introduction 170

14 1 The principle of substantial performance 171

14 2 When a breach of contract occurs 172

14 3 What occurs upon breach 173

14 4 Anticipatory breach 175


15Frustration 179

Introduction 180

15 1 The basis of the doctrine of frustration 181

15 2 The nature of a ‘frustrating event’ 182

15 3 Limitations on the doctrine 185

15 4 The effect of frustration 186


Part VIII Remedies for breach of contract

16Damages 193

Introduction 194

16 1 The purpose of an award of damages 195

16 2 Two measures of damages 196

16 3 When is restitution available? 197

16 4 Remoteness of damage 199

16 5 Mitigation of damage 201

16 6 Non-financial loss 202

16 7 Liquidated damages 203


17Equitableremedies 207

Introduction 208

17 1 Specific performance 209

17 2 Damages in lieu of specific performance 211

17 3 Injunctions 212


Feedback

Feedbacktoactivities 215

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Contents

Introduction 2

1 1 Studying the law of contract 3

1 2 Reading 4

1 3 Method of working 7

1 4 Some issues in the law of contract 8

1 5 Plan of the subject guide 9

1 6 Format of the examination paper 10

1 Introduction and general principles

University of London International Programmes

Introduction

This subject guide is designed to help you to study the Elements of the law of contract in England and Wales. This guide is not a textbook and it must not be taken as a substitute for reading the texts, cases, statutes and journals referred to in it. The purpose of the guide is to take you through each topic in the syllabus for Elements of the law of contract in a way which will help you to understand contract law. The guide is intended to ‘wrap around’ the recommended textbooks and casebook. It provides an outline of the major issues presented in this subject. Each chapter presents the most important aspects of the topic and provides guidance as to essential and further reading. Each chapter also provides you with activities to test your understanding of the topic and self-assessment exercises designed to assist your progress. Feedback to many of these activities is available at the back of this guide. There are also sample examination questions, with appropriate feedback, which will assist you in your examination preparation.

In the study of contract law, it is essential to try to gain an understanding of the principles of law – what the law is trying to do in response to particular issues – rather than the rote memorisation of rules and cases. This means you may need to read passages or chapters in the guide (and the relevant suggested reading materials) several times in order to understand the principles of law being covered.

In this guide we have taken account of all materials available up to February, 2009.

Learning outcomesBy the end of this subject guide and the relevant reading, you should be able to:

u demonstrate a thorough working knowledge of contract law: the syllabus aims to give you a good working knowledge of the elements of contract law and the theory underlying it

u understand contract case law: you should develop the ability to understand contract cases, that is to say the importance of the issues in a case and how the court has resolved the issues

u apply the cases: you should be able to apply the case law to a given issue

u understand statutes: you should develop the ability to interpret a statute; you should also be able to understand the interrelationship between the statute and the relevant common law

u apply the statutes: you should be able to apply the statutes to a given issue.

Each chapter lists specific learning outcomes to be achieved in relation to the material covered in that chapter. There is a ‘Reflect and review’ section at the end of each chapter to help you monitor your progress.

Elements of the law of contract 1 Introduction and general principles page 3

1.1 Studying the law of contract

As already stated, this guide is not a textbook. It must not be taken as a substitute for reading the texts, cases, statutes and journals. Its purpose is to take you through each topic in the syllabus for Elements of the law of contract in a way which will help you to understand contract law. It provides an outline of the major issues presented in this subject. It will also help you prepare to answer the kind of questions the examination paper is likely to contain. Note, however, that no topic will necessarily be included in any particular examination and that some are more likely to appear than others. The Examiners are bound only by the syllabus and not by anything said in – or omitted from – this guide.

What do we mean by ‘taking you through’ a topic? Very simply it is to spell out what problems or difficulties the law is seeking to provide a solution for and to give a structured guide to the materials (textbooks, cases and statutes). You must read these in order to appreciate how English law has dealt with the issues and to judge how satisfactory the solutions are in terms of overall policy.

How to use this subject guide

Each chapter begins with a general introduction to the topic covered and the learning outcomes you should achieve within that chapter.

Following that, the topic is divided into subsections. Each subsection provides a reference to the recommended readings in McKendrick’s textbook and Poole’s casebook (see 1.2 below). At a minimum, you should read these; in many cases you will probably find that you need to re-read them. It is often difficult to grasp some legal principles and most students find that they need to re-apply themselves to some topics.

In addition, at the end of each chapter, there are recommendations for useful further readings. This will always cover the relevant section in Anson’s Law of Contract. You may find it desirable to review this textbook from time to time because it is often easier to grasp a point that you have found difficult when it is explained in a different fashion. Recommended readings are also included in the Elements of the law of contract study pack.

At the end of each subsection, the learning outcomes are again provided to enable you to test your progress. Throughout each chapter, self-assessment questions and learning activities are provided. Feedback is also given with regard to the learning activities to allow you to check your comprehension of a particular matter. You will find this process most helpful if you answer the question before you check the feedback (rather than simply reading the question and then checking the feedback). This is because the object of your studies is to understand, rather than memorise, the law. At the end of each chapter, some advice is given with regard to possible examination questions on this topic. The fact that this constitutes advice about possible examination questions cannot be stressed enough.

The reasons for studying the principles of the law of contract are readily apparent: contracts are the foundation of commercial activities of all kinds and of many ‘everyday’ transactions as well. Many specialist areas of law are built on this foundation. It also presents an ideal opportunity for students to take the first steps towards developing the essential skills of understanding judgments and interpreting statutes.

The importance of case law

It cannot be too strongly emphasised that this is a case law subject. What the Examiners will be seeking to test is your understanding of how the judges in the leading cases have formulated and refined the relevant principles of law. You should attempt to read the important cases. The Online Library (which you can access through the student portal) will give you access to the relevant cases.


There are no shortcuts to understanding the development of the case law. If the job is to be well done, it will be time consuming. Individuals vary, obviously, but it would probably be exceptional to cover the whole syllabus thoroughly in less than 200–250 hours of study.

1.2 Reading

See also the Student Handbook and the Learning skills for law subject guide.

You should begin your reading with this subject guide. Start at the beginning and work through the guide sequentially, reading the textbook and doing the activities as directed. It may be tempting to start with, say, illegality or incapacity, but this is not a good idea. The subject builds on the basic foundations, without which particular topics later in the subject cannot be understood.

In addition to the study guide, you will also want to examine the selected readings in the Elements of the law of contract study pack that you have been provided with.

You should also regularly check the Elements of the Law of Contract section on the Laws VLE as it will provide articles with up-to-date information of interest to students. In addition, the archive section of the VLE contains commentary on a large number of contract cases.

1.2.1 Books for everyday use The main text for this subject is:

¢ McKendrick, E. Contract Law. (London: Palgrave Macmillan, 2009) eighth edition [ISBN 9780230216716].†

This text forms the foundation text for this subject. It is advisable to read and re-read this text to allow the material to be thoroughly understood.

You should also buy a casebook. This guide is structured around:

¢ Poole, J. Casebook on Contract Law. (Oxford: Oxford University Press, 2008) ninth edition [ISBN 9780199233526].

Because these books are not intended to be as comprehensive in their coverage of the materials as the traditional University undergraduate texts for law, you will need to refer from time to time to the more advanced texts mentioned in the next section.

1.2.2 More advanced books The more detailed textbook currently considered to be best suited to the needs of external students is:

¢ Beatson, J. Anson’s Law of Contract. (Oxford: Oxford University Press, 2002) 28th edition [ISBN 0199256039].†

You may also wish to consult a more detailed casebook. Here the choice lies between:

¢ Beale, H.G., W.D. Bishop and M.P. Furmston Contract – Cases and Materials. (London: Butterworths, 2007) fifth edition [ISBN 0199287368].

¢ McKendrick, E. Contract Law: Text, Cases and Materials. (Oxford:Oxford University Press, 2008) third edition [ISBN 0199208018].

¢ Brownsword, R., Smith & Thomas: A Casebook on Contract. (London: Sweet & Maxwell, 2009) 12th edition [ISBN 1847034179].

It is not suggested that you purchase the books mentioned in this section: they should be available for reference in your college or other library.

† Please note that the references to McKendrick in this subject guide are all to the eighth edition (2009).

† In this subject guide this text is referred to simply as ‘Anson’.


1.2.3 Statute booksYou should also make sure you have an up-to-date statute book. Under the Regulations you are allowed to take one authorised statute book into the examination room.

Information about the statute books and other materials that you are permitted to use in the examination is printed in the current Regulations, which you should refer to.

Please note that you are allowed to underline or highlight text in these documents – but you are not allowed to write notes etc. on them. See also Learning skills for law for further guidance on these matters.

The Regulations for the LLB state:

Students may underline and/or highlight passages with a coloured pen in the materials, but all other forms of personal annotation on statues and other materials permitted to be taken into the examination room are strictly forbidden.

Statute books are regularly updated: make sure you use the latest copy.

1.2.4 Other books ¢ Treitel, G.H. and E. Peel. The Law of Contract. (London: Sweet and Maxwell, 2007)

twelfth edition [ISBN 042194840X].

¢ Furmston, M.P. Cheshire, Fifoot and Furmston’s Law of Contract. (Oxford: Oxford University Press, 2007) fifteenth edition [ISBN 0199287562].

¢ Stone, R. The Modern Law of Contract. (London: Cavendish, 2009) eighth edition [ISBN 9780415481373].

At the other end of the scale, many shorter books have been published in recent years aimed at the student market. If you are using McKendrick and Poole, you will generally not find that there is much benefit to be gained from these other works. However, for the particular purpose of practising the art of writing examination answers, you may find it helpful to have:

¢ McVea, H. and P. Cumper Exam Skills for Law Students. (Oxford: Oxford University Press, 2006) second edition [ISBN 0199283095].

But do not be misled into thinking that this will provide you with ‘model answers’ which can be learned by heart and reproduced from memory in the examination. Every examination question requires a specific answer and ‘pre-packaged’ answers do not serve the purpose.

You might also find the following book useful

¢ Brown, I. and A. Chandler Q&A Law of Contract 2009 and 2010 (Oxford: Oxford University Press, 2009) seventh edition [ISBN 0199559554].

This book contains less critical advice on the process of answering examination questions than McVea and Cumper but it provides a greater range of suggested solutions to questions.

References to the recommended books in the guide

This guide is designed for use in conjunction with McKendrick’s textbook and Poole’s casebook. In each section of the guide reference is made to all the relevant pages of the eighth edition of McKendrick and the ninth edition of Poole. In the event that either of these books is released in a new edition before the updating of this guide, and for the greater guidance of the reader, reference is also made to the relevant chapter and section names and numbers in each book. For example:

Essential reading ¢ McKendrick, Chapter 11: ‘Exclusion clauses’ – 11.7 ‘Fundamental breach’, pp.185–187.

¢ Poole, Chapter 8: ‘Discharge for breach of contract’ – Section 2 ‘The consequences of breach’, pp.363–364.


1.2.5 Other sources of information

Journals

It is useful to consult journals regularly to improve your understanding of the law and to be aware of recent developments in the law. Journals which may prove useful to you for their articles and case notes are:

¢ Cambridge Law Journal

¢ Journal of Contract Law

¢ Law Quarterly Review

¢ Lloyd’s Maritime and Commercial Law Quarterly

¢ Modern Law Review

¢ New Law Journal.

Do not worry if you come across material that you do not understand: you simply need to re-read it and think about it.

Online resources

As mentioned earlier, you will find a great deal of useful material on the Laws Virtual Learning Environment (VLE) and Online Library. These are both accessed through the student portal at http://my.londonexternal.ac.uk

The Online Library provides access to cases, statutes and journals as well as professional legal databases such as LexisNexis, Westlaw and Justis. These will allow you to read and analyse most of the cases discussed in this guide and the relevant materials.

Students are also able to access newsletters on the VLE that deal with matters of contemporary interest.

Use of the internet provides the external student with a great deal of information, as a great deal of legal material is available over the Internet. Whilst the sites change on an almost monthly basis, some useful ones at the time of writing this guide are:

u http://www.parliament.the-stationery-office.co.uk contains full texts of the House of Lords’ judgments

u http://www.opsi.gov.uk/acts provides the full text of UK Acts back to 1991

u http://www.parliament.uk/site_map/site_map.cfm the sitemap for the Parliament of the United Kingdom, which will provide you with access to a range of legislative information

u http://www.lawcom.gov.uk the Law Commission’s website; this provides information about law reform.

In addition to these sites, a growing number of private publishers provide legal information and case updates. Some sites where useful information about recent cases and developments in the law can be found are:

u http://business.timesonline.co.uk/tol/business/law the law section of The Times website where you can check the law reports daily

u http://www.bailii.org Bailii is a freely available website which provides access to case law legislation and also provides a recent decisions list (http://www.bailii.org/recent-decisions.html) and lists new cases of interest (http://www.bailii.org/cases_of_interest.html).

http://my.londonexternal.ac.uk


1.3 Method of working

Remember that your main objective is to understand the principles that have been laid down in the leading cases and to learn how to apply those principles to a given set of facts. As a rule of thumb, leading cases for this purpose may be defined as those which are included in the relevant sections of McKendrick and Poole, together with any other (generally more recent) cases cited in this subject guide. At a more practical level the leading cases are those which an Examiner would probably expect the well-prepared candidate to know about. In the nature of things, just as different lecturers will refer to a different selection of cases, there can be no absolutely definitive list of such cases. However there will always be agreement on the importance of many of the cases and in general terms, ‘core’ cases are named in the guide. Space is limited and omission from the guide should not be taken to mean that a case is not worth knowing.

It is suggested that the study of the cases should be approached in the following steps.

1. Read the relevant section of this subject guide.

2. Read the relevant passages of McKendrick’s textbook and Poole’s casebook – it may also be advisable to examine some cases in full following this.

3. Re-read the relevant passages in McKendrick.

4. Attempt to answer the relevant activities or self-assessment questions.

5. Repeat this process for each section of the subject guide.

A further description of the process in each of these steps is set out in further detail below.

Step 1Start with the relevant section of this subject guide – this will give an idea of the points you need to look for. Take one section at a time – do not try to digest several at once. Examine the learning outcomes: these are the matters you need to master in relation to each chapter and subsection within the guide.

Step 2Read the textbook passage referred to. Look in particular for the cases upon which the author places special emphasis.

Read the cases in the casebook (together with any others mentioned in the subject guide – particularly the more recent ones: references are given (where possible) in the guide to the All England Law Reports so that you can look up the recent cases in your library). You will generally also be able to find the case on the Online Library.

The importance of reading the primary materials of the law – cases and legislation – cannot be overemphasised. Learn as much as possible about each case. Make a special effort to remember the correct names of the parties, the court which decided the case – particularly if it is a House of Lords or Court of Appeal decision – the essential facts, the ratio decidendi and any important obiter dicta. It is also important to note any other striking features, such as, for example, the existence of a strong dissenting judgment, the overruling of previous authority or apparent inconsistency with other cases. It is most important that you understand not only what the court has decided but also why it has decided that. Knowing ‘the rules’ is not enough: it is essential to study the judgments and understand the reasoning which led the court in a particular case to uphold the arguments of the successful party and reject the contentions put forward – no doubt persuasively – on behalf of the unsuccessful party. It is also important to be critical when studying the cases: ask yourself whether the result produces injustice or inconvenience; whether there are any situations in which you would not want the result to apply and, if so, how they could be distinguished. If it is an older case, you should also ask yourself whether the reasoning has been overtaken by changes in social and commercial life generally. Lastly, pay attention to the impact of other cases in the area. How strong is an authority in light of subsequent decisions?


Step 3 Read the textbook passage again and ask yourself, ‘Does the book’s statement of the effect of the cases correspond with my impression of them?’ If it does not, read the cases again.

Step 4You will find activities and self-assessment questions throughout the guide. These are intended not only to build up your knowledge of the material but also to provide you with an opportunity to measure your knowledge and understanding of the particular section. An activity demands you to think about a particular question and prepare an answer which extends beyond a simple ‘yes’ or ‘no’. Feedback is provided for these activities at the end of the guide. Self-assessment questions are designed to test your memory of the material which you have covered. No feedback is provided for these questions as they have simple answers available in the textbook or casebook. With both forms of exercises, you will find that your knowledge is enhanced if you complete the exercises as you encounter them in the particular section. You will note that each chapter of McKendrick also includes some exercises for self-assessment: completing these will further develop your legal knowledge and skills.

Step 5Repeat the process for each section of the chapter in turn.

1.4 Some issues in the law of contract

1.4.1 Statutes Although most of the syllabus deals only with principles developed by the courts, there are also a few statutory provisions which need to be considered because they contain rules affecting contracts generally. For the purposes of the suggested method of working, you should approach each relevant section of a statute as if it were a leading case and make a special effort to get to know the precise wording of crucial phrases as well as any cases in which the section has been interpreted and applied. Remember that in English law it is the judges who decide what Parliament meant by the words of the statute.

In general, you are not expected to display knowledge of statutes dealing with particular types of contract, such as the Consumer Credit Act 1974. (Some parts of the Sale of Goods Act 1979 are an exception to this, however see Chapter 5: ‘The terms of the contract’, section 5.2.)

1.4.2 European Union lawThe syllabus refers to the inclusion of relevant European Union legislation. At the present time the most significant part of the general law of contract which is directly affected by European law is that dealing with unfair terms. (This is covered in Chapter 6: ‘The regulation of the terms of the contract’, section 6.3.) Other directives which are important to the general law of contract are Directive 2000/31/EC on Electronic Commerce OJ 2000 L 178/1 and Council Directive 94/44/EC on Certain Aspects of the Sale of Consumer Goods and Associated Guarantees OJ I 171 7.7.99.

1.4.3 The ‘consensus’ theory of contract and objective interpretation In the past, many writers and courts placed much emphasis on the need for a ‘meeting of minds’ or ‘consensus ad idem’ for the making of contracts. This reliance on actual intention was an expression of laissez-faire philosophies and a belief in unfettered freedom of contract. This subjective approach to the making of contracts has now largely been abandoned, though its influence can still be detected in certain rules. In general, what matters today is not what meaning a party actually intended to convey by his words or conduct, but what meaning a reasonable person in the other party’s position would have understood him to be conveying. This is known as the process of


‘objective interpretation’. See McKendrick pp.21–22 and Poole pp.17–20 and the cases referred to there, especially Hartog v Colin and Shields (1939) and Centrovincial Estates v Merchant Investors (1983).

1.4.4 Finding ‘the intention of the parties’ You will soon discover that, in spite of the disappearance of the subjective approach to the making of contracts, the law frequently uses ‘the intention of the parties’ as a test for resolving difficulties. It is most important to appreciate that this does not refer to the parties’ actual intentions – which may well have been conflicting – but to the ‘proper inference’ from the facts as a whole as to what would have been the intentions of a reasonable person in the position of the parties. When deciding what is the ‘proper’ inference a judge has considerable room for manoeuvre and is in reality reaching a conclusion based upon the justice of the case as much as upon any inference in the strict sense. For an instructive illustration of this process see the judgment of Denning LJ in Oscar Chess v Williams (1957) – see Poole – where the court had to decide whether a warranty was intended. Note that Lord Denning defines the test by reference to ‘an intelligent bystander’, but it is clear that it is the court’s responsibility to draw the inference and that the intelligent bystander is merely an alias for the judge.

1.4.5 Law and equityAt one time in England and Wales, there were two separate courts which dealt with contract cases: a court of equity and a court of common law. In the latter part of the nineteenth century, these two courts were amalgamated and one court dealt with both law and equity. Equity had developed its own principles, considerations and remedies to contractual problems. Equity is said to supplement the common law where it is deficient. In the course of studying contract law you will see many equitable principles in place (see, for example, estoppel and undue influence). Equitable intervention in a contractual problem is based on the conscience of the parties; accordingly, equitable relief is discretionary and it is bound by a distinct series of considerations. An example of such a consideration (sometimes referred to as a maxim) is that ‘he who comes to equity must come with clean hands’; that is to say, he who seeks equitable relief must himself not be guilty of some form of misconduct or sharp practice. You will see the particular restrictions placed upon the granting of equitable relief as you proceed through the subject guide (see, for example, rescission for misrepresentation).

1.5 Plan of the subject guide

In line with the order of topics in the syllabus, the guide is structured as follows.

u Part I of the guide deals first with the requirements for the making of a contract (Chapters 2, 3 and 4).

u Part II deals with the content of a contract and some of the regulations of the terms of a contract (Chapters 5 and 6).

u Part III deals with the capacity to contract – the emphasis placed is upon minors’ contracts (Chapter 7).

u Part IV deals with vitiating elements in the formation of a contract (Chapters 8, 9 and 10).

u Part V deals with the question of who can enforce the terms of a contract (Chapter 11).

u Part VI deals with illegality and public policy (Chapters 12 and 13).

u Part VII deals with the discharge of a contract (Chapters 14 and 15).

u Part VIII deals with remedies for a breach of contract (Chapters 16 and 17).


Topics not included in the syllabus Although the following topics are touched upon in the recommended books (and covered in some detail in the larger books), they are excluded from the present syllabus.

u Requirements as to the form of contracts.

u Gaming and wagering contracts.

u Assignment (including negotiability).

u Agency.

1.6 Format of the examination paper

Important: the information and advice given in the following section are based on the examination structure used at the time this guide was written. However, the University can alter the format, style or requirements of an examination paper without notice. Because of this we strongly advise you to check the rubric/instructions on the paper you actually sit.

Past examination papers can be a useful pointer to the type of questions which future papers will probably include, but you should take care not to read too much into the style and format of past papers. Remember that, in this as in other subjects, the Examiners may change the format from year to year – for example, by requiring a different number of questions to be answered, by splitting a paper into Part A and Part B (with some questions to be answered from each part) or by making some questions compulsory. You must always read and comply with the instructions for the particular paper you are taking. The annual Student Handbook will normally give advance warning of changes in the format of question papers, but the Examiners will have no sympathy with a candidate who does not read the instructions properly.

1.6.1 ‘Spotting’ questions As we mentioned at the beginning of this Introduction, there is no guarantee that there will be a question on any particular topic in any given examination paper. It is a mistake, therefore, to assume that topic A is so important that the Examiners are bound to set a question on it. You should bear this in mind when deciding how many topics you need to have thoroughly revised as you go into the examination. It is also worth noting that questions may easily involve more than one topic.

1.6.2 Examination technique in general Make the most of your knowledge by observing a few simple rules. (See also Chapter 7 of the Learning skills for law subject guide.)

1. Write legibly, using a good dark pen. If necessary, write more slowly than normal to improve legibility – the time lost will be amply repaid by not having an irritated Examiner.

2. Complete the required number of questions, including all parts of questions with two or more parts.

3. Plan your time so that you spend about the same amount of time on each question. One of the worst mistakes you can make is to overrun on the first two answers: you are not likely to improve much on the quality of those answers and you will only increase the pressure and tension while you are trying to finish the other questions with inadequate time remaining.


4. Read the questions very carefully looking for hints as to the particular issues the Examiner hopes you will discuss. Think about what the Examiner is asking you to do: what is the question about? It is not the quantity you write but how well you analyse the question and identify the relevant issues that will determine the quality of your answers. Do not waste time repeating the facts of the question or setting out the whole of the law on a topic when the question is only about part of it. Irrelevant material not only earns no marks but actually detracts from the quality of the answer as a whole.

5. Remember above all that the Examiner is particularly interested in how well you know the case law: always try to argue from named cases. Avoid merely listing a lot of case names: select the most relevant cases and show how and to what extent each one supports your argument. State the facts briefly, say which court decided the case (especially if it is a Court of Appeal or House of Lords decision) and indicate the process of reasoning which led the judges to decide the case in the way they did. (For example, did they decline to follow an earlier decision and, if so, why?) Even an ‘essay’ question will be looking for this sort of discussion of the case law.

6. It is very important to plan out your answer in a rough form (on separate pages) before you begin to write your answer. An essential technique is to write out a ‘shopping list’ of the points – and the cases – which you intend to cover. If there is a significant chronology in the question, make a list of the sequence of events with their dates/times. You should develop a logical order of presenting your points: many points will have to precede others. Ideally your lists should be on a piece of paper that you can refer to at all times while writing the answer without having to turn over pages in the answer book. If you do not make such lists, or do not have them where you can easily refer to them, you are bound to forget something.

7. Remember that arguments – the exploration of possibilities – are more important than conclusions, so you should not feel obliged to come down too firmly on one side nor should you be inhibited by the fact that you are not sure what the ‘correct’ answer is. It is in the nature of the English system of judicial precedent that there is nearly always room for argument about the scope of a previous ruling, even by the House of Lords, so that it is quite possible, even likely, that more than one view is tenable. It is far better to put forward a reasoned submission which the Examiner may perhaps disagree with than to try and dodge the issue by saying – as surprisingly many candidates do – ‘As the law is unclear (or, the authorities are conflicting) it will be for the court to decide’.

Make sure that you answer the question which the Examiner has asked. Think carefully about what the question asks of you and provide an answer to that question – not to a related (or even worse, unrelated) topic.

Enjoy your studies – and good luck.

Catharine MacMillan and Richard Stone.


Notes

Contents

Introduction 14

2 1 The offer 15

2 2 Communication of the offer 18

2 3 Acceptance of the offer 18

2 4 Communication of the acceptance 19

2 5 Exceptions to the need for communication of the acceptance 20

2 6 Method of acceptance 22

2 7 The end of an unaccepted offer 23



2 Offer and acceptance


Introduction

The law of contract is mainly about the enforcement of promises. Not all promises are enforced by courts. To enforce a set of promises, or an agreement, courts look for the presence of certain elements. When these elements are present a court will find that the agreement is a contract. This is a somewhat artificial process. To a certain extent, courts will find that some agreements simply look like contracts and they then reason backward – and find the elements necessary to form a contract.

As a student you need to be aware of the elements required to constitute an enforceable contract.

To say that we have a contract means that the parties have voluntarily assumed liabilities with regard to each other. The process of agreement begins with an offer. For a contract to be formed, this offer must be unconditionally accepted. The law imposes various requirements as to the communication of the offer and the acceptance. Once there has been a valid communication of the acceptance, the law requires that certain other elements (covered in Chapters 3 and 4 of this guide) are present.

If these elements are not present, a court will not find that a contract exists between the parties. In the absence of a contract, neither party will be bound to the tentative promises or agreements they have made. It is thus of critical importance to determine whether or not a contract has been formed.

Learning outcomesBy the end of this chapter and the relevant reading, you should be able to:

u explain what an offer is

u distinguish between an offer and other communications

u state when an offer has been communicated

u explain what a valid acceptance is (and is not)

u illustrate the necessity of communicating the acceptance

u indicate what the exceptions are to the necessity of communicating the acceptance

u explain what occurs when the offeror stipulates a certain method of acceptance

u state what happens to an offer which is not accepted

u illustrate when an offer expires.

Elements of the law of contract 2 Offer and acceptance page 15

2.1 The offer

Essential reading ¢ McKendrick, Chapter 3: ‘Offer and acceptance’ – up to 3.7 ‘Acceptance’, pp.26–34.

¢ Poole, Chapter 2: ‘Agreement’ – Section 1 ‘Subjectivity versus objectivity’ to Section 4 ‘Acceptance’, pp.17–36.

It is important to understand that it is not the subjective intentions of the parties that determine the legal effect of their words or actions but the objective inference from them. That is to say, the offer is interpreted according to an objective intention – the interpretation the reasonable person in the position of the offeree would place upon the statement or action of the offeror. This is crucial in answering the basic question ‘what is an offer?’ See Centrovincial Estates v Merchant Investors Assurance Company (1983) regarding the objective requirement.

An offer is an expression of willingness to contract on certain terms. It must be made with the intention that it will become binding upon acceptance. There must be no further negotiations or discussions required. The nature of an offer is encapsulated by two cases involving the same defendant, Manchester City Council. The Council decided to sell houses that it owned to sitting tenants. In two cases, the claimants entered into agreements with the Council. The Council then resolved not to sell housing unless it was contractually bound to do so. In these two cases the question arose as to whether or not the Council had entered into a contract.

In one case, Storer v Manchester City Council (1974), the Court of Appeal found that there was a binding contract. The Council had sent Storer a communication that they intended would be binding upon his acceptance. All Storer had to do to bind himself to the later sale was to sign the document and return it.

In contrast, however, in Gibson v Manchester City Council (1979), the Council sent Gibson a document which asked him to make a formal invitation to buy and stated that the Council ‘may be prepared to sell’ the house to him. Gibson signed the document and returned it. The House of Lords held that a contract had not been concluded because the Council had not made an offer capable of being accepted. Lord Diplock stated:

The words ‘may be prepared to sell’ are fatal… so is the invitation, not, be it noted, to accept the offer, but ‘to make formal application to buy’ on the enclosed application form. It is… a letter setting out the financial terms on which it may be the council would be prepared to consider a sale and purchase in due course.

An important distinction between the two cases is that in Storer’s case there was an agreement as to price, but in Gibson’s case there was not. In Gibson’s case, important terms still needed to be determined.

It is very important to realise from the outset that not all communications will be offers. They will lack the requisite intention to be bound upon acceptance. If they are not offers, what are they? At this point, we will distinguish an offer from other steps in the negotiation process. Other steps in the negotiation process might include a statement of intention, a supply of information or an invitation to treat. We will examine these in turn.

2.1.1 A statement of intentionIn this instance, one party states that he intends to do something. This differs from an offer in that he is not stating that he will do something. The case of Harris v Nickerson (1873) illustrates this point. The auctioneer’s advertisement was a statement that he intended to sell certain items; it was not an offer that he would sell the items.


2.1.2 A supply of informationIn this instance, one party provides information to another party. He supplies the information to enlighten the other party. The statement is not one that is intended to be acted upon. See also the case of Harvey v Facey (1893) where one party telegraphed, in response to the query of the other, what the lowest price was that he would accept for his property.

2.1.3 An invitation to treatThis is a puzzling term. An invitation to treat is an indication of a willingness to conduct business. It is an invitation to make an offer or to commence negotiations. Courts have considered whether or not a communication was an offer or an invitation to treat in a wide variety of circumstances.

You should examine the following instances where courts have found that the communication was not an offer but an invitation to treat.

a. A display of goods is generally an invitation to treat.

See Pharmaceutical Society v Boots (1953) (note the rationale behind treating the display as an invitation to treat rather than as an offer) and Fisher v Bell (1961). Where the display is made by a machine, the display will probably be an offer. See Thornton v Shoe Lane Parking (1971).

Activity 2.1 Your local grocery shop places a leaflet through your letterbox. On the leaflet is printed ‘Tomorrow only, oranges are at a special low, low price of 9p/kilo’.

Has the grocery shop made you an offer? If you visit the shop, must they sell you oranges at this price?

b. An advertisement is an invitation to treat.

See Partridge v Crittenden (1968) – the advertisement of a bilateral contract. The form of the contract will give rise to different results – Carlill v Carbolic Smoke Ball Company (1893) decided that an advertisement was a unilateral offer.

Figure 2.1 The advertisement for Carbolic Smoke Balls


Activity 2.2How were the facts of Carlill v Carbolic Smoke Ball different from the usual situation involving an advertisement?

c. A request for tenders is an invitation to treat and the tender is the offer. See Harvela Investments Ltd v Royal Trust Co of Canada Ltd (1985).

Note, however, that the invitation to treat may contain an implied undertaking to consider all conforming tenders, as in Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council (1990).

d. An auctioneer’s request for bids is an invitation to treat.

The bid is an offer; when the auctioneer brings his hammer down he has accepted the offer. In the case of auctions without a reserve price, the auctioneer enters into a collateral (or separate) contract. The nature of the collateral contract is that the auctioneer will accept the highest bid. See Warlow v Harrison (1859) and Barry v Davies (2000).

Self-assessment questions1. How does an invitation to treat differ from an offer?

2. Does a railway or airline timetable constitute an offer?

3. How do courts treat the display of goods in a shop window differently from a display in an automated machine?

SummaryA contract begins with an offer. The offer is an expression of willingness to contract on certain terms. It allows the other party to accept the offer and provides the basis of the agreement. An offer exists whenever the objective inference from the offeror’s words or conduct is that she intends to commit herself legally to the terms she proposes. This commitment occurs without the necessity for further negotiations. Many communications will lack this necessary intention and thus will not be offers. They may be statements of intention, supplies of information or invitations to treat. Although the distinction between an offer and other steps in the negotiating process is easy to state in theory, in practice, difficult cases arise.

Reminder of learning outcomesBy this stage you should be able to achieve the following learning outcomes:

u explain what an offer is

u distinguish between an offer and other communications (e.g. an invitation to treat, a request for information, a statement of intention).

Useful further reading ¢ Anson, pp.27–38.

¢ Unger, J. (1953) ‘Self-service shops and the law of contract’, 16 MLR 369.†

¢ Winfield (1939) ‘Some aspects of offer and acceptance’, 55 LQR 499.

† 16 MLR 369: This is a standard reference to volume 16 of the Modern Law Review. The article appears at page 369 of that volume.


2.2 Communication of the offer

Essential reading ¢ McKendrick, Chapter 3: ‘Offer and acceptance’ – 3.9 ‘Acceptance in ignorance of

the offer’, pp.35–36.

¢ Poole, Chapter 2: ‘Agreement’ – Section 4 B ‘Acceptance must be made in response to the offer’, pp.44–46.

To be effective, an offer must be communicated. Another way of stating this is to say that there can be no acceptance of the offer without knowledge of the offer. The reason for this requirement is that if we say that a contract is an agreed bargain, there can be no agreement without knowledge. There can be no ‘meeting of the minds’ if one mind is unaware of the other. Stated another way, an acceptance cannot ‘mirror’ an offer if the acceptance is made in ignorance of the offer.

The authorities are, however, divided on the need to communicate the offer. In the case of Gibbons v Proctor (1891) a policeman was allowed to recover a reward when he sent information in ignorance of the offer of reward. The better view is thought to be expressed in the Australian case of R v Clarke (1927):

there cannot be assent without knowledge of the offer; and ignorance of the offer is the same thing whether it is due to never hearing of it or forgetting it after hearing.

The case of Tinn v Hoffman (1873) deals with the problem of cross-offers.

Activity 2.3Was the decision in R v Clarke influenced by the consensus theory of contract?† Should it have been?

Activity 2.4How might the decision have been different if Clarke had been a poor but honest widow?

Reminder of learning outcomesBy this stage you should be able to achieve the following learning outcome:

u state when an offer has been communicated.


2.3 Acceptance of the offer

Essential reading ¢ McKendrick, Chapter 3: ‘Offer and acceptance’ – 3.7 ‘Acceptance’, pp.33–34.

¢ Poole, Chapter 2: ‘Agreement’ – Section 4 A ‘The mirror image rule’, pp.36–43.

For a contract to be formed, there must be an acceptance of the offer. The acceptance must be an agreement to each of the terms of the offer. It is sometimes said that the acceptance must be a ‘mirror image’ of the offer.

The acceptance can be by words or by conduct. See Brogden v Metropolitan Railway Company (1871), where the offeree accepted the offer by performance. More recent instances of acceptance by conduct can be found in Confetti Records v Warner Music UK Ltd (t/a East West Records) [2003] EWHC 1274 where Confetti Records sent Warner a music track and an invoice; this was an offer capable of acceptance by Warner’s conduct in producing an album which contained the track. In Day Morris Associates v Voyce [2003] EWCA Civ 189 it was held that an estate agent’s offer to market a property had been accepted

† See Chapter 1, section 1.4.3.


by the conduct of the client. The client’s conduct was allowing the agent to advertise the property and show large numbers of people around it.

Acceptance occurs when the offeree’s words or conduct give rise to the objective inference that the offeree assents to the offeror’s terms.

If the offeree attempts to add new terms when accepting, this is a counter-offer and not an acceptance. A counter-offer implies a rejection of the original offer, which is thereby destroyed and cannot subsequently be accepted. See Hyde v Wrench (1840).

Where the offeree queries the offer and seeks more information, this is neither an acceptance nor a rejection and the original offer stands. See Stevenson, Jacques & Co v McLean (1880).

In some cases, the parties will attempt to contract on (differing) standard forms. In this instance, there will be a ‘battle of the forms’ with offers and counter-offers passing to and fro. The Court of Appeal has held that the ‘last shot’ wins this ‘battle of the forms’. See Butler Machine Tool v Ex-Cell-o (1979).

Activity 2.5A wrote to B offering 300 bags of cement at £10 per bag. B wrote in reply that she was very interested but needed to know whether it was Premium Quality cement.

The following morning, soon after A read B’s letter, B heard a rumour that the price of cement was about to rise. She immediately sent a fax to A stating, ‘Accept your price of £10 for Premium Quality’. Assuming that the cement actually is Premium Quality, is there a contract? (If so, does the price include delivery?) Explain your reasoning.

Activity 2.6What is the position under the ‘last shot rule’ if, after the exchange of forms, the seller fails to deliver the goods?


u explain what a valid acceptance is (and is not).


2.4 Communication of the acceptance

Essential reading ¢ McKendrick, Chapter 3: ‘Offer and acceptance’ – 3.8 ‘Communication of the

acceptance’, 3.10 ‘Prescribed method of acceptance’ and 3.11 ‘Acceptance by silence’, pp.34–35, 36–37.

¢ Poole, Chapter 2: ‘Agreement’ – Section 4 ‘Acceptance’, pp.36–59.

The general rule is that acceptance is not effective until it is communicated to the offeror. This is sometimes expressed by saying that the acceptance cannot be made through silence. See Felthouse v Bindley (1862). The offeror cannot waive communication if that would be to the detriment of the offeree.

Activity 2.7You offer to buy a kilo of oranges from your local shop for 9p. Nothing further is said, nor do you receive any written correspondence. The next day, however, a kilo of oranges arrives at your house from the local shop. Is there a valid acceptance of the contract? Has there been a communication of the acceptance?

See Brogden v Metropolitan Railway Company (1871).


In the case of a unilateral contract,† Carlill v Carbolic Smoke Ball Company (1893) establishes that the performance is the acceptance and there is no need to communicate the attempt to perform. Communication of the acceptance is waived because it would be unreasonable of the offeror to rely on the absence of a communication which would have been superfluous or which no reasonable person would expect to be made.

Self-assessment questions1. What was the detriment to the offeree in Felthouse v Bindley?

2. Could an offeror use this case to avoid liability?


u illustrate the necessity of communicating the acceptance.


2.5 Exceptions to the need for communication of the acceptance

Essential reading ¢ McKendrick, Chapter 3: ‘Offer and acceptance’ – 3.12 ‘Exceptions to the rule

requiring communication’, pp.37–40.

¢ Poole, Chapter 2: ‘Agreement’ – Section 4 D ‘Communication of the acceptance to the offeror’, pp.46–59.

As we saw above, the general rule is that for an acceptance to be valid it must be communicated to the offeror. It must be brought to the offeror’s attention. To this general rule there are certain exceptions – situations where the law does not require communication of the acceptance. The principal exception is the postal acceptance rule.

2.5.1 Where the offeror has waived the requirement of communicationAs we have seen above, in certain circumstances the offeror may waive the necessity for communication. This is what occurred in Carlill v Carbolic Smoke Ball Co.

A weakness to this exception is that it appears to be of limited application where there is a bilateral contract. In Felthouse v Bindley, the argument can be made that the uncle had clearly waived any need for the nephew to communicate his acceptance of the offer and yet the court held that the offer had not been accepted.

2.5.2 The postal acceptance ruleCommunication by post gives rise to special practical difficulties. An offer is posted. The offeree receives the offer and posts her acceptance. The letter of acceptance will take several days to arrive. At what point is the acceptance good? If one waits until the offeror receives the letter, how will the offeree know when this is? The offeree has known from the time she posted the letter that she has accepted the offer. There is also the occasional problem of the letter that never arrives at its destination.

To overcome these problems, the courts devised an exception to the general requirement of communication (which would have been that the acceptance is only good when the letter arrives). The exception was devised in the cases of Adams v Lindsell (1818) and Household Fire Insurance v Grant (1879).

These decisions establish the ‘postal acceptance rule’, that is, that acceptance is complete when posted. This puts the risk of delay and loss on the offeror. It is important to understand that the rule is an exception to the general rule requiring communication.

† Unilateral contract: one where one party makes an offer if the other party does something, but the other party need not agree to do that thing. An example would be offering a reward for information about a crime.


The postal acceptance rule will only prevail in certain circumstances. It will prevail where use of the post was reasonably contemplated by the parties or stipulated by the offeror. See Household Fire Insurance v Grant (1879).

It may be that the post is the only reasonable form of communication available. See Henthorn v Fraser (1892).

The operation of the postal acceptance rules creates practical difficulties. The greatest problem is that contracts can be formed without the offeror being aware of the contract. For example, an offeror makes an offer. Unbeknown to him, the offeree accepts. The offeror then revokes the offer before receiving the postal acceptance. The offeror contracts with another party over the same matter – and then receives the postal acceptance from the original offeree. The offeror is now in breach of his contract with the original offeree.

Partly because of these problems and partly because of technological advances (the post is no longer a such crucial method of communication), courts seem to be confining the scope of the postal acceptance rule. This is a rationale behind the decision in Holwell Securities v Hughes (1974). In this case, the postal acceptance rule did not apply because the offeror did not intend that it would apply. While this case is authority for the proposition that the terms of an offer must be met for acceptance to be valid, it also illustrates the reservations modern courts have over the postal acceptance rule.

As modern forms of communication such as fax and email have become almost instantaneous, courts have shown a marked reluctance to extend the postal acceptance rule to these new forms of communication. However, in an early case involving a telegram, a form of the postal acceptance rule was applied. See Bruner v Moore (1903).

In later cases involving telexes, the courts refused to extend the application of the postal acceptance rules. See Entores v Miles Far East Corp (1955) and Brinkibon Ltd v Stahag Stahl (1982).

These cases are also important for the principles they establish with respect to instantaneous forms of communication.

English contract law awaits a case involving an almost instantaneous communication – such as a fax or an email. It is clear that a contract can be formed through such mediums (see, for example, Allianz Insurance Co-Egypt v Aigaion Insurance Co SA [2008] EWCA Civ 1455). Because of the technology involved in both these forms of communication they are not entirely instantaneous. An email, in particular, may take some time to arrive at its destination, depending upon the route it takes to its recipient. As Poole has suggested (2.6.5.4 Electronic means of communication) there are two possible approaches to the email communication of the acceptance: postal analogy or receipt rule.

Activity 2.8What rules do you think courts should adopt for communication by fax or email?

Self-assessment questions1. What reasons have been given by the courts for the postal acceptance rule?

2. A posts a letter offering to clean B’s house. B posts a letter accepting A’s offer. Later in the day, B’s house burns down and B now no longer needs a house cleaner. B immediately posts a letter to A rejecting A’s offer. Both of B’s letters arrive at the same time. Is there a contract or not? See Countess of Dunmore v Alexander (1830).

3. In what circumstances will the postal acceptance rules not operate?

4. When, if ever, can an offeror waive the need for communication?


SummaryFor a contract to be formed, the acceptance of an offer must be communicated. There are exceptions to this general rule. The most significant of these exceptions is the postal acceptance rule. The postal acceptance rule is, however, something of an anachronism in the modern world and is unlikely to be extended in future cases.


u indicate what the exceptions are to the necessity of communicating the acceptance.


¢ Hudson, A. (1966) ‘Retraction of letters of acceptance’, 82 LQR 169.

¢ Gardner, S. (1992) ‘Trashing with Trollope: a deconstruction of the postal rules’, 12 OJLS 170.

2.6 Method of acceptance

Essential reading ¢ McKendrick, Chapter 3: ‘Offer and acceptance’ – 3.10 ‘Prescribed method of

acceptance’, pp.35–36.

¢ Poole, Chapter 2: ‘Agreement’ – Section 4 D ‘Communication of the acceptance to the offeror’, pp.46–59.

Sometimes an offeror may stipulate that acceptance is to be made using a specific method. See Eliason v Henshaw (1819) and Manchester Diocesan Council for Education v Commercial and General Investments (1970).

In other cases the required method for communicating acceptance may also be inferred from the making of the offer. See Quenerduaine v Cole (1883).

The problem that arises is this: if the offeree uses another method of acceptance, does this acceptance create a contract? The answer is that if the other method used is no less advantageous to the offeror, the acceptance is good and a contract is formed. This is the result unless the offeror stipulates a certain method of acceptance and further stipulates that only this method of acceptance is good. See Manchester Diocesan Council for Education v Commercial and General Investments (1970).

Self-assessment questions1. Where a method of acceptance has been prescribed by the offeror:

a. May the offeree choose to use another (equally effective) method of communicating his acceptance?

b. What does equally effective mean?

c. Whose interest should prevail?

2. Can an offer made by fax be accepted by letter?

SummaryIf an offeror intends that a certain method of acceptance is to be used, he must stipulate this method and that only an acceptance using this method is to be used. If he only stipulates a method, an offeree can use another method provided that the other method is no less advantageous than the method stipulated.



u explain what occurs when the offeror stipulates a certain method of acceptance.


2.7 The end of an unaccepted offer

Essential reading ¢ McKendrick, Chapter 3: ‘Offer and acceptance’ – 3.13 ‘Acceptance in unilateral

contracts’ to 3.14 ‘Termination of the offer’, pp.40–42.

¢ Poole, Chapter 2: ‘Agreement’ – Section 5 ‘Revocation of an offer’, pp.59–67.

Offers do not exist indefinitely, open for an indeterminate time awaiting acceptance. Indeed, some offers may never be accepted. What we will consider at the conclusion of this chapter is what happens to an offer before it has been accepted. There is no legal commitment until a contract has been concluded by the acceptance of an offer.

2.7.1 Change of mindBecause there is no legal commitment until a contract has been formed, either party may change their mind and withdraw from negotiations. See Offord v Davies (1862) and Routledge v Grant (1828).

In situations where an offeror has stipulated that the offer will be open for a certain time period, he or she can nevertheless withdraw the offer within this time period. This will not be the case, however, where the offeror is obliged (by a separate binding collateral contract) to keep the offer open for a specified period of time.

For the revocation of an offer to be effective, there must be actual communication of the revocation. See Byrne v van Tienhoven, 1880.

It is not necessary for revocation to be communicated by the offeror. Communication to the offeree through a reliable source is sufficient. See Dickinson v Dodds (1876).

Activity 2.9Your neighbour offers to sell you her car for £10,000. She tells you to ‘think about it and let me know by Monday’. On Saturday, she puts a note under your door to say ‘forget it – I want to keep my car’. Can she do this? Explain.

By what process must the offeror of a unilateral contract revoke his offer? The problem of an appropriate process exists when the offer is made to the world. In this situation, what must the offeror do to alert ‘the world’? English law provides no answer to this question, but see Shuey v USA (1875).

If the offeree rejects an offer, it is at an end. See Hyde v Wrench (1840).

Different problems arise when it is the offeree who changes his or her mind. For example, if after posting a letter of acceptance, the offeree informs the offeror by telephone, before the letter arrives, that they reject the offer, should the act of posting an acceptance prevail over the information actually conveyed to the offeror? In the absence of English cases the books refer to a number of cases from other jurisdictions – see Dunmore v Alexander (1830) (Scotland) and Wenkheim v Arndt (1873) (New Zealand) but when citing them, it is important to emphasise that they are not binding – and indeed have very little persuasive authority. The question must therefore be answered primarily as a matter of principle. Treitel suggests that ‘the issue is whether the offeror would be unjustly prejudiced by allowing the offeree to rely on the subsequent revocation’ (p.27).


2.7.2 If a condition in the offer is not fulfilled, the offer terminatesWhere the offer is made subject to a condition which is not fulfilled, the offer terminates. The condition may be implied. See Financings Ltd v Stimson (1962). In this case, the offeror purported to accept an offer to purchase a car after the car had been badly damaged.

2.7.3 Death: if the offeror dies, the offer may lapseAgain, a point on which the cases divide. On the one hand, Bradbury v Morgan (1862) 158 ER 877 (Ex) held that the deceased offeror’s estate was liable on the offer of a guarantee after the death of the offeror. However, obiter dicta in Dickinson v Dodds (1876) state that death of either party terminated the offer because there could be no agreement. The best view is probably that a party cannot accept an offer once notified of the death of the offeror but that in certain circumstances the offer could be accepted in ignorance of death. The death of an offeree probably terminates the offer in that the offeree’s personal representatives could not purport to accept the offer.

2.7.4 Lapse of an offerThe offeror may set a time limit for acceptance; once this time has passed the offer lapses. In many cases, the offeror can revoke the offer before the time period lapses provided that the offer has not been accepted. See Offord v Davies (1862).

In cases in which no time period is stipulated for the offer, an offeree cannot make an offeror wait forever. The offeror is entitled to assume that acceptance will be made within a reasonable time period or not at all. What a reasonable time period is will depend upon the circumstances of the case. See Ramsgate Victoria Hotel v Montefiore (1866).

Self-assessment questions1. Why can the offeror break his or her promise to keep the offer open for a stated

time?

2. In a unilateral contract which is accepted by performance, when has the offeree started to perform the act (so as to prevent revocation by the offeror)? Does the offeror need to know of the performance?

3. How can the offeror inform all potential claimants that the offer of a reward has been cancelled?

4. Will there be a contract if the offeree posts a letter rejecting the offer but then informs the offeror by telephone, before the letter arrives, that he accepts the offer?

5. What is the purpose of implying that the offer is subject to a condition?

SummaryUntil an offer is accepted, there is no legal commitment upon either party. Up until acceptance, either party may change their mind. An offeror may revoke an offer or an offeree may reject an offer.

u An unaccepted offer expires either:

u at the end of any time period stipulated, or

u within a reasonable time period where no time period is stipulated.

u An offer will lapse where it is made on an unfulfilled condition.

u An offer may lapse when the offeror dies.



u state what happens to an offer which is not accepted

u illustrate when an offer expires.


Examination adviceThe detailed rules of offer and acceptance provide a ready source of problems and difficulties on which an Examiner can draw. Here are some examples.

u Is a particular statement an offer or an invitation to treat?

u Is there a counter-offer or is it merely an enquiry?

u When does a posted acceptance fall outside the postal rule?

u Was the offeror or offeree free to have second thoughts?

u When is a telephone call recorded on an answering machine actually received?

u When is an email received?

There are also several everyday transactions where the precise contractual analysis is not immediately apparent – the motorist filling up with petrol (gas), the passenger riding on a bus, the tourist buying a ticket for the Underground (subway) from a machine and so on. The fact that some of these problems are not covered by authority does not make them any less attractive to an examiner – indeed, the opposite might well be the case. The key to most problems of offer and acceptance is the idea that the law should give effect to actual communication wherever possible.

Sample examination questionsQuestion 1 Alice wrote to Bill offering to sell him a block of shares in Utopia Ltd. In her letter, which arrived on Tuesday, Alice asked Bill to ‘let me know by next Saturday’. On Thursday Bill posted a reply accepting the offer. At 6pm on Friday he changed his mind and telephoned Alice. Alice was not there but her telephone answering machine recorded Bill’s message stating that he wished to withdraw his acceptance.

On Monday Alice opened Bill’s letter, which arrived that morning, and then played back the message on the machine.

Advise Alice.

Question 2 Cyril, a stamp dealer, had a rare Peruvian 5 cent blue for sale. He wrote to Davina, a collector who specialises in Peruvian stamps, asking whether she would be interested in purchasing it. Davina wrote in reply, ‘I am willing to pay £500 for the “blue”; I will consider it mine at that price unless I hear to the contrary from you and will collect it from your shop on Friday next week.’

Advise Davina as to the legal position:

a. if Cyril disregarded Davina’s letter and sold the stamp to Eric for £600

b. if Cyril put the stamp on one side in an envelope marked ‘Sold to Davina’ but Davina decided that she no longer wished to buy it.

Advice on answering the questionsQuestion 1 It is important to break the question down into its constituent issues. You are considering each of these issues with a view to determining whether or not a contract has been formed. Bill will argue that he is not obliged to purchase the shares because no contract has been formed.


The issues are:

a. What is the effect of Alice writing to Bill to offer to sell him shares?

b. What is the effect of Alice’s stipulation as to the time the offer is open?

c. What is the effect of Bill’s posting a reply?

d. What is the effect of Bill’s change of mind? Is there effective communication when a message is left on an answering machine?

e. Which of Bill’s two communications is determinative?

When the issues are listed in this form it is apparent that the biggest issue is whether or not a contract has been formed. This is dependent upon whether Alice’s offer has been accepted. This, in turn, depends upon whether Bill has communicated his acceptance or his rejection.

We will examine these issues in turn.

a. Alice’s letter appears to be an offer within the criteria of Gibson v Manchester City Council and Storer v Manchester City Council. You should outline these criteria and apply them to the facts – sometimes the designation of an ‘offer’ in a problem question or in everyday life turns out not to be an offer in the legal sense.

b. Alice’s stipulation that the offer is open for one week is not binding (apply the criteria in Offord v Davies) unless there is a separate binding contract to hold the offer open. There does not appear to be such a separate binding agreement.

c. Because Bill posts his letter of acceptance, we need to consider whether or not the postal acceptance rules apply. Consider the criteria in Household Fire Insurance v Grant. Does the case apply here? In the circumstances, it probably does. Alice has initiated communications by post and thus probably contemplates that Bill will respond by post. In these circumstances, the acceptance is good when Bill posts the letter – it is at this point that a contract is formed. It does not matter that the letter does not arrive until Monday (at which point the offer will have expired, given Alice’s stipulation as to the time period).

A possible counter argument to this is that Alice asked Bill to let her know by Saturday – and this ‘let me know’ means that there must be actual knowledge of his acceptance – that it must really be communicated. This necessity for actual communication means that Bill’s acceptance is not good until Monday when Alice actually opens the letter. To apply this counter argument, one needs to consider the criteria set out in Holwell Securities v Hughes. One might also note that since that decision, courts are reluctant to extend the ambit of the postal acceptance rule.

d. Bill changes his mind. Here there is no authority as to the effect of his change of mind. In addition, given the two possible positions in point (c) above, two possible outcomes exist. If the postal acceptance rules apply, then a contract has been formed and Bill’s later change of mind cannot upset this arrangement. However, this seems a somewhat absurd result since Alice learns almost simultaneously of the acceptance and the rejection. Bill has attempted to reject the offer by a quicker form of communication than the post. In these circumstances, you could apply the reasoning of Dunmore v Alexander and state that no contract has been formed between the parties. In addition, given the reservations of the court in Holwell Securities v Hughes, it seems improbable that a court would rely upon the postal acceptance rule, an unpopular exception to the necessity for communication, to produce an absurd result. The second possible outcome here is that the postal acceptance rules never applied and no contract could be formed until Alice opened the letter. Since she received the rejection at almost the same time, she is no worse off (see reasoning above) by not having a contract. You might also wish to consider the application of the rules for instantaneous communications in Entores v Miles Far East Corp and Brinkibon v Stahag Stahl. Should the communication made by telephone be deemed to have been the first received? If so, there is no contract.


e. This is really the answer to the question. For the reasons stated above, the rejection should be determinative. Accordingly, no contract arises in this situation and Bill is not obliged to buy the shares in Utopia Ltd.

Question 2 Note at the outset that in two-part questions such as this you must answer both parts (unless clearly instructed that candidates are to answer either a or b).

Again, your approach should be to break down the question into its constituent parts:

u The effect of Cyril’s letter – is it an offer or an invitation to treat?

u The effect of Davina’s letter – is it an acceptance? Does the postal acceptance rule apply? Is Davina’s letter a statement of intention?

u Is Davina’s letter an offer? Can she waive the necessity for the communication of the acceptance?

By considering these issues, you can determine whether a contract has been formed or not. With respect to part (a), if a contract has been formed, then Cyril is in breach of this contract when he sells the stamp to Eric. You need to consider whether Cyril has made an offer – has he exhibited a willingness to commit on certain terms within Storer v Manchester City Council (1974)? Or is his communication an invitation to treat or a step in the negotiation of a contract? If his letter is an offer, it seems reasonable that he expects an acceptance by post and the postal acceptance rules will apply: Household Fire Insurance v Grant (1879).

On balance, it seems unlikely that his letter is an offer – it is phrased in terms that seek to elicit information and not to be binding upon further correspondence from Davina. Davina may have made an offer and waived the necessity for further communication – see Felthouse v Bindley (1862). It is, however, possible that either Davina never made an offer to buy the stamp (she was merely giving an indication of her top price) or that Cyril never accepted the offer. In these circumstances, no contract has been formed with Davina and Cyril is free to sell the stamp.

With regard to part (b), if Davina has (and can, given the law in this area – see Felthouse v Bindley (1862)) made an offer, then Cyril has (if possible) accepted the offer when he takes the step of setting aside the stamp. In these circumstances, a contract has been formed and Davina is obliged to buy the stamp. There are, however, significant weaknesses in reaching this conclusion – primarily that she seems to be indicating the top price she would pay for the stamp and that following Felthouse v Bindley (1862) she cannot waive the necessity for communication of the acceptance.


Reflect and review

Look through the points listed below. Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to move on

Need to revise first

Need to study again

I can explain what an offer is. ¢ ¢ ¢

I can distinguish between an offer and other communications.

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I can state when an offer has been communicated.

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I can explain what a valid acceptance is (and is not).

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I can illustrate the necessity of communicating the acceptance.

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I can indicate what the exceptions are to the necessity of communicating the acceptance.

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I can explain what occurs when the offeror stipulates a certain method of acceptance.

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I can state what happens to an offer which is not accepted.

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I can illustrate when an offer expires. ¢ ¢ ¢

If you ticked ‘need to revise first’, which sections of the chapter are you going to revise?

Must revise

Revision done

2.1 The offer ¢ ¢

2.2 Communication of the offer ¢ ¢

2.3 Acceptance of the offer ¢ ¢

2.4 Communication of the acceptance ¢ ¢

2.5 Exceptions to the need for communication of the acceptance

¢

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2.6 Method of acceptance ¢ ¢

2.7 The end of an unaccepted offer ¢ ¢

Contents

Introduction 30

3 1 Consideration 31

3 2 Promissory estoppel 37



3 Consideration


Introduction

The concept of ‘consideration’ is the principal way in which English courts decide whether an agreement that has resulted from the exchange of offer and acceptance (as explained in Chapter 2) should be legally enforceable. It is only where there is an element of mutuality about the exchange, with something being given by each side, that a promise to perform will be enforced. A promise to make a gift will not generally be treated as legally binding. One way of regarding consideration is as an indication of the fact that the parties intended their agreement to be legally binding, although in some cases the courts also apply a separate test of ‘intention to create legal relations’, as discussed in Chapter 4. The doctrine of consideration, while still central to the English law of contract, has been applied with some flexibility in recent years. There is also a significant exception to it, based around the concept of ‘reasonable reliance’ and usually referred to as the doctrine of ‘promissory estoppel’. This applies mainly to the variation of existing legal obligations.


u state the essential elements of the concept of ‘consideration’

u explain the significance of consideration to the English law of contract

u give examples of the types of behaviour which the courts will, or will not, treat as valid consideration

u describe the situations where the performance of, or promise to perform, an existing obligation will amount to consideration for a fresh promise

u define ‘past consideration’

u explain the role of consideration in the modification of existing contracts

u state the essential elements of the doctrine of ‘promissory estoppel’

u explain how the doctrine of promissory estoppel leads to the enforcement of some promises which are not supported by consideration.

Elements of the law of contract 3 Consideration page 31

3.1 Consideration

Essential reading ¢ McKendrick, Chapter 5: ‘Consideration and form’ – 5.1 ‘Requirements of form’ to

5.21 ‘The role of consideration’, pp.61–88.

¢ Poole, Chapter 4: ‘Consideration, promissory estoppel and form’ – Section 1 ‘Consideration’, pp.129–160.

The function of ‘consideration’ is to give what McKendrick calls the ‘badge of enforceability’ to agreements. This is particularly important where the agreement involves a promise to act in a particular way in the future. In exchanges where there is an immediate, simultaneous transfer of, for example, goods for money (as in most everyday shop purchases), the doctrine of consideration applies in theory but rarely causes any practical problems. It is where somebody says, for example, ‘I will deliver these goods next Thursday’ or ‘I will pay you £1,000 on 1 January’ that it becomes important to decide whether that promise is ‘supported by consideration’ (that is, something has been given or promised in exchange). A promise to make a gift at some time in the future will only be enforceable in English law if put into a special form, that is, a ‘deed’. (For the requirements of a valid deed, see Law of Property (Miscellaneous Provisions) Act 1989.) Where a promise for the future is not contained in a deed, then consideration becomes the normal requirement of enforceability.

3.1.1 The definition of consideration

Essential reading ¢ McKendrick, Chapter 5: ‘Consideration and form’ – 5.2 ‘Consideration defined’ to

5.4 ‘Consideration and motive’, pp.61–68.

¢ Poole, Chapter 4: ‘Consideration, promissory estoppel and form’ – Section 1 A ‘What is consideration’ and B ‘Consideration distinguished from a condition imposed on recipients of gifts’, pp.129–130.

Look at the traditional definition of consideration as set out in Currie v Misa (1875):

a valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss of responsibility given, suffered or undertaken by the other.

You will see that it is based around the concept of a ‘benefit’ to the person making the promise (the promisor), or a ‘detriment’ to the person to whom the promise is made (the promisee). Either is sufficient to make the promise enforceable, though in many cases both will be present.

This is generally quite straightforward where one side performs its part of the agreement. This performance can be looked at as detriment to the party performing and a benefit to the other party, thus providing the consideration for the other party’s promise. More difficulty arises where the agreement is wholly ‘executory’ (that is, it is made by an exchange of promises, and neither party has yet performed). It is clear that English law treats the making of a promise (as distinct from its performance) as capable of being consideration – see the statement of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (1915) p.855. Thus, in a wholly executory contract, the making of the promise by each side is consideration for the promise made by the other side (so rendering both promises enforceable). This leads to a circular argument. A promise cannot be a detriment to the person making it (or a benefit to the person to whom it is made) unless it is enforceable. But it will only be enforceable if it constitutes such a detriment (or benefit). For this reason it is perhaps better to regard the doctrine of consideration as simply requiring ‘mutuality’ in the agreement (that is, something being offered by each side to it) rather than trying to analyse it strictly in terms of ‘benefits’ and ‘detriments’.


Activity 3.1Suppose that A arranges for B to clean A’s windows, and promises to pay B £30 for this work. B does the work. How does the analysis of ‘benefit’ and ‘detriment’ apply in identifying the consideration supplied by B for A’s promises of payment?

Activity 3.2As in 3.1, but this time A pays the £30 immediately, and B promises to clean the windows next Tuesday. What is the consideration for B’s promise?

Activity 3.3As in 3.1, but A and B arrange for the windows to be cleaned next Tuesday, with A paying £30 on completion of the work. Suppose B does not turn up on Tuesday. Is B in breach of contract?

3.1.2 Consideration must be ‘sufficient’ but need not be ‘adequate’

Essential reading ¢ McKendrick, Chapter 5: ‘Consideration and form’ – 5.4 ‘Consideration and

motive’ to 5.8 ‘Intangible returns’, pp.69–70.

¢ Poole, Chapter 4: ‘Consideration, promissory estoppel and form’ – Section 1 C ‘Consideration must be sufficient but need not be adequate’, pp.131–152.

The requirement that consideration must be ‘sufficient’ means that what is being put forward must be something which the courts will recognise as legally capable of constituting consideration. The fact that it need not be ‘adequate’ indicates that the courts are not generally interested in whether there is a match in value between what is being offered by each party. Thus in Thomas v Thomas (1842) the promise to pay £1 per annum rent was clearly ‘sufficient’ to support the promise of a right to live in a house: the payment of, or promise to pay, money is always going to be treated as being within the category of valid consideration. On the other hand, the fact that £1 per annum was not a commercial rent was irrelevant, because the courts do not concern themselves with issues of ‘adequacy’.

Consider the case of Chappell v Nestlé (1960). You will see that Lord Somervell justifies the courts’ approach to the issue of ‘adequacy’ by reference to ‘freedom of contract’: ‘A contracting party can stipulate for what consideration he chooses’. The courts will not interfere just because it appears that a person has made a bad bargain. The person may have other, undisclosed, reasons for accepting consideration that appears inadequate. In the case of Chappell v Nestlé the reasoning was presumably that the requirement to send in the worthless wrappers would encourage more people to buy the company’s chocolate.

It is sometimes suggested that consideration will not be sufficient if it has no economic value. This explains White v Bluett (1853) where a son’s promise to stop complaining to his father about the distribution of the father’s property was held to be incapable of amounting to consideration. But it is difficult to see that the wrappers in Chappell v Nestlé had any economic value either.

Activity 3.4Read the case of Ward v Byham (1956). Identify the consideration supplied by the mother. Does the consideration meet the requirement of having economic value?

Activity 3.5Read the case of Edmonds v Lawson (2000). What consideration was supplied by the pupil barrister? Does the consideration meet the requirement of having economic value?


3.1.3 Existing obligations as good consideration

Essential reading ¢ McKendrick, Chapter 5: ‘Consideration and form’ – 5.10 ‘Performance of a duty

imposed by law’ to 5.15 ‘Party payment of a debt’, pp.73–81.


¢ Chen-Wishart, M. ‘Consideration: practical benefit and the Emperor’s new clothes’, Elements of the law of contract Study pack.

There are three aspects to this topic, dealing with three different types of existing obligation which may be argued to constitute ‘consideration’.

1. Obligations which arise under the law, independently of any contract.

2. Obligations which are owed under a contract with a third party.

3. Obligations which exist under a contract with a person who has made a new promise, for which the existing obligation is alleged to provide good consideration.

The third situation is, essentially, concerned with the variation of existing contractual obligations as between the parties and the extent to which such variations can become binding.

These three situations will be considered in turn. (Note that McKendrick deals with the second and third situation in the reverse order to that adopted here.)

An example of the first type of existing obligation would be where a public official (such as a firefighter or a police officer) agrees to carry out one or more of their duties in return for a promise of payment from a member of the public. In that situation the promise of payment will not generally be enforceable. This is either because there is no consideration for the promise (the public official is only carrying out an existing duty) or, more probably, because public policy generally suggests that the law should not encourage the opportunities for extortion that enforcing such a promise would create.

Where, however, the official does more than is required by the existing obligation, then the promise of payment will be enforceable, as shown by Glasbrook Bros Ltd v Glamorgan CC (1925).

Activity 3.6In Collins v Godefroy (1831), why was the promise of payment unenforceable?

Activity 3.7In Ward v Byham (1956), why was the father’s promise enforceable?

In the second type of situation, which regards the performance of, or promise to perform, an existing obligation owed under a contract with a third party, the position is much more straightforward. The courts have consistently taken the view that this can provide good consideration for fresh promise, whether the context is ‘domestic’ or ‘commercial’. Thus it has been applied to the fulfilling of a promise to marry (Shadwell v Shadwell (1860) – such a promise at the time being legally binding) and to the unloading of goods by a firm of stevedores,† despite the fact that the firm was already obliged to carry out this work under a contract with a third party (The Eurymedon (1975)). The fact that the promise to perform the existing obligation, as well as its actual performance, can constitute good consideration was confirmed by the Privy Council in Pao On v Lau Yiu Long (1980).

The third type of existing obligation – that owed under a contract with the party making the new promise – is the most difficult to deal with. This results from the fact that a principle which was clear, though impractical in some circumstances, has now been modified, but the extent of the modification is unclear. There are two particular cases on this area which it is important you should read in full – Stilk v Myrick (1809) and Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991).

† Stevedores: dock workers who load and unload ships.


Photo: Williams v Roffey Brothers – Twynholme Mansion (photo © C. MacMillan 2003)

Stilk v Myrick was long accepted as establishing the principle that the performance of an existing contractual obligation could never be good consideration for a fresh promise from the person to whom the obligation was owed. The sailors’ contract obliged them to sail the ship back home. Thus in bringing the ship back to London they were doing nothing more than they were already obliged to do under their original contract. This could not be good consideration for a promise of additional wages.

Activity 3.8What other explanation can there be for the decision in Stilk v Myrick?

Activity 3.9How can Stilk v Myrick be distinguished from the factually similar case of Hartley v Ponsonby (1857), where the recovery of additional payments was allowed?

The Court of Appeal’s decision in Williams v Roffey raised the question of whether Stilk v Myrick could still be said to be good law. The plaintiff carpenters, in completing the work on the flats, appeared to be doing no more than they were already obliged to do under their contract with the defendants.

How could this constitute consideration for the defendants’ promise of additional payment? The application of Stilk v Myrick would point to the promise being unenforceable.

Yet the Court of Appeal held that the plaintiffs should be able to recover the promised extra payments for the flats which they had completed. The Court came to this conclusion by giving consideration a wider meaning than had previously been thought appropriate. In particular, Glidewell LJ pointed to the ‘practical benefits’ that would be likely to accrue to the defendants from their promise of the additional money. They would be:

u ensuring that the plaintiffs continued work and did not leave the contract uncompleted

u avoiding a penalty clause which the defendants would have had to pay under their contract with the owners of the block of flats

u avoiding the trouble and expense of finding other carpenters to complete the work.


The problem is that very similar benefits to these could be said to have accrued to the captain of the ship in Stilk v Myrick. The main point of distinction between the cases then becomes the fact that no pressure was put on the defendants in Williams v Roffey to make the offer of additional payment. In other words, the alternative explanation for the decision in Stilk v Myrick, as outlined in the feedback to Activity 3.8, above, is given much greater significance. The effect is that it will be much easier in the future for those who act in response to a promise of extra payment, or some other benefit, by simply doing what they are already contracted to do, to enforce that promise.

You should note that Glidewell LJ summarises the circumstances where, in his view, the ‘practical benefit’ approach will apply in six points, which relate very closely to the factual situation before the court and emphasise the need for the absence of economic duress or fraud. There is no reason, however, why later courts should be restricted by these ‘criteria’ in applying the Williams v Roffey approach.

Williams v Roffey has not affected the related rule that part payment of a debt can never discharge the debtor from the obligation to pay the balance. This rule does not derive from Stilk v Myrick but from the House of Lords decision in Foakes v Beer (1884). As with the general rule about existing obligations, if something extra is done (for example, paying early, or giving goods rather than money), then the whole debt will be discharged (as held in Pinnel’s Case (1602)). But payment of less than is due on or after the date for payment will never provide consideration for a promise to forgo the balance. In Foakes v Beer the House of Lords held, with some reluctance, that the implication of the rule in Pinnel’s Case was that Mrs Beer’s promise to forgo the interest on a judgment debt, provided that Dr Foakes paid off the main debt by instalments, was unenforceable.

This rule has been regarded with some disfavour over the past 100 years and in some circumstances its effect can be avoided by the doctrine of promissory estoppel (discussed below, at 3.2). It might have been thought that the extension of the scope of consideration in Williams v Roffey would have provided the opportunity for a revised view of Foakes v Beer. After all, in many situations it may be to the creditor’s ‘practical benefit’ to get part of the debt, rather than to run the risk of receiving nothing at all. In Re Selectmove (1995), however, the Court of Appeal held that Williams v Roffey had no impact on the Foakes v Beer principle. That principle has also subsequently been confirmed by the Court of Appeal in Ferguson v Davies (1997).

In South Caribbean Trading Ltd (‘SCT’) v Trafigura Beeher BV [2004], however, Colman J (paras.106–09 of the judgment) doubted the correctness of the decision in Williams v Roffey. He noted that the decision was inconsistent with the long-standing rule that consideration must move from the promisee.

Activity 3.10Read the case of Foakes v Beer, preferably in the law reports – (1884) 9 App Cas 605 (although extracts do appear in Poole). Which of the judges expressed reluctance to come to the conclusion to which they felt the common law (as indicated by Pinnel’s case) bound them? What was the reason for this reluctance?

Activity 3.11Why do you think that the Court of Appeal has been reluctant to overturn the decision in Foakes v Beer?

3.1.4 Past consideration

Essential reading ¢ McKendrick Chapter 5: ‘Consideration and form’ – 5.16 ‘Performance of a duty

imposed by contract with a third party’ to 5.18 ‘Past consideration’, pp.82–83.


A further rule about the sufficiency of consideration states that generally the consideration must be given after the promise which it is to make enforceable. A


promise which is given only when the alleged consideration has been completed is unenforceable. The case of Re McArdle (1951) provides a good example. The plaintiff had carried out work refurbishing a house in which his brothers and sister had a beneficial interest. He then asked them to contribute towards the costs, which they agreed to do. It was held that this agreement was unenforceable, because the promise to pay was unsupported by consideration. The only consideration that the plaintiff could point to was his work on the house, but this had been completed before any promise of payment was made. It was therefore ‘past consideration’ and so not consideration at all.

As with many rules relating to consideration, there is an exception to the rule about past consideration. The circumstances in which a promise made after the acts constituting the consideration will be enforceable were thoroughly considered in Pao On v Lau Yiu Long (1979). Lord Scarman laid down three conditions which must be satisfied if the exception is to operate.

1. The act constituting the consideration must have been done at the promisor’s request. (See, for example, Lampleigh v Braithwait (1615).)

2. The parties must have understood that the work was to be paid for in some way, either by money or some other benefit. (See, for example, Re Casey’s Patents (1892).)

3. The promise would be legally enforceable had it been made prior to the acts constituting the consideration.

The second of these conditions will be the most difficult to determine. The court will need to take an objective approach and decide what reasonable parties in this situation would have expected as regards the question of whether the work was done in the clear anticipation of payment.

Activity 3.12Why was the approach taken in Re Casey’s Patents not applied so as to allow the plaintiff to succeed in Re McArdle, since it was obvious that the improvement work would benefit all those with a beneficial interest in the house?

Activity 3.13Jack works into the night to complete an important report for his boss, Lisa. Lisa is very pleased with the report and says ‘I know you’ve worked very hard on this: I’ll make sure there’s an extra £200 in your pay at the end of the month’. Can Jack enforce this promise?

Self-assessment questions1. What is an ‘executory’ contract?

2. Is the performance of an existing obligation owed to a third party good consideration?

3. What principle relating to consideration is the House of Lords’ decision in Foakes v Beer authority for?

SummaryThe doctrine of consideration is the means by which English courts decide whether promises are enforceable. It generally requires the provision of some benefit to the promisor, or some detriment to the promisee, or both. The ‘value’ of the consideration is irrelevant, however. The performance of existing obligations will generally not amount to good consideration, unless the obligation is under a contract with a third party, or the promisee does more than the existing obligation requires. This rule is less strictly applied following Williams v Roffey. Part payment of a debt can never in itself be good consideration for a promise to discharge the balance. Consideration must not be ‘past’, unless it was requested, was done in the mutual expectation of payment and is otherwise valid as consideration (Lord Scarman’s three conditions).


Reminder of learning outcomesBy this stage, you should be able to:

u state the essential elements of the concept of ‘consideration’

u explain the significance of consideration to the English law of contract

u give examples of the types of behaviour which the courts will, or will not, treat as valid consideration

u describe the situations where the performance of, or promise to perform, an existing obligation will amount to consideration for a fresh promise

u define ‘past consideration’.


3.2 Promissory estoppel

Essential reading ¢ McKendrick, Chapter 5: ‘Consideration and form’ – 5.22 ‘Estoppel’ to 5.29

‘Conclusion: the future of consideration’, pp.91–100.

¢ Poole, Chapter 4: ‘Consideration, promissory estoppel’ – Section 2 ‘Promissory estoppel’, pp.160–173.

3.2.1 The concept of promissory estoppelThe doctrine of promissory estoppel is primarily concerned with the modification of existing contracts. The position under the classical common law of contract was that such modification would only be binding if consideration was supplied. Thus in a contract to supply 50 tons of grain per month at £100 per ton for 5 years, if the buyer wanted to negotiate a reduction in the price to £90 per ton, because of falling grain prices, this could only be made binding if the buyer gave something in exchange (for example, agreeing to contribute to the costs of transportation). Alternatively the two parties could agree to terminate their original agreement entirely, and enter into a new one. The giving up of rights under the first agreement by both sides would have sufficient mutuality about it to satisfy the doctrine of consideration.

These procedures are a cumbersome way of dealing with the not uncommon situation where the parties to a continuing contract wish to modify their obligations in the light of changed circumstances. It is not surprising, therefore, that the equitable doctrine of promissory estoppel has developed to supplement the common law rules. This allows, in certain circumstances, promises to accept a modified performance of a contract to be binding, even in the absence of consideration.

The origin of the modern doctrine of promissory estoppel is to be found in the judgment of Denning J (as he then was) in the case of Central London Property Trust Ltd v High Trees House Ltd (1947). This is a case which you should read in full.

The facts of the case concerned the modification of the rent payable on a block of flats during the Second World War. The importance of the case, however, lies in the statement of principle which Denning set out – to the effect that ‘a promise intended to be binding, intended to be acted on, and in fact acted on, is binding so far as its terms properly apply’. Applying this principle, Denning held that a promise to accept a lower rent during the war years was binding on the landlord, despite the fact that the tenant had supplied no consideration for it.

The common law recognises the concept of ‘estoppel by representation’. Such an estoppel only arises, however, in relation to a statement of existing fact, rather than a promise as to future action: see Jorden v Money (1854). The concept of ‘waiver’ has been recognised by both the common law and equity as a means by which certain rights


Photo: High Trees House (photo © C. MacMillan 2003)

can be suspended, but then revived by appropriate notice. See, for example, Hickman v Haynes (1875), Rickards v Oppenhaim (1950) and Hughes v Metropolitan Railway (1877) (this case was the one on which Denning placed considerable reliance in High Trees). It never applied to situations of part payment of debts, however. Under the modern law the concept of waiver has been effectively subsumed within ‘promissory estoppel’.

3.2.2 The limitations on promissory estoppelThe doctrine of estoppel has been considered in a number of reported cases since 1947 and now has fairly clearly defined limits. There are six points which must be considered.

Need for existing legal relationship

It is generally, though not universally, accepted that promissory estoppel operates to modify existing legal relationships, rather than to create new ones. The main proponent of the opposite view is Lord Denning himself who, in Evenden v Guildford City FC (1975), held that promissory estoppel could apply in a situation where there appeared to be no existing legal relationship at all between the parties.

Need for reliance

At the heart of the concept of promissory estoppel is the fact that the promisee has relied on the promise. It is this that provides the principal justification for enforcing the promise. The lessees of the property in High Trees had paid the reduced rent in reliance on the promise from the owners that this would be acceptable. They had no doubt organised the rest of their business on the basis that they would not be expected to pay the full rent. It would therefore have been unfair and unreasonable to have forced them to comply with the original terms of their contract. It has sometimes been suggested that this reliance must be ‘detrimental’, but Denning consistently rejected this view (see, for example, W J Alan & Co v El Nasr (1972)) and it now seems to be accepted that reliance itself is sufficient.

A ‘shield not a sword’

This is related to the first point (concerning the need for an existing relationship). The phrase derives from the case of Combe v Combe (1951). A wife was trying to sue her


former husband for a promise to pay her maintenance. Although she had provided no consideration for this promise, at first instance she succeeded on the basis of promissory estoppel. The Court of Appeal, however, including Lord Denning, held that promissory estoppel could not be used as the basis of a cause of action in this way. Its principal use was to provide protection for the promisee (as in High Trees – providing the lessees with protection against an action for the payment of the full rent). As Lord Denning put it: consideration ‘remains a cardinal necessity of the formation of a contract, though not of its modification or discharge.’

Must be inequitable for the promisor to go back on the promise

The doctrine of promissory estoppel has its origins in equitable ‘waiver’. It is thus regarded as an ‘equitable’ doctrine. The effect of this is that a judge is not obliged to apply the principle automatically, as soon as it is proved that there was a promise modifying an existing contract which has been relied on. There is a residual discretion whereby the judge can decide whether it is fair to allow the promise to be enforced. The way that this is usually stated is that it must be inequitable for the promisor to withdraw the promise. What does ‘inequitable’ mean? It will cover situations where the promisee has extracted the promise by taking advantage of the promisor. This was the case, for example, in D & C Builders v Rees (1966) where the promise of a firm of builders to accept part payment as fully discharging a debt owed for work done was held not to give rise to a promissory estoppel, because the debtor had taken advantage of the fact that she knew that the builders were desperate for cash. Impropriety is not necessary, however, as shown by The Post Chaser (1982), where the promise was withdrawn so quickly that the other side had suffered no disadvantage from their reliance on it. In those circumstances it was not inequitable to allow the promisor to escape from the promise.

Doctrine is generally suspensory

Whereas a contract modification which is supported by consideration will generally be of permanent effect, lasting for the duration of the contract, the same is not true of promissory estoppel. Sometimes the promise itself will be time limited. Thus in High Trees it was accepted that the promise to take the reduced rent was only to be applicable while the Second World War continued. Once it came to an end, the original terms of the contract revived. In other cases, the promisor may be able to withdraw the promise by giving reasonable notice. This is what was done in Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd (1955). To this extent, therefore, the doctrine is suspensory in its effect. While it is in operation, however, a promissory estoppel may extinguish rights, rather than delay their enforcement. In both High Trees and the Tool Metal Manufacturing case it was accepted that the reduced payments made while the estoppel was in operation stood and the promisor could not recover the balance that would have been due under the original contract terms.

Where ‘promise’ is prohibited by legislation

Evans v Amicus Healthcare Ltd [2003] EWHC 2161, [2003] 4 All E.R. 903 concerned the use of embryos created by IVF prior to the breakdown of the couple’s relationship. The man wished the embryos to be destroyed, the woman to have the embryos used. In this context it was found, inter alia, that the man had not given such assurances to the woman as to create a promissory estoppel because the relevant legislation allowed him to withdraw his consent to the storage of the embryos at any time. This judgement contains an important discussion as to the current state of promissory estoppel and its possible future development.

Activity 3.14Why was Denning’s statement of principle in High Trees seen as such a potentially radical development in the law?


Activity 3.15Do you think that the doctrine of promissory estoppel is still needed, now that Williams v Roffey has made it much more likely that a modification of a contract will be found to be supported by consideration?

Self-assessment questions1. How does ‘promissory estoppel’ differ from common law estoppel, and from

‘waiver’?

2. What is the meaning of the phrase ‘a shield not a sword’ in the context of promissory estoppel?

3. What important statement of principle did Denning J make in the case of Central London Property Trust Ltd v High Trees House Ltd?

SummaryGenerally the modification of a contract requires consideration in order to be binding. The doctrine of promissory estoppel, however, provides that in certain circumstances a promise may be binding even though it is not supported by consideration. The main use of the doctrine has been in relation to the modification of contracts, but it is not clear whether it is limited in this way. The doctrine is only available as a shield, not a sword; there must have been reliance on the promise; it must be inequitable to allow the promisor to withdraw the promise; but it may well be possible to revive the original terms of the contract by giving reasonable notice.


u explain the role of consideration in the modification of existing contracts

u state the essential elements of the doctrine of ‘promissory estoppel’

u explain how the doctrine of promissory estoppel leads to the enforcement of some promises which are not supported by consideration.


Sample examination questionSimone owns five terraced houses which she is planning to rent to students. The houses all need complete electrical rewiring before they can be rented out. Simone engages Peter to do this work during August, at an overall cost of £5,000, payable on completion of the work. After rewiring two of the houses Peter finds that the work is more difficult than expected because of the age of the houses. On 20 August he tells Simone that he is using more materials than anticipated and that the work will take much longer than he originally thought. He asks for an extra £500 to cover the cost of additional materials. Simone agrees that she will add this to the £5,000. In addition, because she is anxious that the houses should be ready for occupation before the start of the university term, she says that she will pay an extra £1,000 if the work is completed by 15 September.

Peter completes the work by 15 September, but Simone says that she is now in financial difficulties. She asks Peter to accept £5,000 in full settlement of her account. He reluctantly agrees, but has now discovered that Simone’s financial problems were less serious than she made out and wishes to recover the additional £1,500 he was promised.

Advise Peter.


Advice on answering the sample examination questionThis question is concerned with the role of consideration in the modification of contracts, and the doctrine of promissory estoppel.

There are three separate issues which you will need to consider.

u Was Simone’s promise to pay the extra £500 a binding variation of the contract?

u Was Simone’s promise of an extra £1,000 if the work is completed by 15 September a binding variation of the contract?

u Is Peter’s promise to take the £5,000 in full settlement binding on him?

The first two questions involve discussion of what amounts to consideration.

If Peter has provided consideration for Simone’s promises, then he will be able to hold her to them. The answer to the third question will depend to some extent on the answer to the first two. If there has been no binding variation of the original contract, then Peter is not entitled to more than £5,000 in any case. If there has been a binding variation, then the question will arise as to whether he is precluded from recovering the extra money because of the doctrine of promissory estoppel.

As to the promised £500, you will need to consider whether the fact that Peter is buying additional materials is good consideration for this promise. Simone may argue that it was implicit in the original contract that the cost of all materials needed would be included in the £5,000. The fact that Peter has made an underestimate is not her responsibility. Similarly, in relation to the promised extra £1,000, is Peter doing any more than he is contractually obliged to do, in that it seems likely that the original contract was on the basis that the work was to be done by the end of August? In answering both these questions you will need to deal with the principle in Stilk v Myrick and the effect on this of Williams v Roffey. This will involve identifying any ‘practical benefit’ that Simone may have gained from her promises. If such a benefit can be identified and there is no suggestion of improper pressure being applied by Peter, then the variations of the contract will be binding on Simone.

In relation to the third issue, assuming that there has been a binding variation, you will need to decide whether Foakes v Beer applies (in which case Peter will be able to recover the £1,500), or whether Simone can argue that Peter is precluded from recovery by the doctrine of promissory estoppel. In relation to the latter issue, one of the matters which you will need to consider is whether promissory estoppel can apply in a situation of a debt of this kind, as opposed to money payable under continuing contracts such as those involved in High Trees and Tool Metal Manufacturing v Tungsten Electric. You will also need to consider whether the fact that Simone may have not been fully truthful about her financial position may make it ‘inequitable’ for her to rely on promissory estoppel (see D & C Builders v Rees).


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I can describe the situations where the performance of, or promise to perform, an existing obligation will amount to consideration for a fresh promise.

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I can define ‘past consideration’. ¢ ¢ ¢

I can explain the role of consideration in the modification of existing contracts.

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I can explain how the doctrine of promissory estoppel leads to the enforcement of some promises which are not supported by consideration.

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3.1 Consideration ¢ ¢

3.2 Promissory estoppel ¢ ¢

Contents

Introduction 44

4 1 The intention to create legal relations 45

4 2 Certainty of terms and vagueness 47

4 3 A complete agreement 48



4 Other formative requirements: intention, certainty and completeness


Introduction

We have examined many of the basic requirements necessary for the formation of an enforceable contract: offer and acceptance (Chapter 2) and consideration (Chapter 3). To these requirements we must add three more.

1. That the parties intend to create legal relations.

2. That the terms of their agreement are certain and not vague.

3. That their agreement is a complete agreement that does not need further development or clarification.

Once all of these requirements are present, courts will, in the absence of any vitiating elements, recognise an agreement as an enforceable contract. We will examine each of these new requirements in turn.


u explain what is meant by ‘an intention to create legal relations’

u state why courts require an intention to create legal relations

u compare domestic agreements and commercial agreements with regard to an intention to create legal relations

u illustrate the most important factors in determining whether or not an intention to create legal relations exists

u explain what is meant by ‘certainty of terms’

u compare contracts where there is certainty of terms with those where there is not

u state why courts require certainty of terms

u provide a basic statement of the concept of ‘vagueness’

u establish the necessity for finding a complete agreement

u understand why the agreement must be complete

u provide the circumstances in which a court can ‘complete’ an agreement.

Elements of the law of contract 4 Other formative requirements: intention, certainty and completeness page 45

4.1 The intention to create legal relations

Essential reading ¢ McKendrick, Chapter 6: ‘Intention to create legal relations’, pp.103–110.

¢ Poole, Chapter 5: ‘Intention to create legal relations’, pp.191–212.

¢ Hedley, S. ‘Keeping contract in its place – Balfour v Balfour and the enforceability of informal agreements’, Elements of the law of contract Study pack.

In Chapter 2 we examined the importance of intention in relation to an offer: for a statement to be an offer, it must be made with the intention that it be binding upon acceptance. It is also essential that all the parties to an agreement have an intention to create legal relations. What this means is that the parties intend that legal consequences attach to their agreement. In short, the parties intend that the agreement will be binding with recourse to some external adjudicator (a court or arbitrator) for its enforceability. The necessity for intention is most evident in domestic and social agreements. These are agreements between friends (e.g. A agrees to host the bridge club at her house if B will bring the food to feed the club) or agreements made between family members (e.g. sister agrees with brother that she will not play her radio loudly if brother will keep his hamster securely in its cage). In this context there is generally an offer by one party, which is accepted by the other party and supported by consideration. So far, the agreement looks like an enforceable contract. The parties, however, probably do not intend a breach of the agreement to result in legal action. Their agreement lacks an intention to create legal relations and is thus not a contract because they did not intend it to be. The agreement has no legal effect at all.

Traditionally, the law has distinguished between domestic and social agreements and commercial agreements. In the case of domestic and social agreements, it is presumed that there is not an intention to create legal relations. In the case of commercial agreements, it is presumed that there is an intention to create legal relations.

In either instance, the facts of the case may displace the presumption the law would otherwise make. For example, it may be that when neighbour A agreed to mow neighbour B’s lawn in exchange for the apples on B’s apple tree, both parties intended that this agreement would be legally enforceable.

The determination of whether or not the parties intended to enter into legally binding relations is an objective one and context is all-important. What this means is that 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. See Edmonds v Lawson (2000).

This objective approach applies regardless of whether the agreement is a social or domestic one or a commercial one.

Social and domestic agreements

The leading case is Balfour v Balfour (1919). Here, because the husband would be working overseas, he promised to pay his wife an amount of money each month. When the parties separated, the wife sued the husband for this monthly amount. The court refused to allow her action on the grounds that the agreement was not an enforceable contract because, at the outset of their agreement, it ‘was not intended by either party to be attended by legal consequences’. The parties did not intend that the agreement was one which could be sued upon. The judgment of Atkin LJ really seems to rest upon public policy arguments – that as a matter of policy, domestic agreements, commonly entered into, are outside the jurisdiction of the courts. His judgment also highlights a judicial concern that if such agreements could be litigated in the courts, the courts would soon be overwhelmed by such cases.


Similar reasoning was applied in the case of Jones v Padavatton (1969) to find that the agreement between a mother and her adult child did not create a contract. See also Coward v MIB (1962) where the court found that an agreement to take a friend to work in exchange for petrol money was an arrangement which lacked contractual intention.

Increasingly in the modern world, domestic arrangements are beginning to take on a basis in contract law. Balfour v Balfour must be seen as a case which establishes a rebuttable presumption† that domestic agreements are not intended. An example of a situation in which the presumption was rebutted can be found in the decision in Merritt v Merritt (1970). In this instance the spouses were already separated and the agreement was found to have an intention to create legal relations. A similar result followed in Darke v Strout [2003] EWCA Civ 176 as the court found that an agreement for child maintenance following the breakdown of a couple’s relationship did not lack an intention to create legal relations given the formality of the letter. Nor could it be said to be unenforceable for want of consideration since the woman had, in entering the agreement, given up statutory rights to maintenance. In Soulsbury v Soulsbury [2007] the Court of Appeal found that there was an intention to create legal relations between two former spouses when one agreed to forego maintenance payments in return for a bequest in the other’s will.

In addition, in Simpkins v Pays (1955) it was found that there was a contract where three co-habitees entered a competition together.

Activity 4.1Think of the last three promises you have made to friends or family. Did these prom-ises form agreements intended as contracts? Why (or why not)?

Activity 4.2How does Simpkins v Pays differ from Coward v MIB?

Activity 4.3A and B are married to each other. They agree that A will make all the mortgage payments on the marital home and that B will pay all other household bills. This arrangement carries on for two years whereupon A refuses to make any more mort-gage payments. Can B sue A?

Activity 4.4A and B are married to each other. They agree that A will pay all the household expenses and that B will remain at home to care for their children. B subsequently takes up paid employment outside the home and another person cares for the children. Must A continue to pay the household expenses?

Commercial agreements

In relation to commercial agreements, courts will generally presume that an intention to create legal relations is present. See Esso Petroleum Ltd v Commissioners of Customs and Excise (1976).

Exceptionally, the facts may disprove such an intention. In a sale of land, agreements are normally made ‘subject to contract’. This wording expressly displaces any presumption of contractual intention. In other situations, courts have found that the specific wording of the agreement in question displaced any contractual intention. See, for example:

u a comfort letter – Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad (1989)

u an honour clause – Rose and Frank Company v J.R. Crompton and Brothers Ltd (1925).

In most cases where the parties deal at arm’s length (i.e. they have no existing ties of family, friendship or corporate structure) the court will find a contractual intention. See Edmonds v Lawson (2000).

† A rebuttable presumption is a presumption made by courts as to a certain state of facts until the contrary is proved.


Activity 4.5Why might a commercial party not want an agreement to be an enforceable con-tract? Is such an agreement of any practical value?

SummaryUltimately, the question of contractual intention is one of fact. The agreement in question must be carefully scrutinised to determine the nature of the parties’ agreement.

Without an intention to create legal relations, there will not be a contract.

Self-assessment questions1. To what extent are courts examining whether or not the parties intend to take

any dispute to a court for resolution? To what extent are the courts determining whether or not the agreement has certain terms?

2. Are courts influenced by the reliance of one party upon the promise of another in determining that a contractual intention is present?

3. Is the reasoning of the judges in Balfour v Balfour and Esso Petroleum v Commissioners of Customs and Excise based on public policy considerations or on the intentions of the parties to the agreements?

4. What factors do courts consider important in negativing contractual intention?


4.2 Certainty of terms and vagueness

Essential reading ¢ McKendrick, Chapter 4: ‘Certainty and agreement mistakes’ – 4.1 ‘Certainty’ and

4.2 ‘Vagueness’, pp.45–50.

¢ Poole, Chapter 3: ‘Agreement Problems’ – Section 1 A ‘Vagueness’, pp.67–71.

An enforceable contract requires certainty of terms. That is to say, for an agreement to be a contract, it must be apparent what the terms of the contract are. If an important term is not settled, the agreement is not a contract.

In Scammell v Ouston (1941) the court found that the agreement was not enforceable because the terms were uncertain and required further agreement between the parties. Viscount Maugham explained that because the terms were uncertain, there was no real agreement (a consensus ad idem)† between the parties. The underlying rationale for this area of law can be seen in that if the terms cannot be determined with certainty, there is no contract for the court to interpret. It is not the role of the court to create the terms of the contract – for this would be to impose a contract upon the parties.

In some circumstances, particularly where the parties have relied upon an agreement, courts will more readily imply or infer a term. This can be seen in the decision in Hillas v Arcos (1932). Here, the agreement had been relied upon and the court was able to infer the intention of the parties based upon the terms in their agreement and the usage in the trade.

Activity 4.6You agree with Z that you will buy a shirt from Z’s summer collection for £25. No size is specified in your agreement. Have you a contract? Explain.

† consensus ad idem: agreement on identical terms.


Activity 4.7What is the difference between the decisions in Hillas and Scammell? Are there convincing reasons for deciding these cases differently?

It may be that the agreement provides a mechanism, or machinery, to establish the term. In such a situation, there is certainty of terms. Thus, if interest on a loan is to be set at 1% above the Bank of England’s base rate on a certain date, then this is a certain term. It cannot be stated at the outset of the contract what the interest rate is, but certainty of terms exists because, on the relevant date, the interest rate can be determined by an agreed mechanism.

There is a difference between a term which is meaningless and a term which has yet to be agreed. Where the term is meaningless, it can be ignored, leaving the contract as a whole enforceable. See Nicolene Ltd v Simmonds (1953).

SummaryIf the terms of an agreement are uncertain or vague, courts will not find a contract exists. Courts will not create an agreement between the parties. In a number of circumstances, courts will use various devices to ensure that terms which might appear uncertain are, in fact, certain. It may be possible to determine what the term is from the usage in the trade. A vague or meaningless term may be ignored.

Self-assessment questions1. Would an agreement to ‘use all reasonable endeavours’ to achieve a certain

objective be enforceable?

2. What are the arguments in favour of allowing a court to establish the essential terms of an agreement?


4.3 A complete agreement

Essential reading ¢ McKendrick, Chapter 4: ‘Certainty and agreement mistakes’ – 4.3

‘Incompleteness’, pp.50–51.

¢ Poole, Chapter 3: ‘Agreement problems’ – Section 1 C ‘Incompleteness’, pp.72–84.

To create an enforceable contract, parties must reach an agreement on all the major elements of their contract. The agreement must, in other words, be complete. There must be nothing left outstanding to be agreed upon at a later date. Completeness is an aspect of certainty of terms: unless an agreement is complete, a court is unable to state with certainty what agreement has been made between the parties. If there is no agreement on all of the essential elements of a bargain, there is no contract. There must be an agreement on matters such as price, either by fixing the price or establishing a mechanism to fix the price. What is essential in a contract will depend upon the nature of the contract.

There is no such thing as an agreement to agree. In Courtney & Fairbairn Ltd v Tolani Brothers (Hotels) Ltd (1975) it was held that there was no contract where the parties had simply agreed to negotiate. Their agreement was not enforceable as a contract.

The reason for this probably lies in the practical consideration that if the agreement is incomplete, it is not for the court to complete the agreement because the court would then be creating, rather than interpreting, the contract.


Activity 4.8Your milkman leaves you a note to ask if you would like an order of bread at some point in the future. You reply that you would and you agree to pay his price of £1 per loaf. Is your agreement a contract? When will the bread be delivered?

Activity 4.9You offer to pay £200,000 for a house ‘subject to contract’. Although the house looks fabulous on a first viewing, subsequent inspection of it reveals that it suffers badly from damp. The vendor insists that you must buy the house as she has ac-cepted your offer. Must you?

In some instances, legislation or case law will enable the court to add the necessary term to the agreement. An example of this can be seen in s.15(2) of the Sale of Goods Act 1979 which provides that where the price in a contract for the sale of goods has not been determined the buyer must pay a reasonable price. Where this occurs, the agreement can be completed and an enforceable contract exists.

In other instances, where the parties have acted in reliance upon what otherwise might be considered to be an incomplete agreement, courts have found that they were able to imply the necessary terms. For examples of this, see the decisions in Foley v Classique Coaches Ltd (1934) and British Bank for Foreign Trade Ltd v Novinex Ltd (1949). There are two different ways of rationalising what courts are doing in these instances.

u The first is that courts are protecting the parties’ reasonable reliance upon an agreement

u The second is that, because the parties have relied upon the agreement, it is easier to imply with certainty what the parties would originally have agreed upon as the essential terms.

Activity 4.10What elements have courts found essential in determining whether the agreement is complete? Why are these elements essential?

Activity 4.11In what instances have courts been prepared to ‘imply’ or ‘insert’ what appears to be an otherwise missing essential element? Why was the court prepared to do this?

SummaryThe agreement must contain all the essential terms necessary to execute the agreement with certainty. If the agreement does not contain all the necessary terms, it will not be an enforceable contract. Courts will not create the contract between the parties.

Self-assessment questions1. Once the parties have begun to perform an agreement, are courts concerned to

protect the reliance of the parties?

2. How do the previous dealings of the parties or the custom within a particular trade assist the court? See Scammell v Ouston (1941).


Examination adviceThe matters considered in this chapter are unlikely to appear as a separate question on the examination paper. This does not mean that they are not important. They must be present in order to form an enforceable contract. The fact that the law insists upon their presence (and the circumstances in which the law ‘creates’ these elements) tells us a lot about the consensual nature of contract law.


For examination purposes, however, the matters covered in this chapter are likely to appear as issues in a larger question involving a bigger issue. You must think about how these smaller issues fit within the larger issue. Thus, for example, does an intention to create legal relations also indicate a greater problem with the adequacy of consideration?

When you read examination questions that refer to an agreement, check to see if the agreement is domestic or social in nature – will intention to create legal relations be an issue in the context of that question? A party seeking to avoid contractual liability may do so on the ground that there was no intention to create legal relations. Where the agreement is between commercial parties, consider whether or not there are factors which displace the presumption of intention.

With respect to ‘certainty’ and ‘completeness’, situations will arise where the words may be ambiguous. You must ask yourself whether this ambiguity creates a problem of certainty, or possibly a mistake.

Always check to make sure an agreement is complete. Is there anything essential which remains outstanding? If there is, can a court imply or infer what this term should be?

Sample examination questionA promises her son B £1,000 per month if he begins his engineering studies at uni-versity. A’s brother, C, offers B a place in his house if B promises to finish his studies. B offers his girlfriend D £50 per month if she will drive him to the university each morning. Are any of these agreements enforceable?

Advice on answering this questionThe best approach to an examination question of this nature is to break it down into its component parts. There are three agreements in question. Consider each in turn. Do not be afraid to use sub-headings to assist the clarity of your answer.

1. Agreement between A and B A is B’s mother and automatically creates an issue of intention. You should consider the general nature of the test set out by Lord Atkin in Balfour v Balfour. Next, consider the similar facts of Jones v Padavatton. Without some element to distinguish it from Jones, it is likely that a court would reach the same outcome. Is such an element present? Note, however, the more general focus of intention (as opposed to the relationship of the parties) in Edmonds v Lawson.

2. Agreement between C and B C is B’s uncle; again, intention to create legal relations becomes an issue. However, an uncle is one step removed from a parent or a spouse and courts might more readily infer such an intention. You need to consider what is established by the cases cited above in (1). An additional problem present here is that the agreement may not be certain in its terms. How long can B stay in the house? What part of the house can B occupy? How does Scammell v Ouston apply to this situation? This lack of certainty suggests that this is not a complete agreement. Is there a way for the court to infer what these terms (such as the length of B’s tenure) are? See Foley v Classique Coaches Ltd.

3. Agreement between B and D D is B’s girlfriend – the agreement thus occurs within a social context. In this sense, it is similar to Coward v MIB. Here, the House of Lords found that, in the absence of evidence to the contrary, they would be reluctant to infer that agreements to take one’s friend to work in exchange for remuneration gave rise to a contract. The relationship lacked intention – neither party contemplated that they were entering into legal obligations. Note, however, Lord Cross’s judgment in Albert v MIB – does it provide a ground for allowing that the B/D arrangement is a contract?


Reflect and review






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I can illustrate the most important factors in determining whether or not an intention to create legal relations exists.

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I can explain what is meant by ‘certainty of terms’.

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I can compare contracts where there is certainty of terms with those where there is not.

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I can state why courts require certainty of terms.

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I can provide a basic statement of the concept of ‘vagueness’.

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I can establish the necessity for finding a complete agreement.

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I understand why the agreement must be complete.

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I can provide the circumstances in which a court can ‘complete’ an agreement.

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4.1 The intention to create legal relations ¢ ¢

4.2 Certainty of terms and vagueness ¢ ¢

4.3 A complete agreement ¢ ¢


Notes

Contents

Introduction 54

5 1 Is a statement or assurance a term of the contract? 55

5 2 The use of implied terms 57

5 3 The classification of terms into minor undertakings and major undertakings 60



5 The terms of the contract


Introduction

We have examined many of the basic requirements necessary for the formation of an enforceable contract: offer and acceptance (Chapter 2), consideration (Chapter 3) and other necessary requirements such as certainty and intention (Chapter 4). As you will now realise, when all these requirements are present, a contract is formed. We will now determine the content, or terms, of the resulting contract. In other words, what is the extent of the obligations undertaken? What are the parties to the contract obliged to do? It is of critical importance to establish the terms of any contract because the question of whether or not the contract has been breached depends upon whether one party has failed to perform according to the terms of the contract. In addition, the rights that an injured party has following a breach of contract by another party depend upon whether the term breached was a major term or a minor term.

This chapter deals with three areas concerning the content of the contract. These are:

u whether a particular statement made or assurance given in the course of the negotiations leading up to the contract forms part of the contract

u how terms can be implied into a contract either by operation of a statute or by common law

u how, and why, the major or essential undertakings of a contract are distinguished from the minor or inessential ones.

We will now examine each of these areas in turn.


u explain when a statement forms a part of the contract (and when it does not)

u compare the effect of a statement which is a term and a statement which is not a term of the contract

u explain why and when courts will imply terms into contracts

u provide an explanation as to the limits upon courts in implying terms into contracts

u establish the different categories of contractual undertakings (terms)

u explain how to determine within which category a particular term should be placed

u understand the consequences attendant upon a breach of each of these different categories of undertakings.

Elements of the law of contract 5 The terms of the contract page 55

5.1 Is a statement or assurance a term of the contract?

Essential reading ¢ McKendrick, Chapter 8: ‘What is a term?’, pp.143–146.

¢ McKendrick, Chapter 9: ‘The sources of contractual terms’ – 9.1 ‘Introduction’ and 9.2 ‘The parole evidence rule’, pp.147–149.

¢ Poole, Chapter 6: ‘Content of the contract and principles of interpretation’ – Section 1 ‘Pre-contractual statements – terms or mere representations?’, pp.212–221

Contracts in practice are never as simple and neat as the contracts that are explained in legal textbooks. Legal texts leave the reader with the impression that the process begins simply with an invitation to treat, followed by an offer and a corresponding acceptance. In practice, however, there may be lengthy negotiations and exchanges prior to the formation of the contract. Some of these exchanges may be insignificant; others may be highly significant. What is important for our purposes is to determine which of these statements form a part of the contract and which do not.

This is important because those statements that form a part of the contract are terms – and breach of a term of a contract gives rise to a right to damages and, possibly, a right to terminate the contract (see Chapter 14: ‘Performance and breach’). If the statement does not form a part of the contract, it is said to be a mere representation. If a mere representation is not true, there is not a breach of contract because the representation is not a part of the contract.

Note: Terminology. You will notice in your reading on this topic that many of the cases discuss whether the statement is a warranty (by which they mean a term of the contract or of a separate, collateral, contract) or a representation (a ‘mere puff’; a statement which has no legal significance). We have avoided using the term ‘warranty’ here because it confuses the discussion set out in Section 5.3: ‘The classification of terms into minor and major undertakings’, where the term ‘warranty’ is used to mean something slightly different.

Please note further that many of the matters considered here are best understood once you have a grasp of the concept of a misrepresentation dealt with in Chapter 9 of the subject guide. It may be of assistance to you to review these matters again once you have covered Chapter 9.

5.1.1 False representationsIf a representation is simply false, there is no action for a breach of contract. Any possible action would only be available if the representation is a misrepresentation (and meets separate criteria for actionability discussed in Chapter 9). Prior to the enactment of the Misrepresentation Act 1967 and the development of the tort of negligent misstatement in Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964), the misrepresentation had to be fraudulent in order for the injured party to receive damages. The effect of this is that the older cases are concerned with attempts by the injured party to establish the statement as a term rather than as a representation. In these older cases, if the statement was not established as a term of the contract, it was unlikely that the injured party would receive any remedies at all. These attempts are described by Lord Denning MR in Esso Petroleum Co Ltd v Mardon (1976). At present, however, the matter is not so clear-cut. In many circumstances it is now advantageous for a party to establish that the statement is a representation and actionable as a misrepresentation under the Misrepresentation Act 1967. This point will be examined further in Chapter 9 of the subject guide.†

Finding the intention of the parties

What you should realise from the above discussion is that it is of critical importance to establish if the statement is a term of the contract or a ‘mere’ representation which is not a part of the contract. How do lawyers establish which statement is a term and

† See Chapter 9, ‘Misrepresentation’, section 9.1.1 ‘Misrepresentation and contractual terms’ and section 9.2 ‘Remedies for misrepresentation’.


which a representation? The basic criterion is the intention of the parties. This is set out by the House of Lords in the case of Heilbut, Symons & Co v Buckleton (1913). In this case, Lord Moulton stated that for the statement to be a term of the contract, it must be made with the intention that it be a term of a contract.

The requisite intention is an objective not a subjective intention. The test of this is not whether or not those particular parties intended the statement to be a term but whether intention is exhibited by their words and conduct. This is discussed by Lord Denning in Oscar Chess Ltd v Williams [1957] 1 WLR 370 where he stated that ‘If an intelligent bystander would reasonably infer that a warranty was intended that will suffice’(at 375).

In Heilbut, Symons & Co v Buckleton (1913), Lord Moulton set out various criteria that helped to ascertain whether or not this intention was present. These criteria are:

1. the importance of the statement – the more important the matter, the greater the likelihood that the parties intended the statement to be a term

2. where one party is clearly relying upon the other, this is indicative that the statement is intended to be a term, and

3. the relative knowledge of the parties is significant because if one party has a much greater knowledge of the matter than the other, this is again indicative that the statement is intended to be a term of the contract.

A number of cases illustrate how these principles have been applied by the courts: Oscar Chess Ltd v Williams (1957); Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd (1965); Schawel v Reade (1913); Couchman v Hill (1947).

5.1.2 Terms of collateral contractsOne last point to bear in mind is that we have thus far distinguished between contractual terms and representations on the basis that if the statement was a contractual term then it was a term of that particular contract. It is also possible that the statement is a term of a separate contract – a contract collateral to the main contract. For example, it may be that I contract to sell you my antiquarian bookshop. I provide you with figures demonstrating past sales. This statement is not included in the contract of sale; however, it was made with contractual intent and it forms the basis of a collateral contract. If the figures are incorrect, if I have improperly warranted the past sales, this is actionable as a breach of the collateral contract. You can see this process in Heilbut, Symons & Co v Buckleton (1913) and Esso Petroleum Co Ltd v Mardon (1976).

When the parties to a contract decide to commit their contract to writing, it is said that they cannot later seek to establish that there are terms of the contract which are outside the written agreement. They cannot, in other words, seek to show by evidence that there are other terms to the contract. This is described as the parole evidence rule. The difficulty with this rule is that it can lead to injustice – where, for example, a critical term is omitted from the written agreement. For this reason, there are many exceptions to the rule.

Activity 5.1Think of the circumstances in which a purchaser will rely upon a seller’s expertise as to the good being sold. In what situations will a purchaser rely upon a seller?

Activity 5.2Is it relevant to ask, as Lord Denning does in cases such as Dick Bentley Productions v Harold Smith (Motors), whether the defendant was ‘innocent of fault’ as an aid to determining the existence of contractual intention? Does this shed any light on the way judges decide what is the ‘proper’ inference?

Activity 5.3What is the ‘parole evidence rule’? Is it still important? If not, why not?


SummaryIt is important to determine whether a statement or assurance is a term of the contract or a representation because it determines the remedy available to the injured party. If the statement is a term of the contract, or of a collateral contract, the injured party may bring an action for damages. If it is a representation, the injured party must establish that the statement is an actionable misrepresentation.


u explain when a statement forms a part of the contract (and when it does not)

u compare the effect of a statement which is a term and a statement which is not a term of the contract.


5.2 The use of implied terms

Essential reading ¢ McKendrick, Chapter 9: ‘The sources of contractual terms’ – 9.8 ‘Implied terms’,

pp.163–166.

¢ Poole, Chapter 6: ‘Content of the contract and principles of interpretation’ – Section 4 ‘Implied terms’, pp.248–262.

¢ Goode, R. ‘The statutory implied terms in favour of the buyer’, Elements of the law of contract Study pack.

We have, thus far, thought of contractual terms as express terms.† I order a pair of roller skates from a local sports equipment shop. I stipulate that they are to be a size 42, have four in-line wheels and that the colour will be black. I agree to pay £99 for the skates. The shopkeeper stipulates that he will deliver them on Friday. All of the matters in this exchange amount to express terms. These express terms do not necessarily form the entirety of the contract between the shopkeeper and myself. In certain circumstances, a court will imply terms into a contract. Thus, in the example above, a court would imply that the roller skates were of satisfactory quality (because of s.14(2A) of the Sale of Goods Act 1979).

What we will consider in this part is the circumstances in which courts will imply terms into a contract. In considering this area, it is important to bear in mind that courts are generally reluctant to imply terms into a contract. The courts generally consider their role to be that of an interpreter of contracts rather than a maker of them. The more frequently terms are implied into a contract, the greater the extent to which the court has created the contract rather than merely interpreted it.

In Crossley v Faithful & Gould Holdings Ltd [2004] the Court of Appeal declined to find that there was an implied term within the contract of employment which provided that an employer ought to take reasonable care of an employee’s economic well-being. The introduction of such a term would be a major extension of the existing law and would place an intolerable burden upon employers. Dyson LJ observed that courts in cases involving implied terms ought not to ‘focus on the elusive concept of necessity’ but to ‘recognise that, to some extent at least, the existence and scope of standardised implied terms raise questions of reasonableness, fairness and the balancing of competing policy considerations’.

Courts will imply terms into contracts in the following situations, the first three where the term is implied by operation of the common law.

u Where there is an established trade usage.

u Because of the relationship between the parties.

† ‘Express’ terms: nothing to do with speed, but meaning ‘clearly indicated or explicitly stated’.


u To give effect to an unexpressed intention of the parties.

u By operation of statute.

We will examine these in turn.

5.2.1 Implied terms in common law

Trade usage

The courts may imply terms into the contract where an established trade usage can be demonstrated. This is particularly common in commercial and mercantile contracts. Here, the standardised implied term functions as a kind of default rule. An example of such a situation would be that the vendors of a certain type of good always paid the broker’s commission with regard to the sale; absent a term to the contrary, courts will imply such a term into this type of contract.

The nature of the relationship

Similarly, some terms will be implied because of the nature of the relationship between the parties: landlord and tenant or employer and employee are two such instances. An illustration of this can be seen in Malik v BCCI (1997) where it was held that there was an implied obligation upon an employer not to conduct his business in a manner likely to destroy or seriously damage the relationship of confidence and trust between employer and employee. In Malik’s case, the bank had operated corruptly. See also Liverpool City Council v Irwin (1976) and Equitable Life Assurance Society v Hyman (2002).

The unexpressed intention of the parties and the ‘officious bystander’

The courts may imply terms into the contract to give effect to what appears to be the unexpressed intention of the parties. In some circumstances, the contract will not function unless the term is implied. The implication is made as a matter of necessity. See, for example, The Moorcock (1889).

A much quoted description of this process is that of MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd (1939):

Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course’. [1939] 2 KB 206, 227.

Activity 5.4Why did the House of Lords reject the ‘variety of implication’ that the law implies a term on the basis that it is reasonable to do so, favoured by Lord Denning MR? (The rejection is made by Lord Wilberforce in Liverpool City Council v Irwin (1977))

Activity 5.5A contracts with B to assemble bicycles to B’s specifications. One of these specifications is that the bicycles will be fitted with a unique gear system. B manufactures these gear systems. Is there an implied term that B will supply A with this gear system in sufficient quantities to manufacture the requisite number of bicycles?

5.2.2 Terms implied by operation of statuteThe above three instances are circumstances where the term is implied by operation of the common law. Terms may also be implied into contracts by operation of legislation. In these instances, the terms are implied because Parliament legislates that the term will be in the contract. To a certain extent, this is to provide a standardisation of terms in certain kinds of contracts. It also provides a measure of protection for certain categories of parties, such as consumers.


We will consider, briefly, contracts for the sale of goods as an example of this process. Contracts for the sale of goods are everyday occurrences. Parties, however, give little thought to the terms of their contract. To give effect to their reasonable expectations, certain terms are implied into their contract by operation of statute law (see Anson, pp.150–156). The relevant provision for our purposes is that of s.14 of the Sale of Goods Act 1979 (as amended by the Sale and Supply of Goods Act 1994), that goods sold by a seller in the course of his business shall be of satisfactory quality (not ‘merchantable’ quality). Careful attention should be given to the definition of satisfactory quality in the new s.14(2A), the ‘aspects’ of quality listed in s.14(2B) and the provisions with regard to defects which were disclosed by the seller or which the buyer’s examination ought to have revealed (s.14(2C)). Note also the restriction on the buyer’s right to reject for breach of the statutory conditions introduced by s.4(1) of the 1994 Act where the buyer is not a consumer and the breach is ‘so slight that it would be unreasonable’ to reject.

You should keep in mind the fact that these terms are only implied by the statute law: it is open to the parties to defeat this implication, either by their course of dealing or by their express agreement. There are, however, limits to which the parties can defeat terms implied by statute law. The limits are set, principally, by the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999. See Chapter 6: ‘The regulation of the terms of the contract’ for a discussion of these two pieces of legislation.

For an interesting example of the application of s.14(3) see:

u Slater v Finning [1996] 3 All ER 398 (camshaft was fit for its purpose, although it did not work properly in the buyer’s vessel: the problem arose from an abnormal feature of the vessel of which neither party was aware).

For an example of the implied terms under the Supply of Goods and Services Act 1982, where the 1994 Act makes corresponding amendments introducing the concept of ‘satisfactory quality’ in the case of goods supplied, see:

u Wilson v Best Travel (1993) (obligation of tour operator with regard to safety of holiday accommodation).

The Sale of Goods Act 1979 also implies terms as to title (s.12), terms governing the sale of goods by description (s.13) and terms regarding the sale of goods by sample (s.15).


For further discussion of the topic of sale of goods, it is necessary to refer to a specialist work on the sale of goods:

¢ Atiyah, P.S. The Sale of Goods. (London: Longman, 2005) eleventh edition [ISBN 9780582894082].

Self-assessment questions1. Place the circumstances in which terms will be implied into a contract into two

categories – first, those implied by law and secondly, those implied by fact. If necessary, refer to McKendrick, Chapter 9, section 9.8 ‘Implied terms’.

2. On which party is the onus of proving the existence of an implied term?

3. How is ‘satisfactory quality’ determined for the purposes of the Sale of Goods Act 1979?

4. Does the implication of terms into a contract resolve problems or create them?

SummaryCourts will, in certain circumstances, imply terms into a contract. The terms will be implied either by operation of the common law or by statute. Once the terms are implied, they are effective as a contractual term.



u explain why and when courts will imply terms into contracts

u provide an explanation as to the limits upon courts in implying terms into contracts.


5.3 The classification of terms into minor undertakings and major undertakings

Essential reading ¢ McKendrick, Chapter 10: ‘The classification of contractual terms’, pp.168–178.

¢ McKendrick, Chapter 19: ‘Breach of contract’ – 19.6 ‘The right to terminate performance of the contract’ to 19.8 ‘The right of election’, pp.312–314.

¢ Poole, Chapter 6: ‘Content of the contract and principles of interpretation’ – Section 5 ‘Classification of terms’, pp.262–279.

We began this chapter by examining how statements and exchanges become terms of contracts. We conclude by examining how these terms are classified. In general, terms will be classified into minor and major undertakings (or obligations).

To understand the discussion of the classification of contractual terms it is necessary to start with the remedies for breach.† A contractual term is a ‘primary’ obligation. Every breach of a ‘primary’ obligation gives rise to a ‘secondary’ obligation to pay damages for the loss caused. In some cases this is the only remedy, but in others there is the further remedy of ‘terminating’ (ending or rescinding) the contract. That is to say, some breaches of contract provide the injured party with an option. He or she can either (a) terminate the contract and claim damages or (b) affirm the contract (accept the breach and insist on continued performance of the contract) and claim damages. The classification of terms is important because the injured party is only given this option when the term breached is a condition or there is a sufficiently serious breach of an innominate term (see 5.3.2 below). The injured party is not given the right to terminate the contract for breach of a term that is a warranty. We will return to these concepts in Chapter 14 where we examine the performance and breach of contracts.

Before examining what the terms ‘condition’, ‘innominate term’ and ‘warranty’ mean, it is important to consider the different concepts of rescission. The words ‘rescind’ and ‘rescission’ have different meanings in different contexts. Rescinding for breach means that the injured party is entitled, if he so wishes, to treat the contract as discharged (i.e. brought to an end) and to refuse to make further performance of his own obligations or to receive further performance of the other party’s obligations. This is different from rescission (rescinding) for misrepresentation, which means that the contract is cancelled from the very beginning.

Termination for breach is a drastic remedy. The severity of the situation may be exacerbated when an ‘injured’ party uses his right to rescind simply to escape from what has become a bad bargain. For example, a person who has arranged delivery of coal at a time when coal is scarce and prices are consequently high may later find that coal has become more plentiful and prices are lower. Such a person may seek to use a technical breach of contract (that is to say, a breach which does not really harm him) to end the contract.

† See also, Chapter 14, ‘Performance and breach’.


5.3.1 The distinction between conditions and warrantiesFor this reason it is most important to define the breaches which will give the injured party the right to refuse further performance. A solution to this was found in the nineteenth century by classifying the terms of a contract into the two following types.

u Conditions: breach of which gave the right to refuse further performance.

u Warranties: for breach of which damages were the only remedy.

Note that a party rescinding for breach need not show that the breach of condition has actually caused any loss. See Bowes v Shand (1877) and Re Moore and Landauer (1921).

This classification into conditions and warranties was extensively used by the drafters of the Sale of Goods Act 1979, where the principle is that the most important terms are conditions and the less important ones are warranties. (‘Condition’ is another word used in several senses: the present sense is highly artificial, but more important for our purposes than the natural meaning of a ‘suspensive’ condition.)

At common law, however, it is clear that the ultimate test is the parties’ intention: if the intention is clearly expressed, a term will be a condition, however unimportant it is. However if the intention is not clearly expressed, the court will again have to draw the ‘proper inference’. See Behn v Burness (1868); Bettini v Gye (1876) and Poussard v Spiers (1876).

5.3.2 Innominate terms It was implicit in the nineteenth century approach that a breach of a contractual term that was not classified as a condition gave no right to refuse further performance, however serious the consequences for the injured party. This assumption was rejected in the Hong Kong Fir case in 1962, where the Court of Appeal recognised a new category of terms that are neither conditions nor warranties. Such ‘unclassified’ terms are usually referred to as ‘innominate’ or ‘intermediate’ terms.

For breach of such terms the court will decide whether the injured party has the right to rescind in the light of the seriousness of the consequences of the breach. See also Cehave v Bremer HG (The Hansa Nord) (1976), where this analysis was applied to a term in a contract for sale of goods which did not fall within the statutory ‘conditions’.

The Hong Kong Fir approach may make it less easy for a contract to be rescinded for breach on a mere technicality but it inevitably introduces greater uncertainty into the law. In some cases the need for certainty must prevail. See The Mihalis Angelos (1970); Bunge v Tradax (1981); The Naxos (1990) and Barber v NWS Bank (1996). But contrast Torvald Klaveness v Arni Maritime Corp (The Gregos) (1994) where the House of Lords held that the obligation to re-deliver a time-chartered ship on the due date was probably not a condition.

It is important to note that the Hong Kong Fir case has not changed the law on the question of what is a condition. It does, however, seem to have had a ‘knock-on’ effect on the application of that law by the courts. See also Reardon Smith v Hansen-Tangen (1976) where words identifying the yard where the ship was to be built were held not part of the ‘description’ so as to amount to a condition of the charter party.

A similar reluctance to permit rescission on a technicality may have influenced the approach of the House of Lords to the construction of the express condition in L. Schuler v Wickman Machine Tool Sales (1974).

Contrast the more traditional approach in the following cases.

u Lombard North Central v Butterworth (1987): punctual payment was made a condition. Note that the hirer was also liable in damages for the entire loss caused to the plaintiffs by the ‘rescission’ of the contract.

u Union Eagle v Golden Achievement [1997] 2 All ER 215: a 10-minute delay was too much. Time was of the essence: as the time for performance had passed, so too had the right to performance.


Activity 5.6Why was the unseaworthiness of a chartered ship (in Hong Kong Fir) considered less important than the owner’s estimate of when she would be ready to load the charterer’s cargo?

Activity 5.7If the time charterer is late in redelivering the ship, what are the practical consequences for the owner?

Activity 5.8What more could Schuler (in L Schuler v Wickman Machine Tool Sales) have done to achieve the effect of making the visits genuinely a condition of the contract?

Activity 5.9Compare the decision in Schuler with that in Lombard. How are they different?

SummaryContractual terms are categorised as conditions, warranties or innominate (or intermediate) terms. The categorisation is important because it determines whether or not the wronged party is entitled to terminate the contract upon breach. Only the breach of a condition or a sufficiently serious innominate term justifies the termination of the contract. The principal difficulty posed with this area of the law is one of certainty: it is often hard to ascertain whether or not there has been a sufficiently serious breach of an innominate term as to justify termination.


u establish the different categories of contractual undertakings (terms)

u explain how to determine which category a particular term should be placed within

u understand the consequences attendant upon a breach of each of these different categories of undertakings.


Examination adviceThe matters considered in this chapter are unlikely to appear as separate issues in examination questions. However, the material considered in this chapter is very important and virtually all examination papers on the law of contract contain questions on the incorporation of terms in a contract or the classification of terms and the consequences of breaching different terms.

It is of prime importance in any situation to establish what the terms of a contract are. Without establishing the terms of the contract it is impossible to ascertain what the parties are obliged to do and whether or not they have performed the contract. Consequently, you will find that a careful study of this area of the law is important.

A review of past examination papers indicates that the Examiners have frequently combined an issue involving the terms of the contract with other issues. While this advice is not exhaustive, these other areas have often been the regulation of terms, issues involving the performance and breach of the contract and the issue of damages. The scope for combining an issue of terms with other issues is very wide. Because of this breadth, three different questions involving terms have been provided below. You will not, at this point, be able to answer Question 2 or 3 (below) fully: they are provided simply to show you how an issue involving terms can be combined with other issues. You should return to these questions when you have completed these other areas and review the questions again.


In attempting a problem question, you should carefully study the facts provided and determine what terms are incorporated into a contract. If the statement is not a term of the contract, is it possible that it may be a misrepresentation? In examining the terms of a contract, you should bear in mind the possibility that terms might be implied into the contract – if this is the case, what effect do these terms have? Lastly, with regard to the classification of terms, you will need to consider the importance of the term.

A review of past examination papers reveals that essay questions have often been a variation on the theme, ‘Why is certainty so important in commercial contracts?’. It is most important to have thought, before the examination, about such issues as whether the essentially flexible concept of innominate terms does not introduce an undesirable degree of certainty into the law.

Sample examination questionsQuestion 1 Alban is a surveyor. Four months ago he bought a nine-month-old ‘Landmaster’ car from Brenda’s Garage Ltd for use in his practice. He paid £12,500 for the car and was given a written guarantee in the following terms. ‘Brenda’s Garage Ltd guarantees that, for three months from the date of purchase, it will put right free of charge any defects in the vehicle which cannot be discovered on proper examination at the time of purchase. Thereafter all work and materials will be charged to the customer.’

The sales manager recommended to Alban that he should take out the ‘special extended warranty’ under which, for payment of £350, the car would have been guaranteed in respect of all defects for a further two years, but Alban declined.

Last week the engine and gearbox seized up. The repairs will cost £2,000.

Advise Alban. Would your answer differ if he also used the car to take his wife shopping on Saturdays?

Question 2 ‘The present legal rules allowing an innocent party to bring a contract to an end for breach are unclear and in need of reform. Fortunately, the rules concerning measure of damages for breach are clear.’

Discuss.

Question 3 John, a builder, advertised in a trade journal for plaster which he might require in the year 2012. After receiving a number of tenders John entered into a contract with Keith under which Keith agreed to supply John with up to 300 tonnes of plaster at £5,000 a tonne during the year 2012 ‘as and when required’.

The agreement contained the following provisions.

‘(6) It is agreed between the parties that in return for executing this agreement John will not buy plaster from any other plaster supplier during the year 2012.

(7) It is agreed that no undertaking as to quality or fitness for purpose is given by Keith and no compensation shall be payable in respect of the suitability or otherwise of the plaster.’

John ordered four loads of plaster of 20 tonnes each. The first three were satisfactory and paid for. The fourth load proved to be unsatisfactory as it contained lumps. John said to Keith that he would not be wanting any more plaster and that he would be buying his plaster in future from Fred, who had indicated that he would supply the plaster at £4,500 a tonne.

Keith seeks an injunction to prevent John buying plaster elsewhere, payment for the fourth load and damages for the loss of profit on the 220 tonnes John would not be ordering.

Advise John.


Advice on answering the questionsQuestion 1 You should begin this problem by considering the facts given. Note that at the end of the problem, a variant on the facts is provided. The variant involves the personal use of the car – this is likely to give rise to issues about the legal treatment of consumers by statute law.

The first question to establish is whether or not there has been a breach of contract when the engine and gearbox seized up. To establish this, it is necessary to determine what the terms of the contract are. An express term is that Brenda’s garage will put right any problem which occurs within three months. This term is of no use to Alban because his problem has occurred outside the three months. The issue then becomes, in the absence of any other express term, whether or not a term can be implied into the contract. This contract is for the sale of a good and you must consider the Sale of Goods Act 1979. Section 14(2) provides that where the seller sells in the course of a business, ‘there is an implied term that the goods supplied under the contract are of satisfactory quality’. You need to consider whether or not satisfactory quality is established here (by applying ss.14(2A), (2B) and (2C) of the Act). You need to consider whether or not the statutorily implied term is negatived or varied by the express agreement between the parties. If this is a consumer sale (as per the variant), the statutorily implied terms are compulsory and cannot be varied or excluded by the parties (s.6 Unfair Contract Terms Act 1977 – covered in Chapter 6). If this is not a consumer contract, the statutorily implied term can be excluded to the extent that it is reasonable to do so.

If this is not a consumer sale and the term is implied (and not negated by the presence of the express terms) then the buyer, Alban, cannot reject the goods where the breach of a condition implied by s.14 is so slight that it would be unreasonable to reject them (by reason of s.15A of the Sale of Goods Act).

With regard to the variant to the question, you need to consider whether or not the use of the car to take his wife to the market on Saturdays removes the contract from one made in the course of a business.

Question 2 This question calls for an examination of when an innocent party can end a contract and the rules for ascertaining the measure of damages (a topic you have yet to consider in this guide). The question invites a comparison between the apparent lack of clarity an innocent party faces in knowing when he or she is able to end the contract (the warranty/condition approach or the Hong Kong Fir approach) and the clarity in the rules surrounding the calculation of damages. The principal challenge in answering this question lies in clearly synthesising and analysing a wealth of case law. You will need to examine and compare two areas of law (terms and damages). A good answer to this question provides some analysis as to why there is a lack of clarity in ascertaining when a contract can be terminated – you could, for example, discuss whether this apparent lack of clarity provides courts with the flexibility to reach a just result by preventing parties from terminating a contract for what is actually a trivial breach. With regard to the area of damages, it is by no means certain what an appropriate measure of damages will be in many cases. As you will see when you reach this topic, recent case law has, in some ways, rendered this issue more confusing.

Question 3 The question involves an evaluation of what terms exist in the contract between John and Keith and what, if any, effect these terms have. This question involves a number of issues which you have yet to cover – namely a possible restraint of trade issue, an issue regarding remedies and the existence of an exemption clause. All of these issues are yet to be covered – the reason for including this question is to allow you to see how an issue involving terms can be combined with other issues. When you have covered the material in Chapter 13 (restraint of trade), Chapters 16 and 17 (dealing with remedies), and Chapter 6 (the regulation of the terms of the contract), you will have a better grasp of the other issues involved in this question.

An express term of the contract is that Keith will be John’s exclusive plaster supplier for a year. This is a solus agreement: is it also a contract in restraint of trade? Applying Esso Petroleum v Harper’s Garage and Alec Lobb v Total Oil, it is possible to construe


it as such. Keith must show that there is reasonableness and fairness in protecting his commercial interests. Here, at a year, the length of the restraint is not for long. However, in assessing the fairness of the restraint, it must be examined in light of provision 7 of the agreement. The contract purports to allow Keith to deliver plaster which is unfit and unsuitable for John’s purposes. It is hard to see how this is either reasonable or fair. It is unlikely that Keith will succeed in getting an injunction to prevent John from buying his plaster elsewhere or damages for ‘lost’ sales.

Another express term of the contract is an exemption clause. Provision 7 states that Keith provides no undertaking as to the quality or fitness for purpose of the plaster and that no compensation shall be payable in respect of the suitability or otherwise of the plaster. The term purports to exclude the terms implied by the Sale of Goods Act 1979. Principally, these are: s.13(1) [goods sold by description will correspond with the description]; s.14(2) [an implied condition that the goods are of satisfactory quality]; s.14(3) [if the purchaser informs the seller of the purpose the goods have been bought for there is an implied condition that the goods are reasonably fit for that purpose]. The term essentially attempts to exclude recovery for a fundamental breach of the contract in that Keith could supply almost anything. The term is thus subject to challenge on two fronts. Firstly, as a matter of construction, has Keith excluded liability for breach of a fundamental term (Photo Production v Securicor (1980))? Secondly, if there has been a successful exclusion of this liability, does the term withstand scrutiny under the Unfair Contract Terms Act 1977? Two sections of the Act are relevant. Section 3(1) provides that, if Keith deals on his standard written terms, he cannot exclude or restrict liability or claim to be able to render a different performance, or no performance at all, except to the extent the term is reasonable within s.11. Section 6(3) provides that Keith can only restrict or exclude the liability arising under ss.13 and 14 of the Sale of Goods Act to the extent that the exclusion clause satisfies the requirement of reasonableness. It is unlikely that a clause which purports to completely exclude liability will be found to be reasonable in light of the statute and existing authorities. In the circumstances, it will not act as an effective defence for Keith in an action brought by John.


Reflect and review






Readytomoveon

Needtorevisefirst

Needtostudyagain

I can explain when a statement forms a part of the contract (and when it does not).

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I can compare the effect of a statement which is a term and a statement which is not a term of the contract.

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I can explain why and when courts will imply terms into contracts.

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I can provide an explanation as to the limits upon courts in implying terms into contracts.

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I can establish the different categories of contractual undertakings (terms).

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I can explain how to determine within which category a particular term should be placed.

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I understand the consequences attendant upon a breach of each of these different categories of undertakings.

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5.1 Is a statement or assurance a term of the contract?

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5.2 The use of implied terms ¢ ¢

5.3 The classification of terms into minor undertakings and major undertakings

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Contents

Introduction 68

6 1 Common law controls 69

6 2 The Unfair Contract Terms Act 1977 73

6 3 The Unfair Terms in Consumer Contracts Regulations 1999 78



6 The regulation of the terms of the contract


Introduction

The traditional view of the common law is that it is up to the parties to decide on their respective obligations under a contract and that the court should not need to intervene. ‘Regulation’ of the content of the contract by the courts is therefore exceptional. The increased use, however, in the nineteenth century of standard form contracts, some of which contained onerous clauses attempting to exclude or limit liability for breach, led the courts to develop some fairly strict rules designed to limit their scope. More recently a recognition of the need to provide greater protection for the weaker party in a contract, in particular consumers, has led to statutory intervention in the form of the Unfair Contract Terms Act 1977 (UCTA), and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR).


u explain how the courts decide whether a clause has been incorporated into a contract

u state the rules for the construction of exclusion clauses

u give examples of a ‘fundamental breach’ of contract and explain its effect on an exclusion clause

u state what kinds of clauses are invalidated by the UCTA

u state what kinds of clauses are required to be ‘reasonable’ by the UCTA

u explain the test of ‘reasonableness’

u give examples of the kinds of clauses which are invalidated by the UTCCR.

Elements of the law of contract 6 The regulation of the terms of the contract page 69

6.1 Common law controls

Essential reading ¢ McKendrick, Chapter 11: ‘Exclusion clauses’ – 11.1 ‘Exclusion clauses: defence

or definition?’ to 11.8 ‘Other common law controls upon exclusion clauses’, pp.178–187.

¢ Poole, Chapter 7: ‘Exemption clauses and unfair contract terms’ – Section 1 ‘The nature of exemption clauses’ to Section 4 ‘Construction’, pp.295–315.

The principle of freedom of contract means that the courts are reluctant to attack the substance of clauses which attempt to limit or exclude liability. Instead they have developed rules relating to the ‘incorporation’ (is the clause a part of the contract?) and ‘construction’ (does the clause cover the breach?) of clauses, as a means of controlling their effect. In addition, at one stage the courts developed a rule relating to ‘fundamental breach’ (is the breach so serious that the exclusion clause cannot apply?). The potential of this approach has, however, been severely limited by the House of Lords, as is explained in more detail in section 6.1.3 below.

It is important to note that the rules applied in this area are based on rules which potentially apply to all clauses within a contract: their most common use is, however, in relation to exclusion and limitation clauses. We will start by considering the rule of ‘incorporation’.

Activity 6.1List the reasons why it might be undesirable to allow a party to exclude or limit liability for breach of contract. Are there any reasons why it might be desirable to allow such exclusion or limitation?

6.1.1 Incorporation

Essential reading ¢ McKendrick, Chapter 9: ‘The sources of contractual terms’ – 9.3 ‘Bound by your

signature’ to 9.5 ‘Incorporation by a course of dealing’, pp.149–155.

¢ Poole, Chapter 6: ‘Content of the contract and interpretation’ – Section 2 B ‘The effect of signature to implied terms’, pp.226–248.

In order for an exclusion clause to be effective, it must have been incorporated as one of the terms of the contract. ‘Incorporation’ is in fact a requirement for any term of the contract and the rules outlined here do not just apply to exclusion clauses. Their most frequent use in reported cases is, however, in relation to attempts to limit liability. There are three main ways in which incorporation may take place.

First, the clause may be included in a contractual document which has been signed by the other party – as in L’Estrange v Graucob (1934). The party signing will be bound by the clause, even if it has not been read or understood, provided that the other party has not made any misrepresentation as to its effect (as in Curtis v Chemical Cleaning & Dyeing Co (1951)).

Secondly, the clause, even if not in a document which has been signed, may be incorporated provided reasonable notice of it has been given at or before the time of contracting. Notice will not be reasonable if it comes after the contract has been made. Thus, in Olley v Marlborough Court Hotel (1949), the contract was made at the reception desk but the exclusion clause was displayed in the guest’s bedroom. This was too late, and the clause was not incorporated. See also Chapelton v Barry UDC (1940) and Thornton v Shoe Lane Parking (1971).

The test of what is reasonable, assuming that the clause has been put forward in time, was first stated in Parker v South Eastern Rly (1877) and is clearly a question of fact to be determined in the light of all the circumstances. It was held in Thompson v London, Midland and Scottish Rly (1930) that the clause itself does not have to be on


the document put forward: it is sufficient that the document indicates the existence of the clause and where it can be consulted. The document setting out, or referring to, the exclusion clause must, however, be something more than a mere ‘receipt’ (see Chapelton v Barry UDC (1940)). In other words, it must be the kind of document in which you would reasonably expect to find contractual terms, or reference to them.

A number of cases have made it clear that the more unusual or onerous the clause, the more that must be done to draw it to the other party’s attention. This was stated in Spurling v Bradshaw (1956) and again in Thornton v Shoe Lane Parking (1971). It does not only apply in the context of consumer contracts, as shown by Interfoto Picture Library v Stiletto Visual Programmes (1988) (though the clause in this case was not an exclusion clause) and AEG (UK) Ltd v Logic Resource Ltd (1996).

Activity 6.2François, a Frenchman who understands very little English, buys a ticket for entry to Upton Castle (a theme park). The ticket states on it that no liability is accepted for the loss of, or damage to, property belonging to entrants. Will this clause be regarded as being incorporated into François’s contract?

Activity 6.2Angela takes her car for repair at Magna Garages. She is asked to sign a contract which states that Magna ‘accept no liability for minor damage to the bodywork of vehicles left for repair, howsoever caused’. When she queries this, she is told, incorrectly, by an employee of Magna, that it only applies to damage by third parties while the car is parked in Magna’s car park. Angela signs the contract. Is Angela bound by the clause?

The third way in which a clause may be incorporated, in addition to signing and reasonable notice, is through a ‘course of dealing’. If the parties have regularly dealt with each other, and the exclusion clause has always in the past been part of the contract, this may in itself lead to a presumption that the clause will be incorporated in any new contract, even if on this occasion reasonable notice of it has not been given – see Kendall (Henry) & Sons v Lillico (William) & Sons Ltd (1969) (regular contracts with each other on three or four occasions each month over a period of three years). The course of dealing must be consistent, however. In McCutcheon v MacBrayne (1964) there were regular dealings, but the document containing the exclusion clause was not always used: it was held that the clause had not been incorporated.

6.1.2 Construction

Essential reading ¢ McKendrick, Chapter 11: ‘Exclusion clauses’ – 11.4 ‘Incorporation’ to 11.6

‘Negligence liability’, pp.180–185.

¢ Poole, Chapter 7: ‘Exemption clauses and unfair contract terms’ – Section 4 ‘Construction’ to Section 4 D ‘Inconsistent terms’, pp.297–306.

Once it is established that the clause is a part of the contract, the next issue is to decide whether on its true construction the clause covers the particular breach which has occurred. The courts have traditionally been strict in this area and interpret any ambiguity against the person trying to rely on the clause (this is sometimes called the contra proferentem rule). In Andrews v Singer (1934), for example, a clause excluding liability in relation to implied terms was ruled ineffective to exclude liability for breach of an express term. See also: Wallis, Son and Wells v Pratt & Haynes (1911) and Houghton v Trafalgar Insurance Co Ltd (1954).

Now that consumers are generally protected by legislative provisions (see sections 6.2 and 6.3 below), the courts have indicated that there is less need to adopt ‘strained’ constructions of clauses in order to limit their scope. See, for example, the comments of Lord Wilberforce in Photo Production Ltd v Securicor Transport Ltd, [1980] AC 827, p.843; [1980] 1 All ER 556, p.561. They have also suggested that a more relaxed view can


be taken of clauses which merely limit liability, as opposed to excluding it altogether (see Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd (1983)). A difficulty with this approach (which has not been followed in Australia – see Darlington Futures Ltd v Delco Australia Pty Ltd (1987)) is that a very extensive limitation may in fact be equivalent to a complete exclusion.

There remain problems, however, with deciding whether a clause covers liability for negligence in the performance of a contract, particularly where the negligence is by an employee of the contractor. The rules applied in this area derive from the Privy Council’s opinion in Canada Steamship Lines Ltd v The King (1952). The relevant principles were stated to be:

u if the clause contains express language exempting a person from the consequence of the negligence, effect must be given to it

u if there is no express reference to such negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover it

u if the words used are wide enough, the court must then consider whether liability may be based on some ground other than negligence; if so, this will prevent reliance on the clause in relation to negligence.

This general approach is still applied by the courts in commercial cases (see, for example, EE Caledonia Ltd v Orbit Valve plc (1994)), despite the fact that the Unfair Contract Terms Act 1977 specifically deals with the issue (see 6.2.2 below). An example of the application of the second and third rules can be found in White v John Warwick (1953). In a contract for the hire of a bicycle, a clause exempting the owners from liability for personal injuries was held to cover only breach of strict contractual liability as to the condition of the bicycle, and not injuries resulting from negligence in the fitting of the saddle. If, however, the only possible liability is for negligence, then general words (such as ‘howsoever caused’) will be effective to exclude liability: Hollier v Rambler Motors (1972).

6.1.3 Fundamental breach

Essential reading ¢ McKendrick, Chapter 11: ‘Exclusion clauses’ – 11.7 ‘Fundamental breach’,

pp.185–187.

¢ Poole, Chapter 8: ‘Discharge for breach of contract’ – Section 2 ‘The consequences of breach’, pp.363–364.

At one time the courts, and in particular the Court of Appeal, developed a rule by which it was held that an exclusion clause could never be effective against a particularly serious breach of contract – a ‘fundamental’ breach. What is a fundamental breach? There are two main categories.

The first is where the breach relates to a particular obligation which is central to the contract. An example is the case of Karsales (Harrow) Ltd v Wallis (1956). Here the contract was for the supply of a car, previously inspected and found to be in good condition. When delivered, however, it had to be towed, because it was incapable of self-propulsion. Various parts of the engine had been removed or broken. The defendant purported to rely on an exclusion clause. The Court of Appeal held that what had been delivered was not, in effect, a ‘car’. There was, therefore, a breach of a fundamental term of the agreement and the exclusion clause had no application.

The second category of fundamental breach arises where the consequences of the breach are exceptionally serious. An example is Harbutt Plasticine Ltd v Wayne Tank and Pump Co Ltd (1970). The contract involved the supply of pipework in the plaintiff’s factory. The type of piping used was unsuitable and resulted in a fire which destroyed the whole of the plaintiff’s factory. The consequences of the defendant’s failure to meet its obligation to supply suitable pipework were so serious that it constituted a ‘fundamental breach’ of the contract. There could therefore be no reliance on an exclusion clause.


These cases illustrate that a ‘fundamental breach’ can occur either through the breach of a particularly important term, or through a breach which had the consequences of depriving the other party of the whole benefit of the contract.

The approach to fundamental breaches was, however, reviewed by the House of Lords in Suisse Atlantique Société d’Armament Maritime SA v NV Rotterdamsche Kolen Centrale (1967) and Photo Production Ltd v Securicor Transport Ltd (1980). The House rejected the Court of Appeal’s assertion that there was a rule of law in this area preventing reliance on an exclusion clause following a fundamental breach. Rather, the question was one of construction. Does the clause cover the breach which occurred? Although it may be difficult to convince a court that an exclusion clause was intended to cover a breach which has deprived the other side of all benefit, provided that it is clearly worded so as to do so, the courts will not refuse to apply it for this reason.

Activity 6.4Read the case of Photo Production Ltd v Securicor Transport Ltd (1980).

a. What type of fundamental breach was involved in this case?

b. Why did the House of Lords think that it may well have been the parties’ intention that Securicor would have a very minimal level of liability under the contract?

The approach adopted in Photo Production v Securicor may be justified by the fact that there are now statutory protections for consumers in relation to very broad exclusion clauses and that commercial contracts may appropriately be left to be governed by the principle of ‘freedom of contract’. The approach is therefore most appropriate where the parties are businesses contracting on equal terms. The effect of the Unfair Contract Terms Act 1977 is that in all consumer contracts an exclusion clause which attempts to exclude liability for a fundamental breach will either be automatically void or subject to a test of ‘reasonableness’ – which will be very difficult to satisfy. This aspect of the UCTA 1977 is discussed in the next section.

Activity 6.5Mark orders 100 kilos of carrots for his market stall from Ian. Ian delivers 100 kilos of runner beans. When Mark complains, Ian points to a clause in their contract which states: ‘The seller may substitute other vegetables in place of those specified in the order and is not liable for any losses which may result from such a substitution’. Can Mark claim that this clause is invalid under the common law?

Self-assessment questions1. What is the present position on the rule of ‘fundamental breach’?

2. What is the contra proferentem rule?

3. How can an unwritten clause be incorporated into a contract ‘in the course of dealing’?

SummaryThe common law controls the use of exclusion clauses by means of the rules of incorporation and construction. The rules relating to incorporation require close attention to be given to when the clause was put forward and the notice that was given of it. The rule of construction is based around the contra proferentem rule and is applied particularly strictly where the defendant alleges that liability for negligence has been excluded. Where there is a fundamental breach, an exclusion clause does not automatically cease to apply but the courts will need very clear language before they will accept that the clause was intended to cover the breach.



u explain how the courts decide whether a clause has been incorporated into a contract

u state the rules for the construction of exclusion clauses

u give examples of a ‘fundamental breach’ of contract and explain its effect on an exclusion clause.


6.2 The Unfair Contract Terms Act 1977

Essential reading ¢ McKendrick, Chapter 11: ‘Exclusion clauses’ – 11.9 ‘The Unfair Contract Terms Act

1977’ to 11.16 ‘Conclusion’, pp.187–205.

¢ Poole, Chapter 7: ‘Exemption clauses and unfair contract terms’ – Section 5 A ‘Scope of the UCTA 1977’ and Section 5 B ‘Basic scheme of the UCTA 1977’, pp.315–347.

The Unfair Contract Terms Act 1977 (UCTA) provides a statutory framework for the regulation of exclusion clauses. It operates alongside the common law. It is still possible, therefore, for a clause to be struck down by the common law rules, without needing to consider the effect of the UCTA. This might well be true in relation to an argument that the clause had not been properly incorporated into the contract. It is necessary when looking at the validity of a clause to consider both the common law and the statutory controls (in the form of both UCTA and the Unfair Terms in Consumer Contracts Regulations 1999, discussed below at 6.3).

The fact that there are two pieces of legislation, which can overlap, governing the control of contractual terms can lead to confusion. The Law Commission has issued a report, Unfair Terms in Contracts, Law Com No. 292, Cm 646, 2005 (www.lawcom.gov.uk). The report considers the current legislation in this area (the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999) and makes a number of recommendations. These include the recommendations that the two pieces of legislation are unified into a new legislative regime for the whole of the UK, with largely no reduction in consumer protection, and that this regime should be clearer and more accessible to the reader. The government’s response to the report was released in July 2006. The response indicated that, subject to a regulatory impact assessment, it accepted the recommendations and legislation to implement them may be brought forward at some point in the future.

6.2.1 The scope of the ActThe Unfair Contract Terms Act 1977 is primarily concerned with exclusion and limitation clauses, rather than ‘unfair terms’ in general. Virtually all of its provisions are concerned with ‘business liability’ (see s.1(3) of the Act) – that is liabilities arising in the course of a business. The private individual who puts an exclusion clause in a contract (not a very common event) will generally only be subject to the common law rules discussed in the first part of this chapter. Note, however, that the decision in R & B Customs Brokers v UDT (discussed below, section 6.2.3) may mean that some contracts made by a business are not made ‘in the course of business’ if they fall outside the scope of the business’s normal areas of activity (for example, a firm selling off its old computers).

Various different ways of excluding or limiting liability are noted in s.13 and stated to fall within the Act’s scope. For example, making enforcement subject to restrictive or onerous conditions (such as ‘all claims to be made within 24 hours of the conclusion of


the contract’) will be treated as an exclusion. Most of the Act’s provisions also apply to attempts to avoid liability by stating that a particular obligation or duty does not arise. So, in Smith v Eric Bush (1989), a statement by a surveyor that a valuation was given without any acceptance of responsibility for its accuracy, was treated as falling within the scope of UCTA. See also Phillips Products Ltd v Hyland (1987).

On the other hand, certain types of contract do not fall within the main protective provisions of the Act (ss.2–4) at all. These are listed in Schedule 1 to the Act and include contracts of insurance, contracts concerning land and contracts relating to intellectual property. In addition, the UCTA does not apply to international supply contracts by reason of s.26 of the Act. In Amiri Flight Authority v BAE Systems Plc [2003] EWCA Civ 1447; [2003] 2 Lloyd’s Rep 767 the Court held that a contract formed in Abu Dhabi to supply aircraft, where the aircraft was supplied in England, was not an international supply contract within s.26 of the UCTA. Consequently, the exclusion clause in the contract could be scrutinised under the UCTA. Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd [2008] decided that s.26(4)(a) of the UCTA did not require that the goods be delivered to another state and was satisfied if the goods would be carried from one state to another.

One of the first questions to ask, therefore, when considering the impact of the UCTA on an exclusion clause, is whether the Act applies to the situation at all.

6.2.2 Negligence liabilityThe UCTA deals with clauses which attempt to exclude liability for ‘negligence’ in s.2. ‘Negligence’ is defined as covering: an obligation to take reasonable care in the performance of a contract; the tort of negligence; and liability under the Occupier’s Liability Act 1957.

The UCTA separates out negligence resulting in death or personal injury, from negligence leading to loss or damage to property. As regards death or personal injury, s.2(1) provides that there can be no exclusion or limitation of such liability arising from negligence. Any clause in a contract which purports to have this effect will therefore be void.

Section 2(1) does not, however, apply where the effect of the clause is to transfer liability between possible tortfeasors, rather than preventing a victim from recovering (Thompson v Lohan (Plant Hire) (1987)).

Activity 6.6Are there any clauses purporting to restrict liability for causing death or personal injury, which will not be struck down by s.2(1) of the UCTA? If so, what might they be?

Section 2(2) of the UCTA deals with negligence giving rise to loss or damage apart from death or personal injury. We are talking here about damage to property or financial losses (lost profits, etc.). In relation to such loss or damage, s.2(2) provides that a clause purporting to restrict liability will only be effective ‘in so far as [it] satisfies the requirement of reasonableness’. The requirement of reasonableness is discussed below, at 6.2.5.

6.2.3 Contractual liabilityThe exclusion of contractual liability other than through negligence is covered by s.3 of the UCTA. This applies in two situations:

u where one of the parties deals ‘as a consumer’

u where one of the parties deals on the other’s ‘written standard terms of business’.

Note that in relation to the second of these categories, it can apply as between two business contractors. All contracts on written standard terms are therefore potentially within the scope of s.3.

http://uk.westlaw.com/Find/Default.wl?DB=4791&SerialNum=2003669371&FindType=g&AP=&RS=WLUK2.92&VR=2.0&SP=ukatqmw-000&SV=Split&MT=WestlawUK&FN=_top


As to the first category, ‘dealing as a consumer’ is defined in s.12 of the Act. This states that a person deals as a consumer where ‘he neither makes the contract in the course of a business nor holds himself out as doing so’ and the other party does make the contract in the course of a business. The phrase ‘in the course of a business’ is thus crucial to the definition of who is a consumer for these purposes. It is not further defined in the Act, but R & B Customs Brokers v UDT (1988) shows that it does not necessarily apply to all the activities of a business. There a firm which bought a car partly for use in the business but also for the directors’ personal use, was held not to be contracting ‘in the course of business’. The company’s business was concerned with exports, not with the buying and selling of cars. This means that a company may ‘deal as a consumer’, if it is contracting outside its normal areas of activity (though in Stevenson v Rogers (1999) the Court of Appeal took a somewhat different view).

If a contract is within one of the above two categories, then s.3(2) makes any attempt to exclude or limit liability subject to the requirement of reasonableness. It also subjects to the same test clauses which purport to allow a party ‘to render a contractual performance substantially different from that which was reasonably expected’, or ‘to render no performance at all’. This will cover the ‘peas and beans’ type of case (see Activity 6.5 above).

Activity 6.7A Ltd engages B Ltd to service the machines in A Ltd’s factory. The contract is based on a written contract put forward by B Ltd. There is, however, considerable negotiation over the price and the periods between services before the contract is agreed. Will it fall within the scope of s.3 UCTA?

Activity 6.8C Ltd contracts with D Ltd for D Ltd to paint the exterior of C’s office premises. The contract is made through an exchange of letters. Is the contract within s.3 UCTA?

Activity 6.9Ramesh wants a tree in his garden cut down. He asks his neighbour Tony, who is a builder by trade, to do the work and he offers Tony £150. Tony is worried that the tree may damage Ramesh’s greenhouse when it falls. He says that he will do it, but adds ‘I’m not accepting any liability if your greenhouse gets damaged’. Tony cuts down the tree as carefully as he can, but nevertheless the greenhouse is damaged. Will Tony’s stated ‘exclusion of liability’ fall within the scope of s.3 of the UCTA?

6.2.4 The supply of goodsThe UCTA 1977 contains special provisions in ss.6 and 7 dealing with contracts for the sale or supply of goods. This includes hire purchase, hire transactions and contracts for the supply of work and materials. In relation to the statutorily implied terms as to title (ownership) that operate in relation to such contracts, the UCTA prohibits any exclusion of liability. In relation to the implied terms as to description or quality (for example, under ss.13 and 14 of the Sale of Goods Act 1979), the position depends on whether the buyer is dealing ‘as a consumer’ or not. The test for whether this is so is the same as that discussed above (6.2.3) in relation to s.3 UCTA, with the addition of a requirement that the goods concerned must be ‘of a type ordinarily supplied for private use or consumption’ (s.12(1)(c) UCTA). The leading case on ‘dealing as a consumer’, R & B Customs Brokers v UDT (1988), was in fact concerned with s.6 of the UCTA.

If the buyer is dealing as a consumer, then there can be no exclusion or limitation of the implied terms as to description or quality. If the buyer is dealing otherwise than as a consumer, then liability under these terms can only be excluded or limited in so far as the clause satisfies the requirement of reasonableness.


Activity 6.10Emma has a hobby restoring steam engines. She buys from Industries Ltd a second-hand lathe, previously used in Industries’ factory, which she plans to use to make spare parts for her engines. The sale contract states that Industries Ltd’s liability for any loss resulting from the contract is limited to the purchase price of the lathe. What is the effect of s.6 of the UCTA on this clause?

6.2.5 The test of reasonablenessAs we have seen, in a number of situations the UCTA makes the validity of an exclusion clause dependent on whether it satisfies the ‘requirement of reasonableness’. The test for this requirement is dealt with by s.11 and Schedule 2 to the Act. It has also been considered in several cases.

Section 11 itself is not, in fact, very helpful in identifying which clauses will be reasonable. It states that the clause must be ‘a fair and reasonable one to be included’ in the contract, ‘having regard to the circumstances which were, or ought reasonably to have been, in contemplation of the parties when the contract was made’. This does not assist in telling us what will be ‘fair and reasonable’. It does indicate, however, that the test involves looking at the clause at the time of the contract, rather than in the light of any breach that has occurred. The test is whether the clause was a reasonable one to include in the first place, rather than whether it would be reasonable to allow reliance on it in the circumstances which have actually occurred. This approach was confirmed in Stewart Gill Ltd v Horatio Myer & Co Ltd (1992). The obiter suggestion to the contrary in Overseas Medical Supplies Ltd v Orient Transport Services Ltd (1999) seems to go against the clear wording of s.11.

The only other assistance given by s.11 is in s.11(4), referring to clauses limiting liability to a particular sum. Here the Act states that, in assessing the reasonableness of the clause, regard should be had to the resources available to the person putting forward the clause and the possibility of covering the liability by insurance. The more resources that are available, and the greater the opportunity for insurance, the less likely the clause is to be reasonable.

Schedule 2 to the Act contains a list of factors which should be taken into account in assessing reasonableness. The schedule is stated to be applicable to the reasonableness test as it applies under ss.6 and 7 (that is, in relation to contracts for the supply of goods), but the Court of Appeal has made it clear that the factors listed may be relevant wherever the reasonableness of a clause is to be assessed under the Act (see Overseas Medical Supplies Ltd v Orient Transport Services Ltd (1999)).

Activities 6.11–6.13Read the ‘Guidelines’ in Schedule 2 of the UCTA and then answer the following questions.

Activity 6.11What is the overall approach, would you say?

Activity 6.12Are there any overlaps with the common law rules in relation to exclusion clauses?

Activity 6.13How many of the guidelines are only applicable to supply of goods contracts?

Judicial consideration of statutory tests of the reasonableness of exclusion clauses pre-dates the UCTA, in that in 1973 a test of whether it was reasonable to rely on an exclusion clause was added to the Sale of Goods Act (see Schedule 1, para.11 Sale of Goods Act 1979).

The most important case relating to this provision is the House of Lords decision in George Mitchell v Finney Lock Seeds (1983), which has also been referred to in cases on


the UCTA. Here the contract was for the sale of cabbage seed. The wrong seed was supplied and the crop failed entirely. The contract contained a clause limiting the seller’s liability to the price of the seed. This clause was in common use in the trade. Nevertheless, the House of Lords held that the seller’s reliance on it was unreasonable because, among other things, the seller could easily have insured against the liability. It was also common practice for seed sellers not to rely on the clause in situations such as those that had occurred, but to negotiate a settlement of claims on terms more favourable to the buyer.

Post-UCTA the House of Lords considered ‘reasonableness’ in Smith v Eric S Bush (1990). Here the court emphasised the importance of the balance of bargaining power, the availability of alternative sources (in this case of surveying advice), the difficulty of the task for which liability is being limited and the practical consequences of allowing or rejecting the exclusion.

The rest of the appellate decisions on the UCTA test of reasonableness come from the Court of Appeal. See, for example, Phillips Products Ltd v Hyland (1987); Stewart Gill v Horatio Meyer (1992); Schenkers Ltd v Overland Shoes Ltd (1998) and Overseas Medical Supplies Ltd v Orient Transport Services Ltd (1999).

These cases do not add much to the considerations outlined above. One important aspect of the Court’s approach, however, is its general reluctance to interfere with the decision of the trial judge on this issue. Thus, in Phillips Products Ltd v Hyland (1987) the court concentrated on whether the judge had addressed the right issues, rather than the substance of his decision. Applying this approach in Watford Electronics Ltd v Sanderson CFL Ltd (2001), however, the Court felt able to overturn the trial judge’s decision that a clause in a contract for the supply of computer software was unreasonable. The Court emphasised that in general the courts should assume that business contractors will be the best judges of the commercial fairness of their agreements. It is only if there is evidence that one party has taken unfair advantage of the other, or that the term is so unreasonable that it cannot have been properly understood or considered, that the courts should interfere. This suggests a very limited role for findings of unreasonableness outside the area of consumer contracts.

Activity 6.14Xerxes plc includes an exclusion clause in all its contracts stating that ‘Xerxes plc is in no circumstances liable for any losses whatsoever resulting from the breach of this contract, whether resulting from negligence or any other cause.’ Xerxes has broken a contract with Zenon Ltd. The contract is worth £50,000 to Zenon. Xerxes’ breach, which is not caused by the negligence of Xerxes or any of its employees, causes Zenon a loss of £2,500. Zenon claims this amount from Xerxes. Can Xerxes rely on the clause?

Activity 6.15Yasmin buys a computer from XLO Electronics. She finds that the monitor’s detachable lead is faulty. XLO Electronics show her a clause in the contract which she signed when she bought the computer, stating that ‘XLO Electronics will replace any faulty items free of charge, but this does not extend to batteries, leads, headphones, aerials, or other peripherals, in relation to which no liability is accepted for any defects.’ Can Yasmin challenge this clause?

Self-assessment questions1. When may a contract made by a business be considered not to have been made

‘by way of business’?

2. Name three types of contract that are not covered by the provisions of the UCTA.

3. What is the general attitude of the courts to those who make contracts by way of business?

4. What, in general, do exclusion clauses purport to exclude?


SummaryThe Unfair Contract Terms Act 1977 applies mainly to the exclusion of ‘business liability’. Clauses are either rendered invalid or made subject to the requirement of reasonableness. Clauses which are invalid are those excluding liability for negligence causing death or personal injury and those excluding liability for the implied terms in supply of goods contracts with consumers. Clauses which are subject to the test of reasonableness include those excluding liability for negligence causing loss or damage to property; clauses excluding contractual liability in relation to consumers or those contracting on the other party’s written standard terms; and clauses excluding liability for the implied terms in supply of goods contracts with business customers.

The test of reasonableness looks at all the circumstances of the case, but inequality in the strength of bargaining power is likely to be a particularly strong consideration.


u state what kinds of clauses are invalidated by the UCTA

u state what kinds of clauses are required to be ‘reasonable’ by the UCTA

u explain the test of ‘reasonableness’.

6.3 The Unfair Terms in Consumer Contracts Regulations 1999

Essential reading ¢ McKendrick, Chapter 17: ‘Duress, undue influence, and inequality of bargaining

power’ – 17.6 ‘The Unfair Terms in Consumer Contracts Regulations 1999’, pp.295–301.

¢ Poole, Chapter 7: ‘Exemption clauses and unfair contract terms’ – Section 5 C ‘The Unfair Terms in Consumer Contracts Regulations 1999’ to Section 6 ‘Reform’, pp.347–360.

¢ Bright, S. ‘Winning the battle against unfair contract terms’, Elements of the law of contract Study pack.

These regulations (the UTCCR) result from the implementation of a European Directive (93/13/EC). A previous version of the Regulations was enacted in 1994, being replaced by the current version in 1999.

There is considerable overlap between the effect of the UCTA and the UTCCR in relation to exclusion clauses. For this reason, the Law Commission has recommended that the two pieces of legislation be unified into a single legislative scheme: Unfair Terms in Contracts, Law Com No. 292, Cm 646, 2005 (www.lawcom.gov.uk). As they stand, however, there are some important differences between the two pieces of legislation.

u The UTCCR apply only to consumer contracts. A ‘consumer’ is defined by the Regulations as a ‘natural person’ acting for non-business purposes. The approach taken in R & B Customs Brokers v UDT (1998) in relation to the UCTA does not apply to the UTCCR.

u The UCTA applies to all types of contractual clauses, other than those that have been ‘individually negotiated’. It isnot limited to dealing with clauses which have the effect of excluding or limiting liability.

The test of fairness is set out in reg.5 (1). It states that a term will be unfair if ‘contrary to the requirement of good faith’ it ‘causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer’. There are two main elements to this test – ‘good faith’ and ‘significant imbalance’. The relationship between them was considered by the House of Lords in Director General of Fair Trading v First National Bank plc (2002).


The majority of the House agreed with the analysis of Lord Bingham, to the effect that:

u ‘significant imbalance’ arises if ‘a term is so weighted in favour of the supplier as to tilt the parties’ rights and obligations under the contract significantly in his favour’.

u ‘good faith’ on the other hand relates to the need for ‘fair and open dealing’. In other words, it requires that the consumer is given full information and that there are no ‘pitfalls or traps’ in the contract. No advantage should be taken of the consumer’s necessity, lack of experience, weak bargaining position, etc. In Khatun v Newham LBC [2003] EWHC 2326 it was held that the UTCCR applied to the terms of a contract for accommodation in circumstances where the local authority was statutorily obliged to provide accommodation. In other words, ‘significant imbalance’ is concerned with substantive fairness, whereas ‘good faith’ relates to procedural fairness.

Schedule 2 to the Regulations contains an ‘illustrative and non-exhaustive’ list of terms which may be regarded as unfair. The list is long and most of the clauses identified would be in danger of being struck down by the common law or the UCTA. Examples include terms which seek to restrict liability for death or personal injury or allow the seller or supplier to provide an inadequate performance or a different product or service than that which is contracted for. Note, however, that these are examples of terms which are indicative of an underlying substantive unfairness between a seller or a supplier on the one side and a consumer on the other, with regard to the substance of the particular term.

The list also encompasses more procedural considerations; an example of this lies in para.1(i) of Schedule 2, which covers terms that have the effect of binding a consumer to terms he had no real opportunity of becoming acquainted with before the contract was formed. In assessing unfairness, it appears that courts attach significance to which of the parties put forward the term. In Bryen & Langley Ltd v Boston (2005) the Court of Appeal found that the consumer could not complain about the nature of the terms of the contract with a building contractor when the consumer’s agent had asked the building contractor to tender on the very terms now complained of by the consumer.

The test of fairness does not apply to clauses which define the main subject matter of the contract, or the adequacy of the price (reg.6(2)). The House of Lords took a restrictive interpretation to reg.6(2) in Director General of Fair Trading v First National Bank (2001). This interpretation was followed in Bairstow Eves London Central Ltd v Smith (2004) on the grounds that a more liberal interpretation would erode the operation of the Regulations. In Office of Fair Trading v Abbey National plc (2009) the Court of Appeal, in considering reg.6(2) concluded that the ‘essential bargain’ test is a narrow one and will usually operate to exclude from the fairness test only those terms which can genuinely be viewed as representing the agreement between the parties and ‘thus a genuine reflection of freedom of contract’.

In other words, the fairness test does not operate to prevent the consumer from simply making a ‘bad bargain’, for example, by paying too much for goods of poor quality. Clauses relating to these matters are subject only to the requirement of ‘intelligibility’ in reg.7.

Regulation 7 states that all the terms of the contract must be in ‘plain, intelligible language’. This means that complex sentence structures, unfamiliar words and legal jargon should all be avoided. Paragraph 2 of this Regulation effectively incorporates the common law contra proferentem rule, by requiring that where there is a doubt about the meaning of a term it should be interpreted in favour of the consumer. There seems to be no other sanction, however, for a failure to comply with reg.7 (unless the obscurity of the term is such that it should be regarded as ‘unfair’).

In Munkenbeck & Marshall v Harold (2005) Judge Harvey QC held that the terms were unfair (‘onerous and unusual’) and not enforceable despite the fact that they formed part of the profession-wide standard terms.


Activity 6.16Try to find some examples of exclusion clauses aimed at consumers. Likely sources include mail order catalogues or holiday brochures. Consider the extent to which the clauses, in your opinion, meet the standards set by the UCTA 1977 and the UTCCR 1999 (including the requirement of ‘intelligible language’). How might they be improved?

For obvious reasons, no feedback is provided for this activity.

The UTCCR 1999 also give a general supervisory power to the Office of Fair Trading (reg.10). This includes the power to deal with complaints, to obtain injunctions to restrain the use of unfair terms, and to monitor compliance with any court order. In practice this has turned out to be one of the most significant aspects of the regulations, with several hundred cases a year in which clauses have been modified following the exercise of these powers. For further consideration of these powers see Bright (2000).

Self-assessment questions1. To what types of contract do the UTCCR apply?

2. What are the two elements of the test of unfairness in the UTCCR?

3. Does either the UCTA or the UTCCR protect the consumer who makes a ‘bad bargain’?

SummaryThe UTCCR applies only to consumer contracts. All terms within such contracts, other than those defining the bargain itself, must satisfy the test of ‘good faith’ and the avoidance of a ‘significant imbalance’ in the rights and obligations to the detriment of the consumer. All terms must also satisfy the requirement of intelligibility.


u give examples of the kinds of clauses which are invalidated by the Unfair Terms in Consumer Contracts Regulations 1999.


Sample examination questionAndrew is a surveyor. Four months ago he bought a nine-month old ‘Landmaster’ car from Brenda’s Garage Ltd for use in his practice. He paid £12,500 for the car. As part of the contract for the purchase of the car he was given a written guarantee in the following terms: ‘Brenda’s Garage Ltd guarantees that, for three months from the date of purchase, it will put right free of charge any defects in the vehicle which cannot be discovered on proper examination at the time of purchase. Thereafter all work and materials will be charged to the customer.’

The sales manager recommended to Andrew that he should take out the ‘special extended warranty’ under which, for payment of £350, the car would have been guaranteed in respect of all defects for a further two years, but Andrew declined.

Last week the engine and gearbox seized up. The repairs will cost £2,000.

Advise Andrew. Would your answer differ if he also used the car at the weekends for domestic purposes?


Advice on answering the questionIn answering questions of this type you should start by indicating the way in which the potential defendant is in breach of contract. Here it is to be assumed that Brenda’s Garage is in breach of contract as regards the implied term of satisfactory quality under s.14 of the Sale of Goods Act 1979. The question then becomes whether Brenda’s Garage can take advantage of the exclusion of liability which is included in the ‘guarantee’. This aspect of the question was examined in chapter 5. We turn now to the issues of whether or not the clause was incorporated and, if so, how the clause is regulated by the legislation.

As regards the common law rules, the main issue would seem to be that of ‘incorporation’. Was the ‘guarantee’ and the exclusion clause which it contains part of Brenda’s Garage’s contract with Andrew? This will depend on whether the clause was shown to Andrew before or at the time when he entered into the contract. If it was handed to him after he had made the contract for the purchase of the car then it would probably not be incorporated, and would therefore be ineffective (Olley v Marlborough Court). One argument against this which the garage might use would be that there was a separate unilateral contract under which Brenda’s Garage Ltd said, ‘we will give you a three month full guarantee, in return for your acceptance of the limitation of our liability after three months’.

Assuming that the exclusion clause was incorporated, there would not seem to be any argument that it covers the breach which occurred. Any detailed discussion of the rules of construction is therefore unnecessary.

The main focus in answering this question should be the Unfair Contract Terms Act 1979. (Note that the UTCCR do not apply, since Andrew is not a consumer for the purposes of those regulations.) Since the contract is for the sale of goods, then the relevant provision is s.6. This requires you to decide whether Andrew is contracting as a consumer (as defined s.12 UCTA) or not. Is he buying the car in the course of his business as a surveyor? It seems likely that he is (but see R & B Customs Brokers v UDT). If so then the clause limiting liability must satisfy the requirement of reasonableness. In applying this test, as well as thinking about the matters set out in Schedule 2 to the UCTA, you should note the offer of the extended guarantee. Does Andrew’s rejection of this opportunity mean that the exclusion contained in the guarantee is more reasonable?

The alternative scenario increases the likelihood that Andrew will be treated as contracting as a consumer under the R & B Customs Brokers’ approach. If he is contracting as a consumer then the Garage will be unable to exclude its liability for the Sale of Goods Act implied terms (see s.6(2) of the UCTA).


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I can give examples of a ‘fundamental breach’ of contract and explain its effect on an exclusion clause.

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I can state what kinds of clauses are invalidated by the UCTA.

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I can state what kinds of clauses are required to be ‘reasonable’ by the UCTA.

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I can explain the test of ‘reasonableness’. ¢ ¢ ¢

I can give examples of the kinds of clauses which are invalidated by the UTCCR.

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6.1 Common law controls ¢ ¢

6.2 The Unfair Contract Terms Act 1977 ¢ ¢

6.3 The Unfair Terms in Consumer Contracts Regulations 1999

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Contents

Introduction 84

7 1 Contracts for necessaries 85

7 2 Beneficial contracts of service 85

7 3 Voidable contracts 86

7 4 Recovery of property 86


Part III The capacity to contract – minors

7 Contracts made by minors


Introduction

A minor is a young person under the age of 18 years. A minor is not considered to have the same capacities as an adult: one of these capacities is the ability to enter into a legally binding contract. An adult with full mental capabilities has capacity to enter into a contract. Certain persons do not have full contractual capacity. They include the drunk, the mentally disordered, minors, unincorporated associations, corporations, the Crown and public authorities. Within this category of persons who lack capacity, the syllabus of this subject only considers minors. Important changes to this area were made by the Minors’ Contracts Act 1987.

The purpose of the rules is to protect minors against their own inexperience and improvidence by relieving them of liability on contracts made by them but, in some cases, the rights of the other party must in fairness be allowed to prevail over this policy of protection.

The issues to concentrate upon are:

u contracts for necessaries

u beneficial contracts of service

u voidable contracts

u the recovery of money paid or property handed over in pursuance of a non-binding contract.

Note that the Infants Relief Act 1874 has been repealed.


u establish what are contracts for necessaries and beneficial contracts of service

u explain the consequences of failure by the minor to pay for goods or services

u distinguish between the effect of contracts which have been performed and those which are still executory

u determine whether the supplier has any prospect of recovering the goods from the minor.

Elements of the law of contracts 7 Contracts made by minors page 85

7.1 Contracts for necessaries

Essential reading ¢ McKendrick, Chapter 16: ‘Capacity’ – 16.1 ‘Introduction’ and 16.2 ‘Minors’,

pp.277–279.

¢ Poole, Chapter 16: ‘Illegality and capacity to contract’ – Section 3 A ‘Contracts involving continuing obligations’ and Section 3 B ‘Contracts for necessities’, pp.799–801.

The rule with regard to necessary goods is now stated in s.3 of the Sale of Goods Act 1979. Note especially that ‘necessaries’ do not mean ‘necessities’ but goods which are suitable to the minor’s ‘condition in life’ and his actual requirements.

The liability is to pay a reasonable price, not the contract price. What is a necessary will depend upon a number of factors. In Nash v Inman (1908) the supplier had to prove that the minor did not have sufficient suitable clothing. Contrast this with the decision in Peters v Fleming (1840) on the effect of the minor’s ‘condition in life’.

You will note that necessaries may include services and that the beneficial contracts of service considered in the next section are also regarded as another form of necessaries. See, for example, Roberts v Gray (1913) where the minor was held liable for breach of an executory contract.

Activity 7.1How can the supplier know whether young Inman already has enough waistcoats? Is the law perhaps being overprotective here?

Activity 7.2Would the decision in Roberts v Gray also apply to an executory contract for necessary goods?

SummaryAt common law, minority was not a defence where the contract was for necessaries. Necessaries could either be goods or a contract for services.

Reminder of learning outcomesBy this stage you should be able to:

u establish what are contracts for necessaries and beneficial contracts of service.


7.2 Beneficial contracts of service

Essential reading ¢ McKendrick, Chapter 16: ‘Capacity’ – 16.2 ‘Minors’, pp.277–279.

¢ Poole, Chapter 16: ‘Illegality and capacity to contract’ – Section 3 C ‘Beneficial contracts of service’, pp.801–802.

A minor is generally bound by a contract of employment where that contract is beneficial to him. This category includes contracts of apprenticeship, training or employment and professional engagements. As to the overriding requirement that the contract as a whole must be beneficial to the minor, see, for example, Doyle v White City Stadium (1935), and Chaplin v Leslie Frewin (Publishers) (1966) and contrast De Francesco v Barnum (1880).

Note that trading contracts are not included.


Activity 7.3Why should trading be treated differently from exercising a profession?

SummaryA minor will generally be bound where the contract is one of employment which is beneficial to him. Trading activities are excluded from this category.


u establish what are contracts for necessaries and beneficial contracts of service.


7.3 Voidable contracts


In this very mixed group of contracts, the minor may rid himself of his obligations if he repudiates the contract before attaining the age of 18 or within a reasonable time after that. What this means is that the contracts are voidable at the minor’s option. A voidable contract is a contract which exists, but which one party has a right to set aside or render void. This right can be lost in certain circumstances. The most common of these circumstances is the intervention of a third party who has acquired rights following from the voidable contract. A voidable contract is different from a void contract in that a void contract is an entity which was never a contract. The term is, therefore, a paradox. The distinction between void and voidable is discussed again in Chapter 8 in relation to ‘mistake’. There seems to be no convincing explanation for the separate treatment of this group. If the minor needs protection, why are the contracts not simply void?


7.4 Recovery of property


¢ Poole, Chapter 16: ‘Illegality and capacity to contract’ – Section 3 D ‘Restitution by the minor’, pp.802–803.

Previously, at common law, all other contracts (i.e. those neither for necessaries nor falling within the anomalous class of voidable contracts) were not binding on the minor unless he ratified them after reaching majority, but they could be enforced by the minor if he chose. The Infants Relief Act 1874 did away with ratification and made many of the contracts ‘absolutely void’ but the Minors’ Contracts Act 1987 restores the possibility of ratification and provides (s.3) a new remedy of restitution in favour of the other contracting party. This remedy is discretionary but cases such as Stocks v Wilson (1913) and Leslie v Sheill (1914) may illustrate the factors which will be taken into account.

Activity 7.4What is the position of a minor who purchases, and pays for, non-necessary goods but who now wants to cancel the transaction?

Elements of the law of contracts 7 Contracts made by minors page 87


u distinguish between the effect of contracts which have been performed and those which are still executory

u determine whether the supplier has any prospect of recovering the goods from the minor.


Examination adviceA review of past examination papers indicates that this is a topic which has usually occurred as a part of a problem involving other issues.

Sample examination questionLinda left school last year at the age of 16. She took a job as a trainee kitchen assistant in a hotel. Her wages are £50 a week and she is required to give three months’ notice to terminate her employment.

She recently agreed to buy an ‘Osaka’ motorcycle so that she could spend more time with her boyfriend Malcolm, who is mad about motorcycles. She also signed a written agreement to buy a one-quarter share in a racing greyhound called Dingo.

Linda has now been offered a job as a cook in a restaurant at £100 a week, provided she can start immediately. She has failed to pay for the motorcycle or the share in Dingo.

Advise Linda.

Advice on answering the questionThis question presents the issue of incapacity by reason of Linda’s minority in three different contracts. You need to deal with each in turn because they raise slightly different issues. With the first contract, you need to consider whether or not her job as a trainee kitchen assistant is a necessary in that it is a contract of employment beneficial to her. You need to consider the case law in this area, notably Roberts v Gray (1913). The balance of probabilities favours this being a contract of employment from which she will benefit. Accordingly, it is binding upon her.

With regard to the motorcycle, you need to consider whether or not this is a necessary within the meaning of s.3 of the Sale of Goods Act 1979, in light of the decision in Nash v Inman. On the one hand, the motorcycle seems something of an extravagance; on the other hand, it is possible to argue that she needs it for transportation (possibly to her employment). The reason given is that she needs it to spend time with her boyfriend Malcolm, which works against the argument that it is a necessary.

The purchase of a share in the racing greyhound would appear to be something in the nature of a trade. Accordingly, this contract is unlikely to be enforceable.

Your advice to Linda is that she is bound by her contract of employment, may be bound by the contract to purchase the motorcycle and is unlikely to be bound by the contract to purchase a share in the greyhound.


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I can establish what are contracts for necessaries and beneficial contracts of service.

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I can explain the consequences of failure by the minor to pay for goods or services.

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I can distinguish between the effect of contracts which have been performed and those which are still executory.

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I can determine whether the supplier has any prospect of recovering the goods from the minor.

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7.1 Contracts for necessaries ¢ ¢

7.2 Beneficial contracts of service ¢ ¢

7.3 Voidable contracts ¢ ¢

7.4 Recovery of property ¢ ¢

Contents

Introduction 90

8 1 Some guidelines on mistake 91

8 2 Bilateral mistakes 92

8 3 Unilateral mistakes 97

8 4 Mistake in equity 102



8 Mistake


Introduction

Mistake is a difficult area of contract law. A major reason for the difficulty is that the common law recognises no comprehensive theory of mistake. Consequently, many of the decisions are difficult to reconcile with each other. This difficulty is made worse by the fact that the number of mistake cases is quite small. A further complication is that judges, authors and lawyers often use different terms to describe the same concept (and at other times use the same term to describe different concepts). You need to be careful about the language used: look beyond the words and examine what is meant by them.


u explain what contractual mistake is (and is not)

u compare the effect of mistake with that of misrepresentation

u distinguish between bilateral and unilateral mistake

u state what relief a court will provide for an operative mistake in law and in equity

u illustrate the limits of the doctrine of mistake

u explain what is meant by an agreement mistake

u illustrate the circumstances in which an agreement mistake will operate

u indicate what a mutual or common mistake is

u outline the circumstances in which courts have found a mutual or common mistake to be operative

u explain what the basis is for finding a contract is void where a mutual or common mistake operates

u state what a sufficiently fundamental mistake as to a quality of the subject matter is (or is not)

u indicate the circumstances in which courts will find that a contract is void where the mistake is a unilateral mistake

u outline the effect of a mistake as to identity and the circumstances in which courts will find such a mistake is operative.

Elements of the law of contract 8 Mistake page 91

8.1 Some guidelines on mistake

A few guidelines may assist you as you approach this topic.

1. Mistakes can be either unilateral (a mistake of one party only) or bilateral (a mistake of both parties). In general, the law will only provide relief where the mistake is a bilateral mistake – although there are some important exceptions to this point.

2. The parties may share the same bilateral mistake (it is a ‘common’ or ‘mutual’ mistake) or they may each be mistaken, but with respect to a different point.

3. At common law, an operative mistake will render a contract void; in equity, the effect of mistake is said to render the contract voidable. Equity seeks to provide whatever remedy is just in the circumstances.

4. Many cases can be explained upon different grounds than that of mistake.

5. Many mistake cases will present the same fact patterns as misrepresentation cases – indeed, in the majority of cases, a claimant would be advised to claim that a misrepresentation had been made rather than a mistake. This is partly because of the availability of damages for a misrepresentation, but also because the changes effected by the Misrepresentation Act 1967 make a misrepresentation easier to prove. (See Chapter 9.)

6. Courts are reluctant to find an operative mistake. A possible reason for this is that to do so does, to a certain extent, rewrite the contract between the parties. Another possible reason is that if a court finds that a contract is void for mistake, this may well affect the rights of innocent third parties.

Mistake at common law and in equityIt may assist you to think about mistake in different categories. The most significant division is between mistake at common law and mistake in equity. We will begin with mistake at common law, because if the mistake is an operative one, the contract is void – and there is no need to consider mistake in equity. We will begin with bilateral mistakes and consider different types of bilateral mistakes – that is to say, the circumstances in which courts will find that a mistake of both parties is sufficiently fundamental to invalidate the apparent contract. In these cases, if the mistake is operative it is said to result in what is best described as a paradox: a void contract. Because of the mistake, the apparent agreement of the parties lacks consensus and there is no contract.

Mistakes of law and mistakes of factEnglish contract law long barred relief where the mistake was one of law rather than of fact. Exceptions existed to this bar – a common one was that a mistake as to private rights was not a mistake of fact (eg, Cooper v Phibbs (1867)). In Kleinwort Benson Ltd v Lincoln City Council [1999] the House of Lords allowed recovery of a mistaken payment where the mistake was one of law. In Brennan v Bolt Burdon [2004] the Court of Appeal applied this decision and held that the contractual compromise of a legal claim could be void as a result of a common mistake of law. It was a question of construction as to whether or not the mistake made the compromise impossible (Great Peace Shipping Ltd v Tsavliris Salvage Ltd (2002)). Where there was a doubt as to the law concerned, there was no mistake of law sufficient to render the contract void.


8.2 Bilateral mistakes

There are two basic types of bilateral mistakes. In the first case, each of the parties is mistaken, but they do not share their mistake. In the second case, the parties share their mistake.

8.2.1 Absence of genuine agreement

Essential reading ¢ McKendrick, Chapter 4: ‘Certainty and agreement mistakes’ – 4.6 ‘Mistake

negativing consent’, pp.52–60.

¢ Poole, Chapter 3: ‘Agreement problems’ – Section 2 A ‘Mutual mistake’, pp.87–90.

In situations where there is an absence of genuine agreement, the parties are each mistaken, but they do not share a mistake. Their separate mistakes are sufficiently fundamental, however, that no contract can be created. It is sometimes said that the parties are at ‘cross purposes’ and that the offer and acceptance do not correspond. No contract can arise because there is an absence of agreement. A contract cannot be formed in these circumstances because, on an objective interpretation, it cannot be said what was intended by the parties. Another description of this process is that the mistake ‘negatives’ the consent of the parties to contract. They have, in other words, failed to create an agreement.

The leading case is Raffles v Wichelhaus (1864). Here, one party bought, and the other party sold, cotton to be shipped on the vessel Peerless from Bombay. Unknown to either party, there were two ships Peerless, and each intended a different ship. The court found that there was no contract.

See also Scriven v Hindley (1913).

Activity 8.1Suppose the buyers in Scriven v Hindley had been suing for damages for non-delivery of hemp. Would the contract still have been held to be void?

SummaryThe parties are said to be ‘at cross purposes’ when the offer and acceptance do not correspond. In these circumstances, no contract can arise.


u explain what is meant by an agreement mistake

u illustrate the circumstances in which an agreement mistake will operate.


8.2.2 Common mistake

Essential reading ¢ Chandler, A., J. Devenney and J. Poole, ‘Common mistake: a theoretical

justification and remedial inflexibility’, Elements of the law of contract Study pack.

Common mistake (sometimes, confusingly, referred to as mutual mistake) occurs where both parties to a contract are mistaken about a critical element of their agreement. They share this mistaken assumption. The leading case dealing with mistake, and this type of mistake in particular, is Bell v Lever Brothers (1931). In this case, Lord Atkin stated that when mistake operates upon a contract, it does so to negative or nullify the consent of


the parties. Common mistake deals with those situations where an apparent contract lacks consent – that is to say that the apparent consent of the parties is not present and consequently the contract is void ab initio (void from the outset). This approach to mistake is dependent upon a consensual theory of contract – that is to say, if a contract exists it is due to the consensus or agreement of the parties. The court enforces the contract on the basis of this consensus. Mistake operates to disrupt this consensus – it removes any consensus and consequently no contract can arise in the circumstances.

Photo: Bell v Lever Bros – Mr Snelling requested that correspondence be sent to their home addresses (photo © C. MacMillan, 2003)

Because English law has yet to work out any comprehensive theory of mistake, it is best to approach the subject by examining different situations where courts have found that there was no contract. You should keep in mind as you examine these cases that many of them can also be rationalised on grounds other than mistake.

8.2.2.1 Non-existence of the subject matter

Essential reading ¢ McKendrick, Chapter 14: ‘Certainty and agreement mistakes’ – 14.3 ‘Mistake as to

the existence of the subject-matter of the contract’, pp.238–240.

¢ Poole, Chapter 13: ‘Common mistake: initial impossibility’, Section 3 A – ‘Res extincta’, pp.598–599.

In some situations, parties may reach an agreement to deal with a subject matter which, unknown to either party, does not exist. These cases deal with the problem of res extincta. Note that in these cases, the contract suffers from an initial impossibility; from the outset it cannot be performed. An example of such a situation is where A, the seller, contracts to sell his horse to B, the buyer. Without A or B’s knowledge, at the time the contract is entered into the horse is dead. It is, therefore, impossible for A to sell B his horse.

In the leading case, Couturier v Hastie (1856), the seller ‘sold’ a cargo of corn to the buyer. Neither party was aware of the fact that, at the time of the ‘sale’ the captain of the ship carrying the corn had sold the corn. This case has been taken to stand for the proposition that in a contract for the sale of goods, where the goods have perished without the seller’s knowledge, the contract is void – s.6 of the Sale of Goods Act 1979. You will note that in Couturier v Hastie the House of Lords did not call the contract void nor did they consider what the position would have been if the buyer had claimed damages for non-delivery.


It is, thus, possible to interpret this case differently and this is what the High Court of Australia did in McRae v Commonwealth Disposals Commission (1951). The High Court of Australia expressed doubt that Couturier v Hastie involved issues of mistake and discussed the case in the context of a failure of consideration. Even if the case was a case of mistake, the High Court added an important qualification to the generally accepted principle in Couturier. This is that a party cannot rely on a mutual mistake where the mistake is a belief which (1) is understood by the party without any reasonable ground and (2) the party is responsible for implanting the mistake in the mind of the other party.

See also Galloway v Galloway (1914).

SummaryWhere the subject matter of the contract does not exist at the time of the contract, courts will find that the contract is void. This will not occur where the mistake is brought about by the negligence of one party.


8.2.2.2 Mistakes as to ownership


the possibility of performing the contract’, p.240.

Like the situation of the non-existent subject matter, these cases involve a situation of initial impossibility. One party agrees to sell and the other party agrees to buy something which, unknown to either of them, is already owned by the buyer. This is described as the sale of a res sua. The agreement is impossible to perform because it is impossible to transfer the ownership since the ‘buyer’ already owns the thing. See Cooper v Phibbs (1867) and Bligh v Martin (1966) – the mistake must be fundamental to the agreement.

Activity 8.2If the seller of a good which had never existed warranted that it did exist, would the contract of sale be void?

Activity 8.3Is it possible to regard Couturier v Hastie as a case where the seller provided no consideration?

Activity 8.4To what extent, if any, can cases such as Cooper v Phibbs be understood as cases where there is a defective consent to the contract?


8.2.2.3 Mistake as to the possibility of performance


the possibility of performing the contract’, p.240.

In some circumstances the parties may be mistaken as to the possibility of performance. The parties have a shared misapprehension that performance of their agreement is possible – in fact it is not. Professor Treitel (see further reading section below) divides these cases into three categories.


u Cases of physical impossibility – see Sheikh Brothers Ltd v Ochsner (1957).

u Cases of legal impossibility – see Cooper v Phibbs (1867).

u Cases of commercial impossibility – see Griffith v Brymer (1903).

Note that it is important, in cases where it is alleged that there is a mistake as to the possibility of performance, to ascertain from the agreement whether one party has assumed the risk of performance. If one party has assumed this risk, the party will probably be in breach of a (valid) contract. We will return to the concept of impossibility when we consider frustration in Chapter 15 of the subject guide. As we will see, a contract is frustrated if performance becomes impossible because of a supervening (or later) event.

SummaryIt is possible to regard the situations where the subject matter does not exist, or the thing is already owned by the ‘purchaser’ or situations of physical/legal/commercial impossibilities as instances where the contract is void or invalidated because it cannot be performed. It is important to note, however, that the apparent contract is only void where the mistake is of both parties.

Activity 8.5Outline the circumstances in which courts have found that performance is impossible.

Activity 8.6In Griffith v Brymer, is performance of the contract impossible or is performance of the contract radically different from that which was contemplated by the parties?


¢ Peel, E. and G.H. Trietel, The Law of Contract. (London: Sweet & Maxwell, 2007) twelfth edition, pp.317–318.

8.2.2.4 Mistake as to a quality of the subject matter


quality’, pp.243–245.

¢ Poole, Chapter 13: ‘Common mistake: initial impossibility’ – Section 3 B ‘Mistakes as to quality’, pp.599–618.

This is a very difficult area of the law of mistake. The difficulty arises from the House of Lords’ decision in Bell v Lever Brothers Ltd (1931). The case presented hard facts to the court. The chairman and vice-chairman of a Lever Brothers’ subsidiary rendered exceptional services to the company. For a brief period of time they secretly dealt in cocoa commodities on their own account. This was a breach of the duties imposed by their employment contracts. The trades, however, in no way harmed the company. Over a year after the trades had been conducted, Lever Brothers decided to end the employment contracts because the subsidiary was amalgamating with another company. They entered into contracts of severance to end the employment contracts of the two men; Lever Brothers paid handsome sums to end the contracts of employment. When Lever Brothers learned of the secret trades, they sued the two men to recover the sums paid. The mistake was a bilateral mistake as to a quality of the subject matter of the contract (Lever Brothers were unaware of the trades and the two men had forgotten the trades when they entered into the severance contracts). The subject matter of the severance contracts was the employment contracts; the quality of the subject matter was whether the contracts were terminable by Lever Brothers. Because of the breach of duty, Lever Brothers could have terminated the contracts


without compensation. The jury found that they would have terminated the contracts without compensation and would never have entered into the severance contracts had they known of the secret trades.

The House of Lords was divided 3-2 in favour of finding that the severance contracts were valid. Lord Atkin wrote the leading judgment. In it, he recognises that a mistake as to quality may render the contract void:

Mistake as to quality of the thing contracted for raises more difficult questions. In such a case mistake will not affect assent unless it is the mistake of both parties, and is to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.

Lord Atkin then applied this test to the facts before him and found that the mistake in Bell’s case was not sufficient to render the contract void. The problem the case creates is that if the mistake was not sufficient in this case, it almost never would be. It is probably for this reason that there have been so few successful mistake cases in later years.

There are contrary authorities: Nicholson & Venn v Smith-Marriott (1947) and Scott v Coulson (1903).

In the case of Associated Japanese Bank (International) Ltd v Credit du Nord SA (1988) Steyn J (as he then was) explained the meaning and application of Bell v Lever Bros. This is an important case because it provides a comprehensive assessment of contractual mistake. Steyn J discussed Bell v Lever Bros in some detail because of the controversy surrounding the application of the case. He stated that the doctrine of mistake at common law had a narrow ambit – and one into which few cases had fallen. To an extent which has yet to be determined, this case is affected by the decision in The Great Peace (discussed below and in greater detail in 8.4 ‘Mistake in equity’).

In the case of The Great Peace [2002] EWCA Civ 1407, the Court of Appeal referred to Bell v Lever Bros with approval, although Lord Phillips MR noted the cases which Lord Atkin relied upon as support for his principles provided ‘an insubstantial basis for his formulation of the test of common mistake in relation to the quality of the subject matter of a contract’ (at paragraph 61; the cases are discussed in paragraphs 55–60).

SummaryMistake as to a quality of the subject matter creates great difficulties in the common law of contract. Very few contracts are found to be void on the ground that there is a sufficiently fundamental mistake as to quality. It is the element of ‘sufficiently fundamental’ that proves so troublesome. This is partly because of the decision in Bell v Lever Bros and partly because it is difficult to distinguish a sufficiently fundamental quality from the assumption of a risk which worked to the disadvantage of one or both of the parties.

It is because of these difficulties that courts have created an equitable device to circumvent the difficulties posed by mistake at law. This device is discussed below under section 8.4 ‘Mistake in equity’.

Activity 8.7Summarise the approach provided by Steyn J in Associated Japanese Bank (International) Ltd v Credit du Nord S.A. as to how cases where mistake is alleged should be resolved.


u state what a sufficiently fundamental mistake as to a quality of the subject matter is (or is not).


Useful further reading u Anson, pp.302–304.

u Smith, J.C. (1994) ‘Contracts – mistake, frustration and implied terms’ 110 LQR 400.

u Wade, H.R. (1941) ‘Consensus mistake and impossibility in contract’ 7 CLJ 361.

u MacMillan, C.A. (2003) ‘How temptation led to mistake: an explanation of Bell v Lever Bros.’ 119 LQR 625.

8.2.2.5 Fundamental mistake going to the root of the contract

Essential reading ¢ McKendrick, Chapter 14: ‘Certainty and agreement mistakes’ – 14.2 ‘Common

mistake’, pp.236–238.

This is really a broad category of common law mistake which arises out of Lord Atkin’s judgment in Bell v Lever Bros. It may be that the parties share a common mistake so fundamental that it goes to the very root of the contract, to the very consideration provided, to such an extent that the contract is void.

Self-assessment questions1. Write a definition of the term ’res extincta’.

2. Compare your definition of ‘res extincta’ with that of ‘consideration’.

3. In what circumstances did Lord Atkin say that consent would be negatived?

4. In what circumstances did he say it would be nullified?

5. What are the differences between these two?


8.3 Unilateral mistakes

Courts are generally unwilling to find that a contract is void at law where the mistake is the mistake of one party only. To find the contract void would, in most instances, prejudice the non-mistaken party. Accordingly, courts will generally only find the contract void in one of two situations.

u In the first case, the non-mistaken party is aware of the other party’s mistake and proceeds to contract anyway.

u In the second case, the non-mistaken party has created the mistake to induce the (now) mistaken party to contract. The largest group of these cases are those of ‘mistaken identity’.

In both of these instances, the non-mistaken party does not have any reasonable expectations to protect. In the first instance, he is aware of the mistaken assumption or promise and acts to take advantage of it. In the second instance, he has deliberately caused the mistake as to identity to form a ‘contract’ between himself and the mistaken party. In neither situation has he a reasonable expectation that the court will seek to protect. Indeed, the entire mistake has come about by reason of his inaction or by his fraud.

As you consider this area, be aware of the fact that there are many cases where the contract is valid at law and yet equity may provide relief to the mistaken party.


8.3.1 Mistaken assumptions or promises

Essential reading ¢ McKendrick, Chapter 2: ‘Offer and acceptance’ – 2.1 ‘Who decides that an

agreement has been reached?’ to 2.3 ‘The objective test’, pp.17–19.

¢ McKendrick, Chapter 4: ‘Certainty and agreement mistakes’ – 4.6 ‘Mistake negativing consent’, pp.52–60.

¢ Poole, Chapter 3: ‘Agreement problems’ – Section 2 B ‘Unilateral mistake’, pp.90–92.

¢ Brownsword, R. ‘New notes on the old oats’, Elements of the law of contract Study pack.

In some circumstances, mistake is said to negative the consent of the mistaken party so that no contract arises. The mistake prevents the contract from arising. Importantly, the non-mistaken party must be aware of the other party’s mistake.

The perplexing case of Smith v Hughes (1871) illustrates this proposition. The claimant sold the defendant oats after showing him a sample of the oats. The defendant mistakenly thought he was buying old oats; in fact, they were new oats. The claimant had done nothing to induce this mistake and was unaware of it. The Court held that for a mistaken assumption or promise of one party to be sufficient to vitiate a contract (to render it void) the mistake must be known to the other party and it must be a mistake as to what is promised. Thus, in Smith v Hughes, the contract would have been void only if two factors were present. First, if the defendant had been mistaken as to the promise made to him by the claimant. In this case the promise would have been as to the age of the oats. Second, that the defendant knew about the claimant’s mistake as to the nature of the promise made to him by the defendant.

You will see from the discussion in McKendrick, that while the law appears to require a subjective intention in these cases (that is to say, what is actually in the minds of these parties), it is in fact taking an objective approach (that is to say, what would be in the minds of reasonable parties in these circumstances).

Where the mistake is as to an assumption or as to a promise, courts rarely find that the mistake is operative – that is to say, that, because of the mistake, no contract has been created. The entire area displays the extent to which the common law of contract is rooted upon the principle of caveat emptor (let the buyer beware). As long as one party does not misrepresent a state of affairs or defraud the other party, courts will generally find the consensus, the agreement, between the parties which is necessary to form a contract. Indeed, courts will be very reluctant to disrupt an apparent contract in these circumstances, for to do so would be to write the contract for the parties.

In some instances, however, it is so readily apparent to the one party that the other is proceeding upon a mistaken basis that the court will find that the apparent contract is void. These are cases where one party ‘snaps’ at the obviously mistaken offer of another. A always sells B grain at a price of x per pound. One day, A offers to sell B grain at x per ton. B, realising that A has made a mistake, snaps at A’s offer and ‘accepts’ immediately. This is a case where the mistake is operative – the mistake negatives A’s consent in such a way that there is no contract. Note that: (i) B is aware of A’s mistake and (ii) B’s conduct is such that it is unconscionable or inequitable for him to hold A to a contract.

The cases of Hartog v Colin and Shields (1939) and Centrovincial Estates v Merchant Investors (1983) illustrate this proposition.

SummaryThis is not an easy area to understand. The mistake of one party is generally not enough to avoid the contract. The mistake must be known to the other party. For the contract to be void, it is not sufficient that the promisor realises that the promisee is mistaken as to an important element of the contract. The promisor must realise


that the promisee is mistaken and that he is mistaken as to the promise made by the promisor. It may be that this oddity arises because of the nature of the contract in Smith v Hughes – where the sale of the oats was made by sample. The defendant had examined a sample of the oats when he placed the order. In the circumstances, the only reason that the contract would be void was if the promisor’s conduct verged on the fraudulent – in not explaining to the promisee that he was mistaken about the promise.

Courts will usually allow the contract to be avoided for a unilateral mistake in circumstances where the behaviour of the non-mistaken party is such as to indicate that he has no reasonable expectation to protect. Where the non-mistaken party’s actions are such as to indicate that he seeks to take advantage of the mistaken party, there is no reasonable expectation to protect. In other words, a non-mistaken party who ‘snaps’ at the mistaken offer of another will not reasonably have thought the mistaken offer was a legitimate one.


u indicate the circumstances in which courts will find that a contract is void where the mistake is a unilateral mistake.

Activity 8.8Ace Sportscards hires a new assistant, Blob. Blob places various cards in the shop window and places prices below the cards. He knows nothing about sports cards and places the wrong price tag below some cards. He prices a 1979 Wayne Gretzky rookie card at $5 – the card is worth $500. Crafty, passing the shop, notices the card and enters the shop. He offers Blob $20 for the card; Blob notes the price below it and sells the card to him for $5. Blob later realises his error; Ace Sportscards ask you if there is a contract with Crafty.

Activity 8.9A and B are art collectors. A has a picture that may be an Emily Carr. A offers to sell it to B. Consider the following problems. Distinguish between them and note whether, in any or all of them, a contract arises.

a. A says to B: ‘It’s a Carr all right’, whereupon B buys the picture. It is not a Carr.

b. A (mistakenly) believes the painting to be a Carr and tells B that it is a Carr whereupon B purchases it for £500,000.

c. A thinks it is a ‘school of Carr’ picture, but B thinks it is an original.

d. Same as (c) but A knows B thinks it is an original.

e. B thinks A is warranting the picture as original. A knows this, and has no intention of warranting it.


¢ Slade, C.J. (1954) ‘The myth of mistake in the English law of contract’, 70 LQR 385.


8.3.2 Mistakes as to identity

Essential reading ¢ McKendrick, Chapter 4: ‘Certainty and agreement mistakes’ – 4.6 ‘Mistake

negativing consent’, pp.52–60.

¢ Poole, Chapter 3: ‘Agreement problems’ – Section 2 C ‘Unilateral mistake as to identity’, pp.92–119.

This area of law has received recent clarification from the House of Lords in the case of Shogun Finance v Hudson [2003] UKHL 62. Prior to this decision, there was some uncertainty as to the application of a doctrine of mistake as to identity. Virtually all mistake as to identity cases arise as the result of the fraudulent actions of a wrongdoer, the ‘rogue’. In the typical situation a rogue presents himself to an innocent vendor and offers to purchase a good. The rogue deceives the vendor as to his identity. The vendor sells the goods to the rogue and the rogue departs with the goods. The vendor is usually given a cheque which is not honoured. When the vendor seeks the return of the goods from the rogue, he discovers:

a. the rogue for what he is

b. that the rogue has vanished

c. that the rogue has sold the goods to an innocent third party.

The court is thus faced with litigation between the (deceived and mistaken) vendor as claimant and the (innocent) third party as defendant in which the claimant seeks the return of his goods. The court must decide which of these two parties will bear the cost of the rogue’s deception. If the contract between the rogue and the vendor is good, the cost will be born by the vendor because by this contract, the rogue acquired good title to the goods and could sell them on to the third party. If the contract between the rogue and the vendor is void, the cost will be born by the third party because the rogue never acquired title to the goods. The vendor thus recovers his goods from the third party.

You must also note that in these circumstances, misrepresentation is also involved. In the above circumstances, the rogue induced the contract by a misrepresentation. If the contract is not void for mistake, it is voidable for misrepresentation. However, the vendor must then set aside or rescind the contract before the innocent third party contracts with the rogue. If he does not, the first contract can no longer be set aside because of the involvement of the third party’s rights. That is to say, if the third party contracts with the rogue before the contract between the rogue and the vendor is rescinded, then the vendor loses the right to rescind the first contract. This matter will be examined further in the next chapter on misrepresentation in section 9.2.1.

In most mistaken identity cases, the policy arguments will favour protection of the third party. The vendor assumed a normal commercial risk in selling on credit, or accepting a payment by cheque. Because it was the vendor’s choice to assume this risk, there is no valid reason why he should be able to pass the resulting loss on to the third party.

The House of Lords in Cundy v Lindsay (1878), however, found differently. In this case, the rogue presented himself in such a way as to appear to be a legitimate firm. The innocent party thought that they were dealing with a legitimate firm and shipped the goods to the rogue. In these circumstances the House of Lords found that the contract was void because there was a lack of consensus.

Cundy v Lindsay thus operates to establish the proposition that:

1. if A thinks he has agreed with C because he believes B, with whom he is negotiating, is C; and

2. if B is aware that A did not intend to make any agreement with him; and

3. if A has established that the identity of C was a matter of crucial importance,

4. then the contract will be void.


Note that identity must be material to the formation of the contract: Dennant v Skinner (1948).

Later courts often found that in seemingly similar circumstances there was a contract. Thus, a mistake as to the attributes of identity (such as creditworthiness) will generally be insufficient to render the contract void: see King’s Norton Metal Co v Edridge (1897). In addition, in some circumstances the contract is made inter praesentes – that is to say face-to-face – and the vendor meets the rogue and contracts with him. In these cases, courts have frequently said that the rogue is identified by ‘sight and hearing’: see Phillips v Brooks (1919) and Lewis v Averay (1972). Where the parties are before each other, a presumption arises that the mistaken/deceived party intended to contract with the person before him and a contract has arisen. The existence of such a presumption has been doubted in the past, but it was accepted by the majority of the law lords in Shogun Finance v Hudson.

In Shogun Finance v Hudson a rogue entered into a written contract of hire purchase with Shogun Finance to purchase a vehicle on credit. The rogue fraudulently assumed the identity of another person. The majority of the law lords found that in these circumstances, identity was critical to Shogun Finance because it was necessary for them to check the credit rating of their potential borrowers. The apparent contract was a nullity due to the mistake of identity and an absence of consensus. The majority also approved of a presumption that in the face-to-face cases the party deceived intended to deal with the person physically before him and the result is the formation of a voidable contract. The presumption may be rebutted. Shogun Finance, however, was not a case of a face-to-face transaction and the presumption did not arise.

The dissenting law lords disapproved of drawing a distinction based on whether the rogue’s fraud was perpetrated in writing or face-to-face. The dissenting law lords were concerned with the effect of fraud upon contractual formation. They also sought to give coherence to an uncertain area of law. Consequently, they disapproved of Cundy v Lindsay and what they viewed as an untenable distinction based on the method by which the rogue perpetrated his fraud. Both dissenting law lords believed that in these circumstances of mistaken identity a voidable contract arose.†

SummaryIn reviewing this area, you should keep in mind the distinction between contracts formed between the parties face-to-face and contracts formed at a distance. Where the apparent contract is formed at a distance, and probably in some form of writing, it is likely that the apparent contract is void for mistake. For this to occur, however, the identity of the party must be critical in the formation of the contract. Where the contract is formed between parties who appear before each other, a presumption arises that the mistaken party intends to contract with the person before him. The result is a contract which is voidable at the option of the mistaken party. It is uncertain at this stage what is necessary to rebut this presumption.


u outline the effect of a mistake as to identity and the circumstances in which courts will find such a mistake is operative.

Activity 8.10What were the practical and commercial concerns of the dissenting law lords in Shogun Finance v Hudson?

Activity 8.11M sends an order for goods to N on paper which is headed ‘Greenhill & Co’ and shows a picture of a large factory. N sends the goods on credit. Greenhill & Co does not exist. M resells the goods to P and then disappears. Advise N.

† You should note that a further result of Shogun Finance v Hudson is that the Court of Appeal’s decision in Ingram v Little (1961) is unlikely to be followed in the future.


Activity 8.12Suppose the rogue pretends to be a person who has (unknown to the parties) already died – would the contract be void or voidable?

Activity 8.13Does it matter if the rogue pretends to be a fictitious person or assumes the identity of a real person?


¢ Goodhart, C. (1941) ‘Mistake as to identity in the law of contract’, 57 LQR 228.

¢ Phang, A., P. Lee and P. Koh, (2004) ‘Mistaken identity in the House of Lords’, 63 CLJ 24.

¢ MacMillan, C.A. (2004) ‘Mistake as to identity clarified?’ 120 LQR 369.

8.3.3 Documents signed under a misapprehension as to their contents

Essential reading ¢ McKendrick, Chapter 9: ‘The sources of contractual terms’ – 9.3 ‘Bound by your

signature?’, pp.149–152.

¢ Poole, Chapter 3: ‘Agreement problems’ – Section 3 B ‘The plea of non est factum’, pp.125–129.

Clearly a person must normally take full responsibility for his signature and it is up to him to make sure that he appreciates what he is signing. Exceptionally, however, a person may have been so seriously misled that the document is held to be void under the defence of non est factum (‘it is not his deed’). See Gallie v Lee (1971) where the House of Lords rejected the previous test, based upon a distinction – apparently certain but really meaningless – between contents and character, in favour of an openly flexible criterion. The defence is available to a person who signed the documents with a fundamental misapprehension as to the substance of the document – provided that the person who signed the documents took all due care.

You will note that the burden of proof lies on the signer to show that he was not negligent – and this is a burden he will normally be unable to discharge.


8.4 Mistake in equity

Essential reading ¢ McKendrick, Chapter 14: ‘Common mistake and frustration’ – 14.7 ‘Mistake in

equity’, pp.243–245.

¢ Poole, Chapter 3: ‘Agreement problems’ – Section 3 A ‘Rectification’, pp.119–125.

¢ Poole, Chapter 13: ‘Common mistake: initial impossibility’ – Section 3 B ‘Mistakes as to quality’, pp.599– 618.

Mistake in equity is not an easy topic to study. You will not be reassured to know that there is, at present, considerable uncertainty as to the extent of this area of law. The problem lies in the relationship with mistake at law. The following approach is suggested. In dealing with problems in mistake the first question must be whether or not the contract has allocated the particular risk in question. If it has not, the second question must always be, ‘Is there an operative mistake at common law (i.e. one which makes the contract void)?’ If there is such a mistake, there is no room for the


application of principles of equity but, if the contract stands at common law, then the possibility of equitable relief must be considered. It is here that the present difficulty lies. The third question is, if there is no operative mistake at common law, does equity provide relief? A possible fourth question is now, is there any substantive doctrine of mistake in equity?

8.4.1 Three forms of equitable relief

Rectification

Equitable relief takes three principal forms. The first is rectification and this is a remedy which is concerned with correcting a mistake which occurs not in the making of the agreement, but in the recording of the agreement. There is little difficulty in ascertaining the principles of this form of relief. The possibility of rectification exists where a written contract or deed fails to express the common intention of the parties. Even a unilateral mistake may be a sufficient basis for rectification where it is known to the other party and that party fails to draw the mistaken party’s attention to it. See: Roberts v Leicestershire CC (1961), Thomas Bates and Sons v Wyndham’s (Lingerie) (1981), Commission for the New Towns v Cooper (1995), but contrast Riverlate Properties v Paul (1974).

What is important in relation to rectification is that it exists where the mistake is made in the recording of the agreement only. Thus, if A and B negotiate the price of their contract in American dollars, agree on a price in American dollars, but then wrongly provide the price in Canadian dollars in their written contract, the written contract can be ‘rectified’ or fixed to accord with their actual agreement. Note that the mistake must be in the recording of the agreement (e.g. in the documents relating to the negotiation). When the mistake is present in the agreement itself, rectification is not available. See F.E. Rose (London) Ltd v William Pim Jnr & Co (1953).

Because rectification is an equitable device the usual restrictions as to its application apply. Such restrictions encompass matters such as a lapse of time (a claim for rectification will be barred when a period of time has elapsed), or the intervention of third party rights (a claim for rectification cannot be made against a bona fide purchaser for value without notice of the mistake) or the conduct of the party who seeks rectification (it is an equitable maxim that he who comes to equity must come with clean hands). A high degree of proof is required before a court will rectify a contract: George Wimpey UK Ltd v VI Components Ltd [2005].

Specific performance

It is in relation to the second and third forms of equitable relief that uncertainty exists as to the extent to which there is a doctrine of equitable relief. The second form of equitable relief flows from the nature of equitable relief. The principal characteristic of equitable relief is that it is discretionary: that is, flexible and responsive to the justice of the individual case. Thus, in an appropriate case, the remedy of specific performance (discussed in Chapter 17) may be refused. See, for example, the contrasting cases of Denny v Hancock (1870) and Tamplin v James (1880).

Rescission

The third form of equitable relief is, at present, surrounded by the greatest uncertainty. It is also the form of relief considered the most important. Equity, historically, could intervene to rescind the contract. Rescission in this context meant that the contract is voidable by the court and not by one of the parties. A court of equity could also rescind the contract upon those terms which the court considered just in the circumstances. It is important to note at the outset that equitable relief will not be available where the party has made a unilateral mistake as to the commercial consequences of the contract he had entered into rather than the terms of the agreement or the subject matter of the agreement. See Clarion v National Provident Institution [2000] 1 WLR 1888.


The difficulty stems from working out whether or not equity has any ability to intervene in cases where there is a common mistake, but not one which is of sufficient importance to render the contract void at law. The difficulty arises from the combination of the House of Lords’ decision in Bell v Lever Bros and the Court of Appeal’s decision in Solle v Butcher (1950). As was discussed above, Bell v Lever Bros establishes a very narrow ambit for a common mistake (particularly a mistake as to the quality of the subject matter) at law. Lord Denning, in Solle v Butcher, stated that the House of Lords was only concerned with mistake at law and not in equity. Lord Denning then recognised a more flexible doctrine of equitable mistake (in which the criteria were much the same as that of mistake at law) and where such a mistake in equity had been made, the contract was voidable as a court could rescind the contract. Such a rescission might occur on terms. By rescinding the contract on terms, the court could attempt to place the parties where they wanted to be, but for the mistake. Equity offered greater flexibility in remedial relief. The contract is, in a sense, ‘voidable’ for mistake rather than void. This means that a court applying an equitable doctrine of mistake is not faced with the all-or-nothing situation that a court applying a legal doctrine of mistake is – the matter can be rearranged to try to suit the bargain the parties thought they were reaching in the first place.

The decision in Solle v Butcher received subsequent approval in other cases, although in truth, the problem of mistake rarely arose in the case law. The provision of a flexible doctrine of equitable mistake was considered in relation to the more restrictive doctrine of mistake in law and approved by Steyn J in Associated Japanese Banks v Crédit du Nord. There was, however, an uneasy relationship between mistake at law and mistake in equity.

It was in this context that the Court of Appeal gave their decision in The Great Peace (2002). The case involved two ships. The Cape Providence suffered structural damages and it was feared that she might sink. The defendant was hired to salvage the Cape Providence. To this end, they contracted with the claimant that the claimant’s ship, The Great Peace, would travel to the Cape Providence to escort the vessel and stand by for the purpose of saving lives. At the time the defendant approached the claimant, the defendant (and from them the claimant) mistakenly believed that the ships were 35 miles apart. Shortly after the contract was concluded, the defendant discovered that the ships were 410 miles apart. After they had procured a closer substitute ship, the defendant refused to perform their contract with the claimant. At trial, the defendant asserted that the contract was void for mistake at law or voidable in equity by reason of mistake. The trial judge denied this assertion. On appeal, the Court of Appeal considered the extent of the doctrine of mistake in equity.

The Court of Appeal extensively reviewed the cases of Bell v Lever Bros and Solle v Butcher. The concept of mistake in equity was considered both before and after Bell v Lever Bros. Lord Phillips MR concluded that it was impossible to reconcile the two cases. Bell v Lever Bros prevailed; Solle v Butcher was disapproved. The House of Lords in Bell v Lever Bros had not overlooked an equitable right to rescind an agreement which was valid at law. There was no such equitable right and accordingly no separate doctrine of mistake in equity existed to provide relief for a common mistake as to a quality of the subject matter of the contract. In the case before them, the difference in the proximity between the two ships as they were believed to be and as they actually were was not a sufficiently fundamental mistake to render the contract void. The contractual venture could still be performed. Accordingly, the appeal was dismissed: the defendant was liable under the contract to pay the cancellation fee to the claimant. The effect of this decision has yet to be determined and the question of whether or not there is a separate doctrine of mistake in equity has an uncertain answer. If equity lacks the flexibility to provide relief, it is difficult to envision circumstances in which, in light of Bell v Lever Bros, any contract will be affected by a mistake as to a quality of the subject matter (something acknowledged by Lord Phillips MR and also by Steyn J in Associated Japanese Banks v Crédit du Nord).

The requirements of The Great Peace have been applied in a series of subsequent decisions (see, for example, Brennan v Bolt Burdon [2004], Kyle Bay Ltd (t/a Astons Nightclub) v Underwriters [2006], Apvodedo NV v Collins [2008]) with the effect that there is, effectively, no ambit for the doctrine of mistake.



u state what relief a court will provide for an operative mistake in law and in equity

u illustrate the limits of the doctrine of mistake.

SummaryA court of equity is able to rectify an agreement which has been mistakenly recorded. Rectification is, thus, concerned with mistakes in the recording of the agreement rather than in the making of the agreement. A court of equity may refuse to grant an order for specific performance in circumstances where a mistake is present. The ability of a court of equity to rescind an agreement as a result of a common mistake is in doubt. Since Solle v Butcher, it had been thought that equity provided a flexible means of rescinding a contract which had been entered into under a mistake. Such a mistake was not sufficiently serious as to avoid the contract at law. Since the Court of Appeal’s decision in The Great Peace, such a jurisdiction is very much in doubt.

Where equitable relief is allowed, it is subject to the usual bars (e.g. the intervention of a bona fide purchaser for value without notice, laches, the impossibity of restitutio in integrum or lapse of time).

Activity 8.14How did the contract in Grist v Bailey allocate the risk?

Activity 8.15In the following cases, should the court grant equitable relief.

a. A contracts to buy a house from B which both parties believe to be let to T, a tenant protected by the Rent Acts (a fact which would depress the value of the property). B has now discovered that T died the day before the contract was signed and that A has agreed to re-sell the property to X at a great profit.

b. Victor sells a painting to Peter, an art expert, for £50. It is in fact a masterpiece worth £50,000.

Activity 8.16How can the decision in Bell v Lever Bros be reconciled with the decision in Solle v Butcher? What is the effect of the decision of The Great Peace upon both of these cases?


¢ Phang, A. (1989) ‘Common mistake in English law: the proposed merger of common law and equity’, 9 LS 291.

¢ Cartwright, J. (1987) ‘Solle v Butcher and the doctrine of mistake in contract’, 103 LQR 594.

¢ McTurnan, L.B. (1963) ‘An approach to common mistake in English law’, 41 Canadian Bar Review 1.

¢ Grunfeld, C. (1952) ‘A study in the relationship between common law and equity in contractual mistake’, 15 MLR 297.

¢ Chandler, A., J. Devenney, J. Poole, (2004) ‘Common mistake: A theoretical justification and remedial inflexibility’, 2004 JBL 34.

¢ Phang, A. (2003) ‘Controversy in common mistake’, 2003 Conv 247.

Examination adviceRefer to the examination advice given at the conclusion of Chapter 1 of the subject guide.


With regard to mistake questions generally, you are well advised to follow the approach of Steyn J in Associated Japanese Bank v Credit du Nord. That is to say, consider first whether or not the contract is void at law. If it is, your inquiry ends there. If it is not, you then need to consider the position in equity. If the contract is ‘voidable’ in equity, you need to consider the form of relief that a court will provide. The most common will be a rescission of the contract on terms.

It may assist you if you try to consider what type of mistake exists in the given situation and compare it to decided cases where the mistake was found to be operative.

Sample examination question Hammer, an auctioneer, sold a collection of paintings by auction. Each painting was fully described in the catalogue. When Hammer invited bids for Lot 15 – described as ‘Country Scene, artist unknown’ – his assistant Mallet inadvertently held up Lot 16 instead for the bidders to see. Lot 16 was described in the catalogue as ‘Village Life, (?) school of Brushman’, but Sickle, who was sitting in the front row, immediately recognised it as a lost masterpiece by Brushman himself. No other bidders noticed Mallet’s error and Sickle’s bid of £25 was accepted by Hammer. When Hammer realised what had happened he refused to let Sickle have the painting, which is worth £5,000.

Advise Sickle.

Advice on answering the questionBegin by considering the position at law. What sort of mistake has been made here? Two mistakes have been made. First, the wrong painting has been exhibited by Hammer’s assistant, Mallet. Hammer is inviting bids for Lot 15, but Lot 16 has been exhibited. It is possible to argue that Sickle is bidding on Lot 16. Following this argument, no contract is made by reason of the decision in Raffles v Wichelhaus – the parties are at cross-purposes; the offer and acceptance do not correspond. In the circumstances, no contract can arise. The weakness with this argument is that the painting has been displayed and Sickle will undoubtedly argue that it was the painting before him which was bought and sold. If the mistake is only of Hammer, it is a unilateral mistake. Generally, the law will not avoid a contract where the mistake is unilateral only. Here, however, it is possible to argue that Sickle has ‘snapped’ at a mistaken offer by Hammer. There is support for this proposition in Hartog v Colin and Shields (1939): on these grounds, the contract is avoided. Sickle has no reasonable expectations which can be protected. The weakness of this argument is that there is a double mistake here by Hammer – even if he held up the painting as a part of the right lot, he seems uncertain as to what sort of painting he has. In other words, his offer may not be as mistaken as it first appears.

If the mistake is viewed as a common mistake, the contract is unlikely to be avoided because of the decision in Bell v Lever Bros. The painting is the same painting in each case, the artist is only a quality of the subject matter of the painting. It may be possible, using the decision in Nicholson & Venn v Smith-Marriot, to argue that it is by this quality that the painting is identified. This is, however, a weak argument since Hammer is himself confused as to who the artist is (even if he examined the painting as the right lot).

It is likely, on balance, that the contract would be avoided on the principles set out in Hartog v Colin and Shields (1939). This result is by no means certain and so the position must also be considered in equity.

In equity, the argument would be that the parties are mistaken as to a quality of the subject matter of the painting (the identity of the artist). In this sense, the case is within the principles set out by Lord Denning in Solle v Butcher, a decision further considered by Lord Phillips MR in The Great Peace. If the Solle v Butcher line of authorities are followed, the contract should be rescinded on terms. The terms would be that Sickle could proceed with the purchase, but at the real value of the painting. If The Great Peace is followed, however, the court has no ability to rescind the contract on the grounds of mistake in equity. A good answer would also consider the decision in Clarion v National Provident Institution (2000) to establish that this was a mistake as to the contract and not as to the commercial consequences of the contract.


Reflect and review






Ready to move on


Need to study again

I can explain what contractual mistake is (and is not). ¢ ¢ ¢

I can compare the effect of mistake with that of misrepresentation.

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I can distinguish between bilateral and unilateral mistake.

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I can state what relief a court will provide for an operative mistake in law and in equity.

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I can illustrate the limits of the doctrine of mistake. ¢ ¢ ¢

I can explain what is meant by an agreement mistake. ¢ ¢ ¢

I can illustrate the circumstances in which an agreement mistake will operate.

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I can indicate what a mutual or common mistake is. ¢ ¢ ¢

I can outline the circumstances in which courts have found a mutual or common mistake to be operative.

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I can explain what the basis is for finding a contract is void where a mutual or common mistake operates.

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I can state what a sufficiently fundamental mistake as to a quality of the subject matter is (or is not).

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I can indicate the circumstances in which courts will find that a contract is void where the mistake is a unilateral mistake.

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I can outline the effect of a mistake as to identity and the circumstances in which courts will find such a mistake is operative.

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Must revise

Revision done

8.1 Some guidelines on mistake ¢ ¢

8.2 Bilateral mistakes ¢ ¢

8.3 Unilateral mistakes ¢ ¢

8.4 Mistake in equity ¢ ¢


Notes

Contents

Introduction 110

9 1 Definition of misrepresentation 111

9 2 Remedies for misrepresentation 114

9 3 Exclusion of liability 118



9 Misrepresentation


Introduction

This chapter is concerned with the effect of pre-contractual statements on a subsequent contract. Some of these statements will be treated as ‘misrepresentations’ – these are false statements of existing fact which have induced the other party to enter into the contract. They may or may not be contractual terms as well. In a few situations a failure to disclose facts may be treated as a misrepresentation. The remedies for misrepresentation are, potentially, rescission of the main contract and damages. The right to rescind may be lost, however, and the level of damages will depend on whether the misrepresentation was innocent, negligent, or fraudulent. Damages may be available at common law or under the Misrepresentation Act 1967. Attempts to exclude liability for misrepresentation will generally be subject to the ‘reasonableness’ test under the Unfair Contract Terms Act 1977.

Essential reading ¢ McKendrick, Chapter 8: ‘What is a term?’, pp.143–144.

¢ McKendrick, Chapter 12: ‘A duty to disclose material facts?’, pp.207–217.

¢ McKendrick, Chapter 13: ‘Misrepresentation’, pp.217–235.

¢ Poole, Chapter 6: ‘Content of the contract and principles of interpretation’ – Section 1 ‘Pre-contractual statements – terms or mere representations?’, pp.212–221.

¢ Poole, Chapter 14: ‘Misrepresentation’ – Section 1 ‘Actionable misrepresentation’, pp.621–631.

¢ Hooley, R. ‘Damages and the Misrepresentation Act 1967’, Elements of the law of contract Study pack.


u define a misrepresentation

u explain how a statement of opinion, or the failure to disclose information, may sometimes be treated as a misrepresentation

u list the potential remedies for misrepresentation

u explain the limitations on the right to rescind for misrepresentation

u explain the different measures of damages for misrepresentation and give examples of situations in which each will be applicable

u state the rules which limit the possibility of excluding liability for a misrepresentation.

Elements of the law of contract 9 Misrepresentation page 111

9.1 Definition of misrepresentation

When negotiating a contract, the prospective parties may say many things which are designed to encourage the other party to enter into the contract. Sometimes these statements become terms of the eventual contract. If they do not, a remedy may nevertheless be available to a party who has been induced to enter into a contract in reliance on a falsehood. This chapter focuses on identifying the situations where such remedies are available. The first issue is to distinguish between statements which are mere representations and those which become terms of the contract.

9.1.1 Misrepresentation and contractual terms

Essential reading ¢ McKendrick, Chapter 8: ‘What is a term?’ pp.143–144.

¢ Poole, Chapter 6: ‘Content of the contract and principles of interpretation’ – Section 1 ‘Pre-contractual statements: terms or mere representations’, pp.212–221.

As you will recall from our discussion in Chapter 5, the question of whether a pre-contractual statement has become a term of the contract used to be of more importance than it is today because of:

u the limited remedies previously available for misrepresentation

u the fact that if a misrepresentation was incorporated into the contract as a term, then the remedy of rescission for misrepresentation was automatically lost.†

Both of these situations have been changed by the Misrepresentation Act 1967. There are now much more extensive remedies in damages available for misrepresentation (under s.2 of the Act) and s.1(a) provides that a contract may be rescinded for misrepresentation, even if the misrepresentation is also a term of the contract.

The question may, however, still be of importance. If, for example, the pre-contractual statement is in the form of a promise rather than a statement of fact then a remedy for misrepresentation is unlikely to be available. The only possible argument for the claimant will therefore be to show that the statement had become a term of the contract.

For further discussion of the way in which statements may become part of a contract, see Chapter 5, section 5.1.

9.1.2 Statement of existing fact, inducing a contract

Essential reading ¢ McKendrick, Chapter 13: ‘Misrepresentation’ – 13.1 ‘Introduction’ to 13.5

‘Inducement’, pp.217–222.

¢ Poole, Chapter 14: ‘Misrepresentation’ – Section 1 ‘Actionable misrepresentation’, pp.621–631.

For a misrepresentation to be actionable it must be a false statement of existing fact. A statement of opinion is not in general a misrepresentation – as shown by Bisset v Wilkinson (1927). There are two exceptions to this, however. The first is where the person expressing the opinion is aware of facts which indicate that the opinion cannot be sustained. Thus, in Smith v Land House Corporation (1884) a tenant who, the landlord knew, was behind with the rent could not be described as a ‘most desirable tenant’. The landlord’s statement to this effect was therefore a misrepresentation (see also Esso Petroleum Co Ltd v Mardon (1976)).

The second exception, which can lead to a statement of opinion being treated as a false statement of fact, is where there is evidence that the person making the statement does not believe it at the time that it is made. This may, of course, be proved by showing that the person was aware of contradictory facts. The authority

† See section 9.2.1


for this principle is Edgington v Fitzmaurice (1885), where it was held that the ‘state of a man’s mind is as much a fact as the state of his digestion’. The fact which is being falsely stated in this type of case is the speaker’s state of mind. The speaker represents the fact that he or she believes that what is being said is true, whereas in fact no such belief is held.

The Edgington v Fitzmaurice approach can also be used to turn statements of intention into misrepresentations, if at the time of making the statement, the person did not have the stated intention. (This was, in fact, the situation in Edgington v Fitzmaurice itself.)

Traditionally, statements of law have not been regarded as being statements which, if false, will give rise to remedies for misrepresentation. It seems, however, that now that the House of Lords has recognised the possibility of restitutionary remedies for mistake of law (in Kleinwort Benson Ltd v Lincoln City Council (1999)), the same approach may well apply in the area of misrepresentation. This was the view of the High Court in Pankhania v Hackney London Borough Council (2002). In any case, if the statement of law is not believed by the person making it, then the principle in Edgington v Fitzmaurice will apply, so that the statement will be treated as a misrepresentation of the person’s state of mind.

Activity 9.1Consider whether any of the following statements is capable of being a misrepresentation.

a. X, who is selling his car, tells a prospective purchaser that the tyres are ‘good for another 3,000 miles’. In fact, the tyres need replacing after another 1,000 miles.

b. Y, a salesman for XLO Computer Services, tells a prospective customer that all XLO’s service engineers are trained ‘to the highest standards, including six weeks on the job under supervision’. In fact, the supervised period is only five weeks.

c. A new CD is stated on posters displayed in music stores to be ‘The Best Garage Album in the World…Ever!’. Reviews of the CD in the music press are universally hostile.

In order for a misrepresentation to be actionable, it must induce the person to whom it is addressed to make a contract. This simply means that the statement must be one of the factors which led the person to enter into the contract – it does not have to be the sole or main reason (Edgington v Fitzmaurice (1885)). Nor does it matter that the person had the opportunity to discover that the statement was untrue, but did not take it. In Redgrave v Hurd (1881) the purchaser of a solicitor’s practice had the opportunity to consult documents which would have revealed the falsity of the seller’s statement about the practice’s income. His failure to do so did not preclude his later claim based on misrepresentation.

The test of inducement is, unusually, subjective. It is not a question of whether a reasonable person would have been induced to enter into the contract, but whether this particular claimant was, as a matter of fact, so induced: see Museprime Properties Ltd v Adhill Properties Ltd (1990).

9.1.3 Misrepresentation by silence

Essential reading ¢ McKendrick, Chapter 12: ‘A duty to disclose material facts?’, pp.207–217.

¢ Poole, Chapter 14: ‘Misrepresentation’ – Section 1 A ‘Unambiguous false statement of fact: Silence’, p.623.

A misrepresentation generally requires an oral or written statement. There are, however, some exceptions to this.


First, it is clear that in certain situations conduct can be treated as implicitly making a statement. If the implicit statement turns out to be untrue, then it may be a misrepresentation. In Spice Girls Ltd v Aprilia World Service BV (2000), for example, the participation by all five existing members of a pop group in an advertising shoot, was held to have carried the implication that none of them was planning to leave the group. When this turned out to be untrue, an action for misrepresentation was possible in relation to a sponsorship contract signed shortly after the shoot.

Secondly, where a statement, which was true when made, becomes false as a result of a change of circumstances, keeping silent may be treated as a misrepresentation: see With v O’Flanagan (1936).

Thirdly, a statement which is literally true may be treated as a misrepresentation if relevant information related to the statement is not disclosed: see Dimmock v Hallett (1866) – the statement that flats were let was true; the failure to disclose that the tenants had given notice to quit turned it into a misrepresentation.

Fourthly, there are some contracts which are treated as being ‘of the utmost good faith’ (or uberrimae fidei). This means that parties are obliged to disclose relevant information, even if it is not asked for. The most common example of this type of contract is a contract of insurance. The insurer will normally be entitled to rescind the contract if any information relevant to the risk insured is not disclosed, whether or not this has been asked for: see, for example, Lambert v Co-operative Insurance Society (1975).

9.1.4 Categories of misrepresentationThere are four different categories of misrepresentation, which relate principally to the state of mind of the person making the statement.

Fraudulent – the maker of the statement knows or believes that the statement is untrue, or makes it not caring whether it is true or false.

Negligent at common law – the maker of the statement and the person relying on it are in a ‘special relationship’ giving rise to a duty of care under the principles of Hedley Byrne v Heller (1964) and the maker of the statement acts in breach of this duty.

Negligent under statute – the maker of the statement has no reasonable grounds for believing it to be true (s.2(1) Misrepresentation Act 1967).

Innocent† – the maker of the statement genuinely believes it is true, and does not act negligently (at common law or under statute, as above) in making it.

The distinction between these categories is vital in determining the remedies which may be available to the person relying on the statement. This is discussed further in the next section.

Activity 9.2Keith is an international footballer. He enters into a sponsorship agreement with Alpha Sports. A week before signing the sponsorship contract he tells a representative of Alpha that he intends to keep playing for the next five years. Three weeks after the deal is signed Keith calls a press conference and announces his immediate retirement from football. Can Alpha take action against Keith for misrepresentation?

Would Alpha’s case be any stronger if evidence appears that Keith had told his manager on the day before he signed the deal with Alpha that he has just decided to retire?

Self-assessment questions1. Define misrepresentation.

2. In what circumstances can a misrepresentation be innocent?

3. In what sense is the test of inducement ‘subjective’?

† Note that in case law prior to the Misrepresentation Act 1967 all ‘non-fraudulent’ misrepresentations tend to be referred to as ‘innocent misrepresentations’.


SummaryA misrepresentation is a false statement of existing fact which induces a contract. A statement can be both a misrepresentation and a term of the contract. Statements of opinion are not misrepresentations, provided that the opinion is genuinely held, and not contradicted by facts known to the maker of the statement. Silence does not generally constitute a representation, but representations may be inferred from conduct. Silence may also be treated as a misrepresentation where a statement only reveals part of the truth; where circumstances change, rendering the statement no longer true; or in relation to contracts of the ‘utmost good faith’.


¢ define a misrepresentation

¢ explain how a statement of opinion, or the failure to disclose information, may sometimes be treated as a misrepresentation.

Useful further reading ¢ Anson, pp.237–243, 263–275.

9.2 Remedies for misrepresentation

The remedies available for misrepresentation will depend on whether it was made innocently, negligently or fraudulently. There are potential remedies available under the common law (both in contract and tort) and under statute (the Misrepresentation Act 1967). The main categories of remedy are first, rescission of the contract and secondly, damages for losses resulting from the misrepresentation. These will be considered in turn.

9.2.1 RescissionThe principal common law remedy for a misrepresentation which induced a contract was rescission. This was, and is still, available whether the representation was innocent, negligent or fraudulent. ‘Rescission’ in this context means that the contract is set aside, and the parties put into the position they would have been in had the contract never been made. Any goods or money which have been exchanged must be returned.

The remedy of rescission must be sought by the claimant: it does not occur automatically. Until rescission has taken place, the contract will continue to exist. In other words, misrepresentation renders a contract ‘voidable’ rather than ‘void’. Generally speaking the right of rescission will be exercised by giving notice to the other party. There is one authority, however, which holds that rescission can be effected by giving notice to relevant third parties. In Car & Universal Finance Co v Caldwell (1965), where the seller of a car wished to rescind the contract when the purchaser’s cheque bounced, it was held that notifying the police and the Automobile Association was sufficient. The seller had done all that he reasonably could to rescind the contract, given that the purchaser had absconded and was untraceable.

Limitations on rescission

There are some situations where the right to rescind will be lost.

u Where a party to the contract, aware of the other party’s misrepresentation, continues with the contract, and thus ‘affirms’ it: see, for example, Long v Lloyd (1958).

u Where there is a significant lapse of time between the making of the contract and the discovery of the misrepresentation. In Leaf v International Galleries (1950), for example, the gap was five years. It may well be, however, that a much shorter


period would be enough for the right to be lost – unless the misrepresentation is fraudulent. In that case, time does not start to run until the misrepresentation has been, or could reasonably have been, discovered.

u Where restitution is impossible. Since the idea of rescission is to restore the parties to the position they would have been in had the contract not been made, if property which has been transferred has been consumed or inextricably mixed with other property, rescission will not be permitted. See, for example, Clarke v Dickson (1858). The fact that property has been used (rather than consumed), however, will not necessarily prevent rescission, if a payment of money to cover the use can be made.

u Where rescission would affect the rights of a third party. The most obvious example is where goods have been sold to the ‘misrepresentor’, who has then sold them on to an innocent third party before the contract has been avoided. The courts will not require the third party to return the goods to the original owner. This is why parties in this type of situation try to argue that the contract is void for mistake (see Chapter 8, 8.2.2, and the cases discussed there).

Note that the court also has a discretion under s.2(2) of the Misrepresentation Act 1967 to award damages instead of rescission, where it is equitable to do so. This is discussed further in section 9.2.2 below.

Activity 9.3In what other circumstances do the courts talk about ‘rescission’ of a contract? How does this differ from ‘rescission for misrepresentation’?

Activity 9.4Why do you think that the remedy of rescission for misrepresentation is subject to so many limitations? Are they justifiable?

9.2.2 DamagesThe common law has not recognised until relatively recently any right to damages for non-fraudulent misrepresentation. The only possibility of monetary compensation for innocent misrepresentation was an indemnity for necessary expenditure incurred as part of the contract which has been rescinded: see Whittington v Seale-Hayne (1900). Where a misrepresentation is fraudulent, damages may be recoverable under the tortious action for deceit. This requires the claimant to prove that the statement was made knowing that it was untrue, without any genuine belief in its truth, or with a reckless disregard for whether it was true or not: see Derry v Peek (1889).

The measure of damages for deceit, being tortious, is based on putting the claimant into the position he or she would have been in had the misrepresentation not been made. This is in distinction to putting the claimant in the position he or she would have been in had the statement been true. In general, this precludes the claimant from recovering lost profits on the contract. In some circumstances, however, some damages of this kind may be recovered. In East v Maurer (1991), the fraudulent statement led the plaintiff to buy a business which turned out to be much less profitable than it would have been had the statement been true. The damages recoverable took account of the fact that if the statement had not been made the plaintiff would probably have bought another business, from which profits would have been made. These potential profits were recoverable, even though the reduced profits on the business actually bought were not.

Once it is established that the statement was fraudulent, all losses (calculated on the basis outlined in the previous paragraph) which are directly attributable to the deceit are recoverable. The normal rules of ‘remoteness’ which apply to contract or tort damages do not operate in this situation: Doyle v Olby (1969).


Activity 9.5Read the case of Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd (1997) (extracted in Poole). What was the difference between the view of the Court of Appeal and the House of Lords in this case? Explain how the measure of damages used by the House of Lords fits in with the principles outlined above.

The law of tort took some time to recognise a remedy for negligent misstatements causing economic loss. This was eventually done by the House of Lords in Hedley Byrne v Heller (1964). The action that has developed from this provides another potential remedy for a person who has entered into a contract as a result of a negligent misstatement from the other party. That the action can be used in this way was confirmed by the Court of Appeal in Esso v Mardon (1976). Generally, however, the claimant in such a situation will be better advised to use the action provided by s.2 of the Misrepresentation Act 1967, since this has advantages in terms of the burden of proof and damages recoverable, as will be indicated below. The one situation where the Hedley Byrne action may be needed is if the statement cannot be categorised as a statement of fact. A negligently given opinion can, for example, be the basis for an action for negligent misstatement under Hedley Byrne, without the need to show that it meets the strict requirements of being a misrepresentation.

The most important innovation in the Misrepresentation Act 1967 was the introduction of the action for what is generally referred to as ‘negligent misrepresentation’, in s.2(1). In fact, the Act does not use this terminology, but provides that a statement which would form the basis of an action in deceit, if made fraudulently, will also give rise to liability unless the person making it is able to prove that ‘he had reasonable grounds to believe and did believe up to the time that the contract was made that the facts represented were true’.

There are two important points to note about this section: the first relates to the burden of proof; the second to the measure of damages.

The burden of proof

On the burden of proof, all that the claimant has to do is to prove that a misrepresentation was made and that it induced the contract. The defendant will then be liable for damages under s.2(1) unless he or she can prove that there were reasonable grounds for his or her belief that the statement was true. This may not be easy to satisfy. In Howard Marine and Dredging Co v Ogden and Sons (1978) it was held that reliance on a usually authoritative Register of the details of ships did not to amount to ‘reasonable grounds’ for a false statement of a barge’s capacity, when the maker of the statement had access to the correct figure in the shipping documents.

The measure of damages

As regards the measure of damages, the most important authority is Royscot Trust Ltd v Rogerson (1991). Here it was held by the Court of Appeal that damages under s.2(1) should be calculated in the same way as if the statement had been made fraudulently. This means, therefore, that all losses are recoverable, not simply those that were reasonably foreseeable (as would be the case with an action for negligent mis-statement under the Hedley Byrne principle). This conclusion was based on the court’s view of the proper interpretation of s.2(1) and the fact that it appears to require the negligent misrepresentor to be treated in the same way as the fraudulent one. This conclusion is somewhat controversial, and some members of the House of Lords in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd (1997) indicated doubts about its correctness. It has not as yet been overruled, however.

Activity 9.6In what situations may it be preferable to base an action on ‘fraud’ (that is, using the tort of deceit) rather than on s.2(1) of the Misrepresentation Act 1967?


Activity 9.7Why does McKendrick argue that if the House of Lords does not overrule Royscot v Rogerson then legislation should be used to do so?

Section 2(2) of the Misrepresentation Act provides a discretion for a court to award damages in lieu of rescission, where it is adjudged equitable to do so, taking account of the effect of rescission on both parties. There are conflicting authorities on the question of whether the right to rescind must still be available in order for damages to be awarded under s.2(2). In Thomas Witter Ltd v TBP Industries (1996) it was suggested that to require rescission to be still available would be too restrictive an interpretation. This has not been followed, however, in the later cases of Floods of Queensferry Ltd v Shand Construction Ltd (2000) and Government of Zanzibar v British Aerospace (Lancaster House) Ltd (2000). All three cases are first instance decisions and clarification by an appellate court is awaited. The most natural interpretation of the language of s.2(2), however, would suggest that the right to rescind must still subsist in order for damages to be awarded.

As to the measure of damages under this section, there is similarly no definitive ruling. Section 2(3) states that if damages are awarded under s.2(1) and s.2(2), the latter must be taken into account in assessing the former. This implies that s.2(2) damages will be less than those under s.2(1). In William Sindall plc v Cambridgeshire County Council (1994) it was suggested that the basic measure under s.2(2) should be the difference in value between what the claimant was misled into believing he or she was receiving under the contract and the value of what was in fact received. This seems sensible as an estimate of the loss of the right to rescind.

Self-assessment questions1. Can a contract be rescinded where a party continues with a contract despite

knowing the other party has made a misrepresentation?

2. When might a representation be regarded as reckless or negligent?

3. What is the basis of the awarding of damages (in tort) for fraudulent misrepresentation?

SummaryThe remedies for misrepresentation are rescission of the contract and damages. Rescission is available for all types of misrepresentation, but can be lost by affirmation, lapse of time, impossibility of restitution, or the intervention of third party rights. Damages are available for fraudulent or negligent misrepresentations, under the tort of deceit and s.2(1) of the Misrepresentation Act 1967. The measure of damages is the same in both cases. There is also the possibility of an action for the tort of negligent mis-statement based on Hedley Byrne v Heller. Section 2(2) of the Misrepresentation Act 1967 gives the court a power to award damages in lieu of rescission.


u list the potential remedies for misrepresentation

u explain the limitations on the right to rescind for misrepresentation

u explain the different measures of damages for misrepresentation, and give examples of situations in which each will be applicable.



9.3 Exclusion of liability

The exclusion or limitation of liability for misrepresentation is dealt with by s.3 of the Misrepresentation Act 1967, as amended by s.8 of the Unfair Contract Terms Act 1977. This requires that any clause which attempts to limit liability for misrepresentation must satisfy the requirement of reasonableness set out in s.11 of the Unfair Contract Terms Act (discussed in Chapter 6, at 6.2.5).

Broad attempts to exclude liability have been found to be unreasonable, even if the clauses are drawn from widely used standard conditions: see Walker v Boyle (1982) and Thomas Witter v TBP Industries (1996). In HIH Casualty & General Insurance Ltd v Chase Manhattan Bank, Chase Manhattan Bank v HIH Casualty & General Insurance Ltd [2003] UKHL 6, the House of Lords held that the right of a party to exclude damages caused by an innocent or negligent misrepresentation did not extend to a fraudulent misrepresentation. Where there was a fraudulent misrepresentation the party deceived retained the right to rescind the contract and sue for damages.

Sometimes the attempt to exclude liability is put into the form of an assertion, for example, that ‘no statements are made other than those contained in the contract itself’. Such ‘entire agreement’ clauses have been considered in a number of cases. Although there is an early authority (on the pre-UCTA version of s.3) which held that such a clause could be effective to restrict liability for statements made by an agent of the party concerned (Overbrooke Estates v Glencombe Properties (1974)), subsequent cases have generally taken the line that an entire agreement clause, or clauses, which attempt to deny that there is any reliance on pre-contractual statements, do fall within the scope of s.3 as far as liability for misrepresentation is concerned. See, for example, Cremdean Properties v Nash (1977); Inntrepreneur Estates (CPC) Ltd v Worth (1996); Thomas Witter Ltd v TBP Industries Ltd (1996); Inntrepreneur Pub Co (GL) v East Crown Ltd (2000).

SummaryBy virtue of s.3 of the Misrepresentation Act 1967, the exclusion or limitation of liability for misrepresentation is subject to the requirement of reasonableness set out in s.11 of the Unfair Contract Terms Act 1977. ‘Entire agreement’ clauses are generally regarded as falling within the scope of s.3.


u state the rules which limit the possibility of excluding liability for a misrepresentation.


Sample examination questionIan, an investment broker, was approached by Vera who asked him whether she should invest in Wander Electronics Ltd. Ian said, ‘You certainly should, Lord Wellybob is a director. It is a very sound company. It is my view that it will go from strength to strength. In fact I own 5,000 shares myself which I can let you have.’ Vera then bought the shares from Ian for £10,000. The company went into liquidation a month later. The shares are now worthless. It now turns out:

a. that Lord Wellybob resigned from his directorship a week after Ian’s statement was made

b. that Ian’s statement regarding the soundness of the company was based on a report in a financial journal which was intended to refer to Wonder Electronics Ltd but gave the name of Wander Electronics as a result of a printing error.

Advise Vera.


Advice on answering the questionIn order for Vera to have a remedy against Ian for misrepresentation, she will need to show that he has made a false statement of fact which has induced her to contract with him. The statements which Ian makes are: (a) about Lord Wellybob’s directorship; (b) that the company is ‘very sound’; and (c) that it will go from ‘strength to strength’.

Lord Wellybob’s directorship. This statement is true when Ian makes it. Is it still true when Vera enters into the contract? This is not clear from the facts, but if she makes the contract after Lord Wellybob has resigned it may be that Ian should have told her about this (see With v O’Flanagan). If she makes the contract before Lord Wellybob resigns, then Ian can only be liable for misrepresentation if at the time he made the statement he knew that Lord Wellybob was planning to resign (see Dimmock v Hallett and Spice Girls v Aprilia). The final issue will be whether the fact that Lord Wellybob was a director was one of the reasons why Vera entered into the contract. This is for her to prove.

Company is very sound. Is this an expression of opinion (Bisset v Wilkinson), or a statement of fact? If the former, then Ian’s statement will not be a misrepresentation, unless he is aware of facts that make this opinion untenable (Smith v Land House Corporation). If it is a statement of fact, and is untrue, then did Ian have reasonable grounds to believe that it is true (as required by s.2(1) of the Misrepresentation Act 1967)? He relied on the magazine article – will this be enough to constitute ‘reasonable grounds’? Should an investment broker have more solid bases for making recommendations of this kind? (See Howard Marine v Ogden).

Company will go from strength to strength. This is clearly stated as an ‘opinion’. On that basis it will only give a remedy in misrepresentation if Ian did not genuinely hold the opinion (Edgington v Fitzmaurice). Another possibility might be to sue for negligent misstatement under Hedley Byrne v Heller, if Vera can prove that the opinion was negligently given.

In any of the above cases, if Vera can establish the misrepresentation, she may wish to rescind the contract. Do any of the bars to rescission apply? The possible bars here are lapse of time, and the impossibility of restitution. You should discuss both of these in considering whether Vera can return the shares and recover her £10,000.

In relation to damages, Vera’s argument will presumably be that in the absence of the misrepresentation(s) she would not have bought the shares and that she can therefore recover the full loss she has suffered from the fall in the shares’ value (i.e. £10,000 minus the current value of the shares). Are there any other losses for which she could recover?


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9.1 Definition of misrepresentation ¢ ¢

9.2 Remedies for misrepresentation ¢ ¢

9.3 Exclusion of liability ¢ ¢

Contents

Introduction 122

10 1 Duress 123

10 2 Undue influence 126



10 Duress and undue influence


Introduction

Courts are reluctant to set aside a contract between parties of unequal bargaining power solely on the basis of the inequality. However, courts will not allow the strong to push the weak to the wall; in certain circumstances, courts will set aside apparent contracts. Contracts will be set aside if illegitimate pressure is applied during the process of contract formation. Law and equity developed different doctrines to deal with their different conceptions of illegitimate pressure. At common law, the doctrine of duress renders a contract voidable where illegitimate threats have been used by one party to coerce the other party into a contract. In equity, the doctrine of undue influence allows the court to set aside a transaction that has resulted when one party has unduly influenced another to enter into a contract.


u explain the doctrine of duress

u state the theory behind the doctrine of duress

u indicate when duress will vitiate an apparent contract

u distinguish between lawful economic pressure and duress

u outline the effect of duress

u explain what undue influence is

u indicate the circumstances in which undue influence may vitiate a contract

u outline the approach courts have taken towards undue influence.

Elements of the law of contract 10 Duress and undue influence page 123

10.1 Duress


power’ – 17.1 ‘Introduction’ and 17.2 ‘Common law duress’, pp.283–288.

¢ Poole, Chapter 15: ‘Duress, undue influence and unconscionable bargains’ – Section 1 ‘Duress’, pp.694–713.

The common law was slow to develop a doctrine of duress. Initially, only duress to the person – a threat to the personal security of an individual – was recognised as duress. Gradually, the law expanded to encompass duress to goods and, more recently, economic duress. We shall examine these in turn.

We will begin with the effect of duress upon a contract.

10.1.1 The effect of duressDoes duress render a contract void or voidable? This is important because of the potential effect upon a third party. See Chapter 8, ‘Mistake’, section 8.3.2 ‘Mistakes as to identity’, where this is discussed in relation to mistake.) In Barton v Armstrong (1976) the Privy Council declared that certain deeds were void for duress. There is some support for this position amongst the academic commentators (see, for example, Lanham’s article in the further reading section below).

The better view is that duress renders the contract voidable, rather than void. The apparent consent of the victimised party is treated as revocable. They have the ability to affirm or not to affirm the contract. If they choose not to affirm the contract, it is void. That duress rendered the contract voidable was the position taken in the cases of Universe Tankships of Monrovia v International Transport Workers Federation (The Universe Sentinel) (1983) and Pao On v Lau Yiu Long (1980).

The effect of finding that duress renders a contract voidable creates several important consequences. Two of these are:

u the party subject to the duress must act promptly to set aside the contract – see North Ocean Shipping v Hyundai Construction (1979), and

u a third party can acquire good title to goods even though his vendor has acquired those goods pursuant to a contract which was brought about by duress.

In Halpern v Halpern [2007] the Court of Appeal made two observations in relation to the duress issue. One was that rescission for duress should be no different in principle than rescission for other vitiating factors. A second was that the practical effect of rescission would always depend upon the circumstances of a particular case. If, in the present case, the defendants were able to establish that their consent had been procured by duress, it would be ‘surprising if the law could not provide a suitable remedy’.

10.1.2 Forms of duress

Duress to the person

Duress to the person was the first form of duress recognised by the common law. Duress to the person occurs when one party to a contract forces another to contract with him through threats of violence.

The law will find an apparent contract voidable where duress is a reason for the contract. The duress does not have to be the reason for the contract. Where a party enters into a contract for several reasons, of which the duress is only one reason, the contract is still voidable: see Barton v Armstrong (1976).


Duress to goods

Duress to the goods may occur where one person threatens to destroy or take the goods of another unless a contract is entered into. Duress to goods was recognised in the case of The Siboen and The Sibotre (1976).

Economic duress

It has only been in recent years that English courts have accepted that economic duress can be a vitiating factor in contractual formation – that the presence of economic duress will result in a voidable contract. Economic duress as such was recognised in Pao On v Lau Yiu Long (1980) and Universe Tankships of Monrovia v International Transport Workers Federation (The Universe Sentinel) (1983). English courts are still in the process of developing the doctrine of economic duress.

Economic duress occurs when one party uses its superior economic power to force the weaker party into an agreement. The main difficulty in this area is to draw a line between unacceptable commercial pressures (which amount to economic duress) and acceptable commercial pressures (which do not amount to economic duress).

Acceptable commercial pressures not amounting to duress were found to exist in the case of Alec Lobb Ltd v Total Oil (1983). In this case, the defendant had extracted hard terms in a contract with the claimant. The defendant had done this because it was reluctant to contract with the claimant. In addition, the commercial pressures upon the claimant had originated with parties other than the defendant.

Activity 10.1Read Alec Lobb Ltd v Total Oil (1983) and summarise it in about 150 words.

No feedback provided.

Duress exists when there is an illegitimate threat to perform an unlawful act unless the other party enters into a contract or varies an existing contract. Consent must be vitiated. It has been said that the victim’s will must be ‘overborne’ such that he does not really consent to the contract: see Lord Scarman’s comments in Pao On v Lau Yiu Long (1980). In more recent decisions, courts seem to have moved away from requiring an overborne will. The reason for this change of position appears to be the recognition that a person who acts under duress does make a choice. Their act is not, in other words, automatic. The choice, however, is one which they have been compelled to make.

The difference between acceptable and unacceptable commercial pressures is explained in the speech of Lord Scarman in Pao On v Lau Yiu Long (1980). Lord Scarman stated that commercial pressure was not enough to constitute duress: ‘There must be present some factor “which could in law be regarded as a coercion of his will so as to vitiate his consent”’. Lord Scarman then continued and set out the following indicia as being useful in determining whether or not there was a coercion of the will such as to vitiate consent.

1. Did the person who was allegedly coerced protest at the time?

2. Did this person have an alternative course of action open to him – such as an adequate legal remedy?

3. Was the person independently advised?

4. Did the person take steps to avoid the contract once they had entered it?

The following cases are significant in establishing the distinction between acceptable and unacceptable commercial pressures. See:

u North Ocean Shipping v Hyundai Construction (1979)

u Pao On v Lau Yiu Long (1980)

u Universe Tankships v ITF (1982)


u B and S Contracts v Green (1984)

u Atlas Express v Kafco (1989).

The decision of the Court of Appeal in CTN Cash and Carry v Gallaher (1994) is of interest because the Court of Appeal was not willing to extend ‘lawful act duress’ to a threat (in this case to withdraw credit facilities) made in a commercial context in pursuit of a bona fide (but mistaken) claim. The Court, however, refused to state that the threat of a lawful act could ‘never’ constitute duress. In R v Attorney General of England and Wales [2003] UKPC 22 the Privy Council considered the issue of duress in rather unusual circumstances. R was a former SAS member who alleged that he had signed an agreement to prevent him from disclosing UK Special Forces Work under duress. His claim of duress was rejected by the Privy Council. The supposed act of duress, the threat of the SAS to return him to his old regiment, was a lawful act. The Ministry of Defence was entitled to see a person who refused to sign such an agreement as unsuited to work with the SAS.

SummaryThreats to the person, goods or the illegitimate use of pressure to force a party to contract will result in a contract which is voidable for duress. The victim must, however, act promptly to set aside the contract when the duress has been removed. Failure to do so will result in a valid contract. While courts have recognised a doctrine of economic duress in recent years, it is applied cautiously by the courts. The main difficulty which emerges in these areas is in separating acceptable commercial pressures from unacceptable commercial pressures.


u explain the doctrine of duress

u state the theory behind the doctrine of duress

u indicate when duress will vitiate an apparent contract

u distinguish between lawful economic pressure and duress

u outline the effect of duress.

Activity 10.2Outline the criteria the Privy Council stated in Pao On v Lau Yiu Long (1980) were necessary for duress to exist.

Activity 10.3State the steps necessary for a contract to be avoided (not affirmed) following the decision in North Ocean Shipping v Hyundai Construction (1979).

Activity 10.4Would the Court in Atlas Express v Kafco (1989) have reached the same decision if Kafco were aware that Atlas Express had mistakenly underbid the job?

Activity 10.5Is it helpful to define unlawful pressure by reference to ‘coercion of the will’? Does normal economic pressure not ‘coerce the will’?


¢ Atiyah, P.S. (1982) ‘Economic duress and the “overborne will”’, 98 LQR 197.

¢ Lanham, C. (1966) ‘Duress and void contracts’, 29 MLR 615.


10.2 Undue influence


power’ – 17.3 ‘Undue influence’, pp.288–292.

¢ Poole, Chapter 15: ‘Duress, undue influence, and unconscionable bargains’ – Section 2 ‘Undue influence’, pp.713–754.

¢ Phang, A. and H. Tjio, ‘The uncertain boundaries of undue influence’, Elements of the law of contract Study pack.

Equity developed a different response to contracts formed where one party was subject to illegitimate pressure during the contractual process. Equity did not focus on the use of force or threats during the making of the agreement but upon the relationship between the parties to the contract. Equity acts upon the conscience and the equitable doctrine of undue influence operates where the people are in a relationship such that one party relies upon the other. Examples of such relationships would be the man inexperienced in financial affairs who relies upon the advice of his bank manager or the aged father who depends upon his daughter to manage his finances.

In short:

u the equitable doctrine of undue influence focuses upon the relationship between parties

u the common law doctrine of duress examines the procedure by which a contract was reached.

Lord Nicholls, in Royal Bank of Scotland v Etridge (No 2) (2001), describes undue influence as ‘one of the grounds of relief developed by the courts of equity as a court of conscience. The objective is to ensure that the influence of one person over another is not abused.’

In recent years, the House of Lords has twice produced definitive judgments on the doctrine of undue influence. These are Barclays Bank v O’Brien (1993) and Royal Bank of Scotland v Etridge (No 2) (2001).

In the past, courts divided undue influence into two categories – actual undue influence and presumed undue influence, based on the decision in Allcard v Skinner (1887). For a period of time, following the decision in BCCI v Aboody, courts divided the cases of presumed undue influence into two sub-categories, class 2A and class 2B. Although the House of Lords adopted this division in Barclays Bank v O’Brien (1993), the House of Lords in Royal Bank of Scotland v Etridge (No 2) (2001) re-explained what was meant by this division and disapproved of the labels attached to this category. In one instance, undue influence was presumed as a matter of law by reason of the type of relationship between the parties. In the other instance, undue influence would not be presumed by law, but it was open to a party to establish an evidentiary presumption of undue influence.

10.2.1 Actual undue influenceIn such cases, the claimant must prove that the wrongdoer actually exerted an undue influence upon the complainant to enter into the transaction in question. In these instances the criteria are:

u that the party to the transaction (or a person who induced a transaction for his benefit) had the capacity to influence the other party

u the he did influence the other party

u that the exercise of this influence was undue

u that it was because of this influence that the transaction was brought about.


In a situation of actual undue influence, it is not necessary to show that the transaction was manifestly disadvantageous to the party subject to the undue influence. See:

u Lloyds Bank v Bundy (1975): bank and elderly customer

u CIBC Mortgages v Pitt (1993): husband and wife. This case is also useful for its discussion of manifest disadvantage.

Note that there need not be any actual threats made by one party to another. In this regard, actual undue influence is a much broader concept than common law duress.

10.2.2 Presumed undue influenceHere the claimant need not prove that there was actual undue influence. These situations, according to Lord Nicholls in Royal Bank of Scotland v Etridge (No 2) (2001), may arise in one of two ways. In the first case, the law makes a genuine presumption in relation to certain, defined types of relationships. In the second case, there is a shift in the evidential burden of proof from the complainant to the other party, to show that the transaction was made without improper influence. For this situation to arise two elements are required: firstly that the complainant reposed trust and confidence in the other party, or the other party acquired ascendancy over the complainant; secondly that the transaction is not readily explicable other than as resulting from undue influence.

Genuine presumptions

The cases where the law makes a genuine presumption of undue influence consist of a small group of prescribed relationships where the law automatically considers the parties to be in a relationship of trust and confidence. Examples of these relationships are: doctor and patient; solicitor and client; trustee and beneficiary; religious adviser and disciple.

The law strictly protects the weaker of the parties in such a relationship by establishing a presumption of undue influence. The complainant need not prove he actually reposed trust and confidence in the other party. All the complainant needs to do is to establish the existence of the relationship. In cases where the gift is a small one (such as a birthday or Christmas gift), the presumption will not apply. Where, however, the transaction is more substantial, some explanation will be needed on the part of the donee. In the words of Lord Nicholls ‘the greater the disadvantage to the vulnerable person, the more cogent must be the explanation before the presumption will be regarded as rebutted.’ [para.24]

Evidential presumptions

In some instances the relationship may not fall within those where undue influence is presumed by law. However, the complainant may prove the de facto existence of:

a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such relationship raises the presumption of undue influence (per Lord Browne-Wilkinson, Barclays Bank v O’Brien [1994] 1 AC 180, 189).

This situation creates an evidential presumption – the complainant establishes the relationship and an inexplicable transaction and the burden of proof then shifts to the other party to disprove the presumption. That the transaction is inexplicable goes to another element which is necessary in cases of presumed undue influence – that the transaction is disadvantageous to the ‘weaker’ party. The presence of disadvantage strengthens the presumption that the only reason for the transaction was the undue influence of the putative wrongdoer.

The burden of proof then shifts to the putative wrongdoer to disprove that they did not exercise undue influence, which is done by establishing that the complainant acted independently and understood his or her actions. This is most commonly achieved by showing that the complainant received independent advice before acting. See Royal Bank of Scotland v Etridge (No 2) (2001).


10.2.3 Undue influence and third partiesThus far we have considered the situation where the undue influence arises between the two parties to the contract. The intervention of a third party gives rise to difficulties. In practice, most litigation occurs where the relationship of undue influence arises between A and B, whereby B enters into a contract with C for the benefit of A. The most common instance of this scenario is when the relationship of undue influence exists between spouses and one spouse induces the other to enter into a transaction with a bank. This often involves the use of the matrimonial home as security for business debts. The issue here is whether or not the transaction with the bank will be set aside because of the relationship with another party. The transaction will be set aside if the bank has actual or constructive notice of the possibility of undue influence.

The most common way in which the bank can rebut the possibility of notice is to inform the spouse as to the nature of the transaction and advise them to seek legal advice – see Barclays Bank v O’Brien (1993). The advice offered to banks by the above case has, to a certain extent, been modified by the House of Lords in their more recent decision in Royal Bank of Scotland v Etridge (No 2). In the more recent decision, the House of Lords carefully outlined the steps a financial institution must take to avoid taking a charge with notice of the surety’s claim to set it aside. The House of Lords also provided guidance to solicitors who advise in such transactions.

SummaryUndue influence is an equitable doctrine. As such, it is concerned with the conscience of the alleged wrongdoer. The focus is upon the relationship between the parties rather than the procedure by which a contract is reached (which is left to duress).

Undue influence is a broad doctrine and encompasses two types of undue influence. The first is actual undue influence – where one party has actually exerted an influence over another with regard to a contract. The second is presumed undue influence – an even broader category which includes two sub-groupings. In the first sub-grouping, the law irrebuttably presumes that transactions between people who are in certain kinds of relationships are entered into because of undue influence. In the second sub-grouping, an evidentiary presumption is established by the claimant by showing that they reposed trust and confidence in another and that the transaction is disadvantageous to them, or not readily explicable other than on the basis of improper influence. In this second sub-grouping, it is open to the alleged wrongdoer to rebut the presumption by establishing that the claimant entered into the transaction freely with knowledge of the transaction and its consequences.


u explain what undue influence is

u indicate the circumstances in which undue influence may vitiate a contract

u outline the approach courts have taken towards undue influence.

Activity 10.6What is needed to put the bank on notice as to the rights of the surety?

Activity 10.7Why does the law require proof of disadvantage in relation to presumed undue influence but not actual undue influence?

Activity 10.8Outline the differences and similarities between economic duress and actual undue influence.



Sample examination questionsQuestion 1 ‘Economic pressure is what contractual negotiations are all about: it is futile for the courts to try to intervene.’ Discuss.

Question 2 R is a strong-willed and domineering woman. S, the man with whom she lived, left all financial decisions to her. Last year S inherited a holiday apartment in Spain from his aunt A. R insisted that S signed an agreement giving R the exclusive use of the apartment and the right to receive all rent from lettings in exchange for R’s shares in X&Y plc.

R and S have now separated. S wants to go and live in the apartment but R will not permit him to use the apartment. The shares in X&Y plc have increased in value.

Advise S.

Advice on answering the examination questionsQuestion 1 This question asks you to discuss the doctrine of economic duress and analyse whether or not it should be a ground upon which courts can intervene to invalidate a contract. The common law was slow to recognise ‘duress’ as a ground upon which a contract could be made void. This may be because courts of equity recognised undue influence as a ground upon which a contract could be set aside. Whatever the reason for this, duress, as a ground upon which a contract could be set aside, was recognised in The Siboen and The Sibotre (1976) by Kerr J. In the circumstances of that case, where a charter rate was reduced when the charterer ran into financial difficulties, Kerr J refused to recognise duress. There were great commercial pressures, but not duress, which was defined as ‘a coercion of his will so as to vitiate his consent’. This definition was accepted by Lord Scarman in Pao On v Lau Yiu Long (1980).

There are a number of problems with this definition of duress. First, it is by no means clear what is duress and what are great commercial pressures. Secondly, the overborne will theory has been subject to much criticism. Amongst other problems, it is internally inconsistent. Lord Scarman [at 636] stated that the commercial pressures ‘must be such that the victim must have entered the contract against his will, must have had no alternative course open to him and must have been confronted with coercive acts by the party exerting the pressure’. In short, ‘It must be shown that the payment made or the contract entered into was not a voluntary act on his part’ [636]. Further:

in determining whether there was a coercion of will such that there was no true consent, it is material to inquire:

[1] whether, at the time he was allegedly coerced into making the contract, he did or did not have an alternative course open to him such as an adequate legal remedy

[2] whether he was independently advised

[3] whether after entering the contract he took steps to avoid it. [at 635]

The reason why this has been criticised as internally inconsistent is that if the victim’s will is truly overborne, how could he realise that there were no alternative courses open or seek independent advice?

Professor Atiyah has pointed to other problems with the overborne will theory. A significant one is that if duress operates because the will of the victim has been overborne, surely duress should render a contract void and not voidable?

The decision of the Court of Appeal in B&S Contracts & Design Ltd v Victor Green Publications Ltd (1984) indicates that there may be a movement away from the overborne will theory. While this is a logical development, it serves to heighten rather


than lower the difficulties in distinguishing between ordinary commercial pressures and duress.

A possible way of differentiating between these two is to say that duress requires an illegitimate threat or pressure. The Olib [1991] 2 Lloyd’s Rep 108 tells us that the threat made must be illegitimate in that it threatens a civil or criminal wrong or the threat itself is a legal wrong. It has also been suggested that a threat may be illegitimate by reason of public policy: The Evia Luck (No. 2) [1990] 1 Lloyd’s Rep 319. However, CTN Cash and Carry v Gallaher (1994) tells us that in certain rare circumstances it may be possible to have a ‘lawful act’ duress claim.

While it may be difficult to distinguish between the two, the question also asks you if courts should try to intervene. On the one hand, most contracts are formed under some sort of pressure. Many parties are faced with offers made on a ‘take it or leave it’ basis. Few people are able to negotiate the terms of carriage with the Post Office, or the terms of their mortgage with the Building Society, or the conditions upon which they will receive a telephone service. However, statutes will now protect most consumers in these areas. The real problem will be with small commercial firms – especially when they deal with large enterprises. Here, it is hard to justify allowing the strong to push the weak to the wall. If we accept that contracts are consensual in nature, many of these contracts will not be. If we are concerned about public policy arguments, we have to recognise that the use of illegitimate pressure is objectionable.

It is arguable that courts of law have always intervened in these circumstances. Stilk v Myrick (see Chapter 3, Consideration), although generally regarded as a case in which there was a lack of consideration, may really have been a case where the court was concerned about duress. If courts are going to intervene to prevent the strong from taking advantage of the weak, it must be sound law to do so explicitly, rather than implicitly.

Question 2 This question raises issues of undue influence and must be considered in light of the House of Lords’ recent decision in Royal Bank of Scotland v Etridge (No 2) (2001).

S will want to have the transaction with R declared void. It may be that R has exerted actual undue influence upon S to enter into the contract. S will, thus, want to argue that the undue influence is within that set out in CIBC Mortgages v Pitt (1993). The advantage to S is that once the undue influence is made out, the transaction will be set aside. R cannot in anyway ‘rebut’ such a finding. In addition, S will not have to prove that the contract is disadvantageous to him: Royal Bank of Scotland v Etridge (No 2) (2001). This is important since S is financially better off as a result of the contract since the shares in X&Y have appreciated in value.

If S cannot prove actual undue influence, he may be able to establish presumed undue influence. His relationship with R does not bring him within those relationships presumed by law to give rise to undue influence. Lord Browne Wilkinson, in Barclays’ Bank v O’Brien (1993), stated that the law accorded spouses ‘tender treatment’ but that it did not presume undue influence. This was repeated in Royal Bank of Scotland v Etridge (No 2) (2001). S may be able to establish that he reposed trust and confidence in R (Lloyd’s Bank v Bundy) and that the transaction is not explicable on any other ground. The difficulty S faces here is that financially, the contract has been advantageous to him. He cannot prove that he has been disadvantaged by the contract. In the circumstances, courts will be hesitant to invalidate the contract.


Reflect and review






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I can explain the doctrine of duress. ¢ ¢ ¢

I can state the theory behind the doctrine of duress.

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I can indicate when duress will vitiate an apparent contract.

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I can distinguish between lawful economic pressure and duress.

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I can outline the effect of duress. ¢ ¢ ¢

I can explain what undue influence is. ¢ ¢ ¢

I can indicate the circumstances in which undue influence may vitiate a contract.

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I can outline the approach courts have taken towards undue influence.

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Must revise

Revision done

10.1 Duress ¢ ¢

10.2 Undue influence ¢ ¢


Notes

Contents

Introduction 134

11 1 The doctrine of privity 135

11 2 The Contracts (Rights of Third Parties) Act 1999 137

11 3 Rights conferred on third parties at common law 139

11 4 Liability imposed upon third parties 145


Part V Who can enforce the terms of a contract?

11 Privity of contract


Introduction

We have been concerned thus far with the questions of what is necessary to form a contract (an offer and acceptance and consideration), of the content of the contract and vitiating elements upon the contract (such as duress, mistake or misrepresentation). We turn now to the question of who can enforce the contract. This question involves the doctrine of privity. The doctrine itself is simple to understand. However, because it often defeats the intentions of the parties to a contract and can cause substantial injustices, many methods have been devised to circumvent the application of the doctrine. The interpretation and employment of these methods and devices has given rise to much complication in English law. For years, it was recommended by academics, lawyers and judges that privity of contract should be reformed. The result is the Contracts (Rights of Third Parties) Act 1999 which provides parties to a contract with a method of circumventing the doctrine of privity of contract.


u state what the doctrine of privity is

u explain the two aspects of the doctrine of privity

u illustrate the difficulties to which the doctrine of privity gives rise

u explain the significance of the Contracts (Rights of Third Parties) Act 1999

u outline the principal provisions of the 1999 Act

u illustrate the possible applications of the 1999 Act

u identify the major devices by which rights can be conferred on third parties at common law

u discuss the principal strengths and weaknesses of these devices

u state the relationship between the rights of third parties at common law and under the 1999 Act

u outline the possible ways in which liability can be imposed upon third parties to a contract.

Elements of the law of contract 11 Privity of contract page 135

11.1 The doctrine of privity

Essential reading ¢ McKendrick, Chapter 7: ‘Third party rights’ – 7.1 ‘Introduction’ to 7.5 ‘The

Contracts (Rights of Third Parties) Act 1999’, pp.110–115.

¢ Poole, Chapter 11: ‘Privity of Contract and Third Party Rights’ – Section 1 ‘Origins of the privity doctrine’ to Section 2 A ‘Case law interpretation’, pp.497–502.

The doctrine of privity of contract is primarily concerned with the question of who can enforce a contract. There are two aspects to the doctrine of privity of contract at common law.

u The first is that only parties to a contract are bound by it; A and B cannot, by their contract, compel C (a third party to the contract) to do something or to refrain from doing something (see Figure 11.1).

Figure 11.1 ‘Only parties to a contract are bound by it’

The obligation on C to pay B £100 in Figure 11.1 is unenforceable because C is not a party to the A/B contract.

u The second is that only the parties to a contract can derive rights and benefits from their contract; A and B cannot, by their contract, confer an enforceable benefit upon C even if A and B clearly intend to confer a benefit upon C (see Figure 11.2).

Figure 11.2 ‘Only parties to a contract can derive rights and benefits from it’

The obligation on B to pay C £100 in Figure 11.2 is also unenforceable because C is not a party to the A/B contract.

At common law the parties to a contract cannot impose a burden on a third party, nor can they confer a benefit on a third party. See, for example Tweddle v Atkinson (1861).

A number of decisions of the House of Lords illustrate the problems to which the doctrine gives rise, the following in particular.

u Dunlop Pneumatic Tyre v Selfridge & Co (1915). Dunlop sold tyres to Dew, subject to a retail price maintenance scheme. Dew resold the tyres to Selfridge & Co and sought to impose the same retail price maintenance scheme. Selfridge & Co sold the tyres for a price less than the scheme required. Dunlop sued Selfridge & Co on the basis that Dew had contracted with Selfridge & Co as Dunlop’s agent. The House of Lords rejected this argument. In the words of Lord Haldane ‘only a person who is a party to a contract can sue on it’. Note the second principle he discusses – that consideration must be provided if a person is to be able to enforce a contract.

Benefit:

B to pay C £100

ContractBA

C

Obligation:

C to pay B £100

ContractBA

C


Photo: Selfridge & Co department store, Oxford Street, London (photo © C. MacMillan 2003)

u Scruttons Ltd v Midland Silicones Ltd (1962). The House of Lords refused to allow stevedores the benefit of an exemption of a liability clause entered into between the carrier (who hired the stevedores to unload the vessel) and the owner of goods. As a general rule, a stranger to a contract cannot take advantage of its provisions even where the provisions were intended to benefit him.

u Beswick v Beswick (1968). An uncle contracted with his nephew whereby the nephew would receive the uncle’s coal business. In exchange, the nephew agreed to pay a weekly sum to the uncle and, upon the uncle’s death, to the uncle’s widow (the aunt). After the uncle’s death, the nephew refused to make the payments to the aunt. The House of Lords held that the aunt was not entitled to sue to enforce the obligation to make the payments to her. The aunt was, however, able to succeed in her capacity as the personal representative of her deceased husband’s estate.

The first aspect of privity, that the parties cannot by their contract impose liabilities or burdens upon a third party, is unobjectionable. The circumstances in which justice calls for such a result are limited. The second aspect, that the parties cannot benefit a third party to the contract, is objectionable. There are many situations in which the parties to the contract clearly intend to confer an enforceable benefit upon a third party. The denial of the benefit to the third party often produced manifest injustice and commercial inconvenience. As a result, the common law created a number of devices to overcome the rigorous application of the doctrine of privity. Without these devices, it is doubtful that the doctrine of privity would have survived as long as it did. There were numerous calls for its reform or abolition. After a period of thorough consultation and consideration, the Law Commission recommended a legislative reform of the doctrine of privity (see Law Com No 242, Privity of Contract: Contracts for the Benefit of Third Parties). These recommendations were implemented by the Contracts (Rights of Third Parties) Act 1999. The Act allows the parties to a contract to provide the third party with an enforceable benefit.

Activity 11.1In his speech in Scruttons Ltd v Midland Silicones Ltd (1962) Lord Reid stated that the argument that the carriers had acted as the stevedore’s agent in obtaining for them an exemption clause could be successful if a number of conditions were met. What are these conditions? Were they met in the case before him?† † See Section 11.3 below.


Activity 11.2Consider the arguments in favour of privity of contract and the arguments against privity of contract.

Activity 11.3Why do you think privity of contract has survived in the common law for so long?

SummaryThe doctrine of privity of contract provides that the parties to a contract cannot confer a benefit upon a third party nor can they impose a burden on the third party.


u state what the doctrine of privity is

u explain the two aspects of the doctrine of privity

u illustrate the difficulties to which the doctrine of privity gives rise.

Useful further reading u Anson, pp.421–424, 427–429.

u Flannigan, R. (1987) ‘Privity – the end of an era (error)’, 103 LQR 564.

u Kincaid, P. (1989) ‘Third parties: rationalising a right to sue’, [1989] CLJ 243.

11.2 The Contracts (Rights of Third Parties) Act 1999

Essential reading ¢ McKendrick, Chapter 7: ‘Third party rights’ – 7.5 ‘The Contracts (Rights of Third

Parties) Act 1999’ to 7.14 ‘Rights of the promisee’, pp.115–124.

¢ Poole, Chapter 11: ‘Privity of contract and third party rights’ – Section 2 A ‘Case law interpretation’ and Section 2 B ‘Section 1(3)’, pp.502–508.

¢ The Contracts (Rights of Third Parties) Act 1999. Full text available at www.opsi.gov.uk/acts

¢ MacMillan, C. ‘A birthday present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999’, Elements of the law of contract Study pack.

The Act reforms the doctrine of privity; it does not abolish the doctrine. The primary reason for reform of the doctrine of privity was to give effect to the intention of the contracting parties. The Act allows contracting parties to provide an enforceable benefit to a third party; the contracting parties cannot impose a burden upon a third party. The benefit provided may be either a positive benefit or the protection of an exclusion or limitation of liability clause (s.1(6)).

The Act applies generally to all contracts, although certain contracts are excluded from its application (s.6). Under the Act, a third party to a contract can enforce a term of the contract in his own right in two circumstances.

1. Where the contract expressly provides that he may (s.1(1)(a)).

2. Where the terms of the contract purport to confer a benefit upon him and nothing else in the contract denies the purported benefit (s.1(1)(b), s.1(2)).

The second circumstance is more limited than the first because it is possible, on a true construction of the contract, to rebut the presumption of an enforceable benefit. 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 party’s ability to exercise his rights under the contract – they could, for example, stipulate that the third party could receive a benefit under the contract only if he applied for it within a certain time period.


In Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2003] EWHC 2602 the Court of Appeal found that a chartering broker was entitled to recover his commission by enforcing a clause under the charterparty between a shipowner and charterer by reason of s.1(1) of the Contracts (Rights of Third Parties) Act 1999. There was no evidence to conclude that the contracting parties intended that the charterer should not be entitled to rely upon the Act. In Prudential Assurance Co Ltd v Ayres [2007] the High Court held that if, on a true construction of the term, it purports to confer a benefit upon a third party, the third party can enforce that term in their own right. The Act does not require that the sole purpose of the term be to confer a benefit upon the third party; in addition it is possible for a term to confer an enforceable benefit upon a third party and some other party.

The application of s.1(3) of the Act was considered in Avraamides v Colwill [2006]. The Court of Appeal held that s.1(3) required the contract to expressly identify the third party by name or class and that there had been no such identification in the case before them.

The linked nature of a chain of contracts will not preclude the application of the 1999 Act. See: Laemthong International Lines Company Ltd v Artis and Others, (The Laemthong Glory) (No. 2) [2005].

The right of the third party is additional to any right that the promisee might have to enforce any term of the contract (s.4). However, where the promisee has recovered money from the promisor in respect of the third party’s loss or the promisee’s expense in making good that loss, the court shall reduce any award to the third party to the extent it finds appropriate (s.5). The third party enforces the contract by receiving any remedy that would have been available to him as a party to the contract. The rules relating to that remedy apply accordingly, be it damages, injunctions, specific performance or other relief (s.1(5)).

Generally, the parties to a contract cannot rescind the contract or vary it in such a way as to either:

1. deny the right of the third party, or

2. alter the entitlement of the third party once the third party has acquired a right to enforce a term of the contract.

To receive such protection from later changes, the third party must have communicated his assent to the terms to the promisor or the promisor can reasonably be expected to have foreseen that the third party would rely on the term and has relied on the term. If, however, the third party consents to the rescission or variation, the contract can be so changed (s.2(1)). The Act provides that the contracting parties can provide otherwise in their contract. They can contract to allow a rescission or variation of the contract without the third party’s consent or they can obtain the consent in a different manner than that set out in the Act (s.2(3)).

Where a third party seeks to enforce his right and brings a claim against the promisor, the promisor can rely on any defence or set-off in the contract and relevant to the term being enforced as if the claim had been brought by the promisee (s.3(2)).

In studying the Act, you should keep in mind that it only applies if the contracting parties intend it to provide the third party with the right to enforce a term of the contract. In addition, if the contracting parties intend the Act to apply, they may vary the extent of its application (and thus the extent of the benefit provided to the third party) by a number of means. Firstly, they could provide that the contract could be later varied or rescinded by the contracting parties (s.2(3)). Secondly, the contract could provide that the promisor could avail himself of any and all defences and set-offs available in any action brought by the third party (s.3(3)). Thirdly, the promisor can limit or exclude any liability for negligence (other than death or personal injury) in the performance of his obligation to the third party (s.7(2)).

The Act provides an enforceable right to third parties which is given in addition to any right or remedy available at common law (s.7(1)). This means that the various devices developed by the common law to evade the consequences of privity still exist. The common law may possibly also develop new devices, although this seems unlikely.


SummaryThe Contracts (Rights of Third Parties) Act 1999 marks an enormous change in the English common law doctrine of privity. For the first time, parties to a contract can confer an enforceable benefit upon a third party. The intentions of the parties to a contract can prevail, rather than being thwarted by legal doctrine. It is important to remember, however, that the parties must bring themselves within the ambit of the Act and that they can exclude its operation from their contract. In addition, the Act provides the parties with the ability to determine the extent of the benefit conferred upon the third party.


u explain the significance of the Contracts (Rights of Third Parties) Act 1999

u outline the principal provisions of the 1999 Act

u illustrate the possible applications of the 1999 Act.

Self-assessment questions1. When is a third party given the right to enforce a term of the contract?

2. What rights are given to a third party?

3. What defences are available to the promisee in an action brought by the third party?

4. To what extent can the parties to the contract vary or rescind the contract?

5. How can the parties to a contract exclude the rights of a third party?


11.3 Rights conferred on third parties at common law

Essential reading ¢ McKendrick, Chapter 7: ‘Third party rights’ – 7.14 ‘Rights of the promisee’ to

7.22 ‘A further common law exception?’ and 7.24 ‘Conclusions’, pp.124–141, pp.138–141.

¢ Poole, Chapter 11: ‘Privity of contract and third party rights’ – Section 3 ‘Agency’ to Section 8 ‘Privity and burdens’, pp.508–552.

As we pointed out above, the Contracts (Rights of Third Parties) Act 1999 did not abolish the doctrine of privity. The 1999 Act also preserved any rights the third party would have at common law (s.7(1)). In this section, we examine the nature of these rights. Most of these rights arise from various ‘devices’ or methods created in a range of cases for the purpose of circumventing the doctrine of privity of contract. The success of these devices varies greatly.

11.3.1 Enforcement by the promiseeThis is an obvious proposition. It is, essentially, what occurred in Beswick v Beswick. The estate of the promisee was able to enforce the promise. Thus, if A (the promisor) promises B (the promisee) to pay C (the third party) £100, B can sue to enforce this promise. The 1999 Act retains the promisee’s right to enforce the contract (s.4). This method eliminates many of the problems presented by the doctrine of privity, but it is not without difficulty.


Figure 11.3 Enforcement by the promisee

A contracts with B to pay C £100. C is the third party to the contract. B can sue A to enforce the promise because of the A/B contract.

Two difficulties can arise when the enforcement is to be made by the promisee.

1. The promisee may be unwilling, or unable, to enforce the contract (in these circumstances, there is little C can do to compel B to enforce the contract).

2. The second difficulty is to find an appropriate remedy for B.

As we will see in Chapter 16: ‘Damages’, the general purpose of an award of damages is to put the party where they would have been but for the breach of contract. One view of the problem in these circumstances is that B would never have received the money in the first place. She is thus no worse off when the contract is breached by A than if it were performed by A. Another view of this problem is that B has a ‘performance interest’ in the contract and that damages should be awarded to B because this interest has not been realised. Courts are reluctant to recognise such an interest (see Panatown v Alfred McAlpine Construction Ltd (2000)).

The problem of an adequate remedy was considered by the House of Lords in Beswick v Beswick. Where the promise was made solely for the benefit of the third party, the House of Lords had difficulty in awarding damages. In that case, an order was made for specific performance. This result was agreed, in obiter, by the House of Lords in Woodar v Wimpey Construction (1980). In Radford v DeFroberville (1977), however, the Court held that B’s claim against A for damages was not reduced by the fact that the contract between A and B also conferred a benefit upon C.

There are a number of circumstances in which the promisee has been able to receive an award of damages. These are considered below.

Multiple bookings

In Jackson v Horizon Holidays (1975), Lord Denning recognised that a person who booked a holiday on behalf of himself and family members was able to recover damages on behalf of the family members where the contract was breached. The ambit of this decision was later restricted by the House of Lords in Woodar v Wimpey Construction (1980).

Sellers’ contracts with carriers to take buyers’ goods for delivery

In The Albazero (1977), Lord Diplock recognised a limited ability on the part of one party to recover damages on behalf of another. This can occur where, for example, a seller of goods contracts with a carrier to deliver the goods to a buyer. After this first contract has been entered into, the seller enters a second contract of sale with the buyer and sells the goods to the buyer. The buyer has no contract with the carrier. The seller has a contract with the carrier, but because he has transferred the goods to the buyer, he is no worse off if the contract is breached and the goods are in some way damaged. The Albazero recognised that when the seller and 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.

ContractB

to pay £100

A

C


Contracts where the subject matter will be acquired by a third party

The decision in The Albazero was subsequently extended in Linden Gardens Trust v Lenesta Sludge (1993) to cover the situation where A and B contract on the basis that the property which is the subject matter of A’s obligations may at some point be acquired by a third party, C, and on the footing that B should be able to enforce the contract to its full extent for the benefit of C. While this approach initially met with judicial approval, its application has been subsequently limited by the House of Lords’ decision in Panatown v Alfred McAlpine Construction Ltd (2000). Following this case, where the third party has a direct remedy of some sort against the promisor, the exception will not be applied.

An order for the promisor to perform

In some situations it may be possible for the court to make an order for the specific performance of the contract, as in Beswick v Beswick. In other situations, it may be possible for a court to enforce a promise not to do something. Thus, if the promisor A contracts with promisee B not to sue third party C, B can ask the court to stay the proceedings against C: see Snelling v John G Snelling (1973). This approach is not without difficulty: see Gore v Van Der Lann (1967). In that case, B was said not to have an ‘interest’ unless he had a legal liability to C.

Activity 11.4What is the relationship between the 1999 Act and the common law with regard to the provision of exceptions to privity?

Activity 11.5Is it likely that courts will accept a ‘performance interest’ on the part of a promisee and allow the promisee to recover substantial damages for a breach which deprives the third party of his intended benefit?

11.3.2 AgencyThis is not so much an exception to privity as a commercial necessity. If A cannot, or does not choose to, negotiate directly with C he may authorise B to do so on his behalf. As a general rule, the resulting contract creates privity between A and C, with B dropping out of the picture. See Shanklin Pier Ltd v Detel Products Ltd (1951). Occasionally legislation uses agency to avoid the difficulties caused by privity. See, for example, the Consumer Credit Act 1974, s.56.

Figure 11.4 Agency

At point (i), A contracts with B as C’s agent. The result is illustrated by point (ii) – A has a contract with C and thus C can enforce the contract.

The agent of(i)

(ii)

CContract

BA

ContractA C


11.3.3 Exemptions and limitations of liability Where A and B contract for B to perform a service, it may be intended that B will render part of his performance through C, a third party to the contract. For example, if A (the owner of goods) contracts with B (the carrier) to deliver goods from Port 1 to Port 2, C may subcontract the unloading of the goods at Port 2 to a third party (the stevedores). B has two contracts in this example: the first is with A for the carriage of goods and the second is with C for the unloading of the goods. It is common practice for B to seek to limit or exclude his liability for breach of contract through the inclusion of a clause to this effect. B may also seek to extend the benefit of this clause to C. It is at this point that a problem arises, because C is not a party to this first contract. The lack of a contract between A and C is no bar to A suing C in tort should C damage A’s goods.

Figure 11.5 Exemptions and limitations

By contract 1, A contracts with B to carry A’s goods and a clause is included which limits/exempts the liability of B and C. By contract 2, B contracts with C to unload A’s goods. Should C damage the goods, A may bring an action in tort against C. C is unable to protect himself using the exemption clause in contract 1 since he is not a party to that contract.†

In at least one situation, the agency concept has been stretched to provide the third party with the benefit of the exclusion clause in contract 1. This was established in The Eurymedon, New Zealand Shipping v Satterthwaite (1975) and applied again in Port Jackson Stevedoring v Salmond and Spraggon (1980). In The Eurymedon, the Privy Council established that in the situation outlined above, it may be possible for B to contract with A as C’s agent. Through B, A offered an exemption of liability to C. C, in performing their contract with B and unloading the vessel, accepted this offer and a contract between C and A was formed such that C could rely on the exemption clause.

† This topic is considered in detail in Chapter 6, ‘The regulation of the terms of the contract’.

Contract 1

[A to exclude liability of B and C]

Owner

A B

Carrier

C

Stevedores

ThirdParty

B

Carrier

C

Stevedores

Stevedores

C

Contract 2

A sues C in TortOwner

A Tort


(C’s agent)(i)Offer to C of immunity

BA

Accepts A’s offerthrough performance

(ii)Performs Contract 2 (B/C)

C

(iii)Contract 3

A

Result

whereby A exemptsliability of C

(iv)

Final Result

A CTort

C

Contract 3

Exemption clause

Figure 11.6 The Eurymedon device

In Figure 11.6 the following chain of events takes place:

u in (i) A offers immunity to C through B

u in (ii) C unloads the ship and performs contract 2

u the result is (iii), a contract between A and C whereby C is given some form of immunity from action by A

u the final result is (iv), that should A sue C in tort for any damage, C can defend the action on the grounds of the exemption clause in contract (iii).

An excellent summary of the development of the law in this area is provided by Lord Goff in The Mahkutai (1996). Lord Goff makes the point that in the last twenty years, the pendulum of the law has swung away from Scruttons Ltd v Midland Silicones Ltd. The effect of the 1999 Act upon this pendulum is, as yet, uncertain.

The third party can, however, take advantage of an exception clause in a contract for the carriage of goods by sea: s.6(5). It remains to be seen whether it would be possible to use the device in The Eurymedon to confer other benefits.

Activity 11.6What conditions must be met in order for the exemption clause to protect the third party through The Eurymedon device?

Activity 11.7What was the consideration provided by C to A for the contract of immunity in The Eurymedon?

Activity 11.8A contracts with B for B to carry goods between Dover and Calais by sea. Included in this contract is a clause that exempts B and B’s agents, employees and subcontractors from liability for any damage, howsoever caused. B contracts with C for C to unload the ship. The ship carries several cargoes besides A’s goods. In unloading goods belonging to Z, C accidentally destroys A’s goods. What advice do you give to C as to his liability to A for the damage?


11.3.4 Collateral contractsOccasionally a third party may be made liable on the basis that he has made some promise in consideration of the promisee’s entry into the ‘main contract’. See, for example, Andrews v Hopkinson (1957).

11.3.5 TrustsIt is possible for the promisee as ‘owner’ of the promise to constitute a trust of the promise (i.e. B holds A’s promise on trust for C). Where this happens, B may recover from A the whole of the loss suffered by C because of A’s non-performance: Lloyd’s v Harper (1880) 16 Ch D 290.

Taken to its furthest extent, this negates privity altogether, for the third party must simply assert that B is the trustee of the promise and that the benefit of the promise is the third party’s.

Possibly for this reason, this device has not met with favour. There have been few successful decisions since the 1930s. Thus in the case of Re Schebsman [1944] Ch 43 a company promised a retiring employee to pay an annuity to his widow and to his daughter if she (the widow) died within the annuity period. The court held that there was no trust in favour of the widow or daughter.

The reason for refusing to find a trust is usually a failure to prove any positive intention to create a trust. This intention to create a trust was originally a fiction in this context: its strict requirement means that there are very few cases where the trust concept will circumvent the doctrine of privity.

In Darlington BC v Wiltshier, two members of the Court of Appeal found in obiter that the case could have been resolved on the basis that Morgan Grenfell could, before any assignment to the Council, have sued for damages for the breaches and recovered substantial damages as constructive trustee for the council. This flowed from the particular wording of the covenant.

11.3.6 LegislationFor the sake of completeness, you should be aware that in some specific instances, a statute may overcome the problems that would otherwise be posed by privity. Examples of this can be seen in the Third Parties (Rights Against Insurers) Act 1930, s.56 and s.75 Consumer Credit Act 1974 and s.56 Law of Property Act 1925. While you do not need to know the specific details of the operation of these provisions, you should be aware that in particular circumstances the difficulty created by privity may have been overcome by legislation.

SummaryThe harshness caused by a strict application of privity led to the judicial development of a number of devices and approaches to circumvent the application of privity. The application, or the lack of an available application, of these devices and approaches could itself cause injustices to arise. Following the 1999 Act, these continue to exist. Their further development, in situations where the parties have expressly chosen not to avail themselves of the 1999 Act, is questionable.


u identify the major devices by which rights can be conferred on third parties at common law

u discuss the principal strengths and weaknesses of these devices

u state the relationship between the rights of third parties at common law and under the 1999 Act.


Activity 11.9a. Would the widow in Re Schebsman have been better off if there had been a trust?

b. In what way, if at all, does the decision in Beswick v Beswick form an exception to privity?

c. How would the Contracts (Rights of Third Parties) Act 1999 affect the decision in Beswick v Beswick?

d. How would the Contracts (Rights of Third Parties) Act 1999 affect the decision in New Zealand Shipping v AM Satterthwaite?

e. Following the enactment of the 1999 Act, is it likely that courts will continue to devise exceptions to the doctrine of privity?


Useful further reading ¢ Anson, pp.422–429, 439–452, 460–469.

11.4 Liability imposed upon third parties

Essential reading ¢ McKendrick, Chapter 7: ‘Third party rights’ – 7.23 ‘Interference with contractual

rights’, pp.136–138.

¢ Poole, Chapter 11: ‘Privity of contract and third party rights’ – Section 8 ‘Privity and burdens’, pp.552–561.

The question here is the extent to which the burden of contracts relating to things other than land can ‘run’ with them in the same way that the burden of restrictive covenants can run with land. The answer is far from clear. See Lord Strathcona Steamship v Dominion Coal (1926), which was not followed in Port Line v Ben Line Steamers (1958). See also Swiss Bank v Lloyds Bank (1979, at first instance).

Note: The Pioneer Container (KH Enterprise v Pioneer Container) (1994) where the Privy Council applied principles of bailment to hold that the owner of the cargo was bound by the agreement between the bailee and the sub-bailee, although the owner was not a party to the agreement.

Self-assessment questions1. What are the two aspects of the doctrine of privity?

2. Name three devices used in common law to give enforceable benefits to third parties.

3. What is the main test of whether third parties should be given rights under contract?

4. In relation to the doctrine of privity, what is a ‘performance interest’?

5. Outline the Eurymedon case.

6. Can a contract impose a liability on a third party?

SummaryThe number of situations in which liability is imposed upon third parties is limited and is usually dependent upon the knowledge or implied consent of the third party.


u outline the possible ways in which liability can be imposed upon third parties to a contract.



Examination adviceThe material considered in this chapter has frequently come up in examination papers on contract as a question on its own. The questions have taken the form of either:

1. an essay question

2. a problem question.

Examples of both are set out below. Because the material in this chapter goes to the very essence of the nature of contract law, it could be combined with issues from many other areas of contract law in an examination question.

Sample examination questionsQuestion 1 Last year C entered the employment of D Ltd for a fixed period of six years, his contract providing that, if he should die before the end of the six years, D Ltd would pay his widow £2,000 a year for three years from his death. C died in January this year, but D Ltd has refused to make any payment to his widow (E).

Advise E.

Question 2 F lives alone in his own house. His house suffers badly from rising damp. Living conditions have become unpleasant. Unfortunately, F does not have sufficient funds to pay for a course of damp proofing. His daughter, G, offers to pay for the damp proofing. F gratefully accepts this offer. G hires Hopeless Builders Ltd to carry out the damp proofing. Hopeless agree to undertake the task for £10,000. G pays Hopeless in advance. Hopeless estimate that it will cost between £7,000 and £10,000 to undertake the damp proofing. They agree to refund any difference between the £10,000 paid and the actual cost. The refund is to be given directly to F. The damp proofing is badly conducted and F’s house is damaged as a result. The actual cost of the damp proofing and related repairs was only £8,000. Hopeless refuse to provide F with any refund.

Advise F.

Question 3 ‘The doctrine of privity has become largely irrelevant as a result of recent changes.’

Discuss.

Advice on answering the questionsQuestion 1 The widow E is a third party beneficiary to the contract between C and D Ltd. As such, privity of contract prevents her from enforcing the contract (Tweddle v Atkinson, Dunlop v Selfridge & Co). There are, however, two possible ways in which she could overcome the problem posed by privity. The first is that she may be able to utilise the device employed in Beswick v Beswick. That is to say, if she is the executrix or administratrix† of her husband’s estate she could apply in that capacity for an order for the specific performance of the contract. In this instance, the representative of the promisee’s estate would seek to enforce the contract.

The second possible way is if E can bring herself within s.1 of the Contracts (Rights of Third Parties) Act 1999. She would need to establish that she could enforce a term of the contract (that regarding the payment of the annuity to her) because either the contract expressly provided that she could (s.1(1)(a)), or because the term purported to confer a legally enforceable benefit upon her (s.1(1)(b)) and this was not refuted upon a proper construction of the contract (s.1(2)). If this right is given to E, she can receive any remedy which would have been available to her if she had been a party to the contract in question. In this instance, this is likely to be damages, although an order for specific performance might be made instead.

† …trix: the female form of …tor (e.g. executor > executrix).


Photo: Selfridge & Co – Auto Shop (photo © C. MacMillan 2003)

Question 2 There are a number of issues present in this problem. F is a third party beneficiary to the contract between G and Hopeless. F is the intended beneficiary not only of the work to be conducted (the damp proofing) but is also to receive any refund that exists. As discussed above, F will need to bring himself within s.1 of the 1999 Act to sue upon the contract with regard to the deficient work and the damage caused. The likely remedy in this case will be damages. With regard to the payment of the refund, it could be argued that there is not a term of the contract which is intended to confer a benefit upon F. See, for example, White v Jones (1995). Another possible course of action is for G to sue Hopeless and to recover the refund for the benefit of F. The difficulty with this course of action is that it would appear that under the original terms of the contract the money was to go to F – is G, therefore, any worse off when F does not receive the money? See Jackson v Horizon Holidays and Linden Gardens Trust v Lenesta Sludge.

Question 3 A good knowledge of the Contracts (Rights of Third Parties) Act 1999 is essential in answering this question. You need to consider that the doctrine of privity has not been abolished but merely reformed by the Act. In particular, you would have to consider when the Act applied (s.1(1)) because, in absence of the application of the Act, all the old problems associated with privity of contract would remain. A good answer might also consider the decision of the House of Lords in Panatown v Alfred McAlpine Construction Ltd as an instance of the difficulties which could arise if the Act did not apply.


Reflect and review






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I can outline the principal provisions of the 1999 Act.

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I can illustrate the possible applications of the 1999 Act.

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I can identify the major devices by which rights can be conferred on third parties at common law.

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I can discuss the principal strengths and weaknesses of these devices.

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I can state the relationship between the rights of third parties at common law and under the 1999 Act.

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I can outline the possible ways in which liability can be imposed upon third parties to a contract.

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11.1 The doctrine of privity ¢ ¢

11.2 The Contracts (Rights of Third Parties) Act 1999 ¢ ¢

11.3 Rights conferred on third parties at common law ¢ ¢

11.4 Liability imposed upon third parties ¢ ¢

Contents

Introduction 150

12 1 Statutory illegality 151

12 2 Common law illegality 153

12 3 The effects of illegality 154



12 Illegality


Introduction

Illegality is a difficult subject within the law of contract. A contract affected by illegality is one that fails for reasons external to the contract and the parties to it. Illegality, as a topic, covers a wide range of different areas. It is thus hard to categorise and different writers use different categories. The effects of illegality upon a contract vary greatly from none at all to unenforceability. The situations in which illegality arise also vary greatly. Illegality will affect all of the following contracts.

u A contract to commit a legal wrong (eg, murder or robbery).

u A contract which promotes immorality.

u A contract which is performed illegally.

u A contract which is not formed in accordance with the procedure prescribed by a statute.


u distinguish between contracts which are illegal in formation and contracts which are illegal in performance

u compare the different effects the above distinction creates

u establish the different situations in which a court will find that a contract offends against public policy

u understand the consequences of a finding that the contract is illegal.

Elements of the law of contract 12 Illegality page 151

12.1 Statutory illegality

Essential reading ¢ McKendrick, Chapter 15: ‘Illegality’ – 15.1 ‘Introduction’ to 15.5 ‘Gaming and

wagering contracts’, pp.260–263.

¢ Poole, Chapter 16: ‘Illegality and capacity to contract’ – Section 1 B ‘Contracts that are illegal in their performance’, pp.770–774.

¢ Beatson, J. Anson’s Law of Contract – Extract from Chapter 9: ‘Illegality’, Elements of the law of contract Study pack.

12.1.1 Types of illegalityIt may be helpful to consider certain distinctions that exist within the illegality cases. There is a distinction between common law illegality (such as a contract to commit a murder) and statutory illegality (such as a statute which requires the vendor of a certain substance to possess a licence to sell the substance). There is a further distinction between contracts which are illegal as formed (such as the contract to commit a murder) and contracts which are legal as formed but illegal as performed (a contract to deliver pizzas by motorcycle performed by a motorcyclist who exceeded the speed limit).

In general terms, courts will not enforce a contract which involves an illegality, nor will they allow the recovery of a benefit conferred by an illegal contract. There are a number of reasons for this, such as:

u to deter parties from such conduct

u to punish wrongdoers

u to preserve the dignity of the court

u for reasons of public policy (where it would be offensive to society and the law for courts to enforce an illegal contract).

The refusal to enforce a contract because of illegality can be an unnecessarily harsh and unreasonable response. Should, for example, the recipient of the pizzas delivered by the speeding motorcyclist be able to refuse to pay for the pizzas on the ground that the contract was illegally performed? Because of the harshness that can result, courts will sometimes allow a party to enforce a contract or to recover a benefit conferred. The result is to create a certain inconsistency in cases involving illegality.

12.1.2 Contracts that are illegal as formedA contract may be illegal as formed. In this case, it is void ab initio, from the beginning. The illegality is present from the outset of the contract. A statute, for example, may expressly prohibit a certain type of contract. See, for example, Re Mahmoud & Ispahani (1921) and Mohamed v Alaga & Co (A Firm) (2000). In such instances, where the contract is void, the issue is whether or not a party who is innocent of wrongdoing can recover a benefit conferred by the contract. As can be seen by the two decisions above, the result is that sometimes the benefit can be recovered, whilst in other cases it cannot. In the first case, Lord Atkin did not allow the plaintiff to enforce a contract which was expressly prohibited by statute. In the second case, the Court of Appeal found that while any contract to introduce refugees was prohibited by the legislation, it might be possible to recover on a quantum meruit† basis for the translation services provided in relation to the refugees. Translation services were not covered by the legislation and public policy would not be offended by allowing such a recovery.

† Quantum meruit: a partial payment (literal meaning: ‘as much as he/it deserves’).


12.1.3 Contracts that are illegal as performedA contract may be legal in its formation but illegal in its performance. An example of this can be seen in St John Shipping Corporation v Joseph Rank Ltd (1957). A contract for the carriage of goods by sea was lawful in its formation but was performed illegally when the shipowner overloaded his ship in carrying the goods. The overloading was a statutory offence and the master of the ship was prosecuted and fined for this offence. The court held that the shipowner was entitled to recover the moneys owed for the freight. In the course of his speech, Devlin J distinguished between contracts which were entered into for the purpose of committing an unlawful act (which were unenforceable) and contracts which were expressly or impliedly prohibited by statute. The shipowner’s case was in the latter class. Because of this, the court needed to determine if the statute prohibited the formation of such contracts and, if so, did the particular contract before it fall within this prohibition.

Two questions are involved. The first – and the one which hitherto has usually settled the matter – is: does the statute mean to prohibit contracts at all? But if this be answered in the affirmative, then one must ask: does this contract belong to the class which the statute intends to prohibit? … [here] an implied prohibition of loading does not necessarily extend to contracts for the carriage of goods by improperly loaded vessels. (per Devlin J)

In some cases, Parliament will declare that a certain type of contract is ‘void’. It may also provide that no action can be brought to recover a benefit derived from such a void contract. An example is s.18 of the Gaming Act 1845. This section provides that all gaming or wagering contracts are null and void and no action can be maintained to recover money or valuables said to have been won by wager. Statutes may also provide that the performance, or a certain mode of performance, is illegal.

Activity 12.1Bertha is a dealer in poisons. The (fictitious) Control of Poisonous Substances Act 1966 requires that a dealer in poisons be registered under the Act and that no sale of poisons shall be made without the purchaser producing a ‘poison sale authorisation certificate’ from the Poisons Control Board. Bertha is a registered dealer. Arnold, who cannot be bothered to wait for the issue of the certificate, forges one and presents it to Bertha when he contracts with her to purchase rat poison. Bertha accepts the certificate as genuine and sells Arnold rat poison worth £200. Arnold takes the poison away and uses it. He now refuses to pay Bertha for the poison. Can Bertha recover the money owed?

Activity 12.2The same as above, except that Arnold does not produce any certificate, forged or otherwise.

Activity 12.3The same as above, except that Arnold produces a genuine certificate, however Bertha, in delivering the poison to Arnold’s premises, drives her van in excess of the speed limit and thus commits a criminal offence.

SummaryContracts may be illegal as formed or illegal as performed. Where they are illegal as formed, and statute prohibits their creation, a court will not allow the recovery of damages under such a contract. Where an innocent party seeks some benefit from this contract, it may be allowed in some circumstances. Where a contract is illegal as performed, the court will seek to establish what was intended by the statute.



u distinguish between contracts which are illegal in formation and contracts which are illegal in performance

u compare the different effects the above distinction creates.

Useful further reading ¢ Anson, pp.348–352, and pp.385–395.

12.2 Common law illegality

Essential reading ¢ McKendrick, Chapter 15: ‘Illegality’ – 15.6 ‘Illegality at common law’ to 15.11

‘Contracts prejudicial to public relations’ and 15.16 ‘The scope of public policy’, pp.264–266, 270.

¢ Treitel, G.H., Law of contract – Chapter 11: Section 2 ‘Types of illegality’, Elements of the law of contract Study pack.

We are concerned here with those situations where the illegality affects a contract not by way of a statutory prohibition, but by way of a common law prohibition. Professor Treitel divides these situations into two categories. First are those cases involved in the commission of a legal wrong (the contract to commit a murder, for example); second are those cases which involve contracts contrary to public policy. For examples of cases in the first category, see Alexander v Rayson (1936) and Beresford v Royal Exchange Assurance (1938). Of the two, the second category is more troublesome because of the difficulty of ascertaining what the public policy is and whether or not the contract offends against it. Because of the changing nature of public policy, some of the older cases must be treated with care. It is unlikely, for example, that the contract in Pearce v Brooks (1866) to supply a carriage to the defendant for use in her trade as a prostitute would now be considered illegal.

Courts have found that public policy is offended in such a way as to make the contract illegal in a number of different areas. Thus, a contract which is contrary to good morals may be illegal. See not only Pearce v Brooks (1866), but also Franco v Bolton (1797) which involved payment by a man to a woman to become his mistress. Contracts to promote sexual immorality are now less likely to be found to be illegal due to the changing public conceptions of immorality. Contracts which are found to be prejudicial to family life are affected by illegality: see Lowe v Peers (1768) and Hermann v Charlesworth (1905). Thus contracts in which there was an agreement to restrain the freedom to marry, marriage brokerages, or some agreements to separate are illegal. Unsurprisingly, courts are concerned with the administration of justice and a contract which attempts to restrain this is illegal. See for example, R v Andrews (1973) and Elliott v Richardson (1870). Courts are particularly suspicious of agreements to oust the jurisdiction of the court. Another area in which contracts have offended public morals are those which tend to injure the state in its relations with other states. A contract with an alien enemy is illegal in time of war and contracts which contemplate hostile action to a friendly foreign country are also illegal.

Another area in which public policy can be offended are those situations where the contract imposes a restraint of trade. These will be considered in Chapter 13 of the subject guide.

Activity 12.4Compare the cases of Pearce v Brooks (1866) and Tinsley v Milligan (1994). What do these two cases tell us about the changing nature of public morality?

Activity 12.5How does a court determine what public policy is?


SummaryContracts which offend public policy are difficult to categorise. Because public policy can change over time, conceptions of those contracts which offend it will also change.


u establish the different situations in which a court will find that a contract offends against public policy.


12.3 The effects of illegality

Essential reading ¢ McKendrick, Chapter 15: ‘Illegality’ – 15.17 ‘The effects of illegality’ to 15.19

‘Severance’, pp.270–275.

¢ Poole, Chapter 14: ‘Illegality and capacity to contract’ – Section 1 C ‘Money or property transferred under an illegal contract’, pp.774–788.

12.3.1 The case lawBecause there is no single form of ‘illegality’ it is very difficult to ascertain the effect of illegality upon any one contract. The outcomes in the case law are very different. This is not surprising, given that the impropriety involved is very different in its seriousness. Before examining these different outcomes, it is worth bearing in mind that a contract may have both legal and illegal terms. Where it is possible to remove an illegal term or an illegal part of the term, a court can ‘sever’ that term and leave the remainder of the contract standing.

Although a court will not enforce an illegal contract, it may be able to provide an ‘innocent party’ with a remedy in some other manner. In Strongman (1945) Ltd v Sincock (1955) the plaintiffs were unable to sue on the contract, but the court allowed them to recover the value of the work done on the basis of the breach of a collateral warranty. In Shelley v Paddock (1980) the innocent party was allowed damages for a fraudulent misrepresentation.

Another important point is whether a party can be permitted to recover a benefit conferred upon the other party to an illegal contract. The general rule is that courts will not permit recovery under an illegal contract: Holman v Johnson (1775). There are, however, many cases which illustrate methods by which recovery will be allowed. Where the parties are said not to be in pari delicto (equally guilty) the public policy considerations in preventing illegal contracts may be outweighed by the desire to prevent the other party from retaining a benefit which constitutes an unjust enrichment. Thus in the case of Kiriri Cotton Co Ltd v Dewani (1960) the innocent party to an illegal contract was able to recover the money paid pursuant to the illegal contract. The party was ‘innocent’ in the sense that he was unaware that the contract was illegal.

In another set of cases, the party has been allowed to recover a benefit when he withdraws from the contract before the illegality has been committed. See, for example, Taylor v Bowers (1876), Kearley v Thomson (1890) and Tribe v Tribe (1996).

Finally, cases exist which allow a party to recover a benefit where he can do so without relying on the illegal nature of the contract. These cases stem from the decision in Bowmakers Ltd v Barnet Instruments Ltd (1945) and the principle has been extended by the House of Lords to equitable proprietary claims in Tinsley v Milligan (1994). The problem in these cases is that by allowing the recovery, the court may, in effect, enforce the contract or at least provide a remedy which is as helpful to the claimant as enforcing the contract.


12.3.2 Reform of the lawThe Law Commission considered a process of law reform in the area of illegality in contract. In 1999 The Law Commission produced a consultation paper ‘Illegal transactions: the effect of illegality on contracts and trusts’ (see ‘Useful further reading’ below). The Law Commission sought the reform of this area of law and made some provisional recommendations. The most important of these recommendations was that courts would possess a discretion to ‘decide whether or not to enforce an illegal transaction, to recognise that property rights have been transferred or created by it, or to allow benefits conferred under it to be recovered.’ This discretion would not, however, be open-ended to allow the court to do what it considered ‘just’ in the circumstances. This discretion would be structured to provide certainty and guidance (and the report considers the nature of this guidance) – and this guidance would apply only where a statute did not expressly prohibit the transaction. The Law Commission has now decided, however, to leave it to courts to develop the law in an incremental fashion.

Self-assessment questions1. Give an example of a contract that would be illegal as formed.

2. Give an example of a contract that would be illegal as performed.

3. Summarise the matters the Law Commission states a court should consider when exercising the proposed discretion set out in consultation paper 154.

4. What is meant by the term ’locus poenitentiae’?

5. What is meant by the term ’in pari delicto’?

6. What general rule is derived from Holman v Johnson (1775)?

SummaryAs a general rule, a contract tainted by illegality cannot be enforced. It is possible, however, that a remedy may be obtained by another course of action. In addition, courts will, in certain circumstances, allow the recovery of money or property which has been transferred in accordance with an illegal contract. Due to the complexity, and contradictions, in this area of law, the Law Commission has embarked upon a programme of reform.


u understand the consequences of a finding that the contract is illegal.


¢ The Law Commission’s consultation paper, ‘Illegal Transactions: The Effect of Illegality on Contracts and Trusts’ (LCCP No. 154) at http://www.lawcom.gov.uk/library/lccp154/cp154.pdf

Examination adviceA review of past examination papers reveals that this area has generally been examined as a question on its own. Past questions have taken two forms. First, problem questions in which candidates have been asked to ascertain the enforceability of illegal contracts and/or the ability to recover a benefit conferred under the illegal contract. Secondly, the Examiners have asked essay questions in which candidates needed to critically discuss certain aspects of the law in this area.


Sample examination questionPeter was a licensed dealer in pet food under the (fictional) Licensing of Pet Food Act 2001. Section 1 of the Act requires any person selling pet food to be licensed and if ‘anyone shall trade in pet food without the appropriate licence he shall be guilty of a criminal offence’. Section 2 requires sales of pet food to be accompanied by a ‘statutory invoice’ which must contain details of the food supplied and a statement of the quantity supplied.

a. Peter supplied Queenie with pet food costing £500 but failed to provide a statutory invoice at the time of delivery because it had fallen out of the box in which it had been placed by Peter’s employee. Queenie refused to pay for the pet food.

b. Peter supplied Robert with pet food but failed to provide a statutory invoice after Robert said, ‘Between friends no formalities are required’. Robert refused to pay for the pet food and claimed damages from Peter because, he claimed, the pet food was of poor quality.

c. Peter was paid £600 by Stefan for pet food to be delivered to Stefan’s restaurant. Peter suspected that Stefan might be using the food for human consumption (which was prohibited by statute). It was subsequently discovered that Stefan was using the pet food for this purpose. Stefan sought the repayment of the £600.

d. Peter agreed to supply pet food costing £2,000 to Thomas which Thomas paid for in advance. It was then discovered that, unknown to Peter, his licence had expired. Peter refused to deliver the pet food to Thomas or to return the £2,000 which Thomas had paid in advance.

Advise the parties.

Advice on answering the questionThe question calls for a determination of the extent to which courts will enforce a contract despite the taint of illegality. Here the illegality is created by statute. The starting point to such an answer is to consider the purpose behind the statutory requirements. Following St John Shipping v Rank, the issue to be considered in all four parts of the question is the purpose behind the statute. Is the statute intended to penalise conduct or to prohibit contracts? The requirement to provide an invoice appears to regulate the conduct of the business rather than the legality of the business. This would indicate that contracts which do not comply with this requirement are illegal as performed rather than illegal as formed. On the other hand, the requirement that the dealer must be licensed indicates that the purpose of the requirement is to make unlicensed agreements illegal as formed. The facts provided do not make clear at what point Peter’s licence has expired. Nor does the question state whether or not the statute provides for the consequences of illegality.

Parts (a) and (b) deal with the requirement that the pet food dealer must supply a statutory invoice with the pet food. In part (a) Peter attempts to supply Queenie with the invoice but fails to do so because it falls out of the box in which it has been placed. There has been an attempt to comply with the statute and in this sense Peter may be ‘innocent’ in the sense that he is unaware of the illegality. In some circumstances, courts have allowed such contracts to be enforced (see Archbolds (Freightage) v Spanglett) . In other cases, courts have not allowed the contract to be enforced (see Re Mahmoud and Ispahani). Where the statue does not specify the consequences of the illegality on contracts, the better view is that the effects should be determined by reference to the statute. Here it is arguable that the purposes of the statute would not be furthered by denying Peter the remuneration due under his agreement with Queenie. Peter may be able to recover on a quantum valebat basis for the goods supplied (Mohammed v Alaga) but not if public policy would prevent such a restitutionary recovery (Awwad v Geraghty & Co). However, if Peter’s licence has expired, the contract is illegal as formed and thus unenforceable by either party.


Part (b) differs subtly from part (a) in that both Peter and Robert are aware that the contract is illegal because it lacks the statutory invoice. Both are assenting to a performance they know is illegal. The parties are in pari delicto and neither can sue on the contract. Peter cannot obtain the remuneration stipulated in the agreement and Robert cannot obtain damages for the allegedly poor quality of the pet food supplied.

In part (c), Peter is probably aware that subject matter of the contract will be used for an unlawful purpose and thus the contract is illegal. Peter’s awareness may make him a participant in the illegality (Ashmore, Benson, Pease & Co v AV Dawson Ltd). The contract is unenforceable and Stefan cannot recover the £600 advanced in contract. However, as the illegality has not been perpetrated with respect to the particular delivery of pet food, Stefan may be able to recover the moneys paid to Peter on a restitutionary basis. Stefan must repudiate the contract before the illegal purpose has been performed.

In part (d), Peter’s licence has definitely expired and the contract is illegal as formed and thus unenforceable by either party.


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I can establish the different situations in which a court will find that a contract offends against public policy.

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I understand the consequences of a finding that the contract is illegal.

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12.1 Statutory illegality ¢ ¢

12.2 Common law illegality ¢ ¢

12.3 The effects of illegality ¢ ¢

Contents

Introduction 160

13 1 General principles 161

13 2 Employment contracts 161

13 3 The sale of a business 163

13 4 Other agreements 164



13 Restraint of trade


Introduction

The material considered in this chapter is a species of the public policy considered in the previous chapter on illegality. That is to say, a contract which contains a clause to restrain a person’s freedom to trade may be offensive to public policy and, as such, be unenforceable. For example, one party may contract to sell her business to another. A common clause in such a contract is one which prevents the vendor from then opening a competitive business next door or from ‘siphoning off’ customers of the business that has been sold to another business owned by the vendor. Such a clause restrains the freedom of the vendor to trade. As such, it will only be valid to the extent it is reasonable, because it offends public policy to restrain the freedom of an individual for a disproportionate period of time.


u understand the different contractual contexts in which restraint of trade can arise

u state the circumstances in which an employment contract will be found to be in restraint of trade

u establish when a restraint of trade clause in the sale of a business will be unenforceable

u examine the difference of approach by courts to restraint of trade clauses in an employment contract and in the sale of a business

u state when a court might consider a clause to be an offensive restraint of trade in other circumstances

u outline the effect upon the contract of an unacceptable restraint of trade.

Elements of the law of contract 13 Restraint of trade page 161

13.1 General principles

Restraint of trade has been considered primarily in two contexts. The first is in an employment context – an employee may contract with his employer that, among other things, he will not work for a competitor of the employer while employed or for a period of time after his employment has ended. The second is where a business is sold and the purchaser seeks an undertaking from the vendor not to compete with him. Obviously, the employer and the purchaser have legitimate interests to protect – to an extent, what they are contracting over is the exclusive services of the employee or the lack of competition by the former owner. Where the employee provides unique services to the employer, or where he has valuable inside knowledge of the employer’s business, the employer can act legitimately to confine these services or knowledge. In the case of the sale of a business, the purchaser often buys the established trade and ‘goodwill’ of the business. If the seller were able to establish a rival business in the same area, this trade and goodwill would be valueless. The problem is that the agreements can work against the public interest, in that the public is deprived of the abilities of the other party to the contract. There is a corresponding danger that the restraint works unfairly against the interests of the party restrained. For these reasons, courts will only enforce a restraint of trade clause to the extent that it is reasonable. Thus, the party who seeks to enforce the clause must show that it is reasonable between the parties and reasonable in the public interest. In some cases, it may be possible for a court to sever the term which is in restraint of trade and leave the remainder of the contract in force.

In addition, there are statutory controls upon anti-competitive agreements. These are to be found, principally, in Articles 81 and 82 of the European Community Treaty and the relevant provisions of the Competition Act 1998. These controls are of more recent origin than the common law doctrines and broader in scope. They are principally administered by regulatory authorities.

13.2 Employment contracts

Essential reading ¢ McKendrick, Chapter 15: ‘Illegality’ – 15.12 ‘Contracts in restraint of trade’ to 15.13

‘Contracts of employment’, pp.266–267.

¢ Poole, Chapter 16: ‘Illegality and capacity to contract’ – Section 2 A(ii) ‘Covenants between employer and employee’, pp.789–792.

During the employment contract, it is legitimate for an employer to stipulate that he or she requires the exclusive services of the employee. Accordingly, such a restraint will stand unless it is exceptionally onerous – for example, if the restraint has as its purpose the prevention of the employee working altogether. A term will be considered for its reasonableness when it seeks to impose a restraint after the employment relationship has ended. For example, a major computer software company employs a programmer. One of the terms of the contract is that the programmer will not work for another company in the computer business for a period of time after the programmer has left the software company. The computer software company obviously wishes to protect its confidential information and, possibly, its customers, from competition. These can be legitimate interests. The programmer, however, will need to earn a living. The law must balance these two interests.

Whether or not the restraint can stand will be determined by two criteria.

u First, the restraint must be reasonable between the parties – it must do no more than is reasonably necessary for the protection of the employer.

u Secondly, the restraint must not be injurious to the public – it must also be reasonable in the interests of the public.


In practice, the first criterion will be more difficult to establish than the second. This is because the courts are generally reluctant to find that a clause which is reasonable between the parties is not reasonable in the interests of the public.

There are two criteria to the requirement that the clause must be reasonable between the parties. First, the clause must protect some legitimate interest of the employer. It must not be used simply to prevent competition with the employer. The employee must be free to exercise the general skills and knowledge he possesses. See, for example, Herbert Morris Limited v Saxelby (1916). Secondly, in protecting this legitimate interest, the restriction must be reasonable with regard to three elements: subject matter, area, and duration. See, for example, Mason v Provident Clothing & Supply Company Ltd (1913).

Once a court has established that a clause is reasonable between the parties, it is unlikely to find that it is contrary to the public interest. Note, however, the decision in Wyatt v Kreglinger and Fernau (1933) in which this point was considered.

Activity 13.1Amanda is a saleswoman of exceptional ability. She is able to persuade most people to buy whatever product she has on offer. She works for Plod Products Ltd selling paper products to the public. Her contract of employment prevents her from selling any product within a 300km radius of Plod’s head office for six months after leaving their employment. Amanda is offered a job selling the pen and ink products of FabuMats Ltd. Although FabuMats Ltd sells paper, Amanda will not be engaged in the sale of paper. Amanda resigns her position with Plod Products and takes up the position with FabuMats. Plod Products seeks an injunction to prevent her from selling FabuMats.

Advise Amanda.

Activity 13.2Mega-Pharmaceuticals employs Dorothy, a scientist of exceptional ability. Dorothy is hired to undertake research for a cure for HIV/Aids. The contract of employment provides, among other things, that on leaving Mega-Pharmaceuticals, Dorothy will not undertake research privately or for any other employer. This restriction is for a period of five years following her employment with Mega-Pharmaceuticals and applies worldwide. Mega-Pharmaceuticals will pay Dorothy the equivalent of five years’ salary. Dorothy leads the world in this research. When she is very close to a major breakthrough, she is offered a post at Enormo-Pharmaceuticals. Her duties there would include heading a research team engaged in HIV/Aids research. Mega-Pharmaceuticals declares that they would rely on the term of the contract preventing Dorothy from undertaking research in this area. Can they do so?

SummaryA party who seeks to enforce a restraint of trade clause in an employment contract must establish that:

1. he has a legitimate interest to protect

2. the clause is reasonable between the parties as to subject matter, area and duration, and

3. the clause is not injurious to the public.


u understand the different contractual contexts in which restraint of trade can arise

u state the circumstances in which an employment contract will be found to be in restraint of trade.



13.3 The sale of a business

Essential reading ¢ McKendrick, Chapter 15: ‘Illegality’ – 15.14 ‘Contracts for the sale of a business’,

p.268.

¢ Poole, Chapter 16: ‘Illegality and capacity to contract’ – Section 2 A (i) ‘Basic principles’, pp.788–789.

The modern law in this area was established by Nordenfelt v Maxim Nordenfelt (1894). When a business is sold, the purchaser is wise to insist on a restraint of trade clause to prevent the vendor from drawing the business to another establishment. The purchaser has often bought the goodwill and custom of that business and this is protected by a restraint of trade clause. Not many purchasers would pay significant sums if they thought the vendor could establish a rival business. Because the covenant is a part of what is bought, there is an important difference between clauses in restraint of trade in an employment contract and in a contract for the sale of a business. The result of this difference is that courts are much more likely to uphold a restraint of trade clause found in a contract for the sale of a business than in a contract of employment.

The criteria for determining whether or not a restraint of trade clause in a contract for the sale of business is enforceable are much the same as in an employment contract. The party seeking to enforce the clause must show that the clause is reasonable in the interests of the parties to the contract. In determining this reasonableness, courts will have regard to the consideration paid for the business. The clause must be reasonable in light of the interests of both parties. In Nordenfelt v Maxim Nordenfelt, the House of Lords believed that a covenant not to compete in any future business undertaken by the business was unreasonable because it sought to protect the future activities of the business. The House of Lords did, however, find that a worldwide restriction was reasonable because of the limited number of manufacturers in this area.

Once it has been established that the clause is reasonable, it must be established that it is not contrary to the public interest. In practice, it is probably the party who seeks the removal of the clause who will raise this point.

Activity 13.3Taylor Skate Ltd is a company which manufactures ice skates. The company is wholly owned by Cyril Taylor, a metallurgical engineer who has developed most of the Taylor Skate products himself. Mr Taylor sells his company to Mr Shore for £10 million. As a part of the sale agreement, Mr Taylor promises not to open a rival business or to solicit the customers of Taylor Skate Ltd either for himself or in the employ of any other company. In addition, he further promises not to work any-where in the world in any business which produces any product produced by Taylor Skate Ltd either now or in the future. He agrees to refrain from such activities for a period of 30 years. Four years later, Mr Taylor develops an anti-rust coating for metal exposed to damp. When he forms a new company to develop this product for use, he discovers that Taylor Skate Ltd has begun to develop a similar coating for use on a new product. Taylor Skate Ltd warn Mr Taylor that they will not tolerate such competition. Advise Mr Taylor.

SummaryThe criteria necessary to uphold a restraint of trade clause in the sale of a business are broadly the same as those to uphold the same clause in an employment contract. The difference is that the public interest is less likely to be offended. This may be because the public interest is now considered to be protected by competition legislation.



u establish when a restraint of trade clause in the sale of a business will be unenforceable

u examine the difference of approach by courts to restraint of trade clauses in an employment contract and in the sale of a business.

Useful further reading ¢ Anson, pp.366–372, 375–376.

13.4 Other agreements

Essential reading ¢ McKendrick, Chapter 15: ‘Illegality’ – 15.15 ‘Restrictive trading and analogous

agreements’ to 15.16 ‘The scope of public policy’, pp.268–270.

¢ Poole, Chapter 16: ‘Illegality and capacity to contract’ – Section 2 A (iii) ‘Exclusive dealing agreements’ and (iv) ‘Exclusive service agreements’, pp.792–795.

Traditionally the doctrine of restraint of trade was applied to employment agreements and agreements for the sale of a business. This doctrine has also been applied to other forms of agreement. The extent of this possible application to other agreements is uncertain.

One form of agreement to which it has been applied is a ‘solus’ or exclusive dealing agreement. This is a contract whereby one party undertakes to purchase all of its supplies from a certain supplier. In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968), the House of Lords held that such an agreement was within the scope of the doctrine of restraint of trade. In that case, Harper had agreed to buy his petrol exclusively from Esso for a period of four years, five months in relation to one of his garages and for 21 years with respect to another. In relation to the second garage, the promise was given in connection with a loan from Esso. The House of Lords established that the period with respect to the first garage was not a restraint of trade, but that the second one was. Twenty-one years went beyond what was required to protect the interests of Esso.

The doctrine of restraint of trade has also been applied to exclusive service agreements. In these agreements, one party promises to provide their services only to the other party and not to work for anyone else. In A Schroeder Music Publishing v Macaulay (1974), the court found that the exclusive service agreement was a restraint of trade and thus unenforceable. In that instance, a young songwriter had contracted with music publishers to provide his exclusive services for five years. During that period, the songwriter assigned copyright in his music to the publishers. The music publishers were under no obligation to do anything with his songs. In the event that the songwriter’s royalties exceeded a certain amount, the contract would be automatically extended for a further five-year period. While the music publishers were able to terminate the contract, the songwriter was not given this right. The House of Lords applied their decision in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd and found that the case was an unenforceable restraint of trade because it went well beyond what was necessary to protect the interests of the music publishers and so severely curtailed the abilities of the songwriter.

SummaryIn a variety of situations beyond employment contracts and contracts for the sale of a business, courts will consider whether or not the clause is a restraint of trade. While the scope of this application is uncertain, the indications are that it will occur in circumstances similar to employment contracts (such as the exclusive provision of services) or in situations where one party ties himself or herself to another.


Activity 13.4Review the judgments in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd and A Schroder Music Publishing Co Ltd v Macaulay.

What reasons do the judges give for considering the contractual terms in these cases in light of the doctrine of restraint of trade?


u state when a court might consider a clause to be an offensive restraint of trade in other circumstances

u outline the effect upon the contract of an unacceptable restraint of trade.


Self-assessment questions1. When does a restraint of trade occur?

2. What factors will a court consider in determining the public interest in relation to a restraint of trade clause?

3. How does the approach of the courts differ in dealing with a restraint of trade clause in a sale of a business and that of an employment relationship?

4. Why have courts included other sorts of agreements within the scope of the restraint of trade doctrine?

5. What is the effect of the court finding that a term is an unjustifiable restraint of trade?

6. What legislation will also regulate many restraint of trade clauses and arrangements?

Examination adviceYou are reminded of the general advice given in the first chapter to this guide. In particular, this advice is meant to assist candidates by examining past examination papers. It is in no way determinative of what the Examiners in this subject may do in the future.

A review of past examination papers reveals that questions involving restraint of trade have tended to form a part of a larger question on the topic of illegality.

Sample examination questionBob and Ted were in partnership as surveyors and valuers. Each covenanted with the other that he would not, during the time they were in partnership or within five years thereafter, practise within eight miles (12 km) of their present office or any other office in which the other should thereafter practise. Bob later took on Albert as an articled clerk and Albert covenanted that he would not, while employed by Bob or within 10 years of ceasing to be so employed, practise within eight miles of Bob’s office or any office in which Bob should thereafter practise as a surveyor, valuer or estate agent.

A year ago the partnership between Bob and Ted was dissolved and Albert ceased to be employed by Bob. Both Ted and Albert are now practising within eight miles of Bob’s office.

Advise Bob.


Advice on answering the questionBob will want to enforce both his agreements to ensure that neither Ted nor Albert practise near his office. It is likely that Ted and Albert will argue that their respective agreements are unenforceable because they are an unacceptable restraint of trade.

Because there are two agreements, it is best to consider them in turn. In relation to the first agreement between Bob and Ted, Bob will need to establish that this restraint of trade is reasonable. He will need to do this by showing that he has a legitimate interest to protect, that restraint is reasonable between the parties and that it is reasonable in the public interest. While the agreement does not occur within the sale of a business, it occurs within a similar context and thus the cases dealing with these are best considered (such as Nordenfelt v Maxim Nordenfelt). Bob would also be advised to point out that his situation differs greatly from those encountered by the court in the solus agreement cases. It is particularly notable that Bob and Ted have exchanged exactly the same promise – Bob has bound himself to the same conditions.

With regard to the second agreement with Albert, this is an employment agreement. Once again, Bob will need to establish that the clause is not an unacceptable restraint of trade. To do this he needs to establish that: (1) he has a legitimate interest to protect; (2) the clause is reasonable between Bob and Albert as to subject matter, area and duration; and (3) that the clause is not injurious to the public (see Herbert Morris Limited v Saxelby (1916)). Bob’s difficulty here will relate to (2) because it seems unreasonable to bind Albert for ten years and even more unreasonable to extend this to any office in which Bob might work in the future.

On balance, it is likely that the first agreement is enforceable, but that the second agreement is not.


Reflect and review






Ready to move on


Need to study again

I understand the different contractual contexts in which restraint of trade can arise.

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I can state the circumstances in which an employment contract will be found to be in restraint of trade.

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I can establish when a restraint of trade clause in the sale of a business will be unenforceable.

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I can examine the difference of approach by courts to restraint of trade clauses in an employment contract and in the sale of a business.

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I can state when a court might consider a clause to be an offensive restraint of trade in other circumstances.

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I can outline the effect upon the contract of an unacceptable restraint of trade.

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Must revise

Revision done

13.1 General principles ¢ ¢

13.2 Employment contracts ¢ ¢

13.3 The sale of a business ¢ ¢

13.4 Other agreements ¢ ¢


Notes

Contents

Introduction 170

14 1 The principle of substantial performance 171

14 2 When a breach of contract occurs 172

14 3 What occurs upon breach 173

14 4 Anticipatory breach 175



14 Performance and breach


Introduction

The material considered in this chapter is concerned with the performance and discharge of contracts. Contracts will be discharged, that is to say, ended, in one of three general ways. The first is through performance or agreement; the second is by breach; the third is by frustration. In the first instance, the parties have fulfilled their contractual obligations and the contract is at an end; equally, they may enter a binding agreement to end their contract. In the second instance, one or more parties have not performed their contractual obligations and this non-performance arises through the fault of one or more of the parties. In the third instance, the contract is discharged by a supervening event which occurs without the fault of either party. This is known as frustration and is dealt with in Chapter 15.

This chapter deals with the first and second ways in which a contract is discharged: by performance and by breach. The focus of this chapter is primarily upon breach of contract. We are concerned here with situations where the performance tendered is below the standard required by the contract or one party refuses to perform or disables themselves from performing. A party could disable themselves from performing in many ways. They could, for example, take on an additional and conflicting commitment with another party. Alternately, they might remove the means by which they would perform the contract or give up control over the place of performance. We are concerned with what result in law attends upon one of these events. In examining the material in this chapter, you will find it useful to consider the nature of the terms of the contract discussed in Chapter 5.


u explain the principle of substantial performance

u provide an explanation of the standard of performance required in different contracts

u understand the nature of repudiatory breach

u state the consequences attendant upon a repudiatory breach

u identify the circumstances in which an innocent party can terminate a contract for breach

u outline the consequences which occur when there has been a breach of contract.

Elements of the law of contract 14 Performance and breach page 171

14.1 The principle of substantial performance

Essential reading ¢ McKendrick, Chapter 21: ‘Obtaining an adequate remedy’ – 21.2 ‘The entire obli-

gations (or ‘entire contracts’) rule’, pp.347–349.

¢ Poole, Chapter 6: ‘Content of the contract and principles of interpretation’ – Section 6 ‘Entire obligations’, pp.279–284.

It is said that, as a general rule, a party cannot recover payment for the partial performance of an ‘entire obligation’. What this means is that until the entire obligation is performed, the party performing the obligation cannot recover any payment for it. It may be the ‘entire obligation’ is the whole, or entire, contract. An example of such a situation can be seen in the case of Cutter v Powell (1795). In this case, Cutter contracted with Powell to be the second mate on a ship bound from Jamaica to England. Seven weeks after he had commenced performance of this position, Cutter died. His widow sued Powell to recover payment for the period of time in which he had rendered his services. This payment was denied because the contract was not fully performed. There was no pay until the performance was complete: an entire contract requires entire performance to entitle the performer to payment. There is no partial payment for partial performance. The same result occurred in Sumpter v Hedges (1898).

The harshness of this general rule is mitigated by a variety of methods which allow a party to receive some recompense for a partial performance. First, a court may interpret the contract not as being an entire contract, but as a contract which is made up of a series of ‘entire obligations’. The contract is thus divided into a series of stages of performance. When a stage has been completed, the performer can recover payment for this stage. A second method is that courts will allow recovery where a party in breach has substantially performed his obligations. See, for example, Hoenig v Isaacs (1952). A third method is that the innocent party may be liable to compensate the performer for a partial performance where the innocent party accepts the partial performance. The difficulty in establishing this is that the other party may have no choice but to accept the partial performance, although they contracted not for a partial performance but for a complete performance. This was the case in Sumpter v Hedges (1898).

SummaryIt is said that where the contract, or obligation, is ‘entire’ then all of the obligation must be performed in order to entitle the performing party to any payment for performance. In practice, however, it may be possible to recover payment in circumstances where the entire contract has not been performed.


u explain the principle of substantial performance.



14.2 When a breach of contract occurs

Essential reading ¢ McKendrick, Chapter 19: ‘Breach of contract’ – 19.1 ‘Introduction: breach defined’

to 19.3 ‘The consequences of breach’, pp.310–311.

¢ Poole, Chapter 8: ‘Discharge for breach of contact’ – Section 1 ‘Absolute and qualified contractual obligations’, p.361.

¢ Brownsword, R. ‘Retrieving reasons, retrieving rationality? A new look at the right to withdraw for breach of contract’, Elements of the law of contract Study pack.

It is often difficult to ascertain if a breach of contract has occurred. In some cases, where one party refuses to continue performing or commits an act which prevents further performance, it is clear that a breach of contract has occurred. This is a repudiatory breach.† However, in cases where there is a partial performance or an inadequate performance, it is often difficult to determine whether or not such a repudiatory breach has occurred. In this sense, a repudiatory breach is a breach which entitles the innocent party to terminate the contract. A party who alleges that a repudiatory breach has occurred must prove that it has occurred.

In order to determine whether or not a repudiatory breach has occurred, there are two matters to be considered. Both must be considered in relation to the particular terms or obligations of the contract. The first matter is the standard of performance to be met in the contract. The second matter is the type of term which has been breached.

Standard of performance

With regard to the first matter, different terms impose different standards of performance. These can be divided into two general standards: strict liability and a standard of reasonable care. A standard of strict liability is one in which either performance measures up to what is demanded by the contract or it does not. The fault of the party in breach in not measuring up to this standard is irrelevant. A standard of reasonable care, in contrast, imposes a duty on the party to use reasonable care and skill in the performance of her contractual obligations.

Strict liabilityAs a general rule, contracts for the supply of goods impose a strict standard of performance with regard to the quality and quantity of the goods to be supplied. Thus, a contract to supply barrel staves which were half an inch (8/16th of an inch) thick was not performed when the staves supplied were of varying thickness from 7/16ths of an inch thick to 9/16ths of an inch thick (Arcos v Ronaasen [1933] AC 470). The fault of the party who supplies the goods is immaterial; that is to say, it does not matter that the barrel staves were the wrong thickness through no fault of his own. It may be that the party in breach exercised all reasonable care to ensure that the goods conformed to the standard required; she is, however, still in breach of contract. The liability is strict and fault need not be proved. A strict standard of performance may be imposed by the legislation – for example, the obligations imposed upon a seller of goods under the ss.13–15 Sale of Goods Act 1979 are strict.

Reasonable care and skillIn contrast, some contractual terms impose a lower standard of performance – a standard which requires that reasonable care and skill is exercised. In these cases, the fault of the party in breach is relevant. Again, as a general rule, contracts for the supply of services require that the party exercise reasonable care and skill in the performance of her contractual obligations. Thus, s.13 of the Supply of Goods and Services Act 1982 requires a party to exercise reasonable care and skill in the supply of a service.

† A repudiatory breach is said to occur when one party refuses to continue performing the contract or commits an act which prevents further performance.


With regard to the second matter (i.e. the type of contractual term which has been breached) you should refresh your memory by consulting Chapter 5. You will recall that terms can be classified as conditions, warranties or intermediate/innominate terms. The classification of terms is particularly important in relation to a breach of contract because not all breaches give rise to a right to terminate the contract. Only the breach of a condition, or a sufficiently important intermediate/innominate term, gives rise to a right to terminate the contract.

Activity 14.1Mountain Magic Ltd is purchasing a mountain upon which it plans to develop a ski resort. The contract for the purchase requires that it tenders payment of £10 million at 5:00 pm on 3 December at the offices of the vendor, Tighte Fist plc. On 3 December, Mountain Magic Ltd sends a representative with a cheque for payment to the offices of Tighte Fist plc. The representative leaves with plenty of time to reach his destination. Unfortunately, a bomb scare forces police to prohibit all travel in the city for a period of several hours. Consequently, the representative does not reach the offices of Tighte Fist plc until 8:00 pm. Has a repudiatory breach of contract occurred? Would it have occurred if the representative reached the offices at 5:10 pm? Would the result have been any different if Mountain Magic Ltd had telephoned Tighte Fist plc to inform them of the effect of the bomb scare?

SummaryIt is important to ascertain whether a breach of contract has occurred. To determine this, the nature of the term and the standard of performance required must be ascertained.


u understand the nature of repudiatory breach.


14.3 What occurs upon breach

Essential reading ¢ McKendrick, Chapter 19: ‘Breach of contract’, pp.310–321.

¢ Poole, Chapter 8: ‘Discharge for breach of contract’ – Section 2 ‘Consequences of breach’, pp.362–364.

The consequences of a breach of contract are determined by the severity of the breach and the decision made by the innocent party. A breach of contract does not automatically end a contract – no matter how severe the breach (see Decro-Wall SA v International Practitioners in Marketing [1971] 1 WLR 361). Rather, a breach of a condition or a sufficiently serious intermediate/innominate term gives the innocent party the option to terminate the contract.†

Certain other consequences will also occur upon a breach of contract. The innocent party, regardless of whether or not he decides to terminate the contract, will have the right to sue for damages. This is dealt with in Chapter 16. In addition, it may also be that the party in breach is unable to sue upon the contract. This will occur if the obligations imposed by the contract are dependent upon each other. Obligations are dependent when one party must be willing and able to perform his obligation in order to maintain a suit against the other party for his breach. It is usually the case in contract that the obligations are dependent. In a contract of employment, for example, the contract could provide that the employee is paid weekly. In the event that the employee does not work that week, he or she will be unable to recover their wages.

† You will see this option described in various ways as an ‘election’ or the ‘right to rescind’. Where it is described as a right to rescind (and the ensuing process of rescission) bear in mind that this is different from rescission we considered earlier in Chapter 9 in relation to misrepresentation. The difference is that rescission for breach only ends future obligations, while past ones remain. Rescission for misrepresentation ends all obligations.


The innocent party must communicate to the party in breach that he has elected to terminate the contract: Vitol SA v Norelf Ltd (1996).

The nature of a breach of contract is prospective. That is to say, if the innocent party elects to terminate the contract, future obligations are no longer binding and are discharged. Past obligations, however, remain. The contract has no future, but it does have a past. Those rights which have been unconditionally acquired are still binding. See, for example, the speech of Lord Porter in Heyman v Darwins Ltd [1942] AC 356 at 399 and the decision in Johnson v Agnew [1980] AC 367.

If an innocent party elects to terminate the contract for breach she is no longer bound to accept or make any performance under the contract. What happens if she does not elect to terminate the contract? In this case, she remains bound to her obligations. In addition, she cannot subsequently decide to ‘return’ to the earlier breach and then purport to accept it while the breach remains anticipatory: Stocznia Gdanska SA v Latvian Shipping Co (1997). (An anticipatory breach, considered below in 14.4, is a breach which occurs in time before performance is due.) If a party, on the first of the month, commits an anticipatory breach of a contract to be performed on the 15th of the month, the innocent party can terminate the contract or affirm the contract. If the innocent party chooses to affirm the contract, they cannot then claim on the eighth of the month that there has been an anticipatory breach of the contract and purport to then accept the earlier breach. Where the innocent party elects not to terminate the contract, she is said to have ‘affirmed’ the contract.

SummaryNot every breach entitles the innocent party to terminate the contract. Where the breach is sufficiently serious to entitle the innocent party to terminate the contract, the contract is not automatically terminated. It is only terminated where the innocent party elects to terminate the contract. The effect of this termination is prospective only. When a decision has been made by the innocent party to terminate the contract for an anticipatory breach, they cannot then purport to revive the contract before the time at which performance had been due. Likewise, if they affirm the contract after an anticipatory breach, they cannot then purport to terminate the contract for that anticipatory breach before the time at which performance is due.

Activity 14.2In what circumstances will a party be held to have ‘affirmed’ a contract? To what extent is a party’s election to terminate or to affirm constrained by considerations such as the reasonableness of his decision or conduct?

Activity 14.3What is the importance to the innocent party of determining the nature of the term breached by the other party?


u state the consequences attendant upon a repudiatory breach

u identify the circumstances in which an innocent party can terminate a contract for breach.



14.4 Anticipatory breach

Essential reading ¢ McKendrick, Chapter 19: ‘Breach of contract’ – 19.9 ‘Anticipatory breach’,

pp.316–319.

¢ Poole, Chapter 8: ‘Discharge for breach of contact’ – Section 3 ‘Anticipatory breach’, pp.364–389.

Anticipatory breach occurs when, before a performance is due, a party either renounces the contract or disables himself from performing it.

A renunciation must amount to a clear and absolute refusal to perform. This can be either express or indicated by the conduct of the party involved. The inability to perform must involve the breach of a contractual obligation but does not have to be the fault of the party in breach. Thus in the case of Universal Cargo Carriers Corp v Citati (1957), a charterer was held to be in anticipatory breach of his obligation to provide a cargo at the time specified. The breach occurred because of the failure of a third party to provide him with the cargo.

An anticipatory breach gives rise to an immediate right of action. The injured party does not have to wait until the time due for performance to terminate the contract. This means that an anticipatory breach gives rise to a right to terminate if its prospective effects are such as to satisfy the requirement of substantial failure in performance.

One of the odd features about an anticipatory breach is not that the breach gives rise to an immediate right of action but that the damages are determined and can be claimed at once, before the time is fixed for performance. This is by reason of the decision in Hochster v De la Tour (1853).

Termination

How does an injured party know when he or she has the right to terminate for an anticipatory breach? This will depend upon the form of the anticipatory breach. In the case of a renunciation, the renunciation must be such as to prove that the party in breach has ‘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’. The court examines the nature of the refusal to determine whether the injured party was reasonable in their opinion that the refusal was sufficiently clear and absolute to give them the right to terminate.

In the case of a prospective inability (where the party is alleged to have committed a breach by disabling themselves from performance) the question of whether or not the injured party can rescind/terminate the contract will depend upon the seriousness of the consequences of the breach.

Affirmation

One of the effects of an anticipatory breach of contract is that the innocent party may elect to affirm the contract and continue with a performance that he knows is not wanted by the other party: White and Carter (Councils) Ltd v McGregor (1962). The principle established in this case is qualified in a number of ways. One way is that the innocent party cannot carry on with performance where he needs the co-operation of the party in breach: Hounslow LBC v Twickenham Garden Developments Ltd (1971). In addition, Lord Reid, in his speech in White and Carter (Councils) Ltd stated that where the innocent party had no legitimate interest in performing the contract other than claiming damages, he ought not to saddle the other party with an additional burden.

Another effect of an anticipatory breach is that if the innocent party elects to affirm the contract, he runs the risk that the contract may later be discharged by frustration. In this event, he will not be able to claim for the earlier breach. Similarly, if the innocent party affirms the contract and subsequently breaches it himself, again, he will not be able to rely upon the other party’s earlier breach of contract.


SummaryAn anticipatory breach occurs when the contract is breached before the time is set for performance. In such a case, the innocent party may elect to affirm the contract and, if possible, carry on with performance. Alternatively, the innocent party may elect to terminate the contract. In this case, damages will be assessed at the time of the breach, rather than the time at which performance is due.

Activity 14.4Could the claimant insist on performing, after the defendant had repudiated the contract, if he knew that all his effort and expenditure would simply be wasted? (Compare Clea Shipping v Bulk Oil (1984)).

Activity 14.5What are the risks involved in not accepting an anticipatory repudiation?


Examination adviceYou are reminded of the general advice given in the first chapter to this guide. In particular, this advice is meant to be of assistance to candidates by examining past examination papers. It is in no way determinative of what the Examiners in this subject may do in the future.

A review of past examination papers reveals that questions involving performance and breach of contract usually involve issues surrounding the nature of the terms of the contract. They have often involved questions as to the assessment of damages.

Sample examination questionsQuestion 1 ‘When a party has a right to terminate a contract for breach is far from clear and should be clarified.’

Discuss.

What would you propose to improve the current position?

Question 2 Rhonda is a plumber. She contracts with Simon to replace the plumbing in his restaurant for £10,000. The work must be completed by the beginning of December to be ready for Christmas bookings at the restaurant. At the beginning of November, she has not yet begun work. Simon rings her office and discovers she is out on a similar job at Thelma’s restaurant. He realises, correctly, that Rhonda cannot complete both jobs by the beginning of December. He tells Rhonda not to bother with the job. Simon then hires Amanda to replace the plumbing in his restaurant for £15,000. Rhonda, aware that she cannot complete both jobs, has now decided not to continue work on Thelma’s restaurant in order to undertake the work for Simon, which is much more lucrative. Simon’s staff allow Rhonda in to re-place the plumbing while Simon is on vacation. They refuse to allow Amanda entry.

Rhonda completes the work and claims £10,000 from Simon. Amanda sends Simon a bill for £15,000.

Advise Simon.

Advice on answering the questionsQuestion 1 Whether a contract has been breached is largely dependent upon the particular terms of the contract in question. The breach occurs when one party, without lawful excuse, does not perform what is required from him under the contract, or performs it defectively. The problem that the innocent party is then faced with is whether or not the breach is such as to justify termination of the agreement. If the breach is not sufficient to justify termination of the contract but the innocent party purports to do so, he may then himself have breached the contract (Decro-Wall


International SA v Practitioners in Marketing Ltd (1971)). The question thus calls for a discussion of the classification of contractual terms into conditions, warranties and intermediate or innominate terms (Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962)). The difficulty here is for the innocent party to determine in which of these categories the breached term should be placed. This is particularly true where the term is an innominate term and the party must determine whether the breach has been sufficiently serious. Having established the basic framework of the law in this area and explored what is required, a good answer would consider what could be done to improve this situation. Would legislation clearly defining the right to terminate assist (or would it impose an unnecessary rigidity)? Should courts attempt to give greater effect to the manner in which the parties themselves classify terms? Should parties take greater care in specifying the consequences of breaches of certain terms? In these areas, candidates are expected to provide their own thoughts on the matter.

Question 2 The question involves issues of breach and damages. Only the breach issues will be considered at this point, although in an examination, you would be expected to deal with both sets of issues.

With regard to the breach issues, the problem presented is which party is in breach of contract? To answer this, the nature of a breach of contract must be considered. Is Rhonda in breach of contract when she takes on the other job? To answer this, you need to consider whether Rhonda has renounced the job or made it impossible for herself to perform. She clearly has not renounced the job: so has she made it impossible for herself to perform it? In considering the decisions in Universal Cargo Carriers Corporation v Citati and British & Benningtons v NW Cachar Tea (1923) it is not clear that she would lead a reasonable person to conclude that the contract is impossible to perform. Simon makes no further enquiry as to her ability to perform, beyond his initial telephone call. In these circumstances, Simon himself is in breach of contract. Does Rhonda have the right to carry on in performing? Following the decision in White and Carter (Councils) Ltd v McGregor (1962) it would appear that she does. However, she requires access to Simon’s property and in this regard she appears to fall within the exception in Hounslow LBC v Twickenham Garden Developments Ltd (1971). However, Simon’s staff do grant her access to the property – should this be regarded as co-operation on his part?

Finally, Simon has clearly breached the contract with Amanda by refusing to allow her to perform her obligations.


Reflect and review





Tick a box for each topic.Ready to move on


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I can explain the principle of substantial performance.

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I can provide an explanation of the standard of performance required in different contracts.

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I understand the nature of repudiatory breach. ¢ ¢ ¢

I can state the consequences attendant upon a repudiatory breach.

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I can identify the circumstances in which an innocent party can terminate a contract for breach.

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I can outline the consequences which occur when there has been a breach of contract.

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Revision done

14.1 The principle of substantial performance ¢ ¢

14.2 When a breach of contract occurs ¢ ¢

14.3 What occurs upon breach ¢ ¢

14.4 Anticipatory breach ¢ ¢

Contents

Introduction 180

15 1 The basis of the doctrine of frustration 181

15 2 The nature of a ‘frustrating event’ 182

15 3 Limitations on the doctrine 185

15 4 The effect of frustration 186



15 Frustration


Introduction

The doctrine of frustration provides one of the ways in which contractual obligations come to an end. Here, however, in contrast to termination for breach, the termination is not the result of the wrongful action of one of the parties. Nor does it depend on agreement between the parties. The courts decide when a contract has been frustrated and, if they decide that it has, then all future obligations cease. The consequences of this are dealt with by both common law rules and statute (Law Reform (Frustrated Contracts) Act 1943).

Essential reading ¢ McKendrick, Chapter 14: ‘Common mistake and frustration’ – 14.8 ‘Frustration’ to

14.18 ‘Conclusion’, pp.245–258.

¢ Poole, Chapter 12: ‘Discharge by frustration: subsequent impossibility’, pp.561–590.


u explain the role of the doctrine of frustration in the termination of contracts

u give examples of the types of event which will be regarded as frustrating a contract

u outline the limitations on the doctrine of frustration

u explain what is meant by ‘self-induced frustration’

u describe the consequences of frustration under the common law rules

u describe the consequences of frustration under the Law Reform (Frustrated Contracts) Act 1943

u identify the limitations of the 1943 Act reform.

Elements of the law of contract 15 Frustration page 181

15.1 The basis of the doctrine of frustration

Essential reading ¢ McKendrick, Chapter 14 ‘Common mistake and frustration’ – 14.9 ‘Frustration,

force majeure and hardship’, pp.245–248.

¢ Poole, Chapter 12: ‘Discharge by frustration: subsequent impossibility’ – Section 3 ‘The theoretical basis’, pp.565–570.

¢ McKendrick, E. ‘Force majeure and frustration – their relationship and a comparative assessment’, Elements of the law of contract Study pack.

If the continued performance of a contract becomes impossible, the question arises as to where the losses which result should fall. A strict ‘freedom of contract’ approach might lead to the answer that a person who has undertaken to perform obligations has also undertaken the risk that performance of them will become impossible. On this view, failure to perform should therefore be treated in the same way whether that failure is due to a deliberate action or arises from impossibility caused by some supervening event after the contract has been formed. In other words, both situations involve a breach of contract and should be treated as such. This indeed was the approach originally taken by the common law, as shown by Paradine v Jane (1647).

This strict approach was modified in the nineteenth century, starting from the case of Taylor v Caldwell (1863). In this case a music hall which had been hired for a series of concerts was destroyed by fire. The court held that this brought the contract to an end, and discharged both parties from any further obligations under it. The theoretical justification for this approach was that there was an ‘implied condition’ in the contract that the main subject matter (in this case the music hall) should continue to exist. The decision was thus kept in line with freedom of contract theory by use of an implied term.

In the modern law it has generally been recognised that the suggestion that there is an implied term covering the frustrating situation is something of a fiction – see, in particular, the speeches of Lord Reid and Viscount Radcliffe in Davis Contractors Ltd v Fareham Urban District Council (1956). The preferred analysis is simply that in certain situations, where there is a change in circumstances (not attributable to the fault of either party) which is such that performance of the contract would become something radically different from what the parties originally intended, justice requires that the courts should treat the contract as having come to an end – see also National Carriers Ltd v Panalpina (Northern) Ltd (1981).

The fact that the courts will in some circumstances bring a contract to an end on the basis of frustration does not mean that the parties’ original agreement will be ignored. First, it is important that the courts determine exactly what obligations were originally undertaken, in order to decide whether the change in circumstances has made any of them radically different. This issue will be explored further in the next section. Secondly, it is quite possible for the parties themselves to make provision in the contract for what is to happen should the performance of the agreement become impossible, or radically different, as a result of some subsequent event for which neither of them is to blame. This is common in commercial contracts, which frequently use what are known as ‘force majeure’ clauses. Where there is a clause of this type which covers the situation which has occurred, then the courts will give effect to it.

Activity 15.1Why do you think that both McKendrick and Poole deal with the doctrine of frustra-tion in a chapter which also deals with ‘mistake’?



15.2 The nature of a ‘frustrating event’

Essential reading ¢ McKendrick, Chapter 14: ‘Common mistake and frustration’ – 14.11 ‘Impossibility’ to

14.13 ‘Illegality’, pp.248–250.

¢ Poole, Chapter 12: ‘Discharge by frustration: subsequent impossibility’ – Section 4 ‘Frustrating events’, pp.570–579.

What type of event will be treated as having frustrated a contract? It is impossible to give a comprehensive list, because it is the effect of the event, rather than the event itself, which is in the end the determining factor. As Lord Radcliffe put it in Davis Contractors Ltd v Fareham Urban District Council:

frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract… It was not this that I promised to do.

In deciding whether or not a contract has been frustrated, courts apply a ‘multi-factorial approach’ (see Edwinton v Tsavliris (The Sea Angel) [2007]). Factors which courts should take into account include:

the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as to the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances. [per Rix L.J. para 111]

With this general principle in mind, we can now usefully look at examples from the cases of situations which have, or have not, led to a decision that a contract is frustrated. From these some general impression of the characteristics of a frustrating event can be gained. In all cases, however, it must be that the event has made the contract impossible or radically different – it is not enough that the contract has simply become more difficult or expensive for one party. Thus, in Tsakiroglou & Co v Noblee and Thorl (1962) the closure of the Suez Canal did not frustrate a contract for the carriage of goods from Port Sudan to Hamburg. The contract had not specified the route and the fact that the alternative route, via the Cape of Good Hope, would take much longer was not sufficient to frustrate the contract.

Courts have consistently indicated that a contract will be frustrated only where there is a complete change between what was undertaken in the contract and the circumstances in which it is called upon to be performed. Thus in CTI Group Inc v Transclear SA [2008] the Court of Appeal concluded that a contract to sell cement was not frustrated where the contract remained legally and physically possible but where third party suppliers would not sell the necessary cement to the sellers with the result that the sellers could not supply the buyers with the cement.

Destruction of subject-matter

The most obvious example is where the main subject-matter of the contract has been destroyed, as in Taylor v Caldwell (1863). If something central to the performance of the contract no longer exists, then it is not surprising that the courts will find that the parties’ obligations should come to an end. Full destruction may not be necessary. In Asfar v Blundell (1896), the contamination of perishable goods, which rendered them unusable, was held to be equivalent to destruction (see also s.7 Sale of Goods Act 1979).

Personal incapacity

Another clear case of frustration will be where both parties have agreed that the contract is to be carried out by a particular individual, and that individual dies, or is too ill to perform (as, for example, in Condor v Barron Knights (1966) – drummer in a pop group). The court will need to be satisfied, however, the contract was not simply for work to be done, but for it to be done by the particular individual who is unavailable.


Activity 15.2On Monday Nathalie arranges for her car to be serviced at Phil’s garage on the fol-lowing Friday. Jamie, the mechanic who normally carries out services on Nathalie’s car, is taken ill on Thursday and is unavailable on Friday. Will the contract be frustrated?

Activity 15.3On Monday Nathalie arranges to have her hair styled at Phil’s salon on the following Friday. Jamie, the hairdresser who normally styles Nathalie’s hair, is taken ill on Thursday and is unavailable on Friday. Will the contract be frustrated?

Non-occurrence of an event

A number of cases concerned with the cancelled coronation of King Edward VII in 1903 illustrate this category. In Krell v Henry (1903) a room overlooking the route of the coronation procession had been hired for the purpose of watching it. When the procession was cancelled, the contract for the hire of the room was held to be frustrated (see also Chandler v Webster (1904)).

Figure 15.1 The coronation of King Edward VII

Again, however, it is important to be clear as to the precise obligations under the contract in order to decide whether a cancellation has this effect. Thus in Herne Bay Steam Boat Co v Hutton (1904) a boat had been hired to tour the fleet and to watch the King’s review of it, which was part of the coronation celebrations. The King’s illness meant that the review was cancelled. In this case, however, the contract was not frustrated. The tour of the fleet was still possible and this was a significant element in the contract. The hirer remained obliged to pay for the use of boat.

Effects of war

In time of war a government may make trading with companies based in enemy territory illegal. Contracts with such companies which were made prior to this action will be frustrated: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943). Similarly, the requisitioning of property which had been allocated to a contract may lead to the frustration of that contract: see Metropolitan Water Board v Dick Kerr (1918) and FA Tamplin v Anglo-American Petroleum (1916) (although in this case the requisitioning of a ship as a troop ship was held not to have frustrated a charter of it, because the requisitioning was not of sufficient length to defeat the whole purpose of the contract).


The frustration need not result from direct government action. In Finelvet AG v Vinava Shipping Co Ltd (1983), the continuing war between Iran and Iraq trapped certain ships in the Gulf for a lengthy period. Contracts relating to the charter of these ships were held to be frustrated.

Other government action

Government action not related to war can frustrate a contract. In Gamerco SA v ICM/Fair Warning Agency (1995) a stadium which had been booked for a pop concert was closed for reasons of health and safety. It was held that the contract for the hire of the stadium was frustrated. It is also implicit in Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd (1976) that the listing of a building as being of architectural and historical interest (thus limiting the possibilities for its development) could frustrate a contract for its sale (though on the facts it did not).

Other frustrating events

Other types of event which have led to contracts being frustrated include industrial action (The Nema (1981)) and the accidental running aground of a ship (Jackson v Union Marine Insurance Co Ltd (1874)). As indicated above, however, the categories of frustrating event are not closed. It will always be possible to argue that some novel occurrence has frustrated a contract, provided that it has had the required effect on the obligations of either or both parties.

Activity 15.4Aaron has booked tickets to attend an event at Highplace Hall. The event is to include a tour of the grounds and a meal in the hall, followed by a concert featuring the famous pianist, Claudio Quays. Is the contract frustrated if the following take place?

a. On the day before the event, Highplace Hall suffers a fire and is badly damaged. The grounds are still open, but the Hall is closed, so that the meal and concert cannot take place, or

b. On the day before the event Claudio Quays sprains his wrist and is unable to perform. The concert is cancelled.

Self-assessment questions1. What is a ‘force majeure clause’?

2. In what circumstances may government action frustrate a contract?

3. What is the distinction between ‘frustration’ and ‘mistake’?

SummaryThe doctrine of frustration operates to relieve parties of any further obligations under a contract. It applies when some event which is not the responsibility of either party has made performance of the contract impossible, or radically different from what was originally agreed. Examples of events which will lead to frustration include destruction of the subject matter, the non-occurrence of an event, outbreak of war and government intervention. The contract will not be frustrated if the performance is simply made more difficult or expensive, or if a significant part of the contract survives the frustrating event.



u explain the role of the doctrine of frustration in the termination of contracts

u give examples of the types of event which will be regarded as frustrating a contract.


15.3 Limitations on the doctrine

Essential reading ¢ McKendrick, Chapter 14: ‘Common mistake and frustration’ – 14.14 ‘Express

provision’ to 14.16 ‘Self-induced frustration’, pp.250–252.

¢ Poole, Chapter 12: ‘Discharge by frustration: subsequent impossibility’ – Section 2 ‘Contractual allocation of risk’, pp.561–565.

There are two principal limitations on the doctrine of frustration. The first is where the frustrating event has been foreseen and provided for in the contract; the second is where the alleged frustrating event has been ‘self-induced’ by one of the parties, since, as indicated in the quotation from Lord Radcliffe given at the beginning of section 15.2, the problem must arise ‘without the default of either party’.

Part of the essence of the doctrine of frustration is the fact that the event which has occurred is a surprise. This justifies the conclusion that the risk of the event occurring has not been allocated by the parties and that the court should therefore intervene. If, therefore, the parties have clearly foreseen the possibility of a frustrating event occurring and have made provision for what is to happen in their contract, there will be no room for the doctrine of frustration. Thus, as noted at the beginning of this chapter, in the commercial area ‘force majeure’ and similar clauses may well replace the common law and statutory rules on frustration.

The courts have tended to interpret such clauses narrowly, however. In Jackson v Union Marine Insurance Co Ltd (1874) a charter required a ship to sail ‘with all possible dispatch’ from Liverpool to Newport, there to load a cargo for carriage to San Francisco. The ship ran aground off the coast of Newport, was damaged, and not fully repaired for some seven months. The charterer in the meantime used another ship to carry the cargo, on the basis that the contract had been frustrated. The ship owner, however, sued for breach of contract, on the basis that the charter contained a clause stating ‘damages and accidents of navigation excepted’. The court held that this clause could not have been intended to apply in relation to a delay of the length which had occurred. The contract was frustrated and the clause had no application – see also Metropolitan Water Board v Dick Kerr (1918).

Another important element in the doctrine of frustration is that the alleged frustrating event must not be attributable to the fault of either party. If it is, then the likelihood is that the party at fault will be in breach of contract and the doctrine of frustration will have no application. The courts have interpreted the concept of ‘fault’ widely in this context: in fact it may be more accurate to say that wherever the alleged frustrating event is attributable to the actions of one of the parties (whether these involved ‘fault’ or not) then the doctrine of frustration will not apply. In Maritime National Fish v Ocean Trawlers (1935) the defendants chartered a boat from the plaintiffs, but were then unable to use it as they wished to trawl for fish because they were not granted sufficient fishing licences to cover all the boats they wished to operate. It was held that their contract with the plaintiffs was not frustrated. It was the defendants’ choice as to which boats they used the licences for. The ‘frustration’ of the contract with the plaintiffs was therefore ‘self-induced’ and ineffective to relieve the defendants of liability to the plaintiffs under the contract.


Activity 15.5Read the case of Lauritzen AS v Wijsmuller BV, The Super Servant Two (1990) (see Poole). Why is this case seen as extending (rather than simply applying) the principle established in Maritime National Fish v Ocean Trawlers?

Why do you think the decision has been criticised?

At one time it was thought that there was a further limitation on the doctrine of frustration, in that it could not apply to leases of land: see Cricklewood Property Investment Trust v Leighton’s Investment Trusts Ltd (1945). This limitation was rejected by the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd (1981), though on the facts the contract under consideration in that case was held not to have been frustrated.

SummaryIf the alleged frustrating event has been foreseen and provided for in the contract (e.g. by a ‘force majeure’ clause) the doctrine of frustration will not apply. Similarly, if the alleged frustration can be said to ‘self-induced’ (i.e. it is the result of a decision taken by one of the parties) the contract will not be treated as frustrated. The party which took the decision will be in breach of contract.


u outline the limitations on the doctrine of frustration

u explain what is meant by ‘self-induced frustration’.


15.4 The effect of frustration

Essential reading ¢ McKendrick, Chapter 14: ‘Common mistake and frustration’ – 14.17 ‘The effects of

frustration’, pp.254–257.

¢ Poole, Chapter 12: ‘Discharge by frustration: subsequent impossibility’ – Section 5 ‘The effects of frustration’, pp.579–589.

There are two sets of rules relating to the effects of frustration – under the common law and under the Law Reform (Frustrated Contracts) Act 1943. In most cases the 1943 Act will apply, but there are some situations where the common law is still applicable. It is easiest to understand the effect of the Act by considering the common law rules first, and then to look at the way in which the Act has amended these.

15.4.1 Common lawOne common law rule which operates even where the Act is also applicable is that a frustrating event terminates the contract automatically, without any need for action by either party. This is in contrast to the position following a repudiatory breach of contract where the innocent party has the option of continuing with the contract or bringing it to an end (see Chapter 14). It follows that any attempt to affirm the contract following frustration will be ineffective. This was confirmed by the Privy Council in Hirji Mulji v Cheong Yeong Steamship Co Ltd (1926).

As to the distribution of losses following frustration, the common law started from the position that all future obligations were discharged, but that obligations incurred prior to the frustrating event survived. Where the loss fell would therefore depend entirely on what the contract said about when payment was to be made, or when work was to be done. Thus in Chandler v Webster (1904), which was one of the ‘coronation’ cases, the full obligation to pay for a room to watch the procession


arose before the cancellation (in contrast to Krell v Henry (1903) where only a deposit was payable). The hirer of the room was therefore required to make full payment and the entire loss caused by the frustrating event fell on him. The approach taken in Chandler v Webster was, however, modified in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943). £1,000 had been paid under a contract for the supply of machinery which was frustrated by the German invasion of Poland in 1939. The House of Lords held that where there has been a ‘total failure of consideration’ (that is, the party paying the money has received nothing at all under the contract), then money paid could be recovered. The purchasers of the machinery were therefore allowed to recover their payment of £1,000.

Activity 15.6† Sabina makes a contract with Peter for the redecoration of a house which she owns. The total cost is to be £5,000 and, as provided in the contract, she gives Peter an initial payment of £1,500. The balance is to be paid on the completion of the work. The day before Peter starts work, vandals start a fire which totally destroys Sabina’s house. Peter has spent £500 buying materials for the job. What would be the posi-tion as to the distribution of losses on the redecoration contract under the common law rules relating to frustration?

Activity 15.7As in 15.6, but the fire takes place after Peter has done one day’s work. The entire job was expected to take four weeks to complete.

Activity 15.8As in 15.6, but the fire takes place on the day before Peter was due to complete the work.

The inflexibility of the common law rules, even following the slight modification provided by the Fibrosa case, led to demand for reform. This occurred in the shape of the Law Reform (Frustrated Contracts) Act 1943.

15.4.2 The Law Reform (Frustrated Contracts) Act 1943There are some contracts to which the 1943 Act does not apply (see s.2(5)). These include contracts of insurance, some charters of ships (principally charters for a particular voyage) and contracts for the carriage of goods by sea. The exclusion of the shipping contracts exists because there are special rules under shipping law which deal with the situation. The most important exclusion from the effects of the Act is, however, in relation to contracts for the sale of specific goods.† In relation to these contracts the common law rules as to the effects of frustration will apply.

The two main provisions in the 1943 Act are s.1(2), which deals with money paid or payable prior to the frustrating event, and s.1(3) which deals with benefits conferred prior to that event. They need to be considered in turn.

Section 1(2): money paid or payable prior to frustration

Section 1(2) provides that where money was paid or payable prior to the frustrating event, it should be returned (if paid), or should cease to be payable (if not paid but owing). Unlike the common law, this is not dependent on there being a total failure of consideration. Not all the money may be recoverable, however. The section provides that if expenses have been incurred towards the performance of the contract, some of the money paid or payable may be retained or recovered, to the extent that a court considers it just in all the circumstances. The amount concerned cannot exceed the amount of the expenses incurred, nor can it exceed the amount paid or payable under the contract (even if the expenses are greater than this).

The discretion given to the court is a broad one, as confirmed by Gamerco SA v ICM/Fair Warning Agency (1995). The case concerned the frustration of a contract to hold a pop concert because of the closure of the specified stadium on grounds of safety.

† Note: Activities 15.9–15.11 ask you to consider the same situation under the 1943 Act.

† Specific goods are those which are identifiable at the time of the contract, as opposed to ‘unascertained goods’ which are simply sold by description. A contract to buy ‘all the grain in X warehouse’ is a contract for ‘specific’ or ‘ascertained’ goods. A contract to buy ‘5 tons of grain’ is a contract for ‘unascertained goods’. Note also that some contracts for specific goods are rendered void by s.7 of the SGA 1979 if the goods perish.


The plaintiffs sought to recover some $412,500 which had been paid. Although the defendants could point to expenses which they had incurred, the judge concluded that in all the circumstances it was just that the $412,500 should be returned in full. It does not follow, therefore, that simply because a party has incurred expenses that it will automatically be allowed to deduct these from sums returnable under s.1(2). The overall justice of the case must be taken into account.

Section 1(3): compensation for a ‘valuable benefit’

Section 1(3) deals with the situation where a party has received a benefit other than money prior to the point at which the contract was frustrated. In that situation the section allows that the party to recover from the other party ‘such sum… as the court considers just, having regard to all the circumstances of the case.’ In particular the court should take into account any expenses incurred by the benefited party and ‘the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract’.

This final consideration which the court must take into account has been interpreted in a way which has significantly reduced the scope for recovery for the provision of benefits. In BP Exploration Co (Libya) Ltd v Hunt (No 2) (1979), Goff J (as he then was), having held that the purpose of the Act was the prevention of unjust enrichment rather than the apportionment of losses, ruled that the value of any alleged benefit under s.1(3) must be assessed in the light of the frustrating event itself. Where, therefore, the frustrating event has had the effect of destroying the benefit, nothing will be recoverable under s.1(3). This interpretation of the Act has been the subject of much criticism – though this is mainly focused on the poor drafting of the legislation, rather than Goff J’s interpretation of it.

Activity 15.9† Sabina contracts with Peter for the redecoration of a house which she owns. The total cost is to be £5,000 and, as provided in the contract, she gives Peter an initial payment of £1,500. The balance is to be paid on the completion of the work. The day before Peter starts work, vandals start a fire which totally destroys Sabina’s house. Peter has spent £500 buying materials for the job. What would be the position as to the distribution of losses on the redecoration contract under the Law Reform (Frustrated Contracts) Act 1943?

Activity 15.10As in 15.9, but the fire takes place after Peter has done one day’s work. The entire job was expected to take four weeks to complete.

Activity 15.11As in 15.9, but the fire takes place on the day before Peter was due to complete the work.

Self-assessment questions1. Give an example of ‘self-induced’ frustration of contract.

2. Can the doctrine of frustration be applied to leases of land?

3. Explain the distinction between ‘specific’ and ‘unascertained’ goods.

4. What is the ‘object’ of the Law Reform (Frustrated Contracts) Act 1943?

SummaryThe common law rules discharge parties from future obligations, but otherwise leave any losses to lie where they fall. The only exception is the recovery of money paid where there is total failure of consideration. The Law Reform (Frustrated Contracts) Act 1943 provides more flexible rules under which money may be recovered, or payment ordered for benefits which have been acquired. The object of the Act is the prevention

† Note that these questions relate to the situation under the 1943 Act and are thus not identical to Activities 15.6–15.8, which deal with the situation under common law.


of unjust enrichment; it does not always operate, therefore, to distribute losses between the parties. The Act has been much criticised for its unsatisfactory drafting, particularly in relation to s.1(3).


u describe the consequences of frustration under the common law rules

u describe the consequences of frustration under the Law Reform (Frustrated Contracts) Act 1943

u identify the limitations of the 1943 Act reform.


Sample examination questionBernard is the owner of a mansion called Stately Grange, which contains a collec-tion of 50 valuable oil paintings. Bernard contracts with Artistic Cleaners Ltd to have all the paintings cleaned and re-hung, at a cost of £200 per painting. He pays Artistic Cleaners £2,000 in advance, with the balance of £8,000 to be paid when all the pictures have been cleaned and re-hung.

There is a stable yard in the grounds of Stately Grange from which Bernard runs pony-trekking holidays. Christine books a week’s holiday for herself and her five children for the week 8–15 August. She pays a deposit of £150 with the balance of £850 to be paid at the start of the holiday.

Consider the effect of the following events on these contracts.

a. On 6 August Artistic Cleaners Ltd have cleaned and re-hung 40 of the paintings. Of the remaining 10, five have been cleaned but remain at Artistic Cleaners’ workshop. The other five are still at the Grange. That evening Stately Grange is badly damaged by fire and all the paintings in the Grange are destroyed.

b. The fire means that Christine’s holiday party will not be able to be accommodated in the Grange, as was planned, but will have to use tents in the grounds. In addition an outbreak of foot-and-mouth disease on a neighbouring farm means that riding will be restricted to the Grange’s own grounds, rather than including tours of the very attractive local countryside. On learning of this Christine seeks to cancel the holiday and reclaim her deposit.

Advice on answering the question While there is some overlap in between the two sections of this problem, the facts and the issues involved are sufficiently separate for you to deal with each independently.

a. Has the contract with Artistic Cleaners been frustrated? Clearly it cannot be completed, as five of the pictures concerned have not been cleaned and have now been destroyed. Full performance is therefore impossible and this suggests that the contract is frustrated. On the other hand, you might also wish to consider the possibility that this contract is divisible into a series of separate obligations, since the price seems to have been calculated at a rate per painting (see, for example, the discussion of ‘entire obligations’ and ‘substantial performance’ in Chapter 14). On this basis might it be possible to argue that it is only as regards the final five paintings that the contract is frustrated, so that Bernard is obliged to pay for the work that has already been done?

If the contract is frustrated, the 1943 Act will apply. Under s.1(2) Bernard could reclaim the £2,000 he has paid. Artistic Cleaners would wish to set off their expenses, but this will only allow them, at a maximum, to retain the £2,000. If they wish to recover for the work done on the 45 paintings which they have dealt with the claim will have to be based in s.1(3). The difficulty is that Appleby v Myers and


BP Exploration v Hunt suggest that Bernard has not received any valuable benefit, other than in relation to the five paintings in Artistic Cleaners workshop. At the contractual rate of £200 per painting this only entitles Artistic Cleaners to £1,000 as a maximum – that is, less than the £2,000 they have already received. It seems unlikely, therefore, that if the contract is frustrated, Artistic Cleaners will be able to do more than retain the £2,000 – and even this is at the discretion of the court.

b. Again, the first question is to ask whether the contract for the holiday has been frustrated? Clearly it has not been rendered impossible. Christine and her family can still stay at the Grange (albeit camping rather than living in the house itself) and can still spend the week riding ponies. Do the changes and restrictions mean that the holiday is ‘radically different’ from what had been contracted for? This will depend to some extent on what exactly was promised in the contract, and how important a part of that contract the elements which have changed were. In the end, however, it is a matter of judgment, which can be argued either way.

If the contract is frustrated, again the 1943 Act will apply. Christine will be entitled under s.1(2) to reclaim the £150 she has paid, subject to the deduction of expenses by Bernard (to the extent considered just by a court). She will not be liable to pay any of the balance. Section 1(3) does not seem to have any role to play in this part of the problem.

If the contract has not been frustrated, then Christine’s remedies, if any, will depend on whether Bernard is in breach of contract and the seriousness of the breach. See the discussions of breach in Chapter 14 and damages in Chapter 16.


Reflect and review






Ready to move on


Need to study again

I can explain the role of the doctrine of frustration in the termination of contracts.

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I can give examples of the types of event which will be regarded as frustrating a contract.

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I can outline the limitations on the doctrine of frustration.

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I can explain what is meant by ‘self-induced frustration’.

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I can describe the consequences of frustration under the common law rules.

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I can describe the consequences of frustration under the Law Reform (Frustrated Contracts) Act 1943.

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I can identify the limitations of the 1943 Act reform.

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Must revise

Revision done

15.1 The basis of the doctrine of frustration ¢ ¢

15.2 The nature of a ‘frustrating event’ ¢ ¢

15.3 Limitations on the doctrine ¢ ¢

15.4 The effect of frustration ¢ ¢


Notes

Contents

Introduction 194

16 1 The purpose of an award of damages 195

16 2 Two measures of damages 196

16 3 When is restitution available? 197

16 4 Remoteness of damage 199

16 5 Mitigation of damage 201

16 6 Non-financial loss 202

16 7 Liquidated damages 203



16 Damages


Introduction

In Chapter 14 of the subject guide, we examined the issue of what constitutes a breach of contract. In general terms, every breach of contract entitles the injured party to claim damages for the loss caused by the breach. The purpose of an award of damages is simple: to put the injured party in the position they would have been in but for the breach of contract. The difficulty lies in how this loss is measured. Traditionally, the law has employed two measures: one protects expectation interests and the other protects reliance interests. Usually the expectation interest is sought. In some cases, the injured party seeks an award of damages based upon a restitutionary interest. This is an area of law which has been developed recently. A restitutionary interest differs from a reliance interest or expectation interest in two significant ways. First, a restitutionary measure of damages is calculated with reference to the gain made by the defendant rather than the loss incurred by the claimant. Secondly, the circumstances in which a claimant is able to protect his restitutionary interests are narrowly prescribed.

No matter what measure is employed, not all losses will be recoverable. The law employs two devices which limit an award of damages. The first device is remoteness. There can be no recovery of losses which are too remote: that is to say, losses which are not foreseeable. There are two problems present here because not only have different courts seemed to propose different tests (a problem of law), but it is also difficult in many instances to determine what is a foreseeable loss (a problem of fact). The second device is mitigation. It is said that a party cannot recover damages for a loss that he could have reasonably avoided. In addition to these two devices, it has long been said that a party cannot recover damages for a non-financial loss (such as injured feelings or distress arising as a result of the breach of contract). In recent years, however, the position of the courts has changed somewhat in this area of the law. Not surprisingly, given the difficulties that can arise in assessing damages, parties often attempt to stipulate the amount of damages payable upon a breach of contract. This chapter will conclude with an examination of the extent to which the courts will enforce these ‘liquidated damages’ clauses.


u explain the aim of damages for a breach of contract

u explain the principles upon which damages are assessed

u understand the different ways in which damages can be measured

u state the limitations upon an assessment of damages and the circumstances in which damages are too remote to be recovered

u explain the nature of a restitutionary remedy and when it is available

u state the limitations which attend a restitutionary remedy

u distinguish between a restitutionary measure and expectation and reliance measures of damages

u define ‘mitigation of damages’

u examine the extent to which damages are provided for non-financial loss

u outline the ability of parties to stipulate their damages through the use of liquidated damages clauses.

Elements of the law of contract 16 Damages page 195

16.1 The purpose of an award of damages

Essential reading ¢ McKendrick, Chapter 20: ‘Damages for breach of contract’ – 20.1 ‘Introduction’

and 20.2 ‘Compensation and the different ‘interests’’, pp.321–323.

¢ Poole, Chapter 9: ‘Damages for breach of contract’ – Section 1 ‘Aim of contractual damages’, pp.389–390.

¢ McKendrick, E. ‘The common law at work: The saga of Alfred McAlpine Construction Ltd v Panatown Ltd’, Elements of the law of contract Study pack.

¢ McKendrick, E. ‘Breach of contract and the meaning of loss’, Elements of the law of contract Study pack.

¢ Coote, B. ‘Contract damages, Ruxley, and the performance interest’, Elements of the law of contract Study pack.

The purpose of an award of damages is to compensate the injured party, not to punish the party in breach: see, for example, Ruxley Electronics and Construction v Forsyth (1995). Punitive damages are not available for a breach of contract, even where the defendant deliberately breached the contract. While the purpose of the award of damages is to compensate the claimant, the fact that it is difficult to assess damages will not prevent the claimant from recovering damages. See Chaplin v Hicks (1911) where the plaintiff received damages for the loss of a chance to compete in a competition, even though there was no certainty that the plaintiff would have won the competition. The claimant will not, however, receive damages where the breach of contract has left him no worse off. See C and P Haulage v Middleton (1983) and St Albans v ICL (1996).

In Sempra Metals Ltd v Inland Revenue Commissioners (2007) the House of Lords resolved the difficulties regarding the payment of interest upon the late payment of a debt by holding that a court had a common law jurisdiction to award interest, simple and compound, as damages on claims for the non-payment of debts as well as on other claims for a breach of contract.

Damages are normally assessed at the time of breach (Johnson v Agnew (1980)), although this is not an inflexible rule (see Golden Strait Corporation v Nippon Ysen Kubishika Kaisha (2007)).

SummaryThe purpose of an award of damages is to compensate the injured party.


u explain the aim of damages for a breach of contract.



16.2 Two measures of damages

Essential reading ¢ McKendrick, Chapter 20: ‘Damages for breach of contract’ – 20.3 ‘The expectation

interest’ and 20.7 ‘Reliance interest’, pp.323–327, 334–335.

¢ Poole, Chapter 9: ‘Damages for breach of contract’ – Section 2 ‘Expectation loss’ and Section 3 ‘Reliance loss’, pp.390–404.

The question to be answered here is how is the claimant’s loss to be measured? There are three possible bases for assessing damages – the expectation loss, the reliance loss and the restitution loss. We will consider the first two possible bases here; the third will be examined in the following sub-section, 16.3.

Expectation loss is the basic measure of contractual damages. This loss is summarised in Robinson v Harman (1848) 1 Ex 850 as:

the rule of the common law is, that where a party sustains loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed. (per Parke B at 855)

The purpose which the expectation measure of damages is meant to fulfil is that the contract created certain expectations of performance and that when these fail, the innocent party is to have these expectations fulfilled through an award of damages. The compensation is thus for disappointed expectations.

An award based on the claimant’s expectation interest is compensation for the loss of a bargain. The claimant obtains the profits he would have received had the contract been performed – damages are assessed in reference to the claimant’s expectation or performance loss. If A contracts to buy a painting from B for £100 and A plans to resell the painting for £200, on the expectation measure of damages, A has lost £100 as this is his profit upon the re-sale. Had he advanced his £100 purchase price, he has lost £200. What is important in these situations is that the law compensates A for the benefit he would have obtained by reason of his contract with B.

Note that in situations where the defendant does not perform the contract, or performs it badly, the claimant is generally entitled to the ‘cost of the cure’. This is the amount required to pay a third party to perform what was stipulated in the contract. See, for example, Watts v Morrow (1991). In some instances, however, the courts will not award the cost of the cure where this is wholly disproportionate to any benefit which would be received (where there is little difference in value between the value of the thing contracted for and the thing received). In these circumstances, courts will award damages for the loss of amenity: Ruxley Electronics and Construction v Forsyth (1995) and Tito v Waddell (No 2) (1977). Ruxley Electronics and Construction v Forsyth has been accepted and applied in a number of subsequent cases (see, for example, Birse Construction Ltd v Eastern Telegraph Co Ltd [2004]).

In some instances, it will not be appropriate to measure the claimant’s loss on the basis of his expectations. It may be the case, for example, that the claimant is unable to prove the value of his expectations. He cannot establish to what extent he would have been better off had the contract been performed. An alternative basis on which to assess damages is the reliance loss or the loss of expenditure. This basis is usually used when the claimant is unable to prove that a financial benefit would accrue to it had the contract been performed.

In the case of Anglia Television v Reed (1972) the plaintiff was unable to establish what profit his television show would have made and consequently claimed for the expenditures he had made.

The claimant is the party who decides whether to seek his reliance losses or his expectation losses: CCC Films v Impact Films (1984). The claimant cannot, however, seek to recover his reliance losses where this would have the effect of allowing him to escape the consequences of a bad bargain: C & P Haulage Co Ltd v Middleton (1983).


Activity 16.1The government of the (fictitious) country of Culloden offers for sale the rights to hunt and shoot three bighorn mountain sheep. These very rare sheep are highly prized by big game hunters, who consider the heads of the sheep to be attractive trophies. Damian accepts Culloden’s offer and pays £1 million for the hunting rights. He spends £100,000 outfitting a group for the hunt. After several months of search-ing, it transpires that the bighorn mountain sheep are extinct, a matter long sus-pected by some within the Culloden Ministry for the Environment. Advise Damian.

Activity 16.2Emma contracts with Fun Toys Co to purchase 10,000 toys from them. Emma intends to resell the toys in her chain of toy shops. The selection of the toys is to be made within one year by Emma and is to be from Fun Toys’ range of 300 different toys. These toys range in wholesale price from £1.99 to £200. Emma never selects any toys and refuses to do so. Advise Fun Toys Co.

Activity 16.3Why does McKendrick write that ‘In awarding loss of amenity damages it can be argued that the House of Lords (in Ruxley Electronics and Construction v Forsyth, 1995) took one step forwards and one step backwards’? (McKendrick, 20.3 at p.326)

SummaryThe two basic measures by which damages for breach of contract are assessed are the expectation measure and the reliance measure. The expectation measure aims to compensate the claimant for the loss that arises between the difference between no performance and performance – or, in other words, for the profit that the contract would have created for the claimant. The reliance measure compensates the claimant for the wasted expenditures he has incurred.


u explain the principles upon which damages are assessed

u understand the different ways in which damages can be measured.


16.3 When is restitution available?

Essential reading ¢ McKendrick, Chapter 1: ‘Introduction’ – 1.4 ‘Contract, tort and restitution’, pp.4–5.

¢ McKendrick, Chapter 4: ‘Certainty and agreement mistakes’ – 4.5 ‘A restitution-ary approach?’, pp.51–52.

¢ McKendrick, Chapter 15: ‘Illegality’ – 15.18 ‘The recovery of money or property’, pp.270–275.

¢ McKendrick, Chapter 20: ‘Damages for breach of contract’ – 20.4 ‘The restitution interest’, 20.5 ‘Failure of consideration’ and 20.6 ‘Enrichment by wrongdoing’, pp.327–334.

¢ Poole, Chapter 10: ‘Remedies providing for specific relief and restitutionary remedies’ – Section 3 ‘Restitutionary remedies’, pp.479–497.

¢ Poole, Chapter 16: ‘Illegality and capacity to contract’ – Section 1 C ‘Money or property transferred under an illegal contract’, pp.774–788.


The circumstances in which a claimant can recover on a restitutionary basis where there is a breach of contract are strictly limited. This will occur only when they can establish that the defendant was enriched at the claimant’s expense and that it is unjust to allow the defendant to retain his profit without compensating the claimant. The purpose of a restitution award is for the defendant to disgorge the profit obtained as a result of his wrongdoing. When a contract is terminated because of the defendant’s breach, the claimant may elect to proceed in contract or restitution (Planche v Coburn (1831)). However, the circumstances in which a party can so proceed in a contract case are very limited.

16.3.1 Total failure of considerationIn the first set of circumstances, the claimant may seek a restitutionary remedy where there has been a total failure of consideration. The decision in Whincup v Hughes (1871) stands for the proposition that the claimant may seek a restitutionary remedy by saying that the basis upon which he conferred a benefit has failed entirely because of the defendant’s breach of contract. However, to succeed in this, the claimant needs to establish a total failure of consideration. If any part of the contract is performed, or if the claimant has received any part of the consideration, the restitutionary claim is barred. Into this set of circumstances fall many of the illegality cases discussed in Chapter 12. See, in particular, Bowmakers v Barnet Instruments (1945) and Tinsley v Milligan (1993). Note the possibility of the defence of change of position: Lipkin Gorman v Karpnale (1992).

16.3.2 Unjust benefitThe second set of circumstances occurs where the claimant seeks a restitutionary remedy on the ground that the defendant has obtained an unjust benefit, or profit, because of his breach of contract. It is in this set of circumstances that English law has changed recently. The Court of Appeal, in Surrey County Council v Bredero Homes Ltd (1993) held that gains-based damages are not generally available for a breach of contract. In Attorney-General v Blake (2000), however, the House of Lords held that the court would order an account of profits (which would require the wrongdoer to disgorge his profits) where specific performance or an injunction (see Chapter 17) would not provide a sufficient remedy to the claimant, nor would an award of damages based upon a financially assessed measure of damages. This would only occur in exceptional cases where there was no other effective means of protecting the claimant’s performance interest. Unfortunately, the House of Lords declined to provide more explicit direction as to when this would occur. It is likely that Blake, a traitor who sought profit by publishing his memoirs, attracted particular opprobrium by his actions and, consequently, it is possible that this case may be restricted to its own peculiar facts. In Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323 the Court of Appeal did confine an account of profits to exceptional circumstances such as national security, exceptional profits and fiduciary duties. Nevertheless, the House of Lords’ ruling in Blake casts doubt on Surrey CC v Bredero Homes (1993) and Lord Nicholls prefered, where there is a conflict, to follow the earlier case of Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 2 All ER 321. The law in this area may be entering a period of change.

Activity 16.4Write a summary of the House of Lords’ decision in Attorney-General v Blake (2000).


SummaryIn limited circumstances, a claimant may recover damages based on the benefit which accrued to the wrongdoer rather than damages based on the losses suffered by the claimant. The law in this area is, however, in a state of development.



u explain the nature of a restitutionary remedy and when it is available

u state the limitations which attend a restitutionary remedy

u distinguish between a restitutionary measure and expectation and reliance measures of damages.


¢ Hedley, S. ‘“Very much the wrong people”: The House of Lords and publication of spy memoirs (AG v Blake)’, The Web Journal of Current Legal Issues, issue 4, 2000 – found at http://webjcli.ncl.ac.uk/2000/issue4/hedley4.html

¢ Campbell, I.D. and D. Harris (2002) ‘In defence of breach: a critique of restitution and the performance interest’ 22 Legal Studies 208.

16.4 Remoteness of damage

Essential reading ¢ McKendrick, Chapter 20: ‘Damages for breach of contract’ – 20.11 ‘Remoteness’,

pp.337–341.

¢ Poole, Chapter 9: ‘Damages for breach of contract’ – Section 6 ‘Remoteness of damage’, pp.418–427.

It does not follow that because the claimant has established that the defendant’s breach caused his loss that he will receive damages for this loss. Certain kinds of loss are held to be too remote. If the loss is too remote, the claimant cannot recover damages for them.

The basic rule was established by the Court of Exchequer in the case of Hadley v Baxendale (1854) 9 Exch 341. In this case the owners of a mill took their broken shaft to a delivery company to send it to engineers in Greenwich. The carriers delayed the delivery and the owners were not able to use the mill during this time. The owners sought damages based on their loss of business during this time. The court held that the owners could not recover damages for the loss of business during the period of the delay because this was not damage which was reasonably foreseeable by the carriers – it would not be within the normal contemplation of the carriers that the owners would be unable to operate the mill without that particular shaft.

Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such a contract should be such as may fairly and reasonably be considered as [1] either arising naturally, that is according to the usual course of things, from such breach itself, or [2] such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. (per Alderson B, Hadley v Baxendale)

It is sometimes said that there are two limbs to the test of remoteness in Hadley v Baxendale. The first limb, that is to say, the first way in which damages will be foreseeable is those damages which may reasonably be considered as arising naturally – those damages which arise in the ‘usual course of things’ as a probable result of the breach of contract. In South Australia Asset Management Co v York Montague Ltd [1997] AC 191 at 211 the House of Lords held that what will determine which damages arise in the usual course of things, as a probable result of breach, will depend on the degree of knowledge the parties are presumed to possess and the scope of the contractual duty.

The second limb deals with the situation where there are exceptional circumstances. That is to say, if the contract is breached, then the consequences of the breach will be particularly severe because, for example, an especially lucrative opportunity will


be lost. In this case, the damages will only be recoverable (that is to say, they will not be too remote) if the special circumstances are reasonably within the contemplation of the parties at the time they made the contract as likely to occur if the contract is breached. These two limbs are not mutually exclusive (Jackson v Royal Bank of Scotland (2005)).

Hadley itself was found to be within this second limb. The court found that the carriers had no reason to know that without the shaft the mill could not operate. Accordingly, the mill owners could not recover the damages which flowed from the stoppage of the mill:

in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability have occurred; and these special circumstances were here never communicated by the plaintiffs to the defendants. (per Alderson B at 356)

While this is an apparently simple exposition of remoteness, you will see that courts have struggled to define what is within the ‘reasonable contemplation’ of the parties. See, for example: Victoria Laundry (Windsor) v Newman Industries (1949), The Heron II (1969) and H Parsons (Livestock) v Uttley Ingham (1978).

The difficulty courts have experienced in determining whether or not a particular loss is within the reasonable contemplation of the parties can also be seen in Transfield Shipping Inc v Mercator Shipping Inc (The ‘Achilleas’) [2008]. The House of Lords in allowing the appeal, considered the two limbs to the test of remoteness of damage established by the decision in Hadley v Baxendale (1854). Lord Hoffman found that in the particular case, if these parties, contracting against the background of market expectations then existing, had reasonably contemplated the extent of the liability they were undertaking, they would have considered the loss of the following fixture (a subsequent contract) as a type or kind of loss which the charterer was not assuming. Indeed, such a loss would have been completely unquantifiable. The other Law Lords agreed in this result but for different reasons, which makes it difficult to extract a ratio from this case.

Activity 16.5What is the policy behind the rules of remoteness? What is the link, if any, between these rules and the cost of insurance?

Activity 16.6In H Parsons (Livestock) v Uttley Ingham, was it at all probable that the pigs would die? Why should it be enough that it might be foreseen that they would become ill? How can this decision be reconciled with the distinction drawn elsewhere between ‘ordinary’ and ‘special’ business profits?

Activity 16.7Under the second rule in Hadley v Baxendale, is the defendant’s knowledge of the special circumstances enough to make him liable or is something more required. If so, what?

Summary Not all of the claimant’s losses can be recovered. In particular, those losses which are said to be too remote, cannot be recovered. Those losses which ‘arise in the usual course of things’ will be recovered, but where there are special and exceptional losses, these can only be recovered when the claimant has drawn the defendant’s attention to the possibility of these losses at the time of contracting.



u state the limitations upon an assessment of damages and the circumstances in which damages are too remote to be recovered.


16.5 Mitigation of damage

Essential reading ¢ McKendrick, Chapter 20: ‘Damages for breach of contract’ – 20.10 ‘Mitigation’,

pp.336–337.

¢ Poole, Chapter 9: ‘Damages for breach of contract’ – Section 7 ‘Mitigation’, pp.427–429.

Causation and remoteness are two factors which seek to limit the possible damages which can be awarded to a claimant. There is another factor which can act to limit the damages of a claimant – the so-called ‘duty to mitigate’. Claimants are said to be under a duty to mitigate their losses – and there are two elements to this duty: first, to avoid increasing loss and secondly, to act reasonably to reduce it.

The basic duty is stated by Viscount Haldane in British Westinghouse Electric Co Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673.

The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach; but this first principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach, and debars him from claiming any part of the damage which is due to his neglect to take such steps.

Sometimes, the duty to mitigate will require the injured party to re-contract with the party in breach on slightly different terms. See, for example, Payzu v Saunders (1919).

Summary The injured party must act to limit the damages which arise on breach.


u define ‘mitigation of damages’.



16.6 Non-financial loss

Essential reading ¢ McKendrick, Chapter 20: ‘Damages for breach of contract’ – 20.13 ‘Damages for

pain and suffering and the ‘consumer surplus’’ to 20.14 ‘Conclusion’, pp.342–347.

¢ Poole, Chapter 9: ‘Damages for breach of contract’ – Section 8 ‘Non-pecuniary loss’, pp.429–455.

We are concerned here with non-financial losses, that is to say, loss caused by anxiety, mental distress and hurt feelings. This is an area where the position of the law is changing, although the extent of the change is as yet difficult to ascertain. The starting point is the House of Lords’ decision in Addis v Gramophone Co Ltd (1909). In this case, the plaintiff was not allowed to recover damages to cover the indignity he suffered because of the manner in which he was dismissed by the defendants. The House of Lords held that injured feelings were not compensatable for a breach of contract.

This rule was subject to certain recognised exceptions. Primarily, these occurred where the purpose of the contract was to provide pleasure – see, for example, Jarvis v Swans Tours (1973) and Jackson v Horizon Holidays (1975) – or if the purpose of the contract was to alleviate distress (see, for example, Heywood v Wellers (1976)).

The changes to the law have come about through the following cases. As we discussed earlier, the House of Lords in Ruxley Electronics and Construction Ltd v Forsyth (1996) recognised that damages were available for a ‘loss of amenity’. In Malik v BCCI (1997) the House of Lords considered Addis v Gramophone Co Ltd, distinguished it, and held that damages could be awarded for the effect of an employer’s dishonest business operation on the future employment opportunities of honest employees. Malik v BCCI appears to broaden the possible ambit of recovery for damages for non-financial loss. In Johnson v Unisys Ltd (2001), the House of Lords held that Addis v Gramophone Co Ltd did not prevent recovery in circumstances where the claim was based on breach of an implied term of trust and confidence in the contract. The House of Lords held, however, that an employee had no right to damages arising from the unfair manner of his dismissal.

In Farley v Skinner (2001), it was held that damages for non-pecuniary losses would be allowed for a breach of contract where a major or important object of the contract was to give pleasure, relaxation or peace of mind. The claim for non-pecuniary damages was not defeated by the fact that the defendant had only promised to exercise reasonable care in the performance of his obligations, as opposed to guaranteeing a certain result. Watts v Morrow [1991] 4 All ER 937 was explained and distinguished. In Hamilton Jones v David & Snape (a firm) [2003] the court applied the principles developed in Farley v Skinner and allowed the claimant to recover damages for mental distress suffered when the defendant solicitors breached their duty to her in not taking reasonable steps to prevent the claimant’s husband from removing their children from the United Kingdom. In doing so, the court held that the claimant did not need to establish that peace of mind or freedom from distress was the predominant object of the contract but only that these were important terms of the contract.

The effect of these cases appears to be, however, that the manner of the breach cannot be compensated but the courts will consider a wider range of terms (implied and express terms) within a contract which may allow damages for mental distress.

Activity 16.8What is the purpose behind preventing a recovery of damages for mental distress where there is a breach of an ‘ordinary’ contract?

Activity 16.9How can Farley v Skinner (2001) be reconciled with Watts v Morrow [1991]?


Summary Traditionally, the law prevented recovery of damages for hurt feelings, or for mental distress. In recent years, however, the law seems to have relaxed this prevention. The result is to allow recovery for a wider range of damages.


¢ examine the extent to which damages are provided for non-financial loss.


16.7 Liquidated damages

Essential reading ¢ McKendrick, Chapter 21: ‘Obtaining an adequate remedy’ – 21.5 ‘Liquidated

damages’ to 21.8 ‘Liquidated damages, penalty clauses and forfeitures: an assess-ment’, pp.350–360.

¢ Poole, Chapter 9: ‘Damages for breach of contract’ – Section 9 ‘Agreed damages clauses’, pp.455–471.

Because the claimant has the burden of proving the amount of his loss, it is a great convenience to him if the contract can simply state a sum which will be payable by the defendant in the event of breach and the claimant can then sue for the stated sum. On the other hand, any such system is open to abuse if the sums might be set at a level far higher than the loss actually suffered. The House of Lords attempted to reconcile these arguments in Dunlop Pneumatic Tyre v New Garage and Motor (1915) by confirming that a ‘liquidated damages’ clause is enforceable provided that the amount is a genuine pre-estimate of the damage and not unconscionable.

Some care is needed to avoid confusion over the word ‘penalty’. At one level, the term has a purely factual or descriptive meaning. In contracts which contain liquidated damages, these clauses are commonly referred to as providing for ‘penalties’ (i.e. ‘penalty clauses’). At another level, quite distinct from the use of the word ‘penalty’ by the parties to the contract, a penalty, as a matter of legal interpretation, is an invalid contractual provision. The law views a clause which provides an excessive agreed sum to the injured party as invalid because the sum is ‘penal’. There is, in other words, a difference between what the parties to a contract have called a provision (as a matter of fact) and how a court will categorise a provision (as a matter of law). See, for example, Ford v Armstrong (1915) and Bridge v Campbell Discount (1962). For a contrast, however, see Lombard North Central v Butterworth (1987) where the claim was successfully framed as one for damages on breach of condition.

In practice, however, the importance of penalty clauses in the strict sense is much reduced by the ease with which similar results can be achieved by other (unobjectionable) devices. Three devices are outlined in McKendrick (21.6 ‘Evading the penalty clause rule’).

1. The penalty clause rule does not apply to a clause which accelerates an existing liability.

2. Because the penalty clause rule only applies to breaches of contract, the parties can legitimately stipulate that an amount shall be payable on an event which is not a breach of contract.

3. The parties can stipulate that a term is a condition which is of the essence of the contract with the effect that breach of the term allows the injured party to terminate the contract and claim damages.



u outline the ability of parties to stipulate their damages through the use of liquidated damages clauses.


Examination adviceA review of past examination papers reveals that questions involving damages often appear in connection with issues surrounding breach of contract. It appears that an Examiner is likely to want to test your understanding of the material covered in this chapter in one or both of two ways.

1. You may be asked to explain some of the general principles governing the award of damages, in particular those principles, such as the rules of ‘remoteness’, which place limits on the damages which can be recovered.

2. Issues as to damages – and other possible remedies – may be introduced as subsidiary, but nevertheless important, aspects of any problem in which a contract has, or may have, been broken.

In other words, a question may require discussion both of offer and acceptance (or consideration, or frustration, or whatever) and of damages and/or restitutionary remedies. It will, therefore, be difficult, if not impossible, to do well in the examination without a thorough knowledge of remedies.

A review of past examination papers reveals that questions involving restitutionary remedies have occurred in the context of questions involving other issues, such as illegality, capacity and damages.

Sample examination questionsQuestion 1 L hired a band, the Fairies, to play at L’s daughter’s engagement party. The fee was agreed at £10,000. It was agreed that the Fairies would arrive at the party venue one day before the performance to ensure presence on the day. In fact, when the Fairies arrived their lead singer, Tacky, was not with them as he was performing elsewhere. On the day of the engagement party Tacky arrived one hour before their performance was scheduled to take place. Tacky was unwell because he had drunk too much the night before. L told the Fairies that they had broken their contract and would not be required.

Advise L, who had engaged another band at a fee of £20,000 due to the short notice.

What difference, if any, would it make to your advice if:

a. L had sold tickets to the value of £100,000 and the purchasers demanded a refund, or,

b. L had been unable to find an alternative band and the engagement party, which had cost £150,000, was a dreadful flop.

Question 2 M and N arrange to have the electrical system in their house re-wired. Due to the extensive disturbances that this will entail, they move to temporary accommodation for one month. They inform O, the electrician, that they will have to return at the end of the month. O assures them that the work will be finished by this time. It is not. M and N are forced to live in a house without any electricity. M is forced to spend £500 on a laundry service, food delivery service and a multitude of candles. N is unable to bear the stress of living in these circumstances and suffers a nervous breakdown as a result.

Advise O with regard to his liability.

Question 3 ‘Damages are not an adequate remedy for a breach of contract.’

Discuss.


Advice on answering the questionsQuestion 1 This question requires you to consider issues of both breach of contract (and damages) and frustration. It is an error to consider the question as either one or the other: you need to explore both sets of issues to answer the question fully. With regard to frustration, the argument could be made that Tacky’s late appearance and his unfit state is a supervening event which radically changes the nature of the obligation (National Carriers Ltd v Panalpina (Northern) Ltd (1981)). However, this event is attributable to the default of one of the parties to the contract. The issue is then whether the Fairies have breached a condition of the contract, or a sufficiently fundamental Hong Kong term so as to allow L to rescind the contract for breach. If it is not, L is himself in breach of contract. It does seem to have been emphasised in the contract that the Fairies had to be able to perform on the day; it is likely in the circumstances that L is entitled to rescind the contract.

The issue then to be considered is the appropriate measure of damages available to L. The purpose of awarding damages is to put L in the position he would have been but for the breach. Candidates are given two variants. In variant (a), L has sold tickets and will want to seek damages measured on an expectation basis – and seek to recover the profit he would have made from the performance. It may be that such a loss is too remote to recover (Hadley v Baxendale (1854)) because it was not a loss which arose naturally or was contemplated at the time of contracting. It would not normally be the case that a profit would be made by the host in connection with an engagement party. In variant (b), L may wish to seek his wasted expenditure – see Anglia Television v Reed (1972), and CCC Films v Impact Films (1984)).

In both variants, it is arguable that L should recover damages for non-financial loss, namely the distress caused by the breach of a contract to provide enjoyment – see Jarvis v Swan Tours (1973), Jackson v Horizon Holidays (1975) and Farley v Skinner (2001).

Question 2 This question involves two issues: is there a breach of contract and, if so, what are the damages available for the breach? Again, you need to consider both issues to answer the question.

The first issue is whether or not the assurance of O that the work will be finished in a month is a term of the contract. On balance, it appears to be. If it is a term of the contract, what sort of term is it: a condition, warranty or an innominate term? In other words, does breach of the term entitle M and N to terminate the contract? On balance, the term appears to be either a condition or a sufficiently important innominate term to entitle M and N to terminate the contract. This leaves the question as to what damages are available for the breach. To what extent can M and N recover the £500 spent on laundry, meals and candles? An answer to this issue entails a consideration of whether or not the loss is too remote according to the principles established in Hadley v Baxendale (1854) and as refined and explained in successive cases. On balance, the losses do not seem too remote – they arise in the natural course of things and should have been within the reasonable contemplation of the parties at the time of contracting.

More problematic is the possible recovery by N for his nervous breakdown. On the one hand, the House of Lords held in Addis v Gramophone Co Ltd (1909) that the plaintiff was not entitled to compensation for hurt feelings. On the other hand, more recent courts have moved away from an absolute rule prohibiting recovery for mental stress (see Ruxley Electronics v Forsyth (1996), Mahmud v BCCI (1998), Johnson v Unisys (1999) and – importantly – Farley v Skinner (2001)).

Question 3 You need to examine the extent to which a restitutionary remedy based upon the profit of the wrongdoer would provide an adequate remedy. This would involve consideration of the House of Lords’ decision in Attorney-General v Blake (2000). A number of possible circumstances might occur. Two were suggested by the Court of Appeal in Blake’s case. One would be in the instance of a ‘skimped performance’ where the defendant delivers a sub-standard performance of the contract and, in so doing, saves money without causing the claimant loss. The second would be ‘where the defendant has obtained his profit by doing the very thing which he contracted not to do’. Other possibilities exist, particularly where a compensatory measure of damages results in a nominal award of damages and yet the wrongdoer has obtained a vast profit.


Reflect and review






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I can explain the principles upon which damages are assessed.

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I understand the different ways in which damages can be measured.

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I can state the limitations upon an assessment of damages and the circumstances in which damages are too remote to be recovered.

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I can explain the nature of a restitutionary remedy and when it is available.

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I can state the limitations which attend a restitutionary remedy.

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I can distinguish between a restitutionary measure and expectation and reliance measures of damages.

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I can define ‘mitigation of damages’. ¢ ¢ ¢

I can examine the extent to which damages are provided for non-financial loss.

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I can outline the ability of parties to stipulate their damages through the use of liquidated damages clauses.

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16.1 The purpose of an award of damages ¢ ¢

16.2 Two measures of damages ¢ ¢

16.3 When is restitution available? ¢ ¢

16.4 Remoteness of damage ¢ ¢

16.5 Mitigation of damage ¢ ¢

16.6 Non-financial loss ¢ ¢

16.7 Liquidated damages ¢ ¢

Contents

Introduction 208

17 1 Specific performance 209

17 2 Damages in lieu of specific performance 211

17 3 Injunctions 212



17 Equitable remedies


Introduction

In the common law, damages are the principal remedy for a breach of contract. Damages, in other words, will usually be the remedy given to the injured party. The common law, through the operation of equity, possesses different remedies. These remedies seek the performance of the contract rather than damages to rectify the breach of the contract. The performance may be through an order of specific performance: that is to say, an order which compels the party in breach to perform the contract. This is a positive order – an order which compels a party to perform. Another equitable remedy available is an injunction – an order which prohibits a party from certain actions.

Many contracts contain covenants which oblige a party not to do something; in some circumstances, courts will give effect to those clauses.


u explain the nature of an order for specific performance

u explain the availability of, and restrictions on, an order for specific performance

u define an injunction and state when it is available

u compare an order for specific performance with an injunction

u establish when damages may be given in lieu of an order for specific performance.

Elements of the law of contract 17 Equitable remedies page 209

17.1 Specific performance

Essential reading ¢ McKendrick, Chapter 21: ‘Obtaining an adequate remedy’ – 21.9 ‘Specific

performance’, pp.360–363.

¢ Poole, Chapter 10: ‘Remedies providing for specific relief and restitutionary remedies’ – Section 2 ‘Specific performance and injunctions’, pp.471–479.

17.1.1 An exceptional remedyAn order for the specific performance of a contract is an exceptional remedy. Until very recently, the use of specific performance appeared to be on the increase following the House of Lords’ decision in Beswick v Beswick (1968). In this case, an order was made because it appeared to be the only remedy available. More recently, however, in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd (1997), the House of Lords was most reluctant to extend the traditional ambit of an order for specific performance and clung rigidly to the old restrictions in its application.

Traditionally, an order for specific performance was only made when damages were an inadequate remedy. Where damages were an adequate remedy, an order for specific performance would not be made: Cohen v Roche (1927). Where, for example, the contract involved the sale of ordinary goods, damages are an adequate remedy. The damages allowed the injured party to purchase replacement goods in the market. In contrast, damages for a breach of a contract to sell land are viewed as inadequate and the usual remedy in such a case is an order for specific performance: Johnson v Agnew (1979).

Another consideration in awarding specific performance is that in some cases it may be extremely difficult or impossible to quantify the claimant’s loss: Decro-Wall International SA v Practitioners in Marketing Ltd (1971).

In addition, courts have considered whether or not the defendants would be able to pay an award of damages. There are indications that where this seems unlikely, an order for specific performance may be made: Evans Marshall & Co Ltd v Bertola SA (1973).

Courts will consider whether or not, in all the circumstances, an order for specific performance is just.

17.1.2 Restrictions on orders for specific performanceIn a number of situations, an order for specific performance will not be made. Another way of stating this is to say that certain factors prevent an order for specific performance. It is important to remember that since an order for specific performance is an equitable remedy, it is also a discretionary remedy. It does not follow as a matter of right; it is left to the discretion of the courts to decide whether or not to make the award. The court exercises its discretion, not in an arbitrary fashion, but in accordance with strict rules and practices: Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd (1998).

The following restrictions apply.

u The claimant’s conduct must be beyond question. This rests upon the equitable maxim that ‘he who comes to equity must come with clean hands’. Specific performance will be refused if the party who seeks it has induced the defendant to enter into the contract with a promise which he has then failed to perform.

u Likewise, if the party claiming the order has performed the contract in an unfair manner the order will be refused. The court may refuse specific performance of a contract where the contract has been obtained by means which are unfair. It is not necessary that the unfairness amounts to grounds upon which the contract can be invalidated.


u A court will not make an order for specific performance where this would result in severe hardship to the defendant. This also includes cases where the cost to the defendant would substantially outweigh any benefit to the claimant: Tito v Waddell (No 2) (1977).

u The court will not order specific performance where it is impossible for the defendant to comply with the order. Thus, if the defendant has contracted to sell land which he does not own, a court will not make an order to compel him to sell this land.

u There must also be a mutuality of remedy. Courts will sometimes refuse to order specific performance of a contract at the request of one party if it could not order it at the request of the other party. Thus, if one party has promised to perform personal services, the court will not accede to his request for specific performance on the part of the other party as specific performance would not be ordered against him: see Page One Records v Britton (1968). In this case, the first plaintiff was engaged as a manager by the defendants, a band. Stamp J held that as the band could not receive an order for specific performance for the plaintiff to perform his management contract, the manager could not receive an order which obliged the defendants to keep him as their manager. This ‘lack of a mutuality of the right of enforcement’ prevented the plaintiff from receiving an interlocutory injunction preventing the band from engaging another as their manager.

u Lastly, courts will not make an order for specific performance with regard to certain kinds of contracts. The most important of these are contracts for personal services (or employment) – those contracts where one party has agreed to serve another. Contracts which involve the performance of personal services are not, on the whole, subject to an order for specific performance. Courts are strongly reluctant (although have no particular rule against it) to decree specific enforcement of an employment contract. It has long been thought undesirable that parties be forced into an employment relationship. In addition, there is the practical difficulty of determining whether or not there has been a proper performance.

In Giles v Morris, Megarry J stated:

The reasons why the court is reluctant to decree specific performance of a contract for personal services (and I would regard it as a strong reluctance rather than a rule) are, I think, more complex and more firmly bottomed on human nature… who could say whether the imperfections of performance were natural or self-induced?!

However, in some circumstances, a court will order that parties enter into a contract although they would not order them to perform the contract. In the decision of Giles v Morris (1972) 1 WLR 307 the court drew a distinction between an order to perform a contract for services and an order to procure the execution of such a contract. The mere appearance of one provision which would not be specifically enforceable did not prevent the contract as a whole from being specifically enforced. The contract must be regarded as a whole and the desirability of specifically enforcing it outweighed the disadvantages of specifically enforcing the obligation to perform personal services.

Likewise, contracts which require the constant supervision of the court are unlikely to be the subject of an order for specific performance. This issue was examined by the House of Lords in Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd (1997) 2 WLR 898. In discussing these points, Lord Hoffman was careful to point out that the problem was not that the court would have to physically supervise the order, but that continual appearances for further orders for a contempt of court would have to be made.

Activity 17.1Why are damages not considered to be adequate compensation for the breach of a contract for the sale of land?


Activity 17.2Would an order for specific performance in a contract of services be tantamount to slavery?

SummaryIn exceptional cases, an order for specific performance may be made following a breach of contract. The order is a discretionary remedy and a claimant must establish that the discretion of the court should be exercised in her favour. The court will consider the exercise of its discretion in the light of established principles and practices.


u explain the nature of an order for specific performance

u provide a summary of the availability of an order for specific performance

u understand when an order for specific performance is available

u state the restrictions on an order for specific performance.


17.2 Damages in lieu of specific performance

Essential reading ¢ McKendrick, Chapter 21: ‘Obtaining an adequate remedy’ – 21.11 ‘Damages in lieu

of specific performance’, p.364.

The court has the power to award damages in addition to or in substitution for specific performance by reason of s.50 Supreme Court Act 1981. It applies wherever the court has the jurisdiction to entertain an application for an injunction or specific performance. It cannot make such an award where the ability to seek the specific relief has been lost (e.g. through lapse of time).

Claims for damages can be combined with claims for specific performance or injunction although it is generally unnecessary to resort to the special power to award damages in lieu of these remedies (s.49 Supreme Court Act 1981).

In Wroth v Tyler (1974) Ch 30 it was said that damages are made in substitution for specific performance and must ‘constitute a true substitute for specific performance’. The damages awarded must provide as nearly as possible what specific performance of the contract would have provided.

In Johnson v Agnew (1980) AC 367, the House of Lords accepted that damages must be assessed by the same principles whether claimed in law or in equity.



Useful further reading ¢ Anson, p.641.


17.3 Injunctions

Essential reading ¢ McKendrick, Chapter 21: ‘Obtaining an adequate remedy’ – 21.10 ‘Injunctions’,

pp.363–364.

¢ Poole, Chapter 10: ‘Remedies providing for specific relief and restitutionary remedies’ – Section 2 ‘Specific performance and injunctions’, pp.471–479.

So far we have dealt with orders of specific performance – that is, orders where the parties are compelled to perform positive obligations. We now turn to a consideration of negative obligations – that is to say, when a party promises not to do something or to refrain from doing something. In this case, equity offers the possibility of an injunction by the court prohibiting some form of conduct. The court is enforcing a negative stipulation. An injunction is also a discretionary remedy. However, courts will generally order it as a matter of course. They will not order it where it would cause such a particular hardship to a defendant as to be oppressive to him. See Insurance Co v Lloyd’s Syndicate [1995] 1 Lloyd’s Rep 273 at 276.

It is important to consider that a court will not grant an injunction where to do so would be to indirectly order specific performance: Page One Records v Britton (1968). In many cases, however, courts have refused to recognise that the grant of an injunction preventing the party from employment with another effectively compels them to specifically perform the first contract. See, for example, Warner Bros v Nelson (1937) where the court found that the defendant was a person of ‘intelligence, capacity, and means’. The grant of an injunction preventing her from acting for anyone other than the plaintiffs would not compel her to act for the plaintiffs. That this can be an artificial distinction is, to a certain extent, recognised in later cases such as in Page One Records v Britton (1968) and Warren v Mendy (1989).

Like an order for specific performance, an injunction is a discretionary remedy and a court will only order it where it is just to do so.

Activity 17.3Will an injunction be awarded if it has the same effect as an order for specific performance?

SummaryA breach of a negative covenant in a contract may be restrained by the grant of an injunction. An injunction is an equitable remedy; the effect of an injunction is to prohibit certain conduct. An injunction will not be granted in circumstances where it has the effect of compelling the positive covenants in a contract where an order for specific performance would not be granted.


u define an injunction and state when it is available

u compare an order for specific performance with an injunction



Examination advice A review of past examination papers reveals that questions involving equitable remedies appear infrequently. When equitable remedies are involved in an examination question, they tend to appear as a part of a larger question that also involves issues of breach or damages.


Sample examination question‘Damages are not an adequate remedy for a breach of contract.’

Discuss.

Advice on answering the questionThis question expects you to describe the nature of damages as a remedy for a breach of contract. A good answer will display a knowledge of the principles established in the relevant case law. To answer the question you need to analyse what a breach of contract is and to what extent damages are not an adequate remedy. In certain ways, damages are not an adequate remedy. For example, an award of damages is premised, to a certain extent, on the availability of substitutes. Where substitutes are not available, an award of damages is not an adequate remedy. Another example would be where the contract is for the performance of a unique service. It may also be that in certain circumstances the performance interest of the claimant will not be recognised in an award for damages (see, for example, Panatown v McAlpine Construction (2000)). In other cases, damages may not operate to provide a real compensation for the loss (see, for example, Ruxley Electronics and Construction v Forsyth (1996)).

The question then draws you to consider other remedies available in equity – such as an injunction or an order for specific performance. You need to consider the nature of these remedies and the extent to which they can rectify the shortcomings of an award of damages.


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17.1 Specific performance ¢ ¢

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17.3 Injunctions ¢ ¢

Feedback to activities

Contents

Chapter 2 217

Chapter 3 218

Chapter 4 221

Chapter 5 222

Chapter 6 224

Chapter 7 227

Chapter 8 228

Chapter 9 233

Chapter 10 234

Chapter 11 236

Chapter 12 238

Chapter 13 239

Chapter 14 240

Chapter 15 240

Chapter 16 243

Chapter 17 245

Elements of the law of contract Feedback to activities page 217

Chapter 2

Activity 2.1The grocery shop has not made you an offer. They have made an invitation to treat. See Grainger & Son v Gough (1896) and Partridge v Crittenden (1968). The reason that they have only made an invitation to treat and not an offer is because if the statement in the leaflet is construed as an offer, then the shop would be bound to sell to everyone who presented themselves at the shop. Clearly, this is impractical and, indeed, may be impossible. Consequently, if you visit the shop, they do not need to sell you oranges at this price.The offer can be made by action or by statement. See Trentham Ltd v Archital Luxfer (1993).

Activity 2.2 In Carlill’s case the advertiser was advertising the offer of a unilateral contract and not a bilateral contract. Only one party would be bound from the outset.

Activity 2.3 The reasoning behind the decision is clearly influenced by the consensus theory of contract. Note the reference by Higgins J to Anson’s theories of consent.

Activity 2.4 If Clarke had been a widow, the case would be different for two reasons. First, Clarke would appear to be a more ‘deserving’ claimant and the court might have a harder time dismissing her claim. Second, the case, on the facts of it, appears to be much more similar to Williams v Carwardine. However, what is necessary for a contract to be formed, on the basis of the ratio of Clarke’s case, is that Clarke is assenting to the offer – that there is a ‘meeting of minds’. It is not clear that the widow is aware of the offer and that she acts to form the requisite consensus.

Activity 2.5A has offered the goods for sale – the requisite intention to be bound is present. B’s initial correspondence can be taken as a rejection – but it is more likely to be a request for information and the offer survives. B’s fax is good when it is communicated – probably instantly. The fax, however, adds a condition and the communication is therefore not an unqualified consent to A’s offer. On balance, this probably operates as a conditional offer – which has the effect of destroying the original offer. There is, thus, no contract. Even if there is a contract, the contract will not include the delivery price (unless such a term can be implied by reason of the course of dealing between these parties or by reason of the custom of this industry).

Activity 2.6 A contract has been formed. See, for example, Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (England) Ltd. If the seller fails to deliver the goods, they are in breach of the contract.

Activity 2.7 If your ‘offer’ amounts to an offer in law according to the authorities set out in section 2.1, there has been an acceptance of your offer. The acceptance has been by act, rather than by writing or by discussion. Your offer has been accepted by conduct. The oranges have been despatched in response to your request for them.

Activity 2.8 Possible rules include consideration of the following matters.

a. Does the sender know, or have the means of knowing, if the communication has not been received?

b. How quickly will the sender know if the communication has not been received?


c. Which party, if any, accepted the risk of using this form of communication?

d. Has the communication been sent to arrive during normal business hours?

Activity 2.9 Your neighbour is free to withdraw her offer. The offer is not a contract and there is nothing which binds her to keep the offer open until Monday. Authority for this proposition can be seen in the case of Offord v Davies (1862). In this case, the defendant undertook to guarantee certain debts of another party for a period of a year. Before any bills were due, and within the year, the defendant cancelled the guarantee. The Court held that as the offer was not binding, it could be revoked at any time prior to the other party acting upon it. The time limit created no extra liabilities but merely stipulated a period at which liabilities will definitely come to an end.

Special problems arise where the offeror has made an offer of a unilateral contract which is accepted through performance. Here, the revocation is more difficult. The English authorities are divided as to whether or not this is possible. In Luxor (Eastbourne) Ltd v Cooper (1940) the House of Lords allowed an offeror to revoke its offer once the offeree had performed the act stipulated. The better view is, however, that once the act of acceptance has begun the offeror cannot revoke the offer as long as performance is ongoing. See Errington v Errington (1952). It was explained in Daulia v Four Millbank Nominees (1978) that in these circumstances there must be an implied obligation on the part of the offeror not to prevent the condition from becoming satisfied and this obligation must arise as soon as the offeree starts to perform the act of acceptance. Once this performance had begun, the offeror could not revoke his offer.

Chapter 3

Activity 3.1 You should have noted that cleaning the windows is a benefit to A. It is also a detriment to B (despite the fact that B will receive £30), in that B will be expending effort, and could be using the time to do other things. B’s actions are therefore clearly consideration under the Currie v Misa definition.

Activity 3.2 This is the reverse of situation 1. A’s payment of the £30 is a detriment to A and a benefit to B. Again this fits with Currie v Misa.

Activity 3.3 B is only in breach of contract if A provided consideration for the promise to clean the windows on Tuesday. The only possible consideration is A’s promise to pay £30. As we have seen, the courts are prepared to treat the promise to do something as consideration. By promising to pay £30, A has provided consideration for B’s promise to clean the windows. B is therefore in breach of contract. It is difficult, however, to fit this within the Currie v Misa definition of consideration and is better explained by the concept of ‘mutuality’ in exchange. You might also have noted that if the agreement between A and B was in the form of a unilateral contract with A saying ‘If you clean my windows on Tuesday, I will pay you £30’, B would not be in breach of contract.

Activity 3.4 Denning LJ found consideration in the mother’s promise to provide for the child’s upkeep. This clearly has economic value, but raises the question of whether doing something which the law already obliges you to do can ever be good consideration. This is discussed below, in the feedback to Activity 3.13. The majority of the Court of Appeal, however, seems to have found consideration in the mother’s promise to ensure that the child was happy. This does not involve anything of economic value. Can it be distinguished from White v Bluett? It is difficult to see how. This suggests that the requirement of economic value may no longer be part of the doctrine of consideration.


Activity 3.5 The Court of Appeal found that the pupil did not provide consideration as regards her pupil master, but did do so as regards the chambers. This was on the basis that the chambers benefited from attracting talented pupils who might become tenants and enhance the development of the chambers. As Lord Bingham put it: ‘We take the view that pupils such as the claimant provide consideration for the offer made by chambers… by agreeing to enter into the close, important and potentially very productive relationship which pupillage involves’. The economic benefit to the chambers, if any, is therefore indirect – in that in the future the pupil may become a tenant and bring additional work to the chambers, enhancing its reputation and increasing the income of its members. Again, however, the court does not appear too concerned about the issue of ‘economic value’. This suggests, as does Ward v Byham, that this element in the definition of consideration has less importance than is sometimes alleged. You might also have noticed that the pupil could have argued that she was providing consideration through suffering at least a short-term economic detriment, in that she could have taken more secure paid employment elsewhere. This line of argument was not, however, explored by the Court of Appeal.

Activity 3.6 The plaintiff in Collins v Godefroy, in giving evidence as a witness in response to a subpoena, was only doing his public duty. It is clearly undesirable for witnesses (other than expert witnesses) to be paid for giving testimonActivity 3.7 There are at least two possible answers to this question. The first is, as suggested by Lord Denning, that the performance of an existing legal obligation should be treated as good consideration, ‘so long as there is nothing in the transaction which is contrary to the public interest’ (see also Williams v Williams (1957)). The more orthodox view, which was taken by the majority in Ward v Byham was that the mother had done more than her legal duty in relation to her care for her daughter (i.e. following the same line as Glasbrook Bros Ltd v Glamorgan CC). The implication is that if the mother had done simply what the law required her to do she would not have provided good consideration. The problem with the majority view on the particular facts of the case is that, as noted in section 3.1.2, it is difficult to see that the mother’s actions had any economic value.

Activity 3.8 The main alternative explanation of Stilk v Myrick is that it was based on the fact that the pressure put on the captain by the crew was a kind of extortion. To that extent, the case is an early example of a type of ‘economic duress’ (see Chapter 10). This way of viewing the case has become more attractive since the Court of Appeal’s decision in Williams v Roffey, since it avoids the potential conflict between the two cases. Prior to that, however, the courts regularly treated Stilk v Myrick as being based solely upon issues of consideration.†

Activity 3.9The main basis for distinction is that in Hartley v Ponsonby the situation had become so perilous as a result of the reduction in the crew that the surviving members were, in continuing with the voyage, doing more than their original contract would have obliged them to do. The case is thus an example of the principle that doing more than your existing obligation will amount to good consideration for a fresh promise.

Activity 3.10 You should have read Foakes v Beer (1884) 9 App Cas 605 and noted the speeches of Lord Selborne at p.613, Lord Blackburn at p.622 and Lord Fitzgerald at p.630.

Activity 3.11 There are two main reasons which you might have identified. First, there is the problem that Foakes v Beer is a decision of the House of Lords. The doctrine of precedent does not therefore permit the Court of Appeal to overrule it. A full reconsideration of the case will therefore have to await a case which is appealed to

† For detailed discussion of this aspect of the case, and the differences between the reports of the case, see Luther, P. (1999) ‘Campbell, Espinasse and the sailors: text and context in the common law’ 19 Legal Studies 526. See also Harris v Watson (1791).


the House. Secondly, the Court may well have been reluctant to embark on a general relaxation of the rule as to part payment of debts, because it is a situation where the debtor may often be able to put the creditor under pressure to accept such an arrangement, and such pressure may go beyond what the courts feel is acceptable. See, for example, the case of D & C Builders v Rees (1966), discussed in section 3.2.

Activity 3.12 The problem for the plaintiff in Re McArdle was that he acted by himself, without any request, or even approval, from the rest of the family. By contrast in Re Casey’s Patents the owners of the patents knew that the manager was doing the work. In Re McArdle it could not be said, looking at the events objectively, that all the parties anticipated that the work would be paid for, because at the time only the plaintiff knew that the work was being done. The same answer would be arrived at by applying Lord Scarman’s test in Pao On v Lau Yiu Long, since neither of the first two of his conditions would be satisfied.

Activity 3.13 This is a situation where prima facie Lisa’s promise is unenforceable because Jack’s work is ‘past consideration’. Does the exception apply? Presumably the work was done at Lisa’s request, so the first of Lord Scarman’s conditions is satisfied. Was it anticipated by both parties that the work would be paid for? This is more difficult for Jack. If he has simply worked the extra hours on his own initiative, then his claim may well fall at this point. There would need to be some evidence that Lisa was aware that he was working extra hours, and perhaps evidence of past practice in making ‘bonus’ payments in this type of situation. What about the third of Lord Scarman’s conditions? Would Lisa’s promise be enforceable if it had been made in advance of Jack’s doing the work? The only problem for Jack here is whether what he is doing is simply part of his normal obligations as an employee. If it is then he may fall foul of the rules about existing obligations discussed above. If, however, he is doing more than his contract of employment obliges him to do, there is no reason why the third condition would not be met.

Activity 3.14 There are two main reasons. First, if taken at face value, the principle seems to deny the need for consideration altogether. As we shall see, however, later cases have clarified that promissory estoppel only applies in a limited range of situations. Secondly, although Denning purported to be merely building on the concept of ‘waiver’, and Hughes v Metropolitan Railway (1877) in particular, that concept had never been applied to the part payment of debts (which was effectively the situation in High Trees). Prior to that it had always been thought that Foakes v Beer (which came after Hughes, and did not even refer to it) precluded the extension of the concept in this way.

Activity 3.15 It is true that the broader view of consideration is likely to reduce the need to use promissory estoppel – though it is still not possible to be certain how far the Williams v Roffey development will be taken. The area where promissory estoppel will certainly still be required is, however, where the modification of a contract involves the promissor remitting part of a debt (as in High Trees, in relation to the rent). As made clear by Re Selectmove, Williams v Roffey has not affected the rule in Foakes v Beer. Where a contractual modification is of this kind, therefore, it will be necessary for the promisee to provide consideration, or establish a promissory estoppel, in order to be able to enforce the promise.


Chapter 4

Activity 4.1 To answer this question you need to consider the essential nature of your agreements.

Activity 4.2In Simpkins v Pays, the judge finds that there was a ‘mutuality in the agreement’ between the parties. The women entered the contest together in the expectation that, should they win, the winnings would be shared amongst them. This seems to be sufficient to establish an intention to create legal relations. In contrast, in Coward v MIB, the Court of Appeal regards the lift to work as a much more irregular occurrence: it might happen or it might not. Consequently, the agreement was regarded as too informal to demonstrate an intention to create legal relations.

Activity 4.3 The leading cases which deal with agreements in the context of a family are Balfour v Balfour and Jones v Padavatton. You need to do three things here. First, you need to consider what criteria the court established in these cases to determine whether or not an intention to create legal relations is established. Second, you need to apply these criteria to the facts given. Third, you need to provide an outcome to your problem.

Activity 4.4 You need to apply the same process as that set out in relation to Activity 4.3. The purpose of giving this example is for you to contrast it with the example in Activity 4.3. Applying the criteria set out above, this instance is much less likely to give rise to a contract. The requisite intention is most likely lacking at the inception of the agreement. The reason for this is that the promises from both A and B are directed at the care of their children – financially and physically. This strikes at the very core of the family and, without strong evidence to the contrary, is an arrangement which is unlikely to give rise to the necessary intention.

Activity 4.5 There are many reasons why a commercial party might not want an agreement to be an enforceable contract. The parties may be negotiating and wish to finalise their agreement at a later date. Or a party may wish to indicate what their present intention is, without committing themselves to a particular course of action.

Activity 4.6In some circumstances, particularly where the parties have relied upon an agreement, courts will more readily imply or infer a term. This can be seen in the decision in Hillas v Arcos (1932). Here, the agreement had been relied upon and the court was able to infer the intention of the parties based upon the terms in their agreement and the usage in the trade.

It may be that the agreement provides a mechanism, or machinery, to establish the term. In such a situation, there is certainty of terms. Thus, if interest on a loan is to be set at 1% above the Bank of England’s base rate on a certain date, then this is a certain term. It cannot be stated at the outset of the contract what the interest rate is, but certainty of terms exists because, on the relevant date, the interest rate can be determined by an agreed mechanism.

There is a difference between a term which is meaningless and a term which has yet to be agreed. Where the term is meaningless, it can be ignored, leaving the contract as a whole enforceable. See Nicolene Ltd v Simmonds (1953).

In this case, it is likely that a court will either imply that the size of the shirt is your size or, alternatively, find that this term is meaningless.


Activity 4.7 In Hillas, the agreement had already been relied upon by the parties. In addition, the wording of the agreement made it clear that the parties intended to make, and believed that they had made, a concluded bargain. Related to this is that in Scammell’s case, the uncertainty surrounded the nature of another agreement, the hire purchase agreement, which had to be entered into. It was not possible to ascertain or imply the terms of this agreement in the way that the courts could ascertain the meaning of the term in Hillas’s case.

The most convincing reason for distinguishing these cases is likely that in Hillas’s case the agreement had been relied upon; this indicates that there was sufficient certainty present to perform the agreement.

Activity 4.8 In this instance you need to determine whether you have an agreement to agree – that is to say you would like to buy bread and he would like to sell bread – but this may not be a contract. Are all of the terms necessary for a contract to be present? In this case, it is not certain when the bread is to be delivered. That is to say, when will the bread delivery start – right away, next week or next month? A court may be able to imply a term that the delivery will begin in the week the order is placed. A court will, however, have more trouble in establishing how frequently the bread is to be delivered. The court will not want to write the terms of the contract between you and your milkman.

Activity 4.9 In this instance, you do not have to buy the house. The offer was accepted ‘subject to contract’. There has been no contract to purchase and there is, therefore, no obligation upon you to purchase.

Activity 4.10 It is impossible to compile an exhaustive list of essential terms because what is essential will depend upon the particular case. The following are suggested by way of guidance: (a) the identity of the parties involved; (b) price or a mechanism by which price can be determined; (c) the time at which the contract is to be performed. Of these, price is the most important – probably because a bargain is the essence of a contract.

Activity 4.11 You will need to come back to this area after you have reviewed the section on implied terms (Chapter 5, section 5.2). Courts will imply terms to give a contract efficacy; that is to say, to make it work. In some instances this can be done because legislation allows it to be done (see, for example, s.8 of the Sale of Goods Act 1979). In other cases, it can be done because the parties are able to determine a mechanism established by the parties within the contract. In other instances, the contract has been executed, that is to say, the contract has been performed. See, for example, Foley v Classique Coaches Ltd (1934) .

Chapter 5

Activity 5.1 A purchaser will typically rely upon a seller where she has great experience of, or expertise in, a particular area: see Esso Petroleum Co Ltd v Mardon. A purchaser is also likely to rely upon a seller where the seller has knowledge of matters that it is highly unlikely the purchaser would. A seller of a car, for example, is much more likely to know how the car has been driven than the purchaser. Something to bear in mind in considering a purchaser’s reliance upon the seller is that the purchaser may be protected by legislation – particularly if the purchaser is a consumer. See, for example, the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999.


Activity 5.2 Lord Denning uses the term ‘innocent of fault’ in the making of a statement as an aid to the determination of whether to impose contractual liability for the statement. The process he engages in is to determine whether the maker of the statement should have, or could have, known more about the statement. In Dick Bentley Productions v Harold Smith (Motors), the defendants could have checked the accuracy of their statement rather than simply relying upon what was obvious. Their fault becomes even more glaring because the circumstances are such that a purchaser would assume that they had checked the accuracy of the statement.

‘Fault’, however, means something in the nature of negligence rather than fraud or deception. For this reason, an inquiry into fault as such is misleading. It might be more productive to consider whether there is reliance upon the statement and the maker of the statement has assumed responsibility for the accuracy of the statement. What this examination of fault does reveal is the process by which the judges are apportioning liability when the reasonable expectations of the parties are not met. The party who is at ‘fault’ will bear the responsibility for the failure.

Activity 5.3 In practice, the parole evidence rule amounts to no more than a rebuttable presumption that the written contract is the whole contract. The exceptions to the rule are so numerous that its status as a ‘rule’ is highly questionable. These exceptions include evidence to establish that a contract is void or voidable on the grounds of mistake, misrepresentation or fraud; to indicate an implied term or custom; or to prove the existence of a collateral agreement. Because the rule can be circumvented so easily, it is not really a rule. What is useful about the ‘rule’ is that it operates as a guide that the written terms of the contract are, at a minimum, the starting point for the determination of the contract’s terms.

Activity 5.4 The main reason that this variety of implication is rejected is undoubtedly because, if terms were implied into contracts on the basis that it was reasonable to do so, the contract would, inexorably, become what the judges thought was a reasonable contract. In these circumstances, the courts are not so much interpreting the contract as creating the contract. This is a role they have consistently refused. In addition, it may often become difficult to determine what term is reasonable in the circumstances of the case.

Activity 5.5The answer to this question depends upon whether or not a term can be implied by operation of the common law. It may be possible to establish that the commercial practice in such a situation requires B to supply the gear system. A court would require convincing evidence of such an invariable practice and this may not exist. A second argument rests upon necessity – that the parties, by necessity, intended such a term to be within their contract: see MacKinnon LJ’s officious bystander. A possible weakness in such an argument is that it may be that while B is the only manufacturer of such a gearing system, B may not be the only supplier of such a system. If it can be obtained elsewhere, there may be no necessity to imply the term.

Activity 5.6 The unseaworthiness of the vessel was not considered a sufficiently serious breach of an innominate term in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd (1962) as to justify terminating the contract because the delay caused by the breakdown and the necessary repairs were not so great as to remove the commercial purpose of the charterparty. The seaworthiness of the vessel was thus not a condition of the contract. The term did not meet the test set out by Diplock LJ in that case

‘The test of whether an event has this effect or not has been stated in a number of metaphors all of which I think amount to the same thing: does the occurrence of the event deprive the party who has further undertakings still to perform of substantially


the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings?’

In the case before him, there was not a substantial deprivation of benefit.

In comparison, clauses dealing with time tend to be conditions – time is a particularly important factor in commercial contracts. It is often expressed that ‘time is of the essence’. See, for example, Bunge Corporation v Tradax SA (1981).

Activity 5.7 The practical consequences for the owner if the time charterer is late in redelivering the ship is that he will probably be in breach of another contract with another party for the delivery of the ship. These consequences can be quite severe.

Activity 5.8 The difficulty that Schuler faced was that while clause 7(b) of the agreement with Wickman stipulated that it was a ‘condition of this agreement’ that the representatives of Wickman would visit the motor manufacturers at least weekly, the court found that the parties had used the word ‘condition’ in the sense of ‘term’. Consequently, the contract could not be terminated when the weekly visits were not made on a few occasions. What Schuler could have done to ensure that the visits were genuinely a ‘condition’ of the contract (breach of which entitled Schuler to terminate the contract) was to clearly indicate in the contract that a breach of this obligation entitled Schuler to terminate the contract. See Lombard North Central plc v Butterworth (1987) where Mustill LJ discusses the ability of a party to establish as a condition a matter which, at common law, would not be considered a condition in the sense of allowing the injured party to terminate the contract because the obligation stipulated was of a minor nature. It is this point which marks the difference between the majority in Schuler (as expressed in the speech of Lord Reid) and the dissent of Lord Wilberforce.

Activity 5.9 The critical difference between the decision in Schuler AG v Wickman Machine Tools Sales Ltd (1973) and Lombard North Central plc v Butterworth (1987) is that in the latter case, the contract clearly stipulated that the punctual payment was of the essence of the agreement (clause 2(a)) and that failure to make punctual payments entitled the plaintiffs to terminate the agreement (clause 5).

Chapter 6

Activity 6.1 Your list might include the fact that such a clause may be unexpected; that parties should not be able to escape from obligations freely undertaken; and that consumers and other parties with weak bargaining power may be forced to accept unfair clauses. All these reasons relate to the protection of parties from the abuse of a position of power by the other contracting party. As to the reasons why such exclusion might be desirable, if the parties are of equal bargaining power, a clause of this kind may simply indicate that they have thought about where the risks under the contract should lie and have made provision for that by means of an exclusion clause. If, for example, in a construction contract the owner of the land has undertaken to insure against the risk of damage to surrounding property from the work, it will be perfectly reasonable for the developer to exclude its own liability for such damage.

Activity 6.2 The question is whether François has been given ‘reasonable notice’ of this clause. In Thompson v LMS Rly (1930), it was held that reasonable notice had been given, even though the plaintiff was illiterate and could not read the clause. This would suggest that, if Upton Castle have acted reasonably as regards adult entrants who understand English, then the clause will be incorporated. The answer to this question may depend on whether the ticket is a ‘contractual document’ or a mere receipt (see Chapelton v Barry


UDC (1940)). Note that if the clause is incorporated, it will need to be considered in the light of the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contract Regulations 1999, discussed in sections 6.2 and 6.3.

Activity 6.3 Generally the signing of a contract is sufficient to make the signer bound by the terms contained in it (see L’Estrange v Graucob (1934)). This would suggest that Angela is bound by the clause. The only exceptions to this are, first, where the signer can claim that the contract was a fundamentally different document from what it was thought to be – that is the plea of ‘non est factum’ dealt with in Chapter 8, 8.3.3. This has no application to Angela. Secondly, there is an exception where the principle applied in Curtis v Chemical Cleaning and Dyeing Co Ltd (1951) operates. Here an employee innocently misrepresented to a customer the effect of an exclusion clause in a dry-cleaning contract. It was held that the customer, who had signed the contract, could nevertheless recover for losses which fell within the actual scope of the clause, because the company was bound by their employee’s misrepresentation. Here, therefore, the answer would be likely to be that a court would hold that the clause was part of Angela’s contract, but only to the extent that it excluded liability in the situation specified by Magna’s employee.

Activity 6.4 The breach involved was not a breach of a fundamental term. The fire might have been put out quickly, in which case no serious damage would have been done. The case is similar to Harbutt’s Plasticine, in that it was the consequences of the breach which made it ‘fundamental’, rather than the nature of the obligation broken.

As to the explanation for the parties’ agreement to this wide clause, you should have noticed that Lord Wilberforce pointed out that the rate of payment for each visit worked out at 26 pence. Photo Production were therefore getting a very cheap deal. As Lord Wilberforce concluded: ‘In these circumstances nobody could consider it unreasonable, that as between these two equal parties the risk assumed by Securicor should be a modest one, and that [Photo Production] should carry the substantial risk of damage or destruction.’

Activity 6.5 This is a version of the old example of a ‘beans’ for ‘peas’ situation (see Chanter v Hopkins (1838) and Pinnock Bros v Lewis & Peat Ltd (1923)). At one time the courts would have said that this was a fundamental breach and that the exclusion clause would therefore be ineffective. Under the Photo Production approach it is a question of deciding whether the clause on its true construction covers the breach. The clause in Ian’s contract seems to be very clearly worded, and to cover the situation that has arisen. At common law, therefore, Mark would not be able to avoid the effect of the exclusion clause.

Note, however, that under the UCTA 1977, since Ian is almost certainly in breach of one of the implied conditions in the Sale of Goods Act 1979 (s.13, Sale by Description), the exclusion will be subject to the requirement of reasonableness imposed by the UCTA (discussed in 6.2.5). The clause might also come within s.3(2) UCTA (see section 6.2.3).

Activity 6.6 The answer is yes, there can be such clauses. Where the attempt is to restrict a liability which is not based on negligence, then s.2(1) will not apply. The clause may be struck down by other provisions of the Act, however. For example, the obligation to supply goods of satisfactory quality under s.14 of the Sale of Goods Act 1979 is strict and can be broken without negligence on the part of the seller. If a seller puts a clause in a contract stating that ‘the seller will not be liable for death or personal injury arising from the unsatisfactory quality of the goods, unless this is attributable to the seller’s negligence’ this will not be struck down by s.2(1). It will be subject, however, to the special rules applicable to sale of goods contracts and contained in s.6 of the UCTA. These are discussed in section 6.2.4.


Activity 6.7 The only question here is whether the negotiation which has taken place means that the contract is not to be regarded as being on B’s ‘written standard terms’. The question is one of fact and degree, but the case of St Albans City District Council v International Computers Ltd (1996) indicates that prior negotiation will not in itself prevent s.3 from applying. Assuming that any exclusion clause in the contract between A and B is part of B’s ‘standard package’, then s.3 will apply.

Activity 6.8 The fact that the contract is made by an exchange of letters suggests that it is not on ‘written standard terms’. If that is so, s.3 can only apply if one of the parties ‘deals as a consumer’. The only possible argument to that effect would be to apply the R & B Customs Brokers approach and suggest that, since C Ltd is not in the business of painting premises, it is not dealing in the course of a business but as a consumer. Given, however, that the decision in R & B Customs Brokers has been the subject of considerable academic criticism, and that it was viewed with some scepticism by the Court of Appeal in Stevenson v Rogers (1999), it seems unlikely that a court would apply it in this situation. A court would be likely to regard the upkeep of the premises in which C Ltd carries on its business as sufficiently closely connected with its normal activities, for a contract made in relation to it to be regarded as being in the course of business. If that is so, then s.3 of the UCTA will not apply to this contract.

Activity 6.9 There are no ‘written standard terms’ here. Does Ramesh ‘deal as a consumer’? Only if Tony deals ‘in the course of business’. Since he is a builder, rather than a tree surgeon, it seems that he does not so deal. His attempt to exclude liability will not, therefore, be subject to s.3. Note, however, that if Tony had been negligent in cutting down the tree, his exclusion of liability would have been subject to the reasonableness test, by virtue of s.2(2) of the UCTA (see section 6.2.2).

Activity 6.10 The answer to this question depends on whether Emma is dealing as a consumer. If she is, then Industries’ exclusion clause will be totally ineffective. If she is not, then the clause will be subject to the requirement of reasonableness. She is clearly not buying the lathe ‘in the course of business’; she wants it for her hobby. As you will remember, however, there is an additional requirement for ‘dealing as a consumer’ in this context, that is, that the goods are of a kind ordinarily supplied for private use. Will the lathe fall into this category? If, as seems likely from the facts, it is a lathe which was originally intended for industrial use, then the answer will be ‘no’. The limitation of liability clause may then be valid, depending on whether it satisfies the requirement of reasonableness. It may well do so (see, for example, George Mitchell v Finney Lock Seeds (1983), discussed in section, 6.2.5).

Activity 6.11 You may well feel that the overall approach is indicated by the first guideline, which refers to the ‘strength of the bargaining position’ of the parties. The rest of the guidelines can be largely seen as being related to the issue as to whether the ‘customer’ entered into the contract with full knowledge and without undue pressure. That is, the focus is more on the process by which the clause became part of the contract than its substantive content.

Activity 6.12 There is a clear overlap in guideline (c) with the common law rules about ‘reasonable notice’. It might be argued that this guideline is redundant, in that if the customer did not have reasonable notice of the term, then it would not be incorporated into the contract and the issue of its ‘reasonableness’ would not arise.


Activity 6.13 Only guideline (e) makes specific reference to ‘goods’. All the others are in general terms and therefore easily applicable outside the context of sale of goods contracts.

Activity 6.14 We can assume that the clause is incorporated and that its wording covers the breach. It clearly falls within either s.2 or s.3 of the UCTA. The question is, is it reasonable? The test is whether it was a fair and reasonable clause to include in the contract at the time it was made – not whether it is fair and reasonable to allow Xerxes to rely on it in the circumstances which have occurred (see Stewart Gill v Horatio Meyer (1992)).

If the latter was the test to be applied then, in the light of the apparently minor nature of the breach in relation to the contract as a whole, and the fact that it was not caused by negligence, it might well have been reasonable to allow exclusion. Looking at the potential scope of the clause at the time of the contract, however,it becomes much less reasonable. The burden of proof is on Xerxes to prove that it is reasonable (s.11(5) UCTA). A court would have to make a judgment taking into account all the circumstances. The breadth of the clause would suggest that it is likely to be found to be unreasonable. Xerxes would not, therefore, be able to rely on it.

Activity 6.15 This is a contract for the sale of goods and XLO appear to be in breach of the implied term as to ‘satisfactory quality’ under s.14 of the Sale of Goods Act 1979. This means that s.6 of the UCTA applies. We are not told whether Yasmin is dealing as a consumer, though the suggestion is that she probably is. If so, then s.6 prevents any exclusion of liability of the kind which XLO is attempting and Yasmin will be able to recover for the defective lead. If Yasmin were not dealing as a consumer, then the clause would need to satisfy the requirement of reasonableness. This is a matter of judgment, applying the approaches indicated by the cases. What do you think a court would decide?

Activity 6.16 No feedback provided.

Chapter 7

Activity 7.1 In practice, the supplier will have difficulty in establishing whether or not young Inman had sufficient clothing. It is perhaps worth noting from the decision that Buckley LJ describes the clothing as being ‘clothing of an extravagant and ridiculous style having regard to the position of the boy’.

This should have been an indication that these clothes were not necessaries. In addition, it is also worth noting, on the facts of the case, that the plaintiff, a Savile Row tailor, sent his agent to call upon Inman when he was studying at Cambridge University. In the circumstances, he might have been able to note whether or not he had sufficient waistcoats. In this case the law does seem to be overly protective of young Inman. He must have known what he was doing when he ordered the clothes. He is reported as having been ‘spending freely’ and must have been aware of the debts he was incurring.

Activity 7.2The decision would not apply to an executory contract for necessary goods because s.3 of the Sale of Goods Act 1979 provides that it is only where the necessaries ‘are sold and delivered to a minor’ that a reasonable price must be paid for the goods. If the contract was an executory contract, the goods would not have been delivered. In Roberts v Gray, the contract had been partly executed and the infant had received some benefit from it. Consequently, the remainder of the contract was also binding upon him.


Activity 7.3 The traditional explanation is to be found in Ex parte Jones (1881). The explanation is that ‘the law will not suffer him to trade, which may be his undoing’. The law is concerned that the minor may lose all his capital in trade. In contrast, it is perceived that this risk will not occur in learning a profession.

In practice, it may be difficult to distinguish in some circumstances between whether the minor is trading or exercising a profession.

Activity 7.4 The minor will not be able to recover his money unless he can establish that there has been a total failure of consideration (see Steinberg v Scala (Leeds) Ltd (1923)). In general terms the incapacity of a minor will act as a defence to a claim by the other party who seeks to enforce the contract rather than as the basis of a claim by the minor for the restitution of the benefit he has conferred upon the other party.

Chapter 8

Activity 8.1 You must examine the underlying rationale for the decision in order to answer this question. In this case, the trial judge stated that ‘a contract cannot arise when the person seeking to enforce it has by his own negligence or by that of those for whom he is responsible caused, or contributed to cause, the mistake’. In the circumstances of Scriven, the seller was said to have contributed to the cause of the mistake. If the buyers had not contributed to the mistake, the contract would not be void and they should recover damages for non-delivery on the basis of the contract.

Activity 8.2 If the seller warranted that the good existed, then the warranty forms a part of the contract of sale (or a separate, collateral contract). In this case, the seller has assumed the risk that the good exists. If it does not, the seller is in breach of contract. This is one explanation of McRae v Commonwealth Disposals Commission – i.e. the Commission had warranted the existence of the vessel to be salvaged. Since it did not, the Commission had breached their contract.

Activity 8.3 Yes, it is possible to regard Couturier v Hastie as a case where the seller provided no consideration. A strong argument is made by the High Court of Australia in McRae v Commonwealth Disposals Commission (1951) to this effect. The High Court states that the question of mistake as to the supposed existence of the subject matter of the contract never arose in Couturier v Hastie. This was only a subsequent interpretation of the case; and the interpretation which was codified in the Sale of Goods Act 1893. The real ground for the decision is that there was a failure of consideration and the purchaser was not bound to pay the purchase price. The purchaser would receive nothing in exchange for the purchase price. Had he paid the purchase price, he could have sued for the recovery of the money on the ground that this was money he had received. The High Court also stated that such an interpretation is supported by the observations of Lord Atkin in Bell v Lever Bros Ltd (1931). What is of central importance is the construction of the contract. If the vendor had warranted or promised that the goods were in existence at the time of the contract, then the vendor would be in breach of contract if they were not. This was a risk that the vendor had assumed.

Activity 8.4 It is possible to view these as cases where the putative purchaser did not actually consent to the contract. The consent was defective in that it was based upon a mistaken assumption – that the purchaser needed to contract to acquire the right in question. However, it is also possible to see these as cases of impossibility – in which case, how would the consent of the parties be relevant? These are cases of initial


impossibility because it is never possible for an owner to purchase that which he already owns.

Activity 8.5

The most common instance of this form of impossibility is in the case of a res sua – where one party attempts to purchase that which he already owns. The case of Cooper v Phibbs is usually given as support for this proposition. Another instance occurs when the parties contract on the basis that something will be done – when in fact, that something is incapable of performance. See, for example, Sheikh Brothers v Ochsner. Yet another instance can be found in the situation where the commercial purpose of the contract can no longer be fulfilled – see Griffith v Brymer.

Activity 8.6 On the one hand, performance of the contract is still possible – the hirer could still take the room on the appointed day. On the other hand, the entire purpose of the contract was for the hirer to hire a room with a view (of the coronation procession). Once the possibility of this view has gone, the commercial possibility of the contract has also disappeared. The case can be compared to Herne Bay Steamboat Co v Hutton (1903). Here the Court found that some of the commercial possibilities of the contract remained and it had not been frustrated.

Activity 8.7 Steyn J (as he then was) recommended the following approach to cases of common mistake.

It must be determined whether the contract, by express or implied condition, provides who bears the risk of the relevant mistake for only when the contract is silent on this point can mistake as a legal doctrine be considered.

Where common law mistake has been pleaded, the court must then consider this claim and if the contract is found to be void, mistake in equity can not be considered.

If the contract is valid at law, it may still have to be considered as to whether or not there is a mistake in equity. (You should note the effect of The Great Peace upon this last point because Lord Phillips MR found that there was no such separate equitable doctrine of common mistake.)

With this approach in place, Steyn J then set out the following propositions.

1. It is imperative that the law ought to uphold rather than destroy apparent contracts.

2. Common law rules on mistake are designed to cope with the impact of sudden and unexpected circumstances upon apparent contracts.

3. For a mistake to attract legal consequences it must be substantially shared by both parties at the time the contract is made.

4. The mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist.

5. A party cannot be allowed to rely on a common mistake where the mistake consists of a belief which is entertained by him without any reasonable grounds for such belief.

Activity 8.8 You need to approach this question by asking yourself if there is a contract between Ace and Crafty (Blob acts as an employee of Ace). Ace alone, through Blob, operates under a mistake. There is nothing in the problem to indicate that Crafty is mistaken about the worth of the card. If Crafty is also mistaken as to the card, then the parties share a common mistake as to a quality of the subject matter of the contract and the House of Lords’ decision in Bell v Lever Bros Ltd (1931) applies. On the prevailing interpretation of Bell, that means that it is unlikely that the court will find that the contract is voHowever, if only Ace is mistaken, the contract is likely to be set aside as


void. This is because Crafty is aware of Ace’s mistake and he ‘snaps’ at the offer. His conduct is unconscionable or inequitable in the sense that he enters the shop solely to take advantage of what he knows is a mistaken offer. Hartog v Colin and Shields (1939) applies to this case – there the price had always been negotiated per piece and not per pound (which resulted in a lower overall cost). What Crafty will argue in this case is that there have been no prior dealings between the parties in this instance – Ace will need to establish that the price of $20 is so inconsistent with the price offered in the trade that Crafty has indeed ‘snapped’ at the mistaken offer. (You should be aware of the possibility, without exploring it in any depth, that s.20 of the Consumer Protection Act makes it an offence for a person acting in the course of business to give a misleading indication as to price to consumers.)

Activity 8.9In a situation such as this, it is best to approach each subdivision of the question individually. You may find it useful to compare the subdivision you are discussing to another subdivision to express why one subdivision reaches a different outcome from another.

a. The statement is certainly a misrepresentation (see Chapter 9), assuming it is a statement of fact, not opinion. If the statement is not a misrepresentation, it may be incorporated into the contract or form a collateral contract (a contract which is separate from the contract of sale): see Heilbut, Symons & Co v Buckleton (1913). If it is a contractual warranty, then A is liable to B for a breach of contract. If it is a misrepresentation, then A may be liable to B for damages under the Misrepresentation Act 1967, or for a fraudulent misrepresentation (Derry v Peek) or for a negligent misrepresentation (Hedley Byrne v Heller). Regardless of the type of misrepresentation, A should be able to have the contract rescinded if the misrepresentation is actionable.

b. This may be actionable under s.2(1) Misrepresentation Act 1967† – does A have reasonable grounds at the time of making the statement for believing that the picture is a Carr and does he have these grounds up to the time the contract is entered into? (See Howard Marine v Ogden.) If A does not have these grounds, then he is liable to B under s.2(1). Note in this connection that A is a dealer. If A does have these grounds, then the parties are labouring under a mistake. The problem here is that this is a mistake as to a quality (who painted the painting) of the subject matter (the painting). You need to apply the decision in Bell v Lever Bros and this rarely results in an operative mistake. The principle established by Lord Atkin is: ‘Mistake as to quality of the thing contracted for raises more difficult questions. In such a case mistake will not affect assent unless it is the mistake of both parties, and is to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.’

Applying this principle, it will be difficult to establish the mistake as operative. Does the mistake as to the quality ‘make the thing without the quality essentially different from the thing as it was believed to be’? It is still the same painting. It was displayed by the vendor to the purchaser – they identified it by the sight of the painting before them. The identity of the artist is simply a quality of the painting. On the other hand, there may be limited scope to assert that this quality is so important that it is the feature by which the painting is identified. (Certainly conditions in the modern art market, where buyers are more concerned with the creator of art rather than the art itself, would support such an argument.) Unless the artist can be identified as critical to this contract, the contract will not be set aside as void.

c. In this instance both parties may be mistaken, but their mistake is not shared. Therefore, mutual mistake – and Bell v Lever Bros – does not apply. Is there a lack of agreement? On the one hand, they do seem to be dealing in different things. On the other hand, the painting is before them – this situation is unlike that in Raffles v Wichelhaus. The offer is to sell the painting before them; the acceptance is to buy the painting before them. The parties are not at cross purposes. What is really

† The elements of an actionable misrepresentation can be found in Chapter 9 of this subject guide.


going on is that B thinks he is getting the better of A – and courts will not intervene to relieve a party from a bad bargain or for not receiving what he gambled upon receiving. This is, in other words, a case of caveat emptor.

d. In this instance, mere knowledge on the part of A that B thinks that the painting is an original is not sufficient to render the contract void. A has to know of the mistake of B and know that it is a mistake as to the nature of the promise made by A. The principle is set out by Hannen J in Smith v Hughes: ‘In order to relieve the defendant it was necessary that the jury should find not merely that the plaintiff believed the defendant to believe that he was buying old oats, but that he believed the defendant to believe that he, the plaintiff, was contracting to sell old oats.’ There is nothing to indicate that B’s mistake is as to the nature of the promise made by A.

e. In this variant, the mistake of B does seem to be with respect to the nature of the promise made by A. A knows of B’s mistake. Accordingly, the principle in Smith v Hughes (above) applies and the contract is void.

Activity 8.10Lord Nicholls and Lord Millet found commercial sense in allocating the risk of fraud to the party who chose to part with his goods on credit, rather than a third party who purchases from the rogue. In addition, technological changes in the methods of communication may render the distinction between contracts formed face-to-face and contracts formed at a distance untenable.

Activity 8.11 Property in the goods will be P’s. When N supplied the goods on credit they took a commercial risk and they must bear the cost of this risk. Identity was not material to the formation of this contract because there was, in fact, no company by the name of Greenhill & Co. Because of this, this situation is distinguishable from Cundy v Lindsay, where there was a reputable firm by the same name and the mistaken party thought that he was contracting with the reputable firm. See the decision in King’s Norton Metal v Edridge, Merrett (1897).

Activity 8.12 If the person did exist, the fact that their death was unknown to the parties should not be relevant. Applying the principle in Cundy v Lindsay, ‘there was no consensus of mind which could lead to any agreement or any contract whatsoever’ between the rogue and the innocent party. The innocent party is attempting to contract with the third party; in the absence of consensus, the contract is void.

Activity 8.13 It does matter if the rogue assumes the identity of a fictitious party or a real party – but only if the identity is material to the contract. This will generally mean that the mistaken party is mistaken as to identity from the outset of the process of negotiation. If the identity only becomes relevant at the point of payment (will credit be extended or a cheque accepted) then identity will not be viewed as material and the contract will be voidable for misrepresentation. Where identity is relevant from the outset of negotiations, it does matter if the identity assumed is of a real or a fictitious person. In Cundy v Lindsay, the House of Lords found that where the rogue pretended to be a real person, the contract was void. The mistaken party had meant to deal with the reputable firm; with the rogue, there was no consensus and thus no contract. In King’s Norton Metal v Edridge, Merritt & Co (1897), in contrast, there has been no firm by the name given and there was a contract with the rogue.

Activity 8.14 The contract did not allocate the risk explicitly to either party. The contract for the sale of the house was made subject to the existing statutory tenancy; however, neither party assumed the risk that the tenant was no longer a sitting tenant. In the circumstances, Goff J (as he then was) found that there was a fundamental mistake in equity.


Activity 8.15 a. This mistake is probably not sufficient to avoid the contract at common law. It

is a mistake as to a quality of the subject matter of the contract – but it is not sufficiently fundamental within the test established by Lord Atkin in Bell v Lever Bros. The contract thus stands at law and must be considered in equity. In Solle v Butcher, Lord Denning said:

It is now clear that a contract will be set aside if the mistake of the one party has been induced by a material misrepresentation of the other, even though it was not fraudulent or fundamental; or if one party, knowing that the other is mistaken about the terms of an offer, or the identity of the person to whom it is made, lets him remain under his delusion and concludes a contract on the mistaken terms instead of pointing out the mistake. [692]

Goff J applied these criteria in Grist v Bailey to facts that were very similar to the one given in the hypothetical problem. There is a critical difference between the hypothetical and Grist v Bailey. This is that there is the intervention of a third party’s rights – X. X appears to be a bona fide purchaser for value without notice and the intervention of such an individual usually prevents equitable relief. Following the decision in The Great Peace, there is no scope for a doctrine of mistake in equity and the decision in Grist v Bailey is irrelevant to the determination of this problem. The contract is probably good in law and equity is unable to provide relief. Accordingly, B is bound and A can perform his contract with X. B would want to argue that the decision in The Great Peace should not be followed and that those decisions recognising a flexible form of equitable relief for mistake (Solle v Butcher, Grist v Bailey, Associated Japanese Banks v Crédit du Nord) should be followed. Even if the first part of this argument succeeds, B is unlikely to receive equitable relief because of the presence of X.

b. Once again, the contract would likely stand at law: see Bell v Lever Bros. However, the argument can be made that the behaviour of Peter is objectionable and that he is seeking to take advantage of Victor. Peter, as an art expert, must be aware that Victor has seriously undervalued the painting and is unaware of its worth. The judgment in Grist v Bailey indicates that a court of equity will view a mistake as fundamental where there is a great discrepancy in the value of the good. If Victor refuses to deliver the painting, it is unlikely that a court of equity will order specific performance of the contract. Because this case involves an order for specific performance, it is possible to argue that the decision in The Great Peace (which involved the question of rescinding the contract) is not applicable to these circumstances. There is an older line of authorities dealing with the refusal to order specific performance on grounds of mistake.

Activity 8.16 The difficulty with the two cases is that the mistake as to quality in Solle v Butcher is very similar in degree to that of Bell v Lever Bros. Solle v Butcher can be reconciled with Bell v Lever Bros on the grounds that the majority of the House of Lords considered the case on the basis of mistake in law while Solle v Butcher was decided in equity. This is consistent with the dissenting judgment of Lord Warrington where he stated that he was not concerned with the equitable cases and it is the distinction advanced by Lord Denning himself in Solle v Butcher. Further support for this distinction can also be found in the decision of Steyn J in Associated Japanese Bank v Credit du Nord. The weakness with this distinction is that some of the cases considered by the majority in Bell v Lever Bros were equitable cases and the decision appears to attempt to state the position at both law and equity. In addition, Lever Bros’ claim was for rescission of the contracts of termination – and rescission is an equitable remedy. For these reasons, and others, the Court of Appeal in The Great Peace found that it was impossible to reconcile these two decisions and disapproved of Solle v Butcher. If The Great Peace is followed in preference over the Solle v Butcher line of authorities which allow an equitable doctrine of mistake, the result is a very narrow ambit of situations in which a contract will be avoided by reason of a mistake as to a quality of the subject matter.


Chapter 9

Activity 9.1a. X’s statement appears to be an expression of opinion as to the likely future life of the

tyres. The only possibility of this being a misrepresentation is, then, if X is aware that the wear on the tyres is worse than he is suggesting. His statement will then become a misrepresentation as to his state of mind, on the Edgington v Fitzmaurice principle.

b. The phrase ‘trained to the highest standards’ is too vague to be treated as a representation. The statement about the length of supervised training is a statement of fact, however. Since this is untrue, it will amount to a misrepresentation. The remedies available will depend on whether the statement induced a contract, and whether the salesman was aware, or should have been aware, that the statement was untrue (see section 9.2).

c. Statements in advertising are generally treated as ‘mere puffs’, not giving rise to any legal liability. It is unlikely, therefore, that the statement on the poster would be treated as a misrepresentation, even if the statement that the CD was the ‘best’ could be treated as ‘fact’ rather than ‘opinion’. There is also the requirement that the statement is made by one contracting party to the other. Could the statement on the poster be said to be made by the shop selling the CD, rather than the company which produced it?

Activity 9.2 Keith’s statement to Alpha Sports is a statement of intention. Such statements cannot usually be treated as misrepresentations. The exception is where there is evidence that the person making the statement did not genuinely have the relevant intention (as in Edgington v Fitzmaurice). In the absence of evidence that Keith had already decided to retire when he made the statement to Alpha’s representative, Alpha will not be able to take action against Keith for misrepresentation.

In the alternative situation, it seems that Keith has changed his mind about his intentions between speaking to Alpha, and signing the contract. In general, keeping silent does not amount to a misrepresentation. But here Keith’s change of mind means that his statement about his intentions made to Alpha’s representative is no longer true. There is no direct authority in relation to changed intentions (as opposed to changed circumstances), but by analogy with With v O’Flanagan, it would seem that Alpha can argue in this situation that Keith’s failure to tell them of his change of mind does constitute a misrepresentation.

Activity 9.3 The main other use of the term ‘rescission’ is in relation to the power of the innocent party to terminate a contract for breach. This is discussed further in Chapter 14. The chief difference is said to be that termination for breach does not aim to undo the contract, but simply to bring it to an end for the future. In other words it is only obligations which are not yet due for performance that are ‘rescinded’ in this situation. The distinction is not clear cut, however, in that in some cases termination for breach may lead to property being handed back. If, for example, a sale of goods contract is terminated because the goods are of unsatisfactory quality, the consequence may be that the goods are returned to the seller and the purchase price is returned to the buyer. For the sake of clarity it is probably best to reserve the term ‘rescission’ for misrepresentation and to refer to ‘termination’ or ‘repudiation’ when breach is being discussed.

Activity 9.4 You must remember that rescission of a contract is available even if the misrepresentation is entirely innocent. It is also a powerful remedy which, in undoing the contract, can have serious consequences. Taking these two factors together, the courts are probably right to limit the scope for rescission, leaving the situations where the misrepresentation was not innocent to be dealt with by damages under the tort of deceit (as discussed in section 9.2.2).


The gap that was left, however, was the situation where the misrepresentation was negligent. If the right to rescind was lost, the victim of a negligent misrepresentation was left without a remedy. This gap has now been filled as far as damages are concerned by both the common law and the Misrepresentation Act 1967 (again, see section 9.2.2). It is arguable that now that the law has recognised a range of categories of misrepresentation, more flexibility should be employed in deciding whether to allow rescission.

Activity 9.5 The Court of Appeal thought that if the misrepresentation had not been made then the plaintiffs would still have bought the shares, but at a lower price. They would therefore still have suffered a loss on the resale of the shares, but a smaller one, based on the difference between the actual purchase price and the price they would have paid without the misrepresentation. The House of Lords thought that if the misrepresentation had not been made then the plaintiffs would not have bought the shares at all. They were therefore entitled to the full loss suffered on the transaction. It was irrelevant that the dramatic reduction in the value of the shares was unforeseeable at the time of the initial contract. Since the misrepresentation was fraudulent, the principle in Doye v Olby meant that all direct losses were recoverable, without any consideration of ‘remoteness’.

Activity 9.6 Where the fraud involves a misrepresentation by a party to a contract which has induced the other party to enter into an agreement, there seems little point in using the tort of deceit. The Misrepresentation Act 1967 has a much lighter burden of proof for the claimant, and the remedies available are just as extensive as for deceit (on the basis of Rosyscot v Rogerson). Do not forget, however, that the tort of deceit does not only apply to misrepresentations inducing a contract; for fraud outside the contractual area the tort of deceit may well still be a useful basis for a claim.

Activity 9.7 McKendrick’s argument supports the view taken by other academic commentators, and in particular Hooley (1991, provided in your Study pack), that the Court of Appeal’s decision in Royscot v Rogerson involved a misinterpretation of s.2(1) of the 1967 Act. Although the section uses the analogy of fraud, there is nothing in it which compels the court to apply the same approach to damages as is used in the tort of deceit. The current approach means that the law fails to make any distinction between the defendant who cannot prove that he or she took reasonable care and the defendant who is proved to have acted fraudulently. McKendrick suggests that the different level of culpability between the defendants would justify (or even require) a difference in the level of damages which they are required to pay. (Note that considerations of ‘culpability’ have a much stronger role in the law of tort than they normally do in contract, where the loss to the claimant, rather than the fault of the defendant, is generally the dominant consideration.)

Chapter 10


Activity 10.2 In Pao On v Lau Yiu Long (1980), Lord Scarman set out the following criteria as indicative of the existence of duress.

1. Did the person who was allegedly coerced protest at the time?

2. Did this person have an alternative course of action open to him – such as an adequate legal remedy?


3. Was the person independently advised?

4. Did the person take steps to avoid the contract once they had entered it?

Activity 10.3 Mocatta J states that, since duress renders the contract voidable, it is for the party coerced to act to set aside the contract once the pressure has been removed. The party must also have a full knowledge of all the circumstances. The court must, on an objective view, determine whether or not the party coerced has acted to affirm or not the voidable contract. This is done by his conduct: quoting an earlier decision, Mocatta J stated that the question was ‘what would his conduct indicate to a reasonable man as to his mental state?’ In the case before him, Mocatta J noted that the party had not registered a protest once the duress had been removed, that they had made the final payments without qualification and that there was a delay between making the final payment and protesting of the duress.

Activity 10.4 It is by no means certain that the case would have been decided on the same basis if Kafco were aware that Atlas had mistakenly underbid the job. Two possibilities arise in such circumstances. The first is that if Kafco had ‘snapped’ up Atlas’s mistaken offer, it is possible that no contract would have arisen because of this unilateral mistake (see Chapter 8, where the topic of mistaken offers is discussed). The second is that if Kafco were aware that Atlas had underbid the job the case begins to look very similar to Williams v Roffey Bros (discussed in Chapter 3). The question might then become whether, absent duress, there was consideration in the form of a practical benefit for the new contract to pay more.

Activity 10.5 There are many ways of distinguishing between commercial pressures and a ‘coercion of the will’ that constitutes duress. One difference can be seen from the speech of Lord Scarman in Pao On v Lau Yiu Long. In cases of economic duress, for duress to be present, it must be shown that ‘the payment made or the contract entered into was not a voluntary act on his part.’ In contrast, normal economic pressure is not normally to remove the voluntary nature of the contractor’s act. Such an explanation ignores what has, more recently, become the focus of attention in cases of duress. The focus here is upon the illegitimate acts or pressure brought by a stronger party upon a weaker party. Such a focus is present in Universe Tankships Inc of Monrovia v International Transport Workers Federation. Thus, what is critical in the separation of duress and normal commercial pressure is the use of illegitimate force.

Activity 10.6 Where the bank knows of the wrongdoing of the debtor, then they will be bound by the surety’s equity to avoid the transaction: Barclays Bank v O’Brien. It would be highly unusual, however, for a bank to have actual knowledge of the debtor’s wrongdoing. Generally, the bank will be bound because it has constructive notice of the surety’s right to avoid the transaction. The bank has constructive notice when it knows of facts which should put it upon inquiry. The most common fact will be that the transaction is not, on the face of it, to the financial advantage of the wife: see Barclays Bank v O’Brien (where the transaction was not, on the face of it, to the advantage of the surety) and CIBC v Pitt (where the transaction, on the face of it, appeared to be to the advantage of the surety). See Lord Nicholls’ speech at paragraphs 38–43 of Royal Bank of Scotland v Etridge (No 2) in which he discusses the development of form of notice. Lord Nicholls continues to consider [at paras 44 and 47–49] when a bank is put in inquiry.

Activity 10.7 The presence of disadvantage strengthens the presumption that the only reason for the transaction was the wrongdoing of the stronger party. The transaction is not otherwise readily explicable on other grounds. See Royal Bank of Scotland v Etridge (No 2) (2001), paras 21–28.


Activity 10.8 The most obvious difference between the two is that economic duress is a legal doctrine, whereas undue influence is an equitable doctrine. Equity operates as a matter of discretion rather than as of right. There are, however, many similarities between what is required to establish each of them. Duress, whatever form it takes, requires actual coercion or pressure (Pao On v Lau Yiu Long). Similarly, actual undue influence consists of actual pressure brought to bear upon one party by another. The similarities between the two were noted in Royal Bank of Scotland v Etridge (No 2) by Lord Nicholls when he described actual undue influence as ‘overt acts of improper pressure or coercion such as unlawful threats’ and then commented that ‘Today there is much overlap with the principle of duress as this principle has subsequently developed’. [para.8] Similarly, Lord Hobhouse in the same decision noted that the same conduct as would constitute actual undue influence might constitute the defence of duress at law [para.108].

Chapter 11

Activity 11.1 Lord Reid stated that the agency argument might be successful if:

u the contract made it clear that the stevedores were intended to receive the protection of the exemption clause

u the contract made it clear that the carrier, in addition to contracting on his own behalf, was also contracting on behalf of the stevedores

u the carrier had authority from the stevedore to enter into the contract on his behalf (or, possibly, a later ratification of the contract by the stevedores would suffice) and any difficulties about how the stevedores would provide consideration for this contract were overcome.

The agency argument was not successful in the case before Lord Reid. Nothing indicated that the carriers were contracting as the agent for the stevedores.

Activity 11.2 The principal arguments in favour of privity of contract are:

u the doctrine clearly defines the ambit and enforceability of contractual obligations

u it can ensure that courts do not create a contractual obligation

u it operates in tandem with the requirement that consideration must move from the promisee and the third party has not provided any consideration

u it would not be desirable for a promisor to face actions for breach of contract from both the promisee and the third party

u if the third party could enforce the contract, this would affect the ability of the parties to vary or rescind the contract.

The point here is that Lord Reid is indicating how parties can establish a collateral contract between the owner of the goods and the stevedores in order to provide the stevedores with the benefit of the exclusion clause. Because it is a separate contract, it requires consideration.

The principal arguments against privity of contract are:

u it leads to commercial inconvenience

u it can operate to create great injustices

u it defeats the intentions of the parties to the contract

u it puts English contract law in an anomalous position in that the contract law of other countries does recognise third party rights


u it creates uncertainty in contractual relationships given the number of devices which exist to circumvent the application of the doctrine.

Activity 11.3 The survival of privity of contract illustrates some of the limitations of the common law. Courts were hesitant to overrule the doctrine (existing contractual relationships would be upset if the doctrine was abolished) and expressed disapproval of it. Steyn LJ, in Darlington BC v Wiltshier Northern Ltd (1995) pointed out that common law courts ‘are the hostages of the arguments deployed by counsel’ – if counsel did not seek to challenge the doctrine, it was difficult for the court to do so. Legislative action was difficult to achieve, in large part because of the difficulty in finding parliamentary time to deal with the matter.

Activity 11.4 The 1999 Act preserves existing exceptions to privity (subsection 7(1)) and the Law Commission, in its report on privity, ‘Privity of Contract, Contracts for the Benefit of Third Parties’ (Law Com No. 242 Cm 3329 July 1996), expressed the hope that legislation would not hamper the further judicial development of third party rights. The result is that any situation concerning privity of contract and a third party beneficiary will fall within one of four scenarios. In the first scenario, the problem will be dealt with by the 1999 Act alone. In the second scenario, the problem will be dealt with by an existing common law device and does not fall within the 1999 Act. In the third scenario, the problem can be dealt with by both the 1999 Act and an existing common law device. In the fourth scenario, the problem does not come within either the existing common law devices or the 1999 Act.

Activity 11.5 There are two opposing arguments as to the future development of a ‘performance interest’. It is possible to view cases which appear to accept such a performance interest as situations where, in the absence of such recognition, there would be no effective sanction for a breach of contract. The 1999 Act, however, provides parties with the opportunity to confer a benefit on a third party. If they have chosen not to, the court can view the lack of this conferment as indication that there is no performance interest. See, for example, the approach taken in Panatown v Alfred McAlpine Construction Ltd (2000). This may, however, cause harsh results in circumstances where the parties have not, by accident, brought themselves within the ambit of the Act. In such a circumstance, the lack of a ‘performance interest’ which entitles the promisee to substantial damage allows a promisor to breach a contract with impunity

Activity 11.6 The conditions were those set out by Lord Reid in Scruttons Ltd v Midland Silicones Ltd (1962) that:

a. the contract made it clear that the stevedores were intended to receive the protection of the exemption clause

b. the contract made it clear that the carrier, in addition to contracting on his own behalf, was also contracting on behalf of the stevedores

c. the carrier had authority from the stevedore to enter into the contract on his behalf (or, possibly, a later ratification of the contract by the stevedores would suffice), and

d. any difficulties about consideration moving from the stevedores were overcome.

Activity 11.7 C’s consideration was the performance of the contract with B; that is to say, the unloading of the ship. It was good consideration because their performance thus provided A with the benefit of a direct obligation which they could enforce.


Activity 11.8 To answer this question, you need to consider what C’s potential liability is and what defence they could use to meet this liability. They have no contract with A and thus are not liable for a breach of contract in causing the damage. Where their liability probably arises is for the tort of negligence. The issue then becomes whether or not they have a contractual defence to this action based upon the exemption clause negotiated by B. To determine this, you need to apply the criteria (noted in section 11.3.3) set out in The Eurymedon to see if they are met. It is likely that criteria (a), (b) and (c) are met; thus the problem is concentrated on (d). The consideration in The Eurymedon was the stevedores’ performance of the contract between the carriers and the stevedores. Here, the damage occurs before the B/C contract is performed. In the circumstances, it would appear that no consideration has been provided such that a contract of immunity can arise between A and C. If there is no such contract, then C cannot raise a contractual defence of immunity. See Raymond Burke Motors Ltd v Mersey Docks & Harbour Co [1986] 1 Lloyd’s Rep 155 for an example of this problem.


Chapter 12

Activity 12.1 The problem that Bertha faces is that the contract for the sale of the rat poison is tainted with illegality. The first issue to determine is whether the contract is illegal as formed or illegal as performed. In this case, it appears to be illegal as formed – the statute requires that an authorisation certificate must be produced. Here, the certificate was not genuine. Re Mahmoud & Ispahani (1921) needs to be considered; in this instance, it is probably not possible to recover damages under the illegal contract. However, it may be possible to recover the reasonable value of the goods supplied: see Mohamed v Alaga & Co (A Firm) (2000). The difficulty with this approach is that it allows a contract which cannot be enforced directly to be enforced indirectly. See, for example, Awwad v Geraghty & Co (A Firm) (2000) in which Mohamed v Alaga & Co was distinguished† and the claim for the reasonable value of the services was not allowed.

Activity 12.2 The difference created by this variation is that Bertha is not an innocent party to the illegality in the sense that she knows there is no certificate in existence. In the circumstances, it is unlikely that she will be able to recover anything under the contract. See, for example Parkinson v College of Ambulance Ltd & Harrison (1925), Kiriri Cotton Co Ltd v Dewani (1960), and Ashmore, Benson, Pease & Co Ltd v A V Dawson Ltd (1973).

Activity 12.3 In this variation of the problem, the contract is legal as formed (Bertha is registered and the authorisation certificate is validly issued) but it is illegal as performed when Bertha’s van exceeds the speed limit. In this instance, you need to apply St John Shipping Corporation v Joseph Rank Ltd (1957). In applying the criteria set out in that case, it is unlikely that Parliament, with respect to the speeding, intended to prohibit this sort of contract. As such, Bertha’s punishment lies in the criminal law and not the civil law.

Activity 12.4 In Pearce v Brooks, the sexual immorality of prostitution was sufficient to render the contract to supply the brougham† to be illegal. In Tinsley v Milligan, in contrast, the fact that the pair were lovers was not considered sufficiently important to argue that it affected their contractual relations. From this we can deduce that conceptions of morality (and in the case law this is invariably sexual morality) are much more relaxed than they have been in the past. What is considered ‘immoral’ changes over time.

† Distinguished: i.e. the case was differentiated – the Court in Awwad found that Mohamed v Alaga was not applicable to the case before them.

† Brougham: a four-wheeled horse-drawn closed carriage.


Activity 12.5To answer this question, you need to examine the cases. There is no scientific process employed for ascertaining the nature of public policy.

Chapter 13

Activity 13.1 This question involves a restraint of trade clause in a contract of employment. You need to consider, firstly, whether or not the clause seeks to protect a legitimate interest of Plod Products. Plod will need to establish this. A weakness of their position is that they may be seeking to restrain Amanda to keep her from meeting clients of theirs – in other words, it may be to keep her from competing with them. It may be that they seek to protect clients from awareness of FabuMats paper products. Alternatively, it may be possible for Amanda to argue that the real reason they seek to restrain her is to prevent a competitor from gaining strength. Neither of these is a legitimate interest on the part of Plod: see Herbert Morris Limited v Saxelby (1916). If Plod is able to establish a legitimate interest, Plod must still establish that the clause is reasonable as to subject matter, duration and area. The difficulty they have here is that not only is Amanda dealing in a different product, but the area of the restraint is very broad: see Mason v Provident Clothing & Supply Company Ltd (1913). It is likely to be unreasonable as a result.

Activity 13.2 This question involves much the same issues of restraint in a contract of employment. The same approach should be followed as to whether or not the restraint is reasonable between the parties. Unlike the scenario in Activity 13.1, it probably is. Mega-Pharmaceuticals has a legitimate interest to protect with regard to its highly sensitive confidential information. The restraint is very long (five years) and broad (worldwide) but Dorothy will be paid for the duration of this restraint. Where this clause differs from the previous one is that there is an obvious public interest involved here. If Dorothy is at the verge of discovering a cure for a life-taking disease, it is hard to see how the public interest is served by taking her out of circulation.

Activity 13.3 To answer this question, you need to consider the criteria established in Nordenfelt v Maxim Nordenfelt. Taylor Skate Ltd will need to establish that they have a legitimate interest to be protected. If they succeed in this, they then need to establish that the clause goes no further than necessary in protecting this interest – that the clause is reasonable as between the parties. See, for example, Herbert Morris Ltd v Saxelby (1916). Here, Taylor Skate Ltd will encounter problems – the clause covers the entire world, it covers any business in which Taylor Skate might undertake in the future and the time period is very long. If Taylor Skate is able to establish that this is what is adequate to protect their interest, it is then open to Mr Taylor to establish that the clause is not in the interests of the public.

Activity 13.4 The courts exhibit a concern about re-writing the contract between the parties when they examine it to see if it is affected by the doctrine of restraint of trade. They recognise that it is not the role of the court to re-allocate burdens assumed by a party. However, they are also concerned with situations where one party has been disadvantaged vis à vis the other as to the terms of the contract. The example Lord Reid, in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, gave was where conditions have been incorporated which were not the subject of negotiation. In A Schroder Music Publishing Co Ltd v Macaulay, the concern with regard to one, stronger, party taking an unacceptable advantage over the other is more clearly expressed.


Chapter 14

Activity 14.1 This question involves a consideration of the nature of the term in question and the standard of performance required. Terms as to time are generally construed as conditions; it is said that ‘time is of the essence’. Additionally, liability for performance tends to be strict. The cause of the representative’s lateness is, therefore, likely to be irrelevant. For a discussion of these matters, see Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514. In the circumstances, Tighte Fist plc is entitled to terminate the contract for breach.

Activity 14.2 A party is said to affirm the contract when he elects to carry on with the contract and not to terminate it because of the breach of the other party. To affirm the contract, the party must have knowledge of the facts giving rise to the right to elect. More recent cases appear to have further required that the innocent party also be aware of the right to elect: see Peyman v Lanjani (1985) and The Kanchenjunga (1990). While, in theory, the innocent party is free to decide whether to terminate the contract or to affirm it, his decision may in some circumstances be affected by the requirement that he mitigate his damages. It may be that the only way he can mitigate, or minimise, his damages is to affirm the contract. See Payzu Ltd v Saunders (1919).

See Chapter 16, section 16.5, for a full discussion of mitigation. The innocent party must act to minimise his or her damages and not increase them.

Activity 14.3 It is of critical importance for the innocent party to determine the nature of the term breached. Is the term a condition, warranty or intermediate/innominate term? If the term is a warranty, the innocent party is not entitled to terminate the contract; his remedy lies in damages. If the term is a condition, or a sufficiently serious breach of an intermediate/innominate term, then the innocent party is entitled to terminate the contract. One practical aspect of this important point is that if an innocent party ‘elects’ to terminate a contract and refuses to perform his further obligations where (because of the nature of the breach) he does not have that election, he is himself in breach of contract. See Decro-Wall S.A. v International Practitioners in Marketing (1971).

Activity 14.4 The danger to the claimant with such a course of action is that he will be found to have no legitimate interest, financial or otherwise, in performing. In so doing, he would be saddling the defendant with an additional burden where there was no benefit to himself, the claimant. See the speech of Lord Reid in White and Carter (Councils) Ltd v McGregor (1962).

Activity 14.5 The risk in not accepting an anticipatory repudiation is that in so doing, the innocent party may forego all opportunity to claim damages in the event that the contract is later discharged by reason of his own breach or by frustration.

Chapter 15

Activity 15.1 There are close links between frustration and the type of mistake known as ‘common mistake’. For example, if A and B are contracting for the hire of a concert hall, but unknown to them at the time they make the contract the hall has just burnt down, their contract will be void for common mistake. If, on the other hand, the hall burns down the day after they make their contract, it will be frustrated. Both concepts are concerned with deciding where risks and associated losses should fall when a contract


is disrupted by events outside the control of either party. The question as to which applies depends solely on whether the disrupting event takes place before or after the contract is made. (See, for example, Amalgamated Investments & Property Co Ltd v John Walker & Sons Ltd (1977).)

Activities 15.2 and 15.3 As you will have realised, these questions are intended to focus attention on why some contracts which involve the provision of services are more likely to be frustrated than others. I suspect that you are much more likely to have said that the contract for hair styling would be frustrated than the contract for servicing the car. Why should there be such a difference? This can be explained by remembering that it is important when considering frustration to identify exactly what the contract was for. It is likely that in 15.2, the contract was simply for Nathalie’s car to be serviced. In 15.3, because Nathalie is much more likely to be concerned about who styles her hair than who services her car, it may well be that the contract is for her to have her hair styled by Jamie. Once the precise nature of the contract has been identified, then the question becomes whether the alleged frustrating event has rendered performance impossible or radically different. In 15.2, if the mechanic is not specified in the contract, then the unavailability of Jamie makes no difference to Phil’s obligation to carry out the service. In 15.3, if Jamie has been specified as the stylist, then his absence will render performance on the Friday impossible and the contract will be frustrated.

You might also like to consider what the position would be if all Phil’s mechanics go on strike on Friday (see The Nema (1981)).

Activity 15.4 The events which have occurred in the two alternative situations (the fire at the Hall – destruction of subject-matter, and the injury to Claudio Quays – personal incapacity) are clearly of a type capable of bringing about the frustration of a contract. The question requires you to think, however, about whether on the facts there is a sufficient effect on the particular contract for it to be frustrated. In particular, you will need to think about the case of Herne Bay Steam Boat Co v Hutton (1903), outlined above. In both the situations given, some part of the contract survives the ‘frustrating’ event. The question is whether the contract has become ‘radically different’ from what was originally intended. In (a), the answer is probably that it has. Although the tour of the grounds is still possible, two thirds of the contract cannot now take place. If it is frustrated, this will mean that Aaron will not be able to sue for breach of contract in relation to the meal and the concert, but the rules relating to the effect of frustration (discussed in section 15.4) will apply.

The answer to (b) is slightly more difficult. How important an element was the concert? The most likely answer here seems to be that the contract will not be frustrated, but that Aaron will be entitled to compensation for breach of contract, in that Highplace Hall has not provided the promised concert.

All the above is on the assumption that there is nothing specific in Aaron’s contract with Highplace Hall to deal with these situations.

Activity 15.5 A significant difference between The Super Servant Two and Maritime National Fish is that in the Super Servant the owner of the vessels was faced with breaking one or other of two contracts. Once the Super Servant Two had sunk it was impossible for both contracts to be performed. In contrast, in Maritime National Fish the defendants could have allocated one of the licences to the plaintiffs’ boat rather than to one of their own boats. In other words, they could have performed their contract with the plaintiffs without breaking a contract with anyone else. The Court of Appeal, however, treated the two cases as being the same, arguing that in Super Servant Two the reason for the inability to perform was not the sinking of the vessel, but the decision of the owners to allocate the Super Servant One to another contract. Thus in both cases the failure to perform resulted from a decision of one of the parties. Critics of the decision in Super Servant Two argue that the cases are not identical and that in the Super Servant


Two the owners had no real choice, in that whichever contract they used the Super Servant One for, this would involve breaking another contract. There was therefore a much stronger case for treating the Super Servant Two as a case of frustration. Note, however, that the defendants in Super Servant Two were protected by a ‘force majeure’ clause, provided that they had not been negligent.

Activity 15.6 The contract is clearly frustrated when the house is destroyed. The common law rules say that obligations which have arisen up to that point generally stand. The only exception is where there is a total failure of consideration. The obligation to pay the £1,500 arose before the destruction, but it seems that there is a total failure of consideration, in that Peter has done no work on the contract. The common law would therefore allow Sabina to recover the full £1,500. Peter has no entitlement to any payment under the contract – not even for the money spent on materials.

Activity 15.7 In this case, Peter has started work. Sabina cannot argue, therefore, that there is a total failure of consideration. Because Peter has done some work, albeit very little, the common law rules say that Sabina cannot now recover any of the £1,500 which she has paid.

Activity 15.8 As in Activity 15.7, there is no total failure of consideration, so the £1,500 cannot be recovered. The obligation to pay the balance, however, does not arise until the contract has been completed. Sabina is not therefore, under the common law rules, obliged to pay anything to Peter for the work done over the previous weeks. (See, for example, the case of Appleby v Myers (1867)).

Note that in practice the Law Reform (Frustrated Contracts) Act 1943 would apply to the contract between Sabina and Peter and this would affect some of the above answers. This is dealt with further in section 15.4.2.

Activity 15.9 You will remember that under the common law rules (see Activity 15.6 above) Sabina would have recovered her full £1,500 because there was a total failure of consideration. Peter would have been entitled to nothing. Under the Act (which would apply in this situation) Sabina is still entitled to recover her payment under s.1(2). The main difference is that under the Act Peter can argue that he should be allowed to retain some of the £1,500 to cover the cost of the materials which he has bought. It is up to the court to decide what it is just for him to retain. It might be relevant, for example, whether the materials are of a kind which can be used on other jobs, or whether they were specially designed for the work to be done on Sabina’s house.

Activity 15.10 Under the common law, Peter could retain the full £1,500 because there is no total failure of consideration. Under the Act, the position will be the same as the answer to Activity 15.9. In other words, under s.1(2) Sabina can recover the £1,500, subject to Peter being able to retain money to cover his expenses. These may be more than the £500 spent on materials and may include expenses relating to the day’s work which has been done (for example, wages paid to others working on the house). What do you think the position would be if Peter’s expenses totalled £2,000? What is the maximum he could receive under s.1(2)?

Activity 15.11 As regards the £1,500 the position is the same as in Activity 15.10. The difference here is that Peter has almost completed the work on the house when it is destroyed. Will he be entitled to claim under s.1(3) for the value of the benefit which he has supplied by doing the work? The answer, based on BP Exploration v Hunt (1979) is that he will not be able to recover anything under this section. The benefit must be looked at in the light


of the frustrating event; once the house has burnt down there is no valuable benefit to Sabina. The Act has not altered the position as it stood under the common law in Appleby v Myers (1867). The position would be different if, for example, the contract was to decorate two houses and only one of them was destroyed by the fire. In that situation Peter would be able to recover under s.1(3) for the benefit represented by the work done on the surviving house.

Chapter 16

Activity 16.1 You need to establish, first, that there has been a breach of contract. It would appear that there has been – the government has offered for sale something that some of its civil servants suspect does not exist. The offer implies that there exist bighorn mountain sheep to hunt. The next issue is as to the measure of damages recoverable by Damian. What amount of money will put Damian in the position he would have been in if the contract had been performed? These facts offer two possibilities: loss of profits or wasted expenditure. If the sheep are very rare, loss of profits, measured by the value of the trophy heads of the sheep, could be great. The difficulty with this measure is that Damian may well have problems proving this loss (see Anglia Television v Reed). Another way of looking at this is to say that Damian’s loss of profits is too speculative because Culloden has not promised him three sheep, but the opportunity to hunt three sheep. Hence Damian is unable to prove that there is a loss of profit and is confined to claiming his expenditures (McRae v Commonwealth Disposals Commission (1951)).

Activity 16.2 Once again, you need to establish that there has been a breach of contract. This is not difficult since Emma simply refuses to perform. The great difficulty here surrounds the assessment of damages. Fun Toys Co should be able to claim for loss of profits (the case fits ideally within Robinson v Harman); the problem is, what is the amount of the loss suffered? Their toys range in price enormously – can it be said that Emma would have chosen 10,000 of the toys priced at £200 each or 10,000 of the toys priced at £1.99 each? It is suggested that either extreme is unlikely to have actually been undertaken by Emma had the contract been performed. If she was stocking her toy shops, she would not have selected entirely from one end of the price range or the other. Instead, she would likely have selected a range of toys. Consequently, it can be argued that the damages should be assessed by reference to a selection of 10,000 toys chosen in a reasonable manner. Thus the damages are set by a ‘reasonable’ amount made with reference to the likely selections of Emma. See Paula Lee Ltd v Robert Zehil [1983] 2 All ER 390 where the court faced a similar problem.

Activity 16.3 The decision in Ruxley Electronics and Construction v Forsyth is not without problems and it is these problems that McKendrick refers to in this quote. McKendrick points to the recognition of a ‘loss of amenity’ as the step forward. The step backward, however, is the apparent limitations that the decision places upon the valuation of the expectation interest with regard to the claimant’s performance interest. It will often be the case that the claimant has contracted to receive something which is really only a benefit to himself and would not provide a benefit to most people. For example, the claimant, a keen gardener, may contract to have special rails affixed to the exterior of his house to hold plants. The majority of householders would not do this and would see no value in such fixtures (and may well believe that the value of the house was diminished if the rails were in place). This means that there will be no, or only a slight, increase in value if the work is performed. Consequently, the damages will be low. Can it be said that the claimant’s performance interest is properly protected in such circumstances?



Activity 16.5 The policy behind the rules of remoteness is one of limiting the amount of damages that can be recovered. It enables parties to, potentially, plan for any losses which may occur as a result of breach. Thus, for example, parties are able to ensure that they have adequate insurance cover for any loss which will occur. If the loss creates exceptional damages, the party responsible for this loss will want to ensure that they have extra insurance coverage. It also allows parties to determine whether or not it is in their best interests to breach a contract. The link between these rules and the cost of insurance is that the rules give, at least in theory, the insurers the ability to assess loss and hence estimate the cost of the premiums to be paid for the insurance to cover this loss.

Activity 16.6 In H Parsons (Livestock) v Uttley Ingham it was unlikely that the pigs would die, although it was likely that they would suffer some form of illness as a result of the way in which the pig nuts were stored (with the lid of the hopper left closed). The majority (Orr LJ and Scarman LJ) found that it was sufficient to establish liability if there was a serious possibility that breach of contract would cause physical injury to the pigs. It did not matter that the severity of the injury could not be foreseen. Scarman LJ explains that this is sufficient because it would be too much to expect the parties to have a ‘prophetic foresight as to the exact nature of the injury that does in fact arise’. The difficulty with this decision is that it is not easy to reconcile with the cases that distinguish between ‘ordinary’ and ‘special’ business profits, such as Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949). In this case, there had to be disclosure of a particularly lucrative contract that increased the amount of the damages. It may be possible to say that such a contract could be disclosed by the plaintiff because it was within his special knowledge, but that to foresee that the breach of contract in Parsons case would cause death was not within the particular knowledge of either party. This does, however, beg the question of how the cases can be satisfactorily resolved. It is likely that the essential difference is that in Parsons case, the court was also concerned with the concept of remoteness in tort where it is well-established that it is the category of harm resulting from the tort, not the actual extent of the harm, that must be foreseeable: Hughes v Lord Advocate (1963). Lord Denning, in Parsons case, challenged the distinction between remoteness in contract and tort.

Activity 16.7 It is difficult to provide a satisfactory answer to this question. On the one hand, it seems to be sufficient that the defendant is aware of the exceptional circumstances: see Simpson v London and North Western Railway Co (1876) and Seven Seas Properties Ltd v Al-Esa (No 2) (1993). On the other hand, there are some indications that the defendant must also agree to accept liability for this exceptional loss: see Horne v Midland Railway (1873) and Kemp v Intasun Holidays Ltd (1987) FTLR 234. If the defendant, aware of the special circumstances, carries on with the contract is he not impliedly accepting these losses?

Activity 16.8 Judges have been reluctant for some time to award damages to compensate loss which has arisen by reason of mental distress. There are a variety of possible purposes behind this refusal. One possibility, as discussed by Cockburn J in Hobbs v London and South Western Railway Co (1875) is that such loss arising from a breach of contract is beyond the contemplation of the parties to the contract. This, however, will not hold true in all cases – it is entirely possible that such loss may be contemplated in some circumstances. Another possibility is raised by Mellor J in Hobbs v London and South Western Railway Co (1875): such loss, in absence of real physical inconvenience, is ‘purely sentimental’. It is not, in other words, a loss for which contract law will provide damages as a matter of principle. This is reinforced by the decision of the House of Lords in Addis v Gramophone (1909). The problem is that modern tort law will now, in some circumstances, recognise damages for loss connected to mental distress. This anomaly was noted by Lord Denning MR in Jarvis v Swan Tours Ltd (1973) and in this case it was recognised that damages for mental distress would be allowed where


the purpose of the contract was to provide ‘entertainment and enjoyment’. A third possibility is that to allow compensation for mental distress is to award damages that are close to punitive; and damages for a breach of contract are not to be punitive. A fourth possibility is that by not allowing compensation for such loss, the law denies recovery of a form of loss which may be difficult to quantify when the contract is entered into.

Activity 16.9 The two cases are very similar. In both cases, a surveyor was hired by contract to survey a residential home. In both cases, the purchasers proceeded to buy the home based on the surveyor’s report. Both reports were negligently prepared and failed to reveal important aspects of the house. In Watts v Morrow the survey failed to reveal that the property needed major repairs; in Farley v Skinner, the survey failed to reveal that the house was affected by the noise of aircraft flying overhead. In Watts v Morrow, the Court of Appeal disallowed the trial judge’s award of damages for ‘distress and inconvenience’. In Farley v Skinner, however, the House of Lords allowed damages for non-pecuniary loss.

How can the two cases be distinguished? One important factual difference is that in the latter case, Farley had asked the surveyor to investigate the possibility of aircraft noise and as a result of this request, the surveyor included the element within his report. In Farley v Skinner, Lord Steyn distinguished Bingham LJ’s decision in Watts v Morrow by saying that his ‘observations’ were ‘never intended to state more than broad principles’ (see paragraphs 14 and 15). Lord Steyn stated that in Watts v Morrow, the claim was for damages for inconvenience and discomfort resulting from a breach of contract: it was not a claim for damages resulting from the breach of a specific undertaking ‘to investigate a matter important for the buyer’s peace of mind’. The House of Lords, in Farley v Skinner, was also concerned that their decision was consistent with the earlier House of Lords’ decision in Ruxley Electronics v Forsyth (1995).

Chapter 17

Activity 17.1 Each piece of land is considered to be unique and, for this reason, damages are not an adequate remedy for an injured party. Damages generally follow as a matter of course in the case of a breach of contract for the sale of goods because the damages awarded allow the injured party to enter the market and purchase a similar substitute. Because each piece of land is unique, no similar substitute is available. See Johnson v Agnew (1979). Yet, this is not an entirely satisfactory answer in the modern world, where parcels of land tend to be small and many residences are similar in their construction and aspect. In these cases, it may that 125 Acacia Avenue is much the same as 123 Acacia Avenue. The real problem may be that the market of similar substitutes is so small that it is impossible in practice to purchase a substitute: people tend not to sell houses in the way that they sell, for example, cars. The real reason is, therefore, the unavailability of a substitute because the market does not provide one. Another explanation tendered for the availability of specific performance for a breach of a contract for the sale of land is that the sale of land creates an equitable proprietary interest in the purchaser’s favour. Yet, the reason that this occurs is because the law will, generally, order that such a contract be specifically performed. Thus, what may really be occurring here is that an order for specific performance is made because everyone involved expects that it will be made. In such circumstances, damages are not an adequate remedy because none of the parties ever expected such a remedy.


Activity 17.2 It depends on what sort of contract the contract of services was. If the services could be performed by an agent or employee of the parties, then it is hard to see that it would be tantamount to slavery. In addition, in many cases, a modern employer will be enormous and employ vast numbers of people. In such a concern, personal elements will be more removed. In the case where the individual is required to perform their services to an individual or within a small organisation, the analogy to slavery may be more appropriate.

Activity 17.3 As a general rule, an injunction will not be awarded if it has the same effect as an order for specific performance. That is to say, if the terms of the injunction are so broad that they effectively compel a positive performance of the contract, the court will not grant the injunction. See Warren v Mendy (1989) and Page One Records Ltd v Britton (1968). Thus, if Albert contracts with Beatrice not to play professional hockey for anyone else besides Beatrice’s hockey team, and not to work for anyone else in any capacity, a court is unlikely to grant an injunction enforcing such a term. This is because it effectively compels Albert to work for Beatrice – something that would be most unlikely to be the subject of an order for specific performance because it is a contract for personal services. On the other hand, if Albert was simply prohibited from playing professional hockey for anyone else besides Beatrice’s team, such an injunction would likely be granted. Although he cannot play hockey for any other team, he can do anything else necessary to earn his income. This is the underlying rationale in Warner Bros v Nelson (1937). The effect, however, can be to cause Albert to continue with Beatrice’s team. Whilst other employment is open to him, none is as lucrative. This was the effect in Warner Bros v Nelson (1937), where the defendant Nelson (better known as Bette Davis) returned to work for Warner Bros.

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The Law of Contract in UK

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