Contract+Law

8/2/2019 Contract+Law

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TheLaw

Of

Contract

(Study Notes)

Zoha Sirhindi, Esq.

LL.M. (Cornell), Attorney of NYS Bar Association

LL.B. (London), Barrister of Lincolns Inn


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The Analytical Framework of Contract Law

Part I How are contracts formed?...................................................................Page 1

- Invitations to treat- Offers- Acceptance- Consideration- Intention to create legal relations

- Certainty and completeness- Form

Part II What is the content of contracts?........................................................Page 6

- Terms and representations- Parol evidence rule- Conditions / Warranties / Innominate Terms- Exclusion clauses- UCTA 1979 and UTCCR 1999

Part III Who can enforce contracts?................................................................Page 13

- Rules of privity- Contracts (Rights of Third Parties) Act 1999- Exceptions to the Privity Doctrine

Part IV How are contracts destroyed?.............................................................Page 17

- Incapacity- Misrepresentation- Mistake- Illegality- Duress and Undue Influence

Part V How do contracts come to an endand what are their consequences?.......................................................Page 23

- Discharge by Performance- Discharge by Breach- Discharge by Agreement- Discharge by Frustration

- Damages- Other remedies- Law of Restitution- Deposits and Part Payments- Extinction of remedies

THE LAW OF OBLIGATIONS

Contract

(the law of promises orexpectations)

Tort

(the law of civil wrongs)

Restitution

(the law of unjustenrichment)


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Part I - Formation of Contracts

A contract may be defined simply as a legally binding agreement. Alternatively, it may be defined as a promise orset of promises which the law will enforce.

All contracts are agreements but not all agreements are contracts.

Contracts may be classified as either bilateral or unilateral. A bilateral contract is one where a promise by oneparty is exchanged for a promise by the other. The exchange of promises is enough to render them bothenforceable. Thus in a contract for the sale of goods, the buyer promises to pay the price and the seller promisesto deliver the goods.

A unilateral contract is one where one party promises to do something (usually pay a sum of money) in return foran act of the other party, as opposed to a promise. A classic example is a reward case where A promises a rewardto anyone who will find his lost dog. The essence of a unilateral contract is that only one party, A, is bound to doanything. No one is bound to search for the lost dog, but if B, having seen the offer, finds the dog and returns it, heis entitled to the reward.

The test for the existence of an agreement is objective: Centrovincial Estates v Merchant Investors

What matters is not what meaning a party actually intended to convey by his words or conduct but what meaning areasonable person in the other partys position would have understood him to be conveying. This is called thepromisee objectivity test.

An offeris a statement by one party of a willingness to enter into a contract on stated terms. An offer has to becommunicated to the offeree: Taylor v Laird

The distinction between an offer and an invitation to treat is primarily one of intention: did the maker of thestatement intend to be bound by an acceptance of his terms without further negotiation or did he only intend hisstatement to be part of the continuing negotiation process? See Gibson v Manchester City Council

cf. Storer v Manchester City Council

Invitations to treat

An invitation to treat is simply an expression of willingness to enter into negotiations which may lead to theconclusion of a contract.

A supply of information is a statement that merely provides information to the other party and is not intended tobe acted upon: See Harvey v Facey

Common types of invitations to treat:

Display of Goods: Fisher v Bell & Pharmaceutical Society v Boots Cash Chemists

Advertisements: Partridge v Crittenden & Carlill v Carbolic Smoke Ball & Lefkowitz v Minneapolis Stores

Auctions: Harris v Nickerson & Barry v Davies

Tenders: Harvela v Royal Trust Co. of Canada & Blackpool Aero Club v Blackpool Borough Council

Time Tables and Automated Machines: Wilkie v London Transport & Thornton v Shoe Lane Parking


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Methods of terminating an Offer

If the offer is revoked (withdrawn) before acceptance: Routledge v Grant(Knowledge of the revocation may come from a third party rather than the offeror: Dickinson v Dodds)

If the offer is rejected or a counter offer is made: Hyde v Wrench(Note that a request for further information is not a counter offer: Stevenson v McLean)

On the lapse of set time or reasonable time: Ramsgate Victoria Hotel v Montefiore

On the failure of a contingent condition precedent: Financings v Stimpson

On the death of the offeree. It also terminates on the death of the offeror if the contract involves a personalelement or the offeree has knowledge of the offerors death: Bradbury v Morgan

Unilateral offers can be terminated before performance begins: Errington v Errington & Daulia v Millbank& Luxor v Cooper*

Unilateral offers to the world-at-large can be terminated before complete performance and their revocationshould reach the same audience as the offer (preferably same channel): Shuey v US

Rules of Acceptance

An acceptance is an unqualified expression of assent to the terms proposed by the offeror.

Acceptance must be communicated to the offeror: Entores v Miles Far Eastern Corporation

Acceptance may be inferred from conduct: Brogden v Metropolitan Railway

Acceptance cannot be silence: Felthouse v Bindley

Acceptance cannot occur if offeree does not have knowledge of the offer: R v Clarke & Gibbins v Proctor

Motive for acceptance is irrelevant: Williams v Cowardine

Acceptance must be made by the offeree or his agent: Powell v Lee

Acceptance cannot be in the form of a cross offer: Tinn v Hoffman

Acceptance must be the last shot in a battle-of-the-forms: Butler Machine Tool v Ex-Cell-O Corporation

Complete performance amounts to acceptance in unilateral contracts: Daulia v Millbank

Methods of Acceptance:

(a) By post: Adams v Lindsell - the postal rule is establishedHentorn v Fraser- it must be reasonable for the offeree to use the postHolwell Securities v Hughes - rule does not apply where it would lead to manifest absurdityHousehold Fire Insurance v Grant - there is a valid acceptance even if letter is lost in the postByrne v Van Tienhoven - the rule does not apply to letters of revocation

(b) By instantaneous mediums: Entores v Miles Far EasternThe BrimnesAllianz Insurance v Aigaion Insurance

(c) Prescribed method: Manchester Diosecean Council v Commercial Investments

* It is suggested that this case be confined to agency scenarios

Not considered good law


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Consideration

Consideration is defined as, Some right, interest, profit, or benefit accruing to one party, or some forbearance,detriment, loss or responsibility given, suffered or undertaken by the other (per Lush J in Currie v Misa).

Consideration is needed for the formation and variation of a contract. There are three forms of consideration:

Executory consideration: Consideration is called executory where there is an exchange of promises to perform

acts in the future. For example, a bilateral contract for the sale of goods wherein A promises to deliver goods to Bat a future date and B promises to pay on delivery.

Executed consideration: This arises in unilateral contracts where the act of acceptance is also the consideration.If one party makes a promise in exchange for an act by the other party, when that act is completed, it is executedconsideration. However, this label is also used to describe the situation where, in a bilateral contract, one party hasperformed as per his promise in the above example it would be when A delivers the good to B.

Past consideration: Consideration that comes before the promise. If one party voluntarily performs an act and theother party then makes a promise, the consideration for the promise is said to be in the past. Past consideration isnot a valid form of consideration.

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

Past consideration is not good consideration: ReMcArdle

Exception: Doctrine of implied assumpsit: Lampeigh v Braitwait & Pau On v Lau Long

Consideration must move (come) from the promisee: Tweedle v Atkinson

Note there is no equivalent requirement that consideration must move to the promisor: Bolton v Madden

Consideration must not be something the promisee is already bound to do:

o Legal Duty: Collins v Godefroy

Exception: Performance exceeds legal duty: Glasbrook Ltd v Glamorgan CC

o Contractual Duty: Stilk v Myrick

Exception 1: Performance exceeds contractual duty: Hartley v PonsonbyException 2: Practical benefit: Williams v Roffey

The concept of practical benefit does not extend to contracts of debt: Re: Selectmove

o But consideration can be something the promisee is bound to do for a third party: Scottson v Pegg

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

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

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


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Promissory Estoppel

Promissory Estoppel is defined as, Where, by words or conduct, a person makes an unambiguousrepresentation as to his future conduct, intending the representation to be relied on and to affect the legal relationsbetween the parties, and the representee alters his position in reliance on it, the representor will be unable to actinconsistently with the representation if by so doing the representee would be prejudiced.See Central London Property v High Tree House

Exam tip: Consider promissory estoppel only after you are unable to find consideration for a particular promise.

Seven conditions must be satisfied:

There must be a pre-existing contractual relationship: Hughes v Metropolitan Railways

The promise must be unequivocal (but can be implied) as to future conduct:Israel Cocoa v Nigerian Produce Marketing

The promisee must have acted in reliance (whether to his detriment or not): WJ Alan v El Nasr

It can only suspend not extinguish rights* : Tool Metal v Tungsten Electric

It must be inequitable to allow the promisor to go back on his promise: D&C Builders v Rees

It can only be used as a defence and not as a cause of action: Combe v Combe

The promise must not be prohibited by legislation: Evans v Amicus Healthcare

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

contemplated by the parties.

See Hickman v Haynes.

Exam tip: Consider the doctrine of waiver if you are being asked to advise a potential claimant. Note that thedoctrine of waiver will factually overlap with promissory estoppel where the promisor is waiving a particularcondition or obligation of the contract but in such a situation the doctrine of waiver, unlike estoppel, can be used bythe promisee as a cause of action.

For example, you are asked to advise a contractor in a claim against a home owner. Homeowners duty to makemonthly payments is conditioned on the contractor providing an architects certificate that the work done the prior

month was acceptable. Homeowner tells the contractor that he will make future payments without a certificate andso the contractor does not provide the certificate the next month; the homeowner then refuses to pay. Thecontractor will be able to successfully sue the homeowner on the grounds of waiver.

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

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


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Intention to create legal relations

The determination of whether or not the parties actually intended to enter into legally binding relations is anobjective one and context is all important. The courts will not examine the states of mind of the parties to theagreement (a subjective approach) but will ask whether or not reasonable parties to such an agreement wouldpossess an intention to create legal relations.

Although the presumptions can be rebutted by evidence of contrary intention, the presumptions themselves arematters of public policy: that contract law should be confined to the commercial sphere and should not operate insocial or domestic situations otherwise the courts would be swamped by trifling domestic disputes.

Social and domestic agreements are presumed not have legal effect:

(i) Husband and wife: Balfour v Balfour & Merritt v Merritt(ii) Parent and child: Jones v Padavatton(iii) Friends: Simpkins v Pays & Coward v MIB

Rebuttal: (i) Business context: Snelling v John Snelling

(ii) Detrimental reliance: Parker v Clark

Commercial and business agreements are presumed to have legal effect:

Esso Petroleum v Commissioners of Customs and ExciseEdwards v Skyways

Rebuttal: (i) Honour clauses: Rose and Frank v J R Crompton and Bros(ii) Subject to contract clause: Tiverton Estates v Wearwell(iii) Comfort letters: Kleinwort Benson v Malaysia Mining

Certainty and Completeness

Uncertainty may be caused by vagueness and/or incompleteness:

Scammell v Ouston & Nicolene v Simmonds & Hillas v Arcos

Requirements of Form

Unilateral gratuitous promises contained in a deed are enforceable irrespective of consideration.

A deed is a document which (a) bears the word deed, (b) is signed by the maker of the deed, (c) isattested by at least one witness and (d) is delivered i.e. some conduct that shows that the personexecuting the deed intends to be bound by it.

Certain contracts such as those pertaining to the sale or other disposition of an interest in land must bemade in writing.

At common law, a defect in form renders a contract unenforceable (but not void). This is subject to theequitable doctrine of part performance.


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Part II - Contents of Contracts

Difference between Terms and Representations

A term is a word or phrase that is part of the contract. Terms define the obligations/undertakings of a party.

A representation is a statement which simply asserts the truth of a given state of facts.

An objective test of intention is used to determine whether a word or phrase is a term or representationHeilbut, Symons & Co. v Buckleton

The following factors are considered in determining objective intention:

Importance of the Statement: Couchman v Hill

Strength of the statement/Need for verification: Schawel v Reade & Ecay v Godfrey

Special knowledge and skill: Bentley Productions v Harold Smith Motors & Oscar Chess v Williams

Timing of the statement: Routledge v McKay

In a written form: Duffy v Newcastle United Football

The Parol Evidence Rule

The parol evidence rule is that where the contract is embodied in a written document, extrinsic evidence is notgenerally admissible to vary, contradict or interpret the document. The document is the sole repository of the termsof the contract.

Entire agreement clauses are often used to, in effect, codify this rule.

There are many exceptions to this rule:

o Partially written agreement: Couchman v Hillo Operating status of the contract: Pym v Campbello Rectificationso Implied termso Evidence about the capacity of partieso Aids to constructiono Proving custom: Hutton v Warreno Collateral contracts: City and Westminster Properties v Mudd

Rules regarding Implied Terms

Terms may be implied into a contract:

By statute: Sections 12-15 of the Sale of Goods Act 1979

By custom: Hutton v Warren

By common law:

o Terms implied in fact:Business Efficacy test: The Moorcock; Officious Bystander test: Shirlaw v Southern Foundries

o

Terms implied in law:El Awadi v BCCI lays down two requirements: (i) Contract of a defined type; (ii) The necessity test


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Distinguishing between Conditions / Warranties / Innominate terms

A condition is an essential term of the contract which goes to the root of the contract. A breach of a conditionenables the party who is not in breach of contract (the innocent party) either to terminate performance of thecontract and obtain damages for any loss suffered as result of breach or to affirm the contract and recoverdamages for breach.

Such promissory conditions should be distinguished from contingent conditions events upon which theexistence of the contract is dependent. A contingent condition may be a condition precedent (if), a conditionconcurrent (as long as) or a condition subsequent (until).

A warranty is a lesser, subsidiary term of the contract. A breach of a warranty only enables the innocent party toclaim damages; he cannot terminate performance of the contract and must therefore continue to perform hisobligations under the contract.

Distinguish this meaning from the following: A warranty is an assurance by one party (the warrantor) to the otherthat certain facts or conditions are true or will happen; the other party is permitted to rely on that assurance andseek some type of remedy if it is not true or followed. This is the sense in which the word is used when giving alifetime warranty on the sale of a product or when buyers and sellers make representations and warranties in a

commercial transaction such as a sale of a business.

Terms may be classified into conditions or warranty:

(a) By statute: Sections 12-15 of the Sale of Goods Act 1979

(b) By courts: (i) By necessary implication as term goes to the root of the contract: Couchman v Hill

(ii) Due to a previous binding authority on the matter: Arcos v Ronaasen

(c) By the parties themselves: Lombard North Central v Butterworth & Schuler AG v Wickman Machine Tool

An innominate term can be distinguished from a condition on the ground that breach of an innominate term doesnot automatically give rise to a right to terminate performance of the contract and it can be distinguished from awarranty as the innocent party is not confined to a remedy in damages. This third classification originated in HongKong Fir Shipping v Kawasaki and gives the court an important degree of remedial flexibility.

Example: The Hansa Nord

The following factors will be looked at in order to assess whether or not the breach was sufficiently serious:

(i) Any detriment caused or likely to be caused by the breach(ii) Any delay caused or likely to be caused by the breach(iii) The value of any performance received by or tendered to the party not in breach(iv) The cost of making any performance given or tendered by the party in breach conform with the contract(v) Any offer by the party in breach to remedy the breach(vi) Whether the party in breach has previously breached the contract or is likely to breach it in the future(vii) Whether the party not in breach will be adequately compensated by an award of damages


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Criteria for a valid exclusion clause

An exclusion clause is a clause in a contract or a term in a notice which appears to exclude or restrict a liability ora legal duty which would otherwise arise.

Courts have generally treated exclusion clauses as a defence to a breach of an obligation.

Exam tip: Remember to follow the three step process below in order to conclusively determine the validity of anexclusion clause.

1) Incorporation is the clause a part of the contract?

(a) Signature: LEstrange v Graucob & Grogan v Robin

Defence of Non est factum: Gallie v Lee & United Dominions Trust v Western

(b) Reasonable notice: Parker v South Eastern Railway must take reasonable steps to inform claimantThompson v LMS Railway* exclusion clause inside the railway timetable is good enough

Sugar v LMS Railway reference to the exclusion clause obliteratedHenderson v Stevenson an exclusion clause should be referred to on the front of the ticketOlley v Marlborough Court the notice should not come after formation of the contractChapelton v Barry UDC the document must be of a contractual natureSpurling v Bradshaw the red hand rule

(c) Previous course of dealing: McCutcheon v David MacBryne Ltd must be regular and consistentHenry Kendall v William Lilico 100 contracts over 3 years is regular and consistentHollier v Rambler Motors 3 or 4 contracts over 5 years is not regular and consistent

(d) Trade usage or custom: British Crane Hire v Ipswich

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

The Contra Proferentum rule: If there is any ambiguity as to the meaning of an exclusion clause the courtwill construe it contra proferentum i.e. against the party who inserted it into the contract and now seeks torely upon it. For example: Houghton v Trafalgar Insurance

Rules of construction for excluding negligence liability: Canada Steamship v The King

Doctrine of Fundamental Breach: Photo Production v Securicor Transport

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

(a) Statutory: Unfair Contract Terms Act 1977Unfair Terms in Consumer Contracts Regulations 1999Sale of Goods Act 1979

(b) Common Law: (i) Misrepresenting the effect of the exclusion clause: Curtis v Chemical Cleaning(ii) Inconsistent oral promise: Mendelssohn v Normand

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


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Unfair Contract Terms Act 1977

UCTA uses two methods of controlling exclusion clauses: declaring them ineffective and making them subjectto reasonableness.

UCTA does not apply to contracts concerning land, contracts which create or transfer most forms of intellectualproperty, contracts relating to the formation or dissolution of a company or any contract of insurance.

Sections 2 to7 only apply to business liability: s.1(3). Business liability is defined as liability for breach ofobligations or duties arising from things done or to be done by a person in the course of a business (whether hisown business or anothers). In other words, the party seeking to rely on exclusion clauses covered by ss. 2 - 7must be acting in the course of a business.

Exclusion of Negligence Liability: Section 2

Liability for death or personal injury resulting from negligence cannot be excluded or limited clauses purporting todo so will simply be ineffective. This includes liability for negligence in tort as well as contract. Responsibility fornegligence which causes some other type of harm such as economic loss can only be limited or excluded where itis reasonable to do so.

As per s.13(1), section 2 also applies to duty defining clauses i.e. clauses that purport to allocate responsibilityrather than exclude liability.

Phillips Products Ltd. v Hyland & Smith v Eric Bush

Exclusion of Contractual Liability: Section 3

Where one party deals as a consumer or on the other partys written standard terms of business, then the otherparty cannot exclude or restrict his liability for breach of contract, except subject to the requirement ofreasonableness. This reasonableness requirement is also extended to terms purporting to entitle the other party torender (i) performance substantially different from that reasonably expected; or (ii) no performance at all.

Example: Timeload Ltd v British Telecommunications

Section 12 states that a party deals as a consumer if he does notmake the contract in the course of businessand the other party does. A contract is made in the course of business if it is integral to the business or it formspart of the regular course of dealing of that business: R & B Custom Brokers v United Dominion Trust. Note thatthis phrase has a different meaning under SGA 1979.

Indemnities by consumers: Section 4

An indemnity clause is one which provides that one party will reimburse (indemnify) the other in the event of anyloss arising from the contract. The effect of an indemnity clause is often to transfer liability away from the party whowould normally be liable. Under s.4 such clauses are only valid if they are reasonable. For example, contracts forthe hire of a lorry and a driver sometimes contain a clause by which the hirer promises to indemnify the owner forany injury, loss or damage caused by the negligence of the driver. This section has no application to commercialindemnity clauses.

Implied Terms in Sale of Goods contracts: Section 6

Legislation such as the Sale of Goods Act 1979 implies certain terms into contracts for the sale of goods and hire-purchase contracts. Exclusion of these terms is controlled by s.6 of UCTA. The implied condition that the seller hasthe right to sell the goods in s.12 of SGA can never be excluded. Other terms implied by ss.13-15 of SGA cannotbe excluded if one party deals as a consumer. Where neither of the parties is dealing as a consumer the exclusionclause will be subject to a requirement of reasonableness.


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Exclusion of Misrepresentation liability: Section 8

Terms that seek to exempt liability for misrepresentation are subject to a test of reasonableness. The onus lies onthe party relying on the exclusion clause to show that it is reasonable. See section 3 of the Misrepresentation Act1967.

The Reasonableness Test: Section 11

Where a term must satisfy the requirement of reasonableness, the test is that the term shall have been a fair andreasonable one to be included having regard to the circumstances which were, or ought reasonably to have been,known to or in contemplation of the parties when the contract was made: s.11(1). Once again, the onus lies on theparty relying on the exclusion clause to show that it is reasonable.

The impugned clause should be looked at as a whole while assessing reasonableness and not only to the part ofthe clause which is being relied upon as the unreasonable the unreasonable part of the clause cannot besevered: Stewart Gill v Horatio

Schedule 2 of the Act provides some guidelines on assessing reasonableness. As per these guidelines, therelevant factors when assessing reasonableness include:

The strength of the bargaining positions of the parties Whether the customer received an inducement to agree to the term Whether the customer had the opportunity of entering into a similar contract with others w/o such a term Whether the customer knew or ought reasonably to have known of the existence of the term Whether the goods were manufactured or adapted to the special order of the customer

In addition to the guidelines, the following factors may also be taken into account:

Availability of insurance at the time of contract formation: The Flamer Pride Whether the clause undermined an express promise: Lease Management v Purnell Secretarial Enforcement of the clause in practice: George Mitchell v Finney Lock Seeds Whether the clause tries to cover two very different types of loss: Overseas Medical v Orient Transport Limitation clauses are more likely to be considered reasonable than exclusion clauses especially if there is

some objective justification for the selection of the figure: St Albans City Council v International Computers

Attempts at evading UCTA: Section 13 and Section 10

Paragraphs (a) to (c) of s.13(1) ensure that clauses which the effect of excluding or restricting liability but in aslightly round about way, are dealt with as if they limited or excluded liability more simply. For example, paragraph(a) covers a clause stating that any claim must be made with a certain time period and paragraph (b) covers aclause which allows recovery of damages but which purports to remove any right to terminate the contract forbreach whereas paragraph (c) will nullify a clause stating that signature was proof that the goods delivered met therequirements of the contract.

The last part of s.13(1) is similarly a provision to prevent evasion of the Act by exclusion clauses in disguise. Itensures that some clauses which, in form, define the obligation will be identified as exclusion clauses, in nature, forthe purposes of ss. 2,5,6,7. The difficulty is that it does not indicate how to determine which clauses are to betreated in this way.

Section 10 states that an exclusion clause which is contained in a separate contract rather than in the contractgiving rise to the liability, is ineffective in so far as it attempts to take away a right to enforce a liability which underthe Act cannot be excluded or restricted. The mischief at which this section is aimed is the practice of seeking toevade the Act by the use of another contract e.g. where a term in a contract between a manufacturer of a productand a purchaser purports to affect the rights of the purchaser against the vendor under the Sale of Goods Act1979. This section therefore applies to attempts to evade the provisions of UCTA by the introduction of an

exclusion clause in a contract with a third party, but does not apply to genuine compromises of existing claims.


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Unfair Terms in Consumer Contracts Regulations 1999

Scope: The regulations apply to unfair terms in contracts (and is not limited to exclusion clauses) concludedbetween a seller or a supplier and a consumer (reg.4(1)). A consumer is a natural person who is acting forpurposes which are outside his trade, business or profession (reg.3(1)).

Effect: An unfair term shall not be binding on the consumer; however the contract shall continue to bind the partiesif capable of existing without the unfair terms (reg.8(1)&(2)). A contract term that has not been individually

negotiated shall be regarded as unfair, if contrary to the requirement of good faith, it causes a significant imbalancein the parties rights and obligations to the detriment of the consumer (reg.5(1)). In Director-General of FairTrading v First National Bank, it was held that good faith relates to the need for fair and open dealing (theconsumer must be given full information - there should be no pitfalls or traps in the contract) whereas significantimbalance arises where a term is so weighted in favour of the supplier that it tilts the contractual rights andobligations significantly in favour of the supplier. In other words, significant imbalance is concerned withsubstantive fairness, whereas good faith relates to procedural fairness.

A term will be regarded as not individually negotiated if drafted in advance and so the consumer has not beenable to influence the substance of the term (reg.5(2)). However, even where a specific term has been negotiated,this will not prevent the regulations applying to the rest of the contract if, overall, it is a pre-formulated standardform of contract (reg.5(3)). The burden of proving that a term was individually negotiated falls on the seller orsupplier (reg.5(4)).

Schedule 2 contains an indicative and non-exhaustive list of terms which may be regarded as unfair.

In the case of written contracts, a seller or supplier must ensure that any written term is expressed in plain,intelligible language (reg.7(1)).

Exam tip: One of the simplest ways of applying the UTCCR in the exam is to compare the clause in questionwith the list of unfair terms stated in Schedule 2 of the UTCCR.

Core provisions: No assessment shall be made of the fairness of any term which relates to the definition of themain subject matter of the contract or the adequacy of the price or remuneration as against the goods or servicessupplied so long as that term is in plain, intelligible language (reg.6(2)).

Sale of Goods Act 1979

The Sale of Goods Act 1979 as amended by the Sale and Supply of Goods Act 1994 implies certain terms into asale of goods contract.

A sale of goods contract is defined as the agreement by which the seller transfers or agrees to transfer theproperty in goods to the buyer for a money consideration, called the price. Thus, the Act applies only to goodssold for money and does not cover other kinds of transaction such as exchanging of goods.

Goods has been interpreted broadly. It has been held to include packaging surrounding goods and instructions

appearing on the packaging. It does not cover services, which are covered by the Supply of Goods and ServicesAct 1982.

Certain provisions of the SGA apply only when goods are sold in the course of a business. The Court of Appealin Stevenson v Rogers, gave the phrase a very wide scope and held that all sales of goods made by business metthis requirement even if the sale of such goods was not the regular trade of the business. It does not require anyregularity of dealing or indeed any previous dealing at all.

Title: Section 12

Under s.12(1), a condition is implied into any contract for the sale of goods that the seller has a right to sell thegoods and is able to pass good title to the buyer. A breach of this condition amounts to a total failure of

consideration and the buyer may claim back the price of the goods even if they have been used for some time.Section 6 of UCTA prevents this section from ever being excluded.


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Sale by description: Section 13

Section 13(1) states that where there is a contract for the sale of goods by description, there is an impliedcondition that the goods will correspond with the description. In many cases, the implied term as to description willalso be an express term of the contract. If a buyer is told that a sweater is cashmere, it is likely to become anexpress term of the contract alongside the implied term that the good correspond with that description. Since s.13is not limited to sale in the course of business, it can apply to private sales.

Satisfactory quality and Fitness for purpose: Section 14

Section 14(2) requires that goods sold in the course of a business should be of satisfactory quality which meansthat they should meet the standard that a reasonable person would regard as satisfactory, taking into accounttheir price, description and other relevant circumstances. In assessing the quality of goods, the courts may takeinto account their fitness for their usual purpose, their appearance and finish, freedom from minor defects, safetyand durability. The requirement of satisfactory quality will not apply where any defect or other matter is specificallydrawn to the buyers attention before the contract is made, or which ought to have been revealed by the buyersown examination of the good: s.14(2(C)). There is no obligation for a purchaser to examine the goods and acursory look at them without opening the packaging for example is not expected to reveal defects. On the otherhand, where a purchaser does examine the goods before buying, any defects he or she should have spotted willnot be covered.

Section 14(3) basically states that if a buyer tells the seller the goods are required for a particular purpose and theseller goes ahead and sells them, they must be fit for that purpose even if it is an unusual one. But it must beproved that the buyer was indeed relying on the sellers advice in making his choice. The condition will be impliedonly when the goods are sold in course of a business.

There is often an overlap between the conditions on fitness for purpose and satisfactory quality. Where thepurpose for which the buyer claims to want the goods is their ordinary purpose, the ability of those goods to fulfilthat purpose may also be a measure of their satisfactory quality.

Note the analogous section 13 of the Supply of Goods and Services Act 1982 which provides that a person whosupplies a service in the course of business impliedly undertakes to carry out the service with reasonable care andskill.

Sale by sample: Section 15

Section 15 provides that where the goods are sold by sample, there is an implied condition that the bulk of thegoods will correspond with the sample, that the buyer will have a reasonable opportunity of comparing the bulk withthe sample and that the goods will be free from any defect, rendering them unsatisfactory, which would not beapparent on reasonable examination of the sample.

Remedies for breach of implied terms

The Sale and Supply of Goods Act 1994 amended the Sale of Goods Act 1979, inserting a new s.15A which

deems a breach of the conditions implied by ss.13, 14, and 15 to be merely a breach of warranty under certaincircumstances. These circumstances are that the buyer does not deal as a consumer and breach is so slight that itwould be unreasonable to reject the goods. As a result, the buyer is not allowed to reject the goods, but has only aright to claim damages.

In addition, SGA used to provide that once the buyer had accepted goods of them, any breach of the implied termswould only be treated as a breach of warranty so that the buyer could not get back the money paid and could onlysue for damages. The new amended SGA attempts to address this problem. Although acceptance will still bedeemed to have taken place unless the seller is told otherwise within a reasonable length of time, this length oftime is now required to be long enough to give the buyer a reasonable opportunity to examine the goods. Inaddition, the SGA now provides that doing something which is inconsistent with the sellers ownership of the goodswill not mean that the buyer loses the right to reject them until they have had a reasonable opportunity ofexamining to see if they conform to the contract. Asking for or accepting a repair to defective goods does not

amount to acceptance and therefore does not cancel the buyers right to reject the goods.


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Part III - Privity of Contract

There are two rules to the doctrine of privity. The first rule is that the third party can not be made the subject ofa burden imposed by the contract. The second rule is that a third party cannot enforce a contract that has theobjective of conferring a benefit to him. It is the second rule that was thought to be unfair and now, after reforms,has very limited application. The classical position on the matter can be shown by the case of Beswick v Beswick.

There is a very close relationship between the second rule of privity and the rule of consideration that it mustmove/come from the promisee. However, the courts have stated that privity and consideration constitute twohurdles and not one. The joint promisee example is used to make this point: X makes a promise to Y and Z topay 100 to Z in exchange for consideration provided by Y. In such a case Z is privy to the contract but can notmaintain against X as he has not provided consideration for Xs promise.

Compare Tweedle v Atkinson with Dunlop Pneumatic Tyre v Selfridge

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

Applicability: Third parties can enforce contractual terms in the following two situations:

(i) Express provision: s.1(1) a

(ii) The contract purports to confer a benefit: s.1(1) b. This is subject to an important proviso in s.1(2) whereby itwill not apply if on the proper construction of the contract it appears that the parties did not intend the term to beenforceable by the third party. See Nisshin Shipping v Cleaves

Although, it is not necessary for the third party to be specifically named, it is necessary for the third party to beexpressly identified in the contract by name, as a member of a class or as answering a particular descriptions.1(3). See Avraamides v Colwill

Enforcement: The right of the third party to enforce a term of the contract is subject to the terms of the contract:s.1(4). This means that the parties to the contract can impose conditions upon the third partys ability to exercisehis rights under the contract. For example, they could stipulate that the third party could receive a benefit under thecontract only if he applied for it within a certain time period. Third parties have the same remedies as would beavailable to them if they were contracting parties, including the rights to damages and specific performance: s.1(5).Although the contract is enforceable by the promisee as well as the third party, there cannot be double liability forthe promisor: s.5; so any recovery by the promisee would have the effect of reducing any award subsequentlymade to the third party.

Consent to variations: Section 2 deals with the issue of amending and cancelling the contract. This states that,unless the contract provides otherwise, the parties to the contract may not rescind the contract, or vary it so as toextinguish or alter the third partys rights, if the third party has either communicated to the promisor their assent tothe relevant term or has relied on the term and the promisor knows of the reliance or can be reasonably expectedto have foreseen that reliance. If one of these three situations applies, then any variations or cancellation can onlytake place with the consent of the third party. The Act permits the contracting parties to vary the circumstances inwhich a third partys consent is required, or to exclude its requirement altogether: s.2(3).

Defences: In an action by the third party, the promisor is able to rely on any defence arising out of the contractwhich would have been available to him had the claim been by the promisee: s.3. Thus, if the promisee inducedthe promise by misrepresentation or duress, the promisor can use that as a defence to an action by the third party.

N.B. It must be remembered that the main contracting parties are still in control. They can decide that theprovisions of the Act should not apply and there will be nothing that the third party can do about it.


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Exceptions to the Privity Doctrine

(a) Agency

An agent is a person authorized to negotiate and enter into contracts on behalf of another who is known as theprincipal. There are three circumstances in which a person will be treated as being the principals agent: (i) wherethere is express or implied authority (ii) where there is apparent or ostensible authority or (iii) where he hasauthority by operation of law. The principal will be bound by any contract the agent makes while acting within his

authority.

Where an agent makes a contract which lies outside the authority granted by the principal, or where the agent infact has no authority at all, the principal may nevertheless choose to ratify the contract, so long as the agent waspurporting to act on the principals behalf at the time the contract was made and the principal had the capacity tomake the contract at the time. The ability of a principal to ratify an unauthorized act of his agent is said to be anexception to the doctrine of privity.

Another rule that flouts the doctrine of privity is that a principal may, in certain circumstances, sue upon a contractmade when the agent did not disclose to the third party that he was acting as an agent for the principal. In theseconditions, the third party can find himself in a contractual relationship with a person of whose existence he wasunaware of at the time that he entered into the contract.

(b) Assignment

Exam tip: Look for it in the situation where a third party enters the scene aftera contract has been made.

In certain circumstances, it is possible to assign (in effect to sell) the benefit (i.e. a contractual right) of a contractwithout the permission of the other party though normally notice of the transaction must be given. A commonexample is selling debts to factoring houses.

Rights arising from contracts for personal services and those contrary to public interest are incapable ofassignment. For example, an employer is not entitled to transfer the benefit of his employees services to a thirdparty.

(c) Negotiable Instruments

A negotiable instrument is an instrument which may be transferred by delivery and indorsement to a good faithpurchaser for value who then takes the instrument free from any defects in the title of the transferor. For example,a cheque is a written order by a person (the drawer) to his bank (the drawee) to pay on demand a stated sum ofmoney to a named person (the payee). The named person, if he so wishes, can transfer the cheque to anotherparty. This new party then becomes the payee and can demand payment from the bank.

Note that the payee(s) is not privy to the contract between the drawer and drawee and has not furnished anyconsideration to the bank. The advantage of a negotiable instrument as compared with an assignment is that abona fide holder for value who is without notice of any defect in the title of the transferor obtains a good title and isable to demand payment.

(d) Collateral Contracts

A collateral contract is a second independent and separate contract made between the original parties (in whichthe consideration will be the entry into the original or associated contract) OR between a third party and anoriginal party - before or at the same time the first or main contract is made.

Where one party makes contracts with two other parties, the courts will sometimes use the device of finding acollateral contract between the two other parties (the promisor and the third party) to evade the privity rule.

Shanklin Pier v Detel Products & Andrews v Hopkinson


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(e) The Eurymedon Device

In Scruttons v Midland, the claimants who were the owners of the goods, entered into a contract with a firm ofcarriers for their transportation. Under the contract, the carriers limited their liability to $500. Stevedores, who werehired by the carriers, negligently damaged the goods and the claimants brought an action in tort against them. Thestevedores sought to rely on the limitation clause contained in the contract between themselves and the carriersbut it was held that they could not do so because they were not privy to the same contract. The House of Lords

held that English law did not recognize any doctrine of vicarious immunity which would have enabled thestevedores as agents, to claim the benefit of the immunity which had been negotiated by their principals. Besides,the limitation clause only referred to the carriers and so was incapable of providing protection for the stevedores.

However, Lord Reid stated that the stevedores might be able to claim the protection of an exclusion clause if fourrequirements were satisfied. These were:

(i) The contract made it clear that the stevedores were intended to receive the protection of the exemption clause.

(ii) The contract made it clear that the carrier, in addition to contracting on his own behalf, was also contracting onbehalf of the stevedores.

(iii) The carrier had authority from the stevedore to enter into the contract on his behalf (or possibly, a later

ratification of the contract would suffice).

(iv) Any difficulties about consideration moving from the stevedores were overcome.

In New Zealand Shipping v Satterthwaite, the factual situation was similar to Midland except that the contractbetween the consignors and the carriers was much more complex and clearly sought to give the stevedores thebenefit of the exclusion clause. The first three of Lord Reids four conditions were satisfied. The contract expresslyextended the benefit of the exclusion clause to any agents employed by the carriers. The carriers had alsocontracted as agents of the stevedores and they were authorized by the stevedores to so act.

The principal problem lay in locating the consideration provided by the stevedores for the consignors offer ofimmunity. The solution adopted proceeded in two stages. First, it was held that when the consignors signed thecontract, they made an offer to the world at large that anyone who unloaded their goods would be entitled to the

benefit of the exclusion clause. Secondly, that this offer was accepted by the stevedores unloading the goods atthe port of discharge and at that moment a binding contract came into existence between the consignors and thestevedores. The consideration supplied by the stevedores was the performance of their contractual duty owed tothe carriers.

(f) Damages on behalf of third party

Where the promisee sues for damages as a result of the promisor failing to confer the promised benefit on a thirdparty, the question arises whether he can recover anything other than nominal damages. Strictly speaking, thepromisee will not have suffered any direct loss; it is the third party that was to be the beneficiary of the promise.Nonetheless, in Jackson v Horizon Holidays, it was decided that a contracting party could recover substantialdamages for the loss caused by to the third party. The House of Lords disapproved of this in Woodar Investment

Development v Wimpey but did not overrule it. They accepted that the ultimate decision was correct but suggestedthat the loss of enjoyment by Mr. Jacksons family was a loss to Mr. Jackson himself.

In The Albazero, the court recognized that when a seller and a carrier contract in contemplation of a secondcontract with the buyer, the seller can recover substantial damages on behalf of the buyer where the goods are lostor damaged by the carrier.

The more recent case of Linden Gardens Trust v Lanseta Sludge Disposals building upon Lord Diplocks judgmentin Albazero, allowed the promisee to recover damages on behalf of the third party as the promisor knew that thesubject matter of the contract would be acquired by the third party.

However, in Panatown v Alfred McAlphine Construction, the House of Lords made it clear that if the contractualarrangement between the parties in fact provided the third party with a direct remedy against the promisor, then the

exception in Linden Gardens could not be relied upon.


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Part IV - Vitiating Factors

The presence of a vitiating factor may render a contract void, voidable or unenforceable.

A void contract is one where the whole transaction is regarded as a nullity. It means that at no time has therebeen a contract between the parties. Any goods or money obtained under the agreement must be returned as perthe law of restitution (to the extent permitted). Where items have been resold to a third party, they may be

recovered by the original owner.

A voidable contract is a contract that operates as a valid contract until one of the parties takes steps to avoid it.Anything obtained under the contract must be returned in so far as this is possible using the remedy of rescission.If goods have been resold before the contract was avoided, the original owner will not be able to reclaim them.

An unenforceable contract is one that exists but cannot be enforced in the courts if a party refuses to carry out itsterms. Items received under the contract cannot usually be reclaimed the loss lies where it fell.

Incapacity

Minors: As a general rule, a contract with a minor is binding only on the other party. Alternatively expressed, such

a contract is not enforceable against the minor (unless he ratifies it after attaining majority). Minority acts as adefence to a claim brought against the minor by an adult.

The harshness of the rule that a minor can sue but cannot be sued under a contract is mitigated by section 3(1) ofthe Minors' Contracts Act 1987 which allows for restitutionary recovery against the minor if it is "just and equitableto do so".

However, contracts of necessaries (section 3(2) of Sale of Goods Act 1979; Peters v Fleming and Nash v Inman)and contracts of employment for the benefit of the minor (Clements v London Railway and De Francesco vBarnum) are valid and binding on the minor.

Note that there is an anomalous category of contracts which are voidable at the option of the minor. This categoryincludes contracts to lease or purchase land, marriage settlements, contracts to purchase shares and contracts of

partnership. These contracts are binding on the minor unless he repudiates them during minority or withinreasonable time of attaining majority.

Also note that a minor cannot be sued in tort if the effect of the tort action would be to undermine the protectionafforded by the law of contract. So, for example, a minor cannot be sued for the tort of deceit when he fraudulentlymisrepresents his age: Leslie v Sheill.

Mentally incapacitated persons:As per section 2 of The Mental Incapacity Act 2005, a person lacks capacity inrelation to a matter if at the material time he is unable to make a decision for himself because of an impairment ofthe functioning of the mind; the impairment may be permanent or temporary.

Section 7 states that if necessary goods or services are supplied to a person who lacks capacity to contract, hemust pay a reasonable price for them. Necessaries are defined to mean suitable to a persons place in society andhis actual requirements when the goods or services are supplied.

At common law, if the incapacity is known or ought to have been known to the other party, then the contract is setaside: Imperial Loan Co v Stone

Where the incapacity is genuinely unknown, the contract can only be set aside in case of an unconscionablebargain: Hart v O Connor

Drunkenness is treated in the same manner as mental incapacity. A contract may be set aside by a drunken partywhere his drunkenness prevented him from understanding the transaction and the other party knew of hisincapacity: Gore v Gibson

Companies: The rule established in Ashbury Railway Carriage v Riche was that a contract which is ultra vires acompany is void. The effect of s. 39(1) of the Companies Act 2006 is virtually to abolish the doctrine of ultra vires inrelation to third parties who deal in good faith with the company.


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Misrepresentation

A representation is a statement which simply asserts the truth of a given state of facts.

A promise is a statement by which the maker of the statement accepts or appears to accept an obligation to do ornot something: Kleinwort Benson Ltd v Malaysia Mining Corporation.

A general duty to disclose does not exist but one should not make active misrepresentations:Keates v Cadogan.

But a duty to disclose does arise in certain situations:

o If the seller is aware that the buyer has misunderstood the terms of his offer i.e. he must disclosethe existence of the unilateral mistake: Smith v Hughes

o If the defendants conduct gives a wrong impression he is under an obligation to correct it:Spice Girls v Aprilia World Service

o Subsequent falsity: With v OFlanagano Statement literally true but misleading (partial disclosure): Notts Patent Brick v Butlero Contracts requiring utmost good faith (Uberrimae Fidei) e.g. insurance contractso Where there is a fiduciary relationship e.g. lawyer-client or trustee-beneficiary

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

The misrepresentation must be a statement of fact:

o Can be made by conduct: Gordon v Selicoo Should not be a mere puff: Dimmock v Halletto Should not be merely an opinion: Bisset v Wilkinsono Where the representor has greater knowledge than the representee, the courts will imply that the

representation must be made with reasonable care and skill: Esso Petroleum v Mardono Misrepresenting ones present intention is a false statement of fact: Edgington v Fitzmaurice

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

The misrepresentation must have induced the representee into making the contract:

o If the misrepresentation would have induced a reasonable person to enter into the contract, thecourt will presume that it did and the onus of proof is then placed on the representor to show that

the representee did not in fact rely on the misrepresentation: Museprime properties v Adhillo The misrepresentation does not have to be the sole or main factor inducing the representee intothe contract: Edgington v Fitzmaurice

o No inducement if the claimant is unaware of the misrepresentation: Horsfall v Thomaso No inducement if the claimant knows the representation to be untrueo No inducement if representation does not affect the claimants judgment: Smith v Chadwicko No inducement if the representation had been verified by the third party and there was reliance on

the verification: Atwood v Smallo It is irrelevant that the claimant has the opportunity to verify the veracity of the representation but

does not take it: Redgrave v Hurd*

* This principle is in doubt: Smith v Eric Bush


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There are four types of misrepresentations:

o Fraudulent misrepresentation (tort of deceit): Derry v Peeko Negligent misrepresentation under common law: Hedley Byrne v Hellero Negligent misrepresentation under s.2(1) Misrepresentation Act 1967: Howard Marine v Ogdeno Innocent misrepresentation: Routledge v McKay

Exam tip: Note the three distinct advantages that misrepresentation under statute enjoys: (i) there is no

need to prove a special relationship between the parties or for that matter, any form of fraud (as the wordnegligent should clearly indicate), (ii) the onus of proof is on the misrepresentor and (iii) the measure ofdamages is the same as that for fraudulent misrepresentation. But also note the distinct limit on the scope ofthis form of misrepresentation: it has no applicability where the representation is made by a third party who isnot a party to the contract an uncommon occurrence on the exam. On balance, misrepresentation understatute will be the form of misrepresentation that you will usually advise the claimant i.e. the representee tosue under.

There are two remedies for misrepresentation and they are available for all types of misrepresentations:

(a) Rescission

When rescission occurs, the transaction is unwound in order to restore the parties, as far as possible,back to the position in which they were before they entered into the contract (thestatus quo ante).

Notice indicating intention to rescind must be given to relevant third parties:Car and Universal Finance v Caldwell

Right to rescission may be lost in four ways:

(i) By affirmation: Long v Lloyd(ii) Lapse of time: Leaf v International Galleries(iii) Where restitutio in integrum* is impossible: Vigers v Pike(iv) Where it would affect third party rights: Phillips v Brooks

(b) Damages

In the law of tort, damages seek to protect the reliance interest. The test for remoteness of damagevaries for the different forms of misrepresentation.

For fraudulent misrepresentation the defendant is liable for all actual damage flowing directly from themisrepresentation: Doyle v Olby

For negligent misrepresentation under statue the test is the same i.e. the defendant is liable for allactual damage flowing directly from the misrepresentation: Royscot Trust Ltd v Rogerson

For negligent misrepresentation under common law, the defendant is liable for damages that were

reasonably foreseeable.

Damages may be available in lieu ofrescission in cases of innocent misrepresentation:William Sindall v Cambridge County Council

An indemnity payment (a personal restitutionary claim) may be ordered: Whittington v Seale Hayne

Section 3 of the Misrepresentation Act 1967 makes a clause excluding liability for misrepresentationsubject to reasonableness as per section 11 of UCTA 1977. An application of this section can be seen inWalker v Boyle.

Entire agreement clauses seem to fall within the scope of section 3.

* restoration to the original condition or position

Since the law now allows for damages in cases of innocent misrepresentation, it is arguable that this remedy is redundant.


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Mistake

Mistake: One or both of the parties believe that a given set of facts exist and this belief subsequently turns out tobe wrong. An operative mistake will render a contract void.

The mistake must exist at the time of contract formation: Amalgamated Investment v John Walker

A common mistake is one which both parties make regarding the same fact(s). It can be of three types:

(a) Mistake as to the existence of the subject matter of the contract (Res Extincta)Couturier v Hastie & McRae v Commonwealth Disposals Commission

(b) Mistake as to possibility of performing the contract:

Physical impossibility: Sheikh Brothers Ltd v OchsnerLegal impossibility: Cooper v PhibbsCommercial impossibility: Griffith v Brymer

(c) Mistake as to quality of the subject matter is usually not a fundamental one:

Bell v Lever Bros & Solle v Butcher* & Leaf v International Galleries & Great Peace v Tsavliris Salavage

Exception: Nicholson & Venn v Smith-Marriot

A mutual mistake occurs where the terms of the offer and acceptance suffer from such latent ambiguity that it isimpossible to impute any agreement between the parties and the parties can be said to be at cross purposes.

Raffles v Wichelhaus & Scriven Brothers v Hindley

A unilateral mistake is one which only one party makes regarding a particular fact.

(a) When one party is mistaken as to the terms of the offer and the other party is aware or ought to be aware of it,the aware party will be unable to enforce his version of the contract as he had a duty to disclose the existenceof the mistake (snatching a bargain).

Hartog v Colin and Shields & Smith v Hughes & Statoil v Louis Dreyfus

(b) A unilateral mistake as to the identity of the other party will render the contract void. Case law suggests that acourt is more likely to conclude that the contract is void where it has been reduced to writing because in face toface dealings there is a firm presumption that the party intended to deal with the person physically in front ofhim.

Cundy v Lindsay Written contract; rogue assumes identity of real person: contract is voidKings Norton Metal Co v Edridge Written contract; rogue assumes identity of fictional person: contract is not voidPhillips v Brooks Face to face dealing; telephone directory irrelevant: not voidLake v Simmonds Face to face dealing; person well known; no steps taken to verif y identity: voidIngram v Little

Face to face dealing; telephone directory relevant: void

Lewis v Avery Face to face dealing; identity card irrelevant: not voidShogun Finance v Hudson Face to face dealing b/w third party and rogue but written contract b/w claimant and rogue: void

Exam tip: In spite of the inconsistent case law, in face to face dealings, look for the following four factors beforelabelling a contract void: (i) the claimant intended to deal with someone else (this is easy to establish if the rogueimpersonates an acquaintance); (ii) the party they dealt with knew of this mistake; (iii) the claimant regardedidentity as of crucial importance and (iv) the claimant took reasonable steps to verify the identity of the other party.

* Although this decision is no longer good law as mistakes of law are now recognized and the doctrine of mistake in equity no longer exists, itis illustrative of the confusing nature of the topic.

This decision is unlikely to be followed.


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Illegality

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

Illegality in performance: If the illegality arises in the performance of an otherwise valid and enforceablecontract, the illegality will not invalidate the contract unless it was thepurpose of the statutory or common

law rule that a breach committed in the course of the performance of a contract should invalidate thecontract: St John Shipping Corp v Joseph Rank & Shaw v Groom.

Knowledge of the innocent party is a relevant factor: Archbolds v Spanglett & Ashmore v Dawson

Illegality at formation: A contract is illegal if its formation is expressly or impliedly prohibited by statute oris contrary to public policy.

(a) Statutory prohibitions:

o Express statutory prohibition: Section 2(4) Competition Act 1998o Implied statutory prohibition: Re Mahmoud and Ispahani

(b) Common law (public policy) prohibitions:

o Contracts to commit a crime, tort or fraud: Alexander v Raysono Contracts promoting sexual immorality: Pearce v Brookso Contracts prejudicial to family life: Lowe v Peerso Contracts prejudicial to public safety: Foster v Driscollo Contracts prejudicial to the administration of justice: Elliot v Richardsono Contracts promoting corruption in public life: Parkinson v College of Ambulanceo Contracts in restraint of trade: Nordenfelt v Maxim Nordenfelt

Effects of Illegality: Illegality renders a contract unenforceable* and the courts will not usually permit therecovery of money or property under an illegal contract (as illegality is normally used as a defence to arestitutionary action which would have otherwise succeeded). See Holman v Johnson

However, the courts have allowed the recovery of benefits under illegal contracts in three scenarios:

(i) Where the parties are not at equal fault (in pari delicto): Oom v Bruce & Hughes v Liverpool Society

(ii) Where the claimant has repudiated the illegal purpose in time: Kearley v Thomson

(iii) Where the claimant does not found his claim on the illegality: Bowmakers v Barnet Instruments

Note that sometimes restitutionary recovery seems to have the same effect as enforcing the contract.

Also note that if a statute specifically provides for the consequences of a contract contravening one of itsprovisions, the express statutory language will prevail.

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

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


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Part V - Discharge and Remedies

Discharge by Performance

The entire obligations rule: starting position is that complete performance of the contract is required to sueon it: Cutter v Powell*

But substantial performance allows a party to enforce a contract: Hoenig v Isaacs & Bolton v Mahadeva

Partial performance only allows for restitutionary recovery: Sumpter v Hedges

If a contract is divisible i.e. capable of severance into separate obligations, a party may claim payment forthe performance of a particular obligation: Roberts v Havelock

A party can sue if his performance is incomplete due to the actions of the other party: Planche v Colburn

Vicarious performance is not permitted where the contract involves the personal skill, judgment or abilitiesof the party: Davies v Collins

Time is usually not of essence in the absence of an express provision; delayed performance only gives theinnocent party a right to damages. However, a buyer may make time of the essence after a seller does notdeliver on time by calling on him to deliver within a reasonable time on pain of having the goods rejected ifthis does not happen. Provided the court later agrees with the buyers assessment of what was areasonable further time for delivery such a notice will be effective: Charles Rickards Ltd. v Oppenheim

The order in which obligations are to be performed may depend on whether the various promissoryconditions are construed as conditions precedent, conditions concurrent or conditions subsequent:Trans Trust SPRL v Danubian Trading

Discharge by Breach

A breach of contract is committed when a party fails or refuses to perform what is due from him under thecontract or performs defectively or incapacitates himself from performing without lawful excuse.

Breach of a warranty gives the innocent party the right to claim damages.

Breach of a condition or a sufficiently serious breach of an innominate term (a repudiatory breach) givesthe innocent party the option

to terminate or affirm the contract in addition to the right to claim damages.

o The decision has to be communicated: Vitol SA v Norelf Ltd

o The motive for the decision is irrelevant: Arcos v Ronaasen

o A valid reason for termination which is subsequently discovered is ok: The Milhalis Angelos

o Acceptance of further performance amounts to affirmation of the contract: Davenport v R

o The decision cannot be revoked; it is permanent: Johnson v Agnew

o Decision to terminate operates prospectively i.e. both parties are relieved of their obligations toperform in the future but the contract is not void ab initio: Photo Production v Securicor Transport

o If the option to terminate is wrongly exercised the party will itself be in breach of contract:Decro-Wall v International Practitioners in Marketing

* Such factual scenarios would now be decided differently as per the Law Reform (Frustrated Contracts) Act 1943

Alternatively described as right of election or right to rescind the latter description is misleading as it connotes a link with the equitableremedy of rescission. Also avoid the discussion of how affirming a contract is a waiver by election.


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Party in breach cannot usually enforce the contract against the innocent party.

Exception: Independent obligations or conditions: Taylor v Webb

An anticipatory breach occurs where one party informs the other before the time fixed for performancethat he will not perform his obligations under the contract. The renunciation must be such as to prove thatthe party in breach acted in such a way as to lead a reasonable man to conclude that he did not intend tofulfil his part of the contract.

An anticipatory breach entitles the innocent party to terminate performance of the contract immediately damages can be claimed on the date of the acceptance of the breach: Hochster v De La Tour

o After affirming the contract, the innocent party may continue to perform even though he knows theperformance is not wanted by the other party: White and Carter v McGregor

o However, the innocent party must have a legitimate interest in continuing performance i.e. it mustnot act wholly unreasonably: The Alaskan Trader

o The innocent party cannot compel the party in breach to cooperate with him so that, where theinnocent party cannot continue without the cooperation of the party in breach, he will becompelled to accept the breach: Hounslow LBC v Twickenham

There are two potential disadvantages for the innocent party in affirming the contract after an anticipatorybreach: Firstly, the innocent party may lose his right to sue for damages completely if the contract isfrustrated between the date of the unaccepted anticipatory breach and the date fixed for performance.Secondly, an innocent party who affirms the contract but subsequently breaches the contract himselfcannot argue that the unaccepted anticipatory breach excused him from his obligation to perform under thecontract.

Discharge by Agreement

In general, an agreed discharge will be binding if it contains the same ingredients that make a contract

binding when it was formed.

Where performance has not been completed by either party to the contract, there is generally no difficultyin finding consideration because, in voluntarily giving up their rights to compel each other to perform, eachparty is giving something to the bargain and so consideration is given.

But where the contract is wholly executed on side, an agreement to abandon the contract will not beautomatically supported by consideration as the discharge is for the benefit of one party only. This newagreement (accord), in order for it to be effective, must be supported by fresh consideration (satisfaction).Note that there will be no need for fresh consideration if the new agreement is in the form of a deed.Moreover, if the doctrine of promissory estoppel or the doctrine of waiver applies, the unilateral dischargewill be effective without the need for accord and satisfaction.

Exam tip: Variation of an existing contract or waiver of a particular obligation is usually discussed in aquestion on consideration/estoppel.

Novation is a term usually used to describe the act of replacing a party to an agreement with a new party.In contrast to an assignment, which is valid so long as the person receiving the benefit of the contract isgiven notice, a novation is valid only with the consent of all parties to the original agreement: the obligeemust consent to the replacement of the original obligor with the new obligor. A contract transferred by thenovation process transfers all duties and obligations from the original obligor to the new obligor.

For example, if there exists a contract where A will give 100 to B and another contract where B will give100 to C then, it is possible to novate both contracts and replace them with a single contract wherein Aagrees to give 100 to C. Consideration is still required for the new contract but it is usually assumed to bethe discharge of the former contract.

When the parties have agreed on the occurrence of a contingent condition subsequent, the contract will bedischarged if it indeed occurs.


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Discharge by Frustration

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

When a frustrating event occurs, a contract is terminated. Obligations cease to exist from that point

onwards. The contract is not treated as void ab initio.

Impossibility can arise due to:

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

Supervening illegality: Fibrosa v Fairbairn

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

There are four limits to frustration:

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

Effects of frustration:

(a) At common law: Fibrosa v Fairbairn & Appleby v Myers

(b) Modern approach: Law Reform (Frustrated Contracts) Act 1943

Section 1(2): The principal effect of the subsection is to (i) entitle a person to recover money paid under acontract prior to the frustrating event, (ii) remove any obligation to pay money that existed prior to thefrustrating event and (iii) entitle a payee to set off against the sums so paid, expenses which he has

incurred prior to the discharge, in the performance of the contract: Gamerco SA v ICM

Section 1(3): If before the frustrating event one party obtains a valuable benefit (other than money)because of something done by the other in performance of the contract, the party receiving the benefit canbe ordered to pay a just sum in return for it. This provision has caused the most problems in practice forthe courts. First, a court has to identify the valuable benefit i.e. value of the end product; secondly, it has toaward a just sum for that benefit: BP Exploration v Hunt


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Damages

The aim of damages is to compensate the injured partys losses and not to punish the party in breach.Punitive damages cannot be imposed even if the defendant calculated that he would make a profit from hisbreach: Cassel v Broome

There are basically three types of interests that damages try to protect i.e. expectation interest, relianceinterest and restitution interest.

A claimant has a right to choose between expectation or reliance interest: Anglia Television v Reed

An award of damages generally seeks to protect the claimants expectation interest: Robinson v Harman

Non-pecuniary losses are generally not recoverable: Addis v Gramophone & Hayes v Dodd

Exceptions:o Where the purpose of the contract is mainly pleasure: Jarvis v Swan Tours & Farley v Skinnero Where the purpose is to relieve a source of distress: Heywood v Wellerso Where breach leads to mental suffering caused by physical inconvenience: Perry v Sidneyo Where breach leads to a loss of reputation: Johnson v Unisys Ltdo Where the contract was for the provision of a pleasurable amenity: Ruxley Construction v Forsyth

Expectation loss is calculated or quantified in many ways:

(i) Difference in value between claimants expectation and what he received: Ruxley v Forsyth(ii) Cost of cure: Ruxley Electronics v Forsyth(iii) Loss of opportunity damages: Chaplin v Hicks(iv) Market Price rule: Thompson Ltd v Robinson & Lazenby Garages v Wright

Unjust benefit/profit made by the defendant is usually unrecoverable:Surrey CC v Bredero Home & Attorney General v Blake

Reliance loss can include pre-contractual expenditure: Anglia Television v Reed but it can not be used to

compensate for a bad bargain: Haulage v Middleton. It may be claimed instead of expectation loss wherethat is too speculative: McRae v Commonwealth Disposals Commission though Chaplin v Hicks statesotherwise.

There are many limitations on damages for expectation loss:

(a) Causation: Quinn v Burch Builders

(b) Remoteness of damages: Hadley v Baxendale & Heron II & Victoria v Newman & Parsons v Ingham

(c) Mitigation: Brace v Calder & Pilkington v Wood & British Westinghouse v Underground Electric

(d) Contributory Negligence: Vesta v Butcher

Damages are to be assessed as at the date of breach: Johnson v Agnew but where the claimant isunaware of the breach, damages will generally be assessed as at the date on which the claimant could,with reasonable diligence, have discovered the breach. Similarly, where it is not reasonable to expect theclaimant to take immediate steps to mitigate his loss, the date of assessment will be postponed until suchtime as it is reasonable to expect the claimant to mitigate his loss: Radford v De Froberville

Criteria for differentiating between a liquidated damages clause and a penalty clause:

Dunlop Pneumatic Tyre v New Garage & Motor & Phillips Hong Kong v Attorney General of Hong Kong

There are two ways of having a fixed sum payable stipulated in the contract without the clause beingconsidered a penalty clause:

(i) The clause merely accelerates an existing liability: Protector Loan v Grice(ii) The amount shall be payable on an event which is not a breach of contract: Alder v Moore


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Law of Restitution

Scope:A restitutionary claim arises when (1) the defendant has received a benefit; (2) its receipt was atthe plaintiffs expense; and (3) the circumstances are such that it would be unjust for the defendant toretain the benefit.

Note that the phrase at the plaintiffs expense does not necessarily mean enrichment by subtraction i.e.

the enrichment has arisen through a transfer from the plaintiff, leaving him with a loss corresponding to thedefendants gain; it can also mean a gain that was obtained by inflicting a wrong upon the plaintiff.

Applicability: As a practical matter, restitutionary claims usually arise:

(1) when a contract has been declared void (e.g. mistake); or

(2) when there has been a failure of consideration (e.g. frustration); or

(3) when there has been a breach of fiduciary obligations.

Remedies: The most common restitutionary remedies are:

(1) Quantum Meruit or Quantum Valebat(2) Money had and received(3) Reasonable Use / License fee(4) Disgorgement / Account of Profits(5) Constructive trust*

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

There is limited scope forrestitutionary damages where there has been a breach of contract:

(a) Total failure of consideration: Whincup v Hughes & White Arrow Express v Lameys Distribution

(b) Unjust benefit: Attorney General v Blake & Experience Hendrix LLC v PPX Enterprises Inc.

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


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Deposits and Part Payments

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

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

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

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

Another point that was decided in Dojab was that in the event of the deposit being declared unreasonable,

the court will not rewrite the contract by inserting into it a reasonable deposit. This will provide anincentive to contracting parties to err on the side of caution when deciding the level of any deposit payable- thus placing limits upon the ability of contracting parties to provide for excessive deposits.

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


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Extinction of Remedies

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

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

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

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

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

Where a claimant is under a disability, for example, he is a minor or is of unsound mind at the time when

the cause of action accrues, the limitation period does not begin until the disability has ceased to o

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