3 - Law of Contract Flashcards
What is the difference between a contract under seal and a simple contract?
Also called a deed, a contract under seal is a formal contract in writing, which has been witnessed, and originally had to be sealed and delivered. It must be clearly stated to be a deed. Some contracts must be in this form to be valid.
All other contracts are simple contracts (or informal contracts)
What is the difference between a unilateral and bilateral contract?
A unilateral contract is only binding upon one party, a bilateral is binding upon two.
Give an example of a unilateral contract
An offer of a reward for finding a lost pet. The owner is legally bound to pay if someone does find the pet, but nobody is legally bound to find it
Give an example of a bilateral contract
Insurance!
The insured is legally bound to pay the premium, the insurer is legally bound to pay valid claims
What is a void contract?
A contract which is not binding because either it is not held to be a contact or neither party can fully enforce it
What is a voidable contract?
A binding contract where one or both parties have the option to set it aside if they wish (usually subject to certain conditions)
What are the 5 essentials for the formation of a valid contract?
- Agreement (offer and acceptance)
- Intention to create legal relations
- Capacity to contract
- Consideration (for simple contracts)
- In the form required by law (if applicable)
How may an offer be made?
In writing, orally, or by conduct to a single person, group of people, or publicly
How long is an offer open for?
The offeror can state a time limit. If they do not then the offer is open for a “reasonable time”
How can an offer be accepted?
In writing, orally, or implied through conduct. However if the offeror states that it must be accepted in a particular way then the oferee must generally accept in that method or in a method that is just as effective (eg a request for acceptance by post could be satisfied if accepted by email)
When does acceptance take effect?
Generally when it is communicated except for two notable circumstances:
- Where the offer states it can be accepted just be carrying out their part of the agreement
- The posting rule - where post is the method of communication, acceptance occurs the moment it is posted not when it is delivered
What is meant by the term “intention to create legal relations”?
The parties must intend for their arrangement to be legally binding
Generally speaking, how does intention to create legal relations apply to:
a) business arrangements?
b) social or domestic arrangements?
a) It is assumed that contractual intention exists in business arrangements except where there is strong evidence to the contrary (eg it is expressly stated in the agreement not to be binding)
b) Social and domestic arrangements are assumed not to be legally binding unless there is strong evidence to the contrary (eg a formal agreement)
How can consideration be described?
The price which supports the promise - either a promise or benefit to the promsior or a detriment to the promisee (or both)
What are the five main rules of consideration?
- Must be real or genuine (not a vague promise or no real benefit/detriment)
- It does not need to be adequate (eg you could sell your house for £1)
- Must not be in the past
- Consideration must move from the promisee (a person cannot enforce a promise if the consideration for it is wholly supplied by a third party)
- Cannot be based on a pre-existing duty or something which the promisee is already bound to do. It must impose an extra duty
What is promissory estoppel?
An exception to the rule that a promise without consideration is not binding
If person A makes a promise to person B, who acts upon it, person A may be prevented (“estopped”) from going back on it
What is a bare or gratuitous promise? Is it binding?
A promise made without the support of consideration. Generally it is not enforceable unless it is made under seal
What are the four examples of forms that a contract may have to be in for it to be binding?
- Under seal
- In writing
- Evidenced in writing by a note or memorandum
- One party must give certain particular to the other
What is the main example of a contract that must be made under seal?
Leases for longer than 3 years
What are some examples of contracts that must be in writing?
Marine Insurance
Cheques and promissory notes
Bills of exchange
Transfer of shares in a registered company
What are the main categories of people with restricted contractual capacity?
Minors, mentally ill, drunk, and corporations
How is a minor defined in English law under the Family Law Reform Act 1969?
A person below the age of 18
Is a contract binding on a minor?
Some contracts are binding, including payment for “necessaries” (food, clothing, education) and contracts for employment and apprenticeship provided it is for their benefit. Some types of contracts such as leases, partnerships and shareholder agreements are binding however the minor can repudiate the contract to avoid liability. All other contracts are not binding upon the minor (but are on the other party)
What is the law of restitution? What is an example of when this applies?
When a person is liable to return property to another. Used when a minor “buys” property in a contract which the other party cannot enforce. The minor cannot be made to pay which is not fair, therefore the remedy is restitution
Is a contract binding on a patient with a mental health condition?
Generally yes, but it may be avoided if they were unable to understand the agreement and the other party was aware of this
Is a drunk person bound by a contract?
Yes unless they can show they did not understand what they were doing and the other party knew this
A chartered corporation makes a contract which is not authorised or is prohibited by its’ charter. Is it valid?
Yes the contract remains valid but the charter may be revoked
When may a contract made by a statutory or registered company be invalid? What is this doctrine?
When it is “beyond the powers of” the corporation. This is called “ultra vires”
What is meant by “certainty of terms”?
No contract is formed if a vital term is missing or if the meaning is uncertain. This does not apply if it is a very minor term or if there are past agreements which imply a term
What are the two classifications of contract terms?
- Express
2. Implied
What is an express term?
A term that is expressly used in the contract via the words used (this can be in writing or orally)
What are the three ways contract terms may be implied?
- In fact
- By custom or usage
- In law
What is a term implied in fact?
A term which is not expressly stated but is presumed to be intended by both parties
What is a term implied by custom or usage?
A term which is not expressly stated but is customary in the market, locality, or trade
What is a term implied in law?
A right or duty of the parties which comes from law
What must an exclusion clause be in order for a party to rely on it?
It must be incorporated in the contract
What does incorporation of an exclusion clause mean?
It can be shown that the other party agreed to it either before or at the time the contract was made
What happened in the cases of Olley v Marlborough Court Ltd (1949) and Thornton v Shoe Lane Parking (1971)?
It was ruled that an exclusion clause did not apply because it was only brought to the claimant’s attention after the contract was made
(In Olley’s case this was a notice in a hotel room exempting liability only seen after she had paid for the room and in Thornton’s case this was a sign in a car park that he had to pay to enter)
How can incorporation of an exclusion course be achieved?
Either by signing of a written document, or if there is no signed contract by a notice/document displayed at the premises the contract is made or is brought to both parties attention before/at the time the contract is made
In rare cases the court may allow an exclusion clause if it has been regularly used in past dealings between the two parties
What act governs contracts concluded between businesses?
Unfair Contract Terms Act 1977
What act governs contracts between a trader and a consumer?
Consumer Rights Act 2015
What is section 2 of the Unfair Contract Terms Act 1977?
Negligence liability - you cannot contractually exclude your liability for death or bodily injury arising from your negligence.
You can exclude other forms of loss (eg property damage) but you must prove the exclusion is reasonable
What is section 3 of the Unfair Contract Terms Act 1977?
Contractual liability - when one party’s standard written terms of business are used, that party cannot exclude or restrict their liability for breach of contract unless it is subject to a requirement for reasonableness
What is section 6 of the Unfair Contract Terms Act 1977?
Sale of goods and hire-purchase - Implied terms as to title (legal ownership) cannot be excluded or restricted (effectively you cannot sell goods you don’t own no matter the contract). Other important implied terms (eg condition of goods, fitness for purpose) can only be excluded if fair and reasonable
How does the Unfair Contract Terms Act 1977 apply to insurance?
It does not - insurance contracts are excluded as it would make them too uncertain
How does Section 62 of the Consumer Rights Act 2015 define an unfair term? How are they dealt with?
An unfair term is one which cause a significant imbalance in the parties’ rights and obligations to the detriment of the consumer.
They are held to not be binding upon the consumer and the contract continues to have effect so far as practicable without that term
What is section 65 of the Consumer Rights Act 2015?
Exclusions - A trader cannot exclude or restrict liability for death or personal injury resulting from negligence. This does not apply to a contract of insurance or to the creation/transfer of land
What is section 31 of the Consumer Rights Act 2015?
Implied terms - A term that excludes implied terms (eg description of goods, fitness for purpose, quality) is not binding upon the consumer
What is the difference in importance between a warranty and a condition?
A condition relates to an important aspect of the agreement whereas a warranty has a minor impact
What is the difference between a warranty and a condition if they are broken?
If a warranty is broken the aggrieved party can claim damages, if a condition is broken the aggrieved can both claim damages and terminate the agreement.
Note this does not apply to insurance contracts
What could result in a defective contract?
- Illegality
- Improper pressure
- Misrepresentation
- Non-disclosure
- Mistake
What are the three categories of contracts which are defective due to illegality?
- Contrary to law
- Contrary to public policy
- Restraint of trade
When is a contract contrary to law? What is the result?
If the contract involved the commission of a crime or tort, or is against statute law.
In some cases simply making the contract is forbidden by law, in some the contract itself is not illegal to make but the purpose is, and in some the contract is forbidden but it is not a criminal act so there is no penalty other than the contract being voided
When is a contract contrary to public policy?
When it does involve a legal wrong and is not forbidden by statute but is harmful to the public and society
What is the outcome if a contract is in restraint of trade?
Generally they are void but if they are reasonable they may be upheld
What are the main two examples of contracts that are in restraint of trade?
- Restraints of employment. For example non-compete clauses. Unless reasonable the court will usually see these as void
- Restraints on the seller of a business. For example requiring the seller not to carry on a similar business as competition. Usually these are seen as more reasonable unless the payment is wholly inadequate
What is the effect of an illegal contract?
Generally it is void and unenforceable. Goods or money transferred under the contract is usually not recoverable unless the parties are not equal in wrongdoing, one party abandons the illegality, or the claimant is a protected class under statute (eg a tenant)
What are some examples of times when illegality of contract might arise in insurance?
- There is no insurable interest
- The purpose of the contract is illegal
- There is an unlawful use of insured property
- The claimed loss is closely linked to a crime
Name and describe two cases which highlight how illegality of contract can affect insurance
- Beresford v Royal Insurance Co Ltd (1938) - The insured committed suicide with the intention that the payout on his life insurance could pay off his debts. At the time suicide was illegal so the court held that whilst the policy did cover suicide, it was against public policy as his estate would benefit from his criminal act so there was no payout
- Geismar v Sun Alliance (1977) - The insured had smuggled items into the UK without declaration or payment of duty. They were subsequently stolen from him but the court ruled that the claimant could not claim for this as he would indirectly profit from his criminal act
How does illegality of contract affect motor insurance?
The driver may not claim for damages causes by their criminal acts, but a third party could still claim. They are an innocent victim so it would not be fair to penalise them by invalidating the contract due to the insured’s criminality. In this case the insurer (or the MIB if they paid out) could seek recovery from the insured
What is the leading case in recovery under insurance where there is illegality of contract?
Gray v Burr (1971)
A man threatened his wife’s lover with a loaded gun to scare him, but accidentally shot him in a scuffle. He was acquitted of murder and manslaughter but successfully sued for damage by the dead man’s wife. He attempted to claim indemnity under his household insurance’s personal liability section. The court refused this as it would be against public policy to permit indemnity against consequences of your conduct
What two forms of improper pressure could lead to a contract being void? What is not improper pressure?
- Duress
- Undue influence
It is important to note that one party “driving a hard bargain” or hard pressure selling is not improper pressure
What is duress?
Forcing a party to agree to a contract against their will by threatening to commit a legal wrong (eg blackmail or violence)
What is undue influence?
When one party takes advantage of a dominant position of trust and confidence, eg doctor over a patient or solicitor over a client
When may a mistake make a contract void? What are the three categories?
When the mistake is so fundamental that it undermines the contract - it is said to “go to the root”
This could be:
- Mistake concerning the subject matter that renders the contract impossible
- Mistaken identity of either party
- Mistake in recording the agreement (eg the written contract is wrong)
What is a case relevant to insurance involving a mistake in a contract?
Beach v Pearl Assurance Co Ltd (1983)
A proposer tried to insure the life of her mother, Mary Ellen Ince. The insurance company’s agent thought the policy was for her grandmother, Mary Ann Ince. The policy was issued in the name of Mary Ellen, the mother, but the details were for the grandmother, Mary Ann, and the premium calculated accordingly. Upon the mother’s death it was ruled that there could be no claim because there was no “consensus ad idem” (meeting of the minds) so the contract was not valid
(The company agreed to return the premiums)
What is a misrepresentation?
A factually false statement made by one party to induce the other into an agreement
What are the three categories of misrepresentation?
- Fraudulent - when the party knows it is false or has no belief it is true, or doesn’t care
- Innocent - They honestly believe it to be true
- Negligent - They do not take sufficient care to ensure it is true
What are the possible remedies for misrepresentation?
- Rescission (claimant avoids the contract)
- Damages
- Refusal of further performance
- Affirmation (contract is treated as binding if claimant wishes)
What is non-disclosure?
Failure to tell the other party about relevant information and leaving out material facts
When does a duty of disclosure exist?
In general there is no positive duty of disclosure for most contracts. However it may exist in some circumstances, for example if a representation made becomes untrue due to a major change then there is a duty to disclose this change and correct the now false statement
A notable time where a duty of disclosure exists is for commercial insurance!
What is the duty of fair presentation for consumer insurance and from which statute does this arise?
To take reasonable care not to make a misrepresentation
Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA)
State the 5 ways a contract may be discharged
- Performance
- Breach
- Frustration
- Operation of law
- Agreement
What does it mean for a contract to be discharged?
The rights and obligations conferred by the contract on the parties come to an end
When is a contract performed? Give an example
When both parties have carried out their side of the agreement. For example one party has paid an agreed price and the other has delivered purchased goods
What are two ways in a contract may be discharged via breach of contract?
Breach by failure to perform
Anticipatory breach - one party indicates they will or not will be unable to perform ahead of the date of performance
What does it mean for a contract to be frustrated?
The contract has become impossible or futile to perform due an unexpected event which is not the fault of either party
What are some ways in which a contract may be frustrated?
Change in law
Death or personal incapacity
Commercial purpose frustrated
Destruction of subject matter or thing necessary for performance
Non-occurrence of an event
What is discharge by agreement?
Both parties make an agreement to release each other from the contract. However if one party has already performed their duties and only one side is being released, that side must give up some consideration for it to be binding. This is known as an accord and satisfaction
What are the main remedies available in the law of contract?
Termination
Damages
Specific performance
Injunction
When is termination an available remedy to a breach of contract?
Only if the breach is so serious that it fundamentally affects the contract - it “goes to the root”
What is the purpose of awarding damages for a breach of contract?
To place the claimant in the same financial position they would have enjoyed if the contract had been fully and properly performed. It should compensate the claimant but not punish the defendant (that would be punitive damages)
If the parties agree that a fixed sum is payable in the event of a breach, how is this treated in law?
If the amount is reasonable it is valid and is known a a liquidated damages clause.
If it is excessive or unreasonable then it is an invalid penalty clause
In contract law, what is the remedy of specific performance?
The court orders the defendant to fulfil their part of the contract by doing something they have promised to do
In contract law, what is the remedy of injunction?
The court forbids the defendant to do something which they have promised not to do
What act governs the period of limitations for claims of breach of contract? What are these limitations?
Limitation Act 1980
Six years for a simple contract, except for personal injury which is three years
Twelve years for a contract under seal/deed
What is meant by the term “privity of contract”?
The rights and duties created by a contract are restricted to the parties who made it. A contract cannot impose rights or benefits on a third party
What impact does the Contracts (Rights of Third Parties) Act 1999 have on privity of contract?
A third party can enforce a contractual term if the contract says they may, or the contract is intended to provide a benefit to the third party, provided they are identified in the contract and that it does not disallow them the right to enforce it
When could privity of contract have an impact on insurance?
If there are joint or composite insureds
In contract law, what is meant by “assignment”?
One party of a contract transfers (assigns) their rights under the contract to a third party
What are the two most common types of assignment and what is the difference between them?
- Statutory assignment according to the Law of Property Act 1925
- Equitable assignment
The main difference is that a statutory assignment allows the assignee to sue the debtor in their own name, whereas an equitable assignment does not
What must be satisfied for a statutory assignment?
The assignment must be:
- Absolute
- In writing
- Expressly made
How can an equitable assignment be made?
By informing the assignee of the transfer or by informing the debtor to discharge payment/performance to the assignee
When can rights under a contract not be assigned?
If the contract is “personal” and it would be unreasonable to expect a party to fulfil their obligations towards anyone other than who the contract was made with
Can you transfer your obligations under a contract?
Generally no, unless the other contracting party and assignee both agree
Can the right to recover money under an insurance contract be assigned?
Yes, it is a chose in action which can be assigned. The entire contract is not assigned, there is no change in subject matter - just the benefit of the contract is assigned
What is a chose in action and a chose in possession?
A chose in action is intangible (eg property), a chose in possession is a piece of tangible property
Can an entire insurance contract be assigned?
Generally speaking no. They are usually personal so would require the Insurer’s consent to be assigned, which in practice is extremely unlikely to be granted.
Notable exceptions are marine insurance and life insurance
