Chapter 3 - Validity of Contract

Question 1

Invalidation of Contract

Types of invalidation

Answer 1

Mistake
Misrepresentation
Duress
Undue Influence

Question 2

Invalidation of Contract
Mistake

Case: Leaf v International Galleries

Answer 2

A mistake about the law never invalidates a contract.
Mistake about facts doesn’t invalidate a contract.

Case: Leaf v International Galleries
where both seller and buyer believed the painting to be a Constable; contract was valid, even though the painting wasn’t a Constable.

Certain mistakes about facts may invalidate the contract

Question 3

Void Contract

Answer 3

A void contract is treated as if it never existed. Court returns parties to their previous positions.

Goods may often be recovered, even from an innocent party who acquired the goods in good faith.

Question 4

Voidable contract

Answer 4

It’s a valid contract, but the innocent party has the right to set it aside.

If goods have been transferred to a third party, who acquired in good faith before the contract was avoided, the goods are seldom recoverable

Question 5

Mistakes relating to subject matter

Case: Raffles v Wichelhaus (1864)

Answer 5

Mistakes about subject matter are not enough to void the contract, unless it’s a mutual mistake as to the identity of the subject matter, as parties will have cross-purposes.

Case: Raffles v Wichelhaus (1864)
Cargo of cotton was described as being on the SS Peerless from Bombay. There were 2 ships with the same name that sailed from Bombay, one in October and one in December. Seller intended to put the cotton on the second ship, buyer expected it to be on the first.
Held: contract was void due to cross-purposes

Question 6

Mistakes relating to the existence of subject matter

Case: Couturier v Hastie (1856)

Case: Galloway v Galloway (1914)

Answer 6

When parties think that a thing is in existence, when in fact it ceased to exist. Contract will be void.

Case: Couturier v Hastie (1856)
Contract made in London for the safe cargo of corn. By the time the contract was made, seller had already sold the corn, because it had begun to ferment.
Parties didn’t know.
Held: contract was void, as subject matter didn’t exist.

Case: Galloway v Galloway (1914)
Separation agreement, but parties had never been married.
Held: separation agreement was void.

Question 7

Mistake as to identity of parties

Case: Cundy v Lindsay (1878)

Case: Kings Norton Metal v Edridge Merrett (1897)

Answer 7

Unilateral mistake, as it usually arises as a result of fraud by one of the parties.
Contract will only be void if the identity of the party is material to the contract. That is, aggrieved party must prove they intended to enter contract with that particular person and no one else.

Case: Cundy v Lindsay (1878)
Blenkarn ordered linen by post from Lindsay & Co. He signed his name so that it looked like ‘Blenkiron & Co’, a respectable firm. Blankarn then resold to Cundy, but didn’t pay for goods. Lindsay & Co sued Cundy for goods.
Held: Contract was void, because Lindsay and Co intended to deal only with Blenkiron & Co. Cundy had to restore the goods.

Case: Kings Norton Metal v Edridge Merrett (1897)
Claimants sold goods to a non-existent firm called ‘Hallam & Co’; Wallis invented this name, got hold of the goods and sold them to a third party.
Held: contract was merely voidable, claimant was willing to deal with an unknown company, and should have therefore checked their existence. They were not able to recover goods or their value from third party.

Question 8

Mistake as to identity of parties

Case: Phillips v Brookes (1919)

Case: Lewis v Averay (1971)

Answer 8

Case: Phillips v Brookes (1919)
Man persuaded jeweller that he Sir George Bullough and bought a ring for a worthless cheque. The man then pawn the ring. Jeweller said contract was void for mistake in identity and tried to recover the ring from pawnbroker.
Held: contract was not

Case: Lewis v Averay (1971)
Lewis sild his car to a man who claimed to be Richard Greene, a well known actor, who paid him a worthless cheque. The man resold the car to Averay, before Lewis found out he had been scammed. Lewis sought to recover the car from Avery,
Held: contract between Lewis and the rogue was not void, merely voidable. Lewis dealt with the person face to face, so should have known he was not dealing with the genuine Richard Greene. Contract still existed at the time car was sold to third party, so third party voulf keep it.

In all cases above, claimants could have sued rogues for fraudulent misrepresentation, rather than suing the innocent parties for the goods. Suing rogues is likely to given them no value though.

Question 9

Mistake as to identity of parties
Fraudulent misrepresentation and mistaken identity

Case: Shogun Finance v Hudson (2003)

Answer 9

Case: Shogun Finance v Hudson (2003)
Fraudster signed a draft finance agreement as Durlabh Patel and presented a stolen drivers’ license to prove his identity. Car dealer sent all documents to Shogun Finance, and they confirmed the credit rating and approved for sale.
Fraudster paid 10% to Shogun as deposit, took the car and the paperwork. He then resold the car for £17,000 to an innocent purchaser, Hudson.
Shogun discovered and sued Hudson for the cost of the car.
Hudson lost original trial and appealed, but Shogun succeeded both in the Court of Appeal and house of Lords.
House of Lords established there had been no contract between the rogue and Shogun; therefore the title of the car remained under Shogun.

The face to face didn’t apply either, because it was the car dealer that met the fraudster face to face and not Shogun.

Question 10

Mistaken signing of a written document

‘Non est factum’

Answer 10

A person who signs a document is assumed to have read, understood and agreed to it.

‘Non est factum’ is the possible defence to this (it’s not my deed) and it was originally developed to protect the blind and illiterate. It was then extended to protect persons failing to understand what they have read.
It doesn’t protect the careless.

3 conditions must apply:

• fundamental difference between the legal effect of the documents to what the signer thinks they have
• no carelessness on signer’s part
• signing must have been fraudulently induced

If ‘non est factum’ succeeds, then the contract is void and the property needs to be returnable.

Question 11

‘Non est factum’

Case: Foster v Mackinnon (1869)

Case: Saunders v Anglia Building Society (1971)

Answer 11

Case: Foster v Mackinnon (1869)
Foster induced Mackinnon, a man with poor eyesight, to sign a document he thought was a guarantee. It was an endorsement for a Bill of Exchange of £3,000 with personal liability,
Held: Mackinnon had not been careless, he was not liable for the bill

Case: Saunders v Anglia Building Society (1971)
Mrs Gallie intended to assign the lease of her house to enable her nephew to borrow money. Someone prepared it fraudulently in the name of Lee, who promised to arrange the loan. When she signed, lease was passed to Lee, who mortgaged it to a building society. She claimed it was void, because her glasses were broken when she signed and was therefore unaware of the meaning. Her defence failed.
She died before she could appeal, Saunders, her executor, did so on her behalf.
Held: Mrs Gallie had intended to sign the lease and her mistake was not sufficiently fundamental. Court said there had been an element of carelessness on her part.

Question 12

The position in Equity

Relief in equity

Answer 12

Relief in equity takes 3 forms:
rectification
rescission on terms
refusal of a grant of specific performance

Question 13

Rectification

Case: Grist v Bailey (1966)

Answer 13

Appropriate when written contract doesn’t express intention of the parties correctly. It allows the document to exceptionally be amended. It’s not a change to the agreement.

2 conditions must be met:

• parties must have common intention
• document must not correctly reflect that common intention

Question 14

Rescission on terms

Case: Grist v Bailey (1966)

Answer 14

If the court determines a comprise is required to achieve fairness, it may impose a new compromise.

Case: Grist v Bailey (1966)
Seller agreed to transfer house to purchaser for £850. both thought there was a tenant, but property was vacant.
Held: Court didn’t consider the contract void for mistake, the court was prepared to set it aside, provided that the purchase price was increased to £2,250, which is the true market value, and a new contract agreed.

Question 15

Refusal of a grant of a specific performance

Answer 15

Specific performance is an equitable remedy,

If party allowed the other party to proceed, despite knowing of mistake, court may not grant specific performance.

Question 16

Misrepresentation
A false statement of fact

Case: Bisset v Wilkinson (1927)

Case: Smith v Land and House Property (1884)

Answer 16

Statement must be false and must be about the facts, not about the law. And it cannot be a statement of opinion.

Case: Bisset v Wilkinson (1927)
Seller with no expertise expressed opinion that ungrazed piece of land would support 2,000 sheep. It was incorrect, but it was no misrepresentation, just an opinion, as he has no expertise.

Case: Smith v Land and House Property (1884)
Seller described tenant as ‘most desirable’ which was incorrect, because he hadn’t been paying the rent.
This was misrepresentation, as seller had to correct knowledge and this was fact.

Case: Dimmock v Hallet (1866)
Land for sale was described as ‘fertile and improvable’, but it wasn’t.
This was deemed as mere sales talk, too vague and didn’t amount to fact; therefore not misrepresentation.

A seller who deliberately conceals dry rot is liable for misrepresentation to buyer.

Question 17

Misrepresentation

Made by one party to a contract to the other party

Answer 17

Statement must be made one party to the other, not to a third party. This has to do with privity of contract.

But misrepresentation can be made to the public in general.

Question 18

Misrepresentation

Before the contract is made

Answer 18

Statement must be made before the contract is entered.

Question 19

Misrepresentation

With a view to inducing the other to enter contract

Answer 19

Claimant must show they was aware of the misrepresentation, that they believed it and that it affected judgement.

Question 20

Representation or terms?

Answer 20

If the representation is incorporated in the contract, it becomes a term. This means deceived party can sue for breach of contract, rather than for misrepresentation,
Damages for breach are immediately awarded, whereas damages for misrepresentation will not be awarded if the maker of the statement can establish that they believed it to be true.

Question 21

Misrepresentation
The effect of silence and duty of disclosure

Case: London Assurance v Mansell (1879)

Case: Nottingham Brick Tile Company v Butler (1886)

Case: With v O’Flanagan (1936)

Answer 21

There is no general duty to disclose facts, so silence will not amount to misrepresentation.

Half- truth may amount to misrepresentation.

Case: London Assurance v Mansell (1879)
Person looking for life assurance was asked what other proposals he had made. He answered truthfully he had made another 2 the previous year and that they were accepted. What he didn’t disclose was that he had made several others that were rejected.
Held: this amount to misrepresentation

Case: Nottingham Brick Tile Company v Butler (1886)
Solicitor stated land was free from restrictions, as far as he was aware, This was true, but he had not investigated the title deeds, which contained restrictive covenants.
Held: this amounted to misrepresentation.

Case: With v O’Flanagan (1936)
A seller stated truthfully that doctor’s practice was for sale and had annual income of £2,000. Seller became ill and by the time of the sale the profits had decreased a lot.
Held: the decrease of profit should have been disclosed to purchaser.

Question 22

Uberrimae Fidei

contract examples

Answer 22

Contracts in which one party alone is in possession of all the facts forming the basis of the contract. In this case they are under duty to disclose in full. That is, it relies on good faith.

Examples of Uberrimae Fidei contracts:

• contracts of insurance - all that may affect the premium must be disclosed, otherwise contract will be void
• contracts for the sale of land - seller is under duty to disclose all defects in title.
• contracts of family arrangement - family members must disclose all relevant facts
• contracts to purchase shares - company must disclose matters listed in the Company Acts. Otherwise contract may be rescinded.

Question 23

Types of misrepresentation and remedies available
Fraudulent misrepresentation and its remedies

Case: Derry v Peek (1889)

Answer 23

Case: Derry v Peek (1889)
Statement was made, either with knowledge that it wasn’t true or without believing it was true, or without caring if it was true or not.

It may be hard to establish if such a case was misrepresentation or not.

Remedy

1. Rescission
2. Damages - damages for tort of deceit can be recovered

Question 24

Types of misrepresentation and remedies available

Negligent misrepresentation and its remedies

Answer 24

Party that makes statement believes it to be true, but without having reasonable grounds to such belief.

Remedy

1. Rescission
2. Damages for tort of deceit
3. Damages for tort of negligent mis-statement

Tort of negligent mis-statement implies there was a liability of care between the parties under the common law.
‘Special relationship’ carries a liability of care. This is where a party is expected to be relied upon by the other party. There is close proximity between the parties, thus duty of care.

Question 25

Types of misrepresentation and remedies available
Negligent misrepresentation and its remedies

‘Special relationship’
Case: Hedley Byrne v Heller & Partners (1963)

Answer 25

‘Special relationship’ carries a liability of care. This is where a party is expected to be relied upon by the other party. There is close proximity between the parties, thus duty of care.

Case: Hedley Byrne v Heller & Partners (1963)
Company asked claimants for credit. They asked for financial advice on the company’s standing from the company’s bankers, the defendants.
They carelessly stated the company was sound.
Held: Claimants were liable, as they had a duty of care.

Question 26

Types of misrepresentation and remedies available
Negligent misrepresentation and its remedies

Damages for negligent misrepresentation under Section 2(1) of the Misrepresentation Act 1967

Case: Corner v Mundy (1988)

Case: Howard Marine v Ogden (1978)

Case: Spice Girls v Aprilia World Services (2002)

Answer 26

This act doesn’t require ‘special relationship’ to be proven, whilst under common law it does.

Cases below show that defendant is liable for negligent misrepresentation, unless they can prove, they had reasonable belief in the accuracy of the statement.

Case: Corner v Mundy (1988)
Vendor of a house told purchaser that central heating was in good order, which was true at the time. Before contract was made, pipes froze and burst and the purchaser was not informed.
Held: vendor was liable for damages, he could not prove he has reasonable cause to believe up to the time of contract was made that his statement was true.

Case: Howard Marine v Ogden (1978)
Owners made false statements about the capacity of 2 barges to a company negotiating to hire them. Owners relied on incorrect information.
Held: owners were liable. They should have informed of correct capacity and could not prove they believed their initial incorrect information to be true.

Case: Spice Girls v Aprilia World Services (2002)
Aprilia hired Spice Girls in their full formation to promote cycles and scooters. The agreement comprised the 5 Spice Girls and was signed.
Spice Girls sued for non-payment, Aprilia counter-claimed the Spice Girls knew Geri Halliwell was going to leave when they signed the contract, they therefore incurred expenditure and suffered loss when they shot the commercial.
Court of appeal ruled that knowing a member was leaving amount to misrepresentation.

Question 27

Innocent misrepresentation

Answer 27

Statement reasonably believed to be true.
If it turns out to be false, aggrieved party can rescind or refuse to carry out the contract.

1. Rescission
2. Damages under Section 2(2) of the Misrepresentation Act 1967

Damages are only awarded by court in lieu (instead of) rescission.

Question 28

A misrepresentation incorporated into the contract as a term

Answer 28

Remedies here will depend on how the misrepresentation became part of the contract.

Situation 1: representation was later found to be untrue, but was important enough to be later incorporated in the contract as a term.
Deemed as representation
1. Rescission
2. Damages

Situation B: representation was later found to be untrue at the point of contract seems to be important enough to be incorporated in the contract
Deemed as breach
1. Damages for breach
2. Withholding future obligation (treating misrepresentation as a breach of condition, central to the purposes of the contract)
3. Rescission, treating misrepresentation as a repudiatory breach

Question 29

Rescission as a remedy for misrepresentation

Case: Leaf v International Galleries (1950)

Answer 29

It is available for all 3 forms of misrepresentation: negligent, fraudulent or innocent.

If it is granted the contract will no longer exist and each party will be restored to the position they were in before contract (goods will be returned to seller, price will be returned to purchaser).
That is contract is voidable.

Right to rescind will be lost if:

• it becomes impossible to restore parties to their original positions
• since it is an equitable remedy, it must be exercised promptly

Case: Leaf v International Galleries (1950)
Picture was sold in 1944 as a Constable. In 1949 it was discovered it was an imitation and claimant wanted to rescind.
Held: 5 years had past, so the right to rescind was lost. He could have sued for damages instead.

• rescission will not be granted if a third party has acquired the goods in bona fide, as they would be disadvantaged
• rescission will not be granted if innocent party afforms the contract, that is, carries out the contract, despite being aware of the misrepresentation. Contract may be affirmed by conduct.

Question 30

Measure (quantum) of damages
Fraudulent and Negligent Misrepresentation

Damages for the tort of deceit

Answer 30

Amount corresponds to the amount that places innocent party to the position they would if the deceit had not been committed. That is, it will include foreseeable and unforeseeable losses and expenses., as long as they aren’t too remote.

Question 31

Measure (quantum) of damages
Fraudulent and Negligent Misrepresentation

Damages for the tort of negligence through negligent mis-statement

Answer 31

Amount awarded will that required to restore the innocent party to the foreseeable position they would have been, if negligent act had not been committed. Only foreseeable losses and expenses, as long as they aren’t too remote.

Question 32

Measure (quantum) of damages

Negligent and Innocent Misrepresentation

Answer 32

Damages as per Section 2 (2) of the Misrepresentation Act 1967 in lieu of rescission.

Usually the amount granted will be the difference between what the claimant thought they were getting had the misrepresentation not taken place, and what they actually got.

Question 33

Difference between tort and contract measure of damages

Contract Damages

Answer 33

Contract damages are awarded to place claimants in the position they would have been if the contract had been performed as agreed. So the aim is to provide foreseen financial benefit.

Tort protects a bad bargain and contract protects a good one.

Question 34

Difference between tort and contract measure of damages

Tort Damages

Answer 34

Tort Damages aim to put the claimant back in the position held before the tort was committed.

Tort protects a bad bargain and contract protects a good one.

Question 35

Attempts to exclude liability for misrepresentation

Answer 35

It can only be done if it is reasonable to do so.
Section 3 of the Misrepresentation Act 1967, no enshrined in the Unfair Contract Terms Act 1977, any term excluding or restricting liability is void, unless person making it can prove its reasonableness.

Question 36

Duress

Case: Barton v Armstrong (1975)

Answer 36

When a party in induced to enter a contract by force or threat of force.

Any such contract us voidable in common law.

Innocent party can set it aside, but this must be fone promptly, otherwise the right is lost.

Case: Barton v Armstrong (1975)
Armstrong was chairman, and Barton the MD. Armstrong threatened to have Barton murdered, unless he sold the interest in the company to him in favourable terms.
Held: it was voidable for duress

Question 37

Economic duress

Case: Atlas Express v Kafco Limited (1989)

Case: CTN Cash and Carry v Gallaher (1994)

Answer 37

Threat of economic damage.

Case: Atlas Express v Kafco Limited (1989)
Small manufacturer received a large sum from a high street chain store. They then made a contract with a carrier to deliver the goods at a fixed price. After first delivery, carrier said they miscalculated and refused to make further deliveries, unless they paid double the fees. They agreed, but then refused.
Held: agreement was entered into under economic duress, and therefore not enforceable.

Case: CTN Cash and Carry v Gallaher (1994)
Cigarette supplier had monopoly of suppy of the best brands, and supplied to claimant on credit terms. One of the orders was taken to the wrong warehouse. Defendants admitted responsibility and agreed to re-deliver to the correct address. Consignment was stolen before second delivery. They resent delivery, but then charged for this one and stolen one. Claimant refused at first, but then agreed after being threatened that credit facilities would be withdrawn,
Held: not duress, as defendants merely tried to chase them for the money they genuinely were owed, which is not unlawful.

Question 38

Economic duress

Case: Opel Gmbh and Renault SA v Mitras Automotive

Case: Tankship v International Transport Workers’ Federation (1983)

Answer 38

Case: Opel Gmbh and Renault SA v Mitras Automotive
Opel and Renault had contracted with Mitras for a while to supply bumper mountings for vans. They decided they want to change the design of their vans and notified Mitras of termination, they gave them 6 months notice. Mitras demanded several hundred thousand pounds compensation, and refused further deliveries. They reluctantly accepted their terms and paid, but then claimed economic duress.
Held: there was economic duress, and agreement was invalidated, making it voidable. Defendants put illegitimate pressure on claimants threatening to breach supply.

Note there was be legitimate commercial pressure, due to debt, so it may be difficult to determine if there was economic duress.

Case: Tankship v International Transport Workers’ Federation (1983)
ITWF insisted that payment was made to their welfare fund before they called off a strike, which was affect a ship belonging to the claimants. Payment was made and strike was lifted. The ship owners then claimed they had made payment under duress.
Held: there was duress, not because the owners had no other choice but to pay, but because they had no other alternative other than to pay, and this pressure was considered to be illegitimate.

Question 39

Undue Unfluence

Answer 39

This is when a party is induced to enter a contract by improper pressure from the other party.

Where undue influence is proved, the court may set the contract aside or modify its terms, in order ro reduce disadvantage of innocent party.

Question 40

2 types of undue influence

Answer 40

Actual Undue Influence

Presumed Undue Influence

Question 41

Actual Undue Influence

Case: Williams v Bayley (1866)

Answer 41

Where it can be proved party was induced to enter into a contract by improper pressure from the other party.

Case: Williams v Bayley (1866)
Undue influence was established when a father was prevailed upon to give security for his son’s debts under threats from the bank to prosecute the son.
Could be set aside due to Undue Influence.

Question 42

Presumed Undue Influence

Case: O’Sullivan v MAM (1985)

Case: National Westminster Bank v Morgan (1985)

Answer 42

Law attempts to protect weaker party from entering contracts against their will by presuming that there has been undue influence under the following circumstances:

a) Relationship
doctor/patient
solicitor/client
religious advisor/disciple
parent/child

(wife/husband and employer/employee not included, though it may happen too)

b) Transaction inconsistent with and not explained by the relationship
Weaker party is coerced into entering contract they wouldn’t normally enter into freely. Relationship is abused.

Case: O’Sullivan v MAM (1985)
young singer and composer made several contracts with management company when he had no business experience. He then set it aside, as they were unduly harsh and not the sort of transaction the weaker party would normally enter into.

Case: National Westminster Bank v Morgan (1985)
Couple mortgaged home as they were in financial difficulties. Bank manager visited the house and persuaded the wife to sign. She didn’t realise that the mortgage also covered her husband’s business debts. She took no independent advice and the effect of the mortgage was then explained to her.
Held: contract was binding, she wanted the loan initially and understood what she was doing. There was no disadvantage, because what she wanted was a loan.

Question 43

Presumed Undue Influence

Case: Leggatt v National Westminster Bank (2000)

Case: Credit Lyonnais Bank v Burch (1997)

Answer 43

Case: Leggatt v National Westminster Bank (2000)
Husband’s partnership was in financial difficulties, bank agreed to advance new loan, which was signed by husband and wife. Later the bank claimed the house.
Held: Wife provided security for husband’s debts, but partnership would have been made bankrupt if the wife had not signed the loan, so the charge was to her advantage. But banks should always ensure they explain all details to all parties.

Case: Credit Lyonnais Bank v Burch (1997)
Employee was required by employer to mortgage his flat to the bank as a security for employer’s debts.
Held: whilst the employee/employer doesn’t raise the presumption of undue influence, the circumstances around this case did, and it was set aside.

Question 44

Rebutting he Presumption of Undue Influence

Case: Barclay Bank v O’Brien (1993)

Case: Lloyds Bank v Bundy (1975)

Answer 44

Undue influence can be rebutted by evidence of the contrary.
Example, weaker party got independent legal advice.

Case: Barclay Bank v O’Brien (1993)
Wife was persuaded by husband to mortgage family home as security for business debts. He led her to believe liabilities would be limited to £60,000, but they were far higher.
Held: bank was unable to prove he had taken reasonable steps to explain to the wife the potential liabilities, and couldn’t enforce mortgage against the wife.

Case: Lloyds Bank v Bundy (1975)
Son was in financial difficulty. Bank manager visited the father and persuaded him to guarantee son’s debts and the mortgage the house to the bank as security. Father was old and had no opportunity to find independent legal and financial advice.
Held: contract of guarantee was set aside.

Case: CIBC Mortgages v Pitt (1993)
Married couple borrowed money jointly and told lender it would be to pay their mortgage and to buy a new holiday home. But it was actually for husband to speculate the stock market, and wife only reluctantly agreed.
Held: lender was allowed to force mortgage against both. Wife knew real purpose, lender didn’t.

Question 45

Rebutting he Presumption of Undue Influence

In practical terms

Case: Alicard v Skinner (1887)

Answer 45

• Lender is automatically put on constructive notice there may be potential undue influence, when the weaker party is not acting in the course of business.
• Must advice weaker party to seek independent legal advice.
• Must reassure weaker party has understood the consequences of what they are signing, and has been warned of the risks is non-technical language and has freely chosen to sign.

Case: Alicard v Skinner (1887)
Miss Alicard joined a religious order and gave £7,000 according to their rules of poverty, over the 8 years she was a member. 6 years after leaving the order, she tried to recover that money.
Held: Money was taken from her under undue influence, but she waited too long before suing.

Question 46

Illegal Contracts

Restraint of trade contracts

Answer 46

‘Restraint of trade’ are contrary to public policy, but are not illegal. They are void.

Restraint of trade contracts:

• restraints of employment
• restraints on sale of business
• supplies of goods and services (agreements to fix prices)
• solus agreements

Question 47

Illegal Contracts

Restraint of trade contracts - severing the clause

Answer 47

The restraint of clause will usually be limited to a clause.
So if one clause is invalid, it doesn’t mean the whole contract is invalid, as it can be severed from the contract.

If the contract remains unaltered after severing that clause, it can be carried on; if not, it will be void.

Question 48

Illegal Contracts

Restraint of trade contracts - burden of proof

Answer 48

The restraint clause will be presumed void, unless teh person imposing it can prove it’s reasonable in the interest of both parties and in the interest of the public at large.

Question 49

Illegal Contracts

Contracts restraining Employment

Case: Home Counties v Skilton (1970)

Case: Littlewoods Organisation v Harris (1978)

Answer 49

General rule is that a person should be free to earn their living where and with whom they like.
Putting restraints on ex-employees can be allowed in some circumstances, because employees often hold valuable information about employer’s customers. Therefore clauses preventing employees from working for rivals are reasonable.

Case: Home Counties v Skilton (1970)
Milkman’s contract had a clause prohibiting him to sell milk to any of employer’s customers for a period of 6 months. Regardless of self-employed, or working for another.
Held: valid as it was to protect employer’s interest, potential loss of customers.
The clause actually stated ‘milk and dairy produce’; but ‘dairy produce’ was deemed to be too wide and it restricted to the sale of milk.

Case: Littlewoods Organisation v Harris (1978)
Claimant had planned the Littlewoods catalogue for 1 year and then left to work in the Universal Stores; but his contract stated he couldn’t work for the Universal Stores for 1 year after leaving.
Held: it was a very general restriction, as it prevented him from working to the Universal Stores in any capacity. If it expressed a trading of information role, the clause would be seen as reasonable, but it didn’t

Question 50

Illegal Contracts

Case: Foster and Sons v Suggett (1918)

Case: Eastham v Newcastle United (1964)

Case: Mason v Provident Club Clothing Company (1913)

Answer 50

Case: Foster and Sons v Suggett (1918)
Manager of glass works had agreed not to work for a rival firm for a period of 5 years after leaving.
Held: the clause was valid, as employee had access to valuable manufacturing processes.

Case: Eastham v Newcastle United (1964)
Clause prohibited the transfer of footballer player from one team to another without the original club’s consent.
Held: clause was wider than needed to protect the interests of the club

Case: Mason v Provident Club Clothing Company (1913)
A clause prevented employee from working to any similar business within 25 miles of London for 3 years after leaving.
Held: clause was too wide to be reasonable.

Any hidden penalties in contracts, such as penalty on pension scheme, will have to satisfy the test of reasonableness.

Question 51

Illegal Contracts

Contracts restraining Employment
Skills Acquired

Answer 51

Any attempt from an employer to prevent employee from using a particular skill acquired in the course of their employment will be void.

Question 52

Illegal Contracts

Contracts restraining Employment
If employer ends contract and not employee

Answer 52

Then employer will be unable to enforce the restraining clause within the contract.

Question 53

Illegal Contracts

Contracts restraining Employment
Clause imposing duty of confidentiality

Case: Faccenda Chicken v Fowler (1986)

Answer 53

Employers may have in implied term in employee’s contracts with duty of confidentiality.

Case: Faccenda Chicken v Fowler (1986)
Defendant was company’s sales manager and then resigned to set up a rival business. Several Fccenda employees joined Fowler in his new business. The Faccenda contracts didn’t include an express term restricting their activities if they left. Faccenda argued they had broken implied terms by making use of confidential sales information.
Held: Court of Appeal agreed there was implied confidentiality, but information about customers was not confidential.

Question 54

Illegal Contracts

Restrictions on sales of business

Case: British Reinforced Concrete v Schelff (1921)

Answer 54

These are found to be more likely to be found valid than in an employment contract, this is because buyer and seller are commercial parties and therefore more likely to have equal bargaining power.

Restriction must be reasonable, must protect the business.

Case: British Reinforced Concrete v Schelff (1921)
Seller was small manufacturer of specialised road improvement product, and sold its business to a large national firm. There was a clause stating seller must not manufacture general road surfacing products in the future.
Held: clause was void, business sold concerned specialised product only, and restraints could only be imposed in that particular product.

Question 55

Illegal Contracts

Agreements to fix prices

Answer 55

These agreements are know as ‘cartels’ and are detrimental to consumers, because they reduce competition and make prices artificially high

S2 (1) and Chapter 1 of Competition Act 1998, which prohibits acts that may affect trade within the Uk and distort competition.

Article 101 and 102 of the EU Lisbon Treaty renders void any agreements that affect trade in EU and distort its competition.

Part 4 of the Enterprise Act 2002, which empowers the Competition Commission to investigate markets where there appears competition may be harmed.

S188 of the Enterprise Act 2002 states individual is guilty of an offence if they dishonestly agree to engage in price fixing, limitation of supply or production,

Question 56

Illegal Contracts

Solus Agreements

Case: Esso Petroleum v Harper’s Garage

Case: Cleveland Petroleum v Dartstone Ltd (1969)

Answer 56

Where a retailer promises to sell only supplier’s brand of goods.

Agreement is only valid if it meets what’s in the case below.

Case: Esso Petroleum v Harper’s Garage
Harper owned several garages, one of them entered into a contract where it was promised it would be open at all reasonable hours and sell only supplier products, in return garage received a discount in petrol. Further agreement with a second garage was made, where they would sell only Esso petrol for 21 years in exchange of a loan.
Held: First agreement was valid, because the agreement was limited to a reasonable period, and there was public benefit.
Second agreement was invalid, as period of restraint was too long, and against public interest.

Case: Cleveland Petroleum v Dartstone Ltd (1969)
Defendants took lease of a garage from Cleveland Petroleum. Lease stated they could only sell Cleveland petroleum during the whole period of the lease.
Held: restriction was not unreasonable, since defendants hadn’t previously occupied the land and had taken the lease with full knowledge of this restriction.

Question 57

Construction of restraint clauses

Case: Clarke v Newland (1991)

Case: Nordenfelt (1894)

Answer 57

Generally court will not amend any restraint clause in order to render it valid. It will stand or fall.
It may try to attribute a common sense to the words, rather than changing them.

Case: Clarke v Newland (1991)
Doctor in general practice was prohibited by a partnership agreement from practising locally within 3 years after leaving. He went to a local nearby hospital and succeeded in claiming the restraint didn’t prevent him from hospital work, since it didn’t compete with the partnership.
So though the restraint was valid, it didn’t apply to hospital work.

If a restraint clause restricts several activities, it may be possible to sever void sections from the valid ones.

Case: Nordenfelt (1894)Case: Nordenfelt (1894)
Inventor and manufacturer of munitions sold his business and agreed not to engage in the munitions trade with any other business liable to compete, anywhere in the world for 25 years,
Held: court decided the part of ‘munitions business’ was valid, but ‘in any other business’ was not, as it was too wide.

Question 58

Contracts illegal on the grounds of public policy

Illegal and void contracts

Answer 58

Illegal contracts
Some contracts are illegal on the grounds of public policy. These will be void contracts and contracts will do nothing to assist, due to being illegal.

Void contracts
Other contracts may be void, but not illegal.

Question 59

Contracts illegal on the grounds of public policy

Examples

Answer 59

Contracts that interfere with the right to marry, or which deprive rights over the child.

Agreements to commit a criminal offense or tort
Case: Foster v Driscoll (1929)
where there contract to import whiskey into the USA during the Prohibition was held to be void.
Case: Allen v Rescous (1676)
claimant paid the defendant to assault and evict a tenant. Defendant didn’t carry out, and claimant wasn’t able to recover payment.

Contracts to defraud the revenue
Case: Miller v Karkinski (1945)
Agreement between employer and employee to disguise their salaries as expenses was void.

Contracts to corrupt public life
Case: Parkinson v College of Ambulance (1925)
Secretary of a college promised P he would obtained knighthood if he donated £5,000 to the college. P did so, but wasn’t give knighthood. Contract was held illegal and P couldn’t recover his money.

Bribes to public officials

Sexually immoral contracts
Case: Pearce v Brookes (1866)
owner of coach hired it to prostitute, who used it to attract clients, and he knew. Contract was deemed illegal and void.

Contracts for trading with the enemy

Contracts to obstruct the course of justice: for instance a contract not to prosecute someone who committed a crime.

Question 60

The consequences of illegality

Answer 60

Illegal contract is void.
Unlike any other void contract, money or goods that changed hands can’t be recovered.

If one party is innocent, they can sue the other

If party repents before contract, the court may allow a remedy.

Question 61

Contracts illegal and void by statute

The Life Assure Act 1774

The Enterprise Act 2002

Answer 61

Some statutes declare a whole contract void.

The Life Assure Act 1774: proposer has the right to insure their own life and any other party whose death would affect them financially, a debtor. If there is no insurable interest, it will be illegal.
Case: Harse v Pearl Life Insurance
Son insured life of his mother. There was no insurable interest, so it was deemed void and son couldn’t recover the premium he had paid.

The Enterprise Act 2002
Agreements between suppliers to price-fix , to limit supply or production to influence price, market share, are unlawful. These suppliers are known as cartels.

Question 62

Transactions that are only partly illegal

Case: Archbolds Ltd v Spanglett Ltd (1961)

Case: Cope v Rowlands (1836)

Answer 62

if a contract only has certain illegal terms, they can be severed in order to give effect to the remainder of the contract.
however the illegal promise must be independent of the other terms and must not constitute consideration on which contract his made, such as a promise to carry out a legal act.

If it’s only the act and not the contract that is illegal, innocent party can sue as long as they were not aware of the illegality.

Case: Archbolds Ltd v Spanglett Ltd (1961)
Splangletts was contracted to carry whiskey belonging to Archbold in a van that was not licensed to carry freight. This was a statutory offense. Whiskey was stolen from van, and Archbold’s sued for breach. Splanglett pleaded their own illegality had made contract void.
Held: defence failed as there was no illegal conspiracy or illegal purpose for the contract. Archobolds didn’t know the van was unlicensed. Splangett was ordered to pay value of whiskey in damages.

Case: Cope v Rowlands (1836)
Unlicensed broker sued for his fee.
Held: He couldn’t recover fee, as the law was designed to protect public from the activities or unlicensed dealers.