Contract - ALL Flashcards
What is a contract?
A legally binding agreement which imposes duties on the parties, breach of which gives the innocent party a remedy that the law will enforce.
What three elements are required for a contract?
- Agreement (offer and acceptance)2. Intention to be legally bound3. Consideration (i.e. something of value given in support of the agreement)
What are three ways a simple contract can come into existence?
- In writing2. Orally3. Through conduct of parties
What are three examples of contracts which must be in writing?
- Guarantees2. Contracts for sale/disposition of an interest in land3. Consumer credit agreementsNote, for the majority of contracts, there are no formal requirements.
How are contracts in electronic form typically treated?
They will be considered properly executed as if they were in writing
What is a deed?
A document which makes it clear on its face that it is a deed.Requirements:1. Executed by the parties to it in the presence of a witness2. Delivered (i.e. the parties have shown their intention to be bound)Certain contracts must be made by deed to be enforceable including promises for no consideration and a conveyance of land.
In the context of a deed, what does delivered mean?
Any act indicating the parties’ intention to be boundThis is typically one by including words such as “Delivered as a deed on [date]”
What are two instances where a contract must be made via deed to be enforceable?
- Promises where nothing is received/promised in return (avoids consideration issue)2. Conveyance/transfers of land (the actual land itself; not to be confused with the contract to sell/dispose of an interest in land)
What is the timing advantage in having a contract made by deed as opposed to a contract not made by deed?
12 years to bring a claim for breach with a deed, as opposed to 6 years for a simple contract
Contract formation
Agreement* Offer (promise, undertaking, or commitment with definite and certain terms communicated to offeree) AND Acceptance before termination by revocation, rejection, or operation of law* Whether this is present is determined on an objective standard: did the words or conduct of the parties manifest a present intention to enter into a contract?Consideration* Bargained-for exchange of something of legal value OR Substitute for consideration e.g. promissory estoppelIntent * Presumption of intent in commercial arrangements (but not in domestic/social situations)Capacity* Minors/Mentally incapacitate people may not have capacity. Lack of capacity results in the contract being unenforceable
What is an offer?
A: * promise, undertaking or commitment * with definite and certain terms * communicated to the offereewhich creates a power of acceptance in the offeree and a corresponding liability on the part of the offeror.
What is required for a communication to be an offer?
It must create a reasonable expectation in the offeree that the offeror is willing to enter into a contract on the basis of all material terms contained in the offer
An expression of what is required for a communication to be an offer?
An expression of a promise, undertaking, or commitment to enter into a contract with definite and certain terms (i.e. not a mere invitation to begin preliminary negotiations)If it is too vague, uncertain or incomplete it will not be an offer.Example: * A to B: “I will sell you my car for £5,000” - very clearly an offer.* A to B: “I am thinking of selling my car. I reckon it is worth around £5,000. Would you be interested in it at that price?” - not an offer, A has not said that he actually intends to sell his car, and the price is only a potential asking price.
What is the basic enquiry required to determine if an offer contains definite and certain terms?
Whether enough of the essential terms have been provided so that a contract including them would be capable of being enforced* “I will sell you my car for £5,000” is enforceable as there is a clear intent and certainty as to which car A is referring to and the price. * “I might sell you a car for around £5,000”, there is no certainty that A does in fact want to sell, which car he is referring to, or the price.
Does an offeree need to have knowledge of an offer?
Yes.Note, an offer can be made to a specified individual or group, or to the world at large.
How does an offeree acquire knowledge of an offer?
The offer must be communicated to them
Which 2 types of communications do not amount to an offer?
Responses to requests for information * Example: “Will you sell me your house? Email lowest cash price”. Response: “Lowest cash price for my house is £290,000”. This is not an offer.Invitations to treat (i.e. an invitiation to make an offer)* Advertisements * Shop Sales* Price Lists* Tenders * Auctions * Price quotations
Is a statement made in response to a request for information an offer?
No
What is an invitation to treat?
The first step in the negotiations for a contract, but it falls short of actually being an offer. An invitation to treat is often an invitation to the other party to make an offer.These are often in the form of:* Advertisements * Shop Sales* Price Lists* Tenders * Auctions * Price quotationsExample: A asks B if they would be interested in buying A’s car for £5,000. This is an invitation to treat. B may make an offer in response to A’s enquiry, and that offer could lead to further negotiations or acceptance.
Is an advertisement an offer?
Generally, no. If it were, the number of acceptances might quickly exceed the number of items for sale. The advertisement is therefore an invitation to treat, and an offer to buy is made by anyone who contacts the seller in response to the advert. The seller is then free to accept that offer (or not).
Is a pricelist an offer?
Generally, no, they are invitiations to treat, like advertisements. Example: A supplier of vehicle parts publishes a list of prices for parts for BMWs. The price list is an invitation to treat, not an offer. If a mechanic places an order for BMW air filters based on the price list, the mechanic’s order is an offer. The supplier can choose to accept or reject the order. They might want to reject it if they were going to find it difficult to obtain enough air filters to fulfil the order.
Is a price quotation an offer?
Whether a price quotation constitutes an offer or merely an invitation to treat is a question of fact based on the intention of the parties, deduced through prior correspondence. It is unlikely that you will have to make such a judgment call in an exam question.
Is an auction an offer?
- An auction catalogue is not an offer; it is merely an invitation to treat. Owner of the goods listed and the auctioneer can withdraw lots* An auctioneer’s request for bids is also an invitation to treat. The persons taking part in the auction make offers by placing bids. These offers can be revoked at any time until the hammer falls. When the hammer falls, the auctioneer has accepted the highest offer/bid (as long as any reserve price has been met).
Is a tender an offer?
No, a tender is an invitation to interested parties to submit bids setting out the terms on which they are prepared to carry out a piece of work. Example: A retailer needs a new computer system to manage its stock and its sales. It invites IT suppliers to submit bids in which they will describe the goods and services that they are offering and the terms on which they are prepared to supply them. The retailer’s invitation to tender is an invitation to treat, not an offer. The bids submitted by the suppliers are offers. The retailer can decide which offer to accept.
Are goods displayed in shop windows/shelves an offer?
No, they are invitations to treat. * The offer to buy is made by the customer when the goods are taken to the till point. * The offer is accepted when the shopkeeper rings up the saleNote, this is particularly important where goods are restricted e.g. knives or alcohol so the shop assistant can decide whether or not to accept the offer.
What is a unilateral contract?
- A contract which arises when an offeror promises to do something if the offeree does something in return and the offeree actually does this thing* Only one party assumes an obligation (e.g. a promise of payment) when the offer is made. The other party can choose to accept (i.e. knowledge of the offer is required) and become bound to the contract only by performance. These offers are often (although not always) made to the whole world, frequently in an ad promising a payment or other reward in return for particular actions.
When is each of the below effective:* Revocation by Offeror* Rejection by Offeree* Termination by Operation of Law
- Revocation by Offeror: When received* Rejection by Offeree: When received* Termination by Operation of Law: when the death or insanity of either party, destruction of the subject matter or supervening illegality occurs.
What is the method for each of the below:* Revocation by Offeror* Rejection by Offeree* Termination by Operation of Law
- Revocation by Offeror: Express/implied revocation (e.g. offeree discovers offeror sold subject matter to someone else) Note: this is limited by existence of a collateral contract or beginning performance of a unilateral contract* Rejection by Offeree: Express rejection, counteroffer, or lapse of reasonable time. Note: Offeree generally cannot reject if already accepted* Termination by Operation of Law: Death or insanity of either party, destruction of the subject matter or supervening illegality.
Revocation by Offeror* When is it effective?* What are the methods for revocation?* Are there limitations?
- Effective: when received* Methods: Express/implied revocation (e.g. offeree discovers offeror sold subject matter to someone else)* Limitations: Collateral contract, beginning performance of unilateral contract
Revocation by Offeree* When is it effective?* What are the methods for revocation?* Are there limitations?
- Effective: when received* Methods: Express rejection, counteroffer, or lapse of reasonable time* Limitations: Generally cannot reject if already accepted
Termination by Operation of law* When is it effective?* What are the methods for revocation?* Are there limitations?
- Effective: when the death or insanity of either party, the destruction of the subject matter, or the supervening illegality occurs* Methods: death or insanity of either party, destruction of the subject matter, or supervening illegality.* Limitations: No
What is the effect of termination of an unaccepted offer?
It cannot be accepted
What is a revocation?
A retraction of an offer by the offerorAn offeror may revoke by:* directly communicating the revocation to the offeree at any time before acceptance (e.g. “I revoke my offer of 25th May”)* indirectly communicating the revocation (subject to conditions).Effective: Only when received by offeree (which may be by reliable third party)Limitations: Offers may be revoked, even if there has been a promise not to revoke for a certain period where:* there is a collateral contract* the offeree has begun performance of a unilateral contract* the offeree has begun performance of a bilateral contract (note, here the offer has been accepted so the contract is formed).
In a coffee shop, A brings a flapjack to the till. The assistant scans it. Can A revoke the offer?
Technically, no. * Bringing the flapjack to the till was an offer. * Scanning it was acceptance. (Note, if A revoked the offer before scanning, revocation would be effective)* The contract was formed.Note, usually shops allow customers to change their mind after scanning but this is a courtesy.
How is an offer revoked directly?
By directly communicating the revocation to the offeree before acceptance
How is an offer revoked indirectly?
If the offeree receives: (1) correct information, (2) from a reliable source, (3) of acts of the offeror which would indicate to a reasonable person that the offeror no longer wishes to make the offer (e.g. after the offeror offers to sell his car to the offeree, the offeree is told by a reliable third party that the offeror has just sold his car to someone else).
What is required for revocation to be effective?
It must be received by the offeree
What are two limitations on an offeror’s power to revoke?
- Collateral contract2. Beginning performance under an offer for a unilateral contractNote, beginning performance under a bilateral contract will constitute acceptance, forming the contract. In these circumstances, it will not be open to the offeror to revoke as it is too late.
What is a collateral contract?
A separate contract which is collateral to an offer, in which the offeror promises (supported by consideration from the offeree) to not revoke an offer within an agreed time period.Example: A offers to sell her farm to B for £1 million and promises to keep the offer open for 90 days if B pays her £1,000 to keep the offer open. B agrees and pays the £1,000. If 30 days later A then revokes her offer to sell the farm, this would be a breach of the separate collateral contract.
Why is a unilateral offer irrevocable once performance has begun?
Because it would be unfair on the offeree if the offeror could revoke the offer after the offeree has already begun performanceNote, offeree may withdraw at any time until performance is completeExample: A father buys a house for his son and daughter-in-law, telling them that if they pay the mortgage instalments, it will be theirs once the mortgage is paid off. This is an offer to enter into a unilateral contract because only the father has promised to do anything. The son and daughter-in-law have not promised anything, but they can accept the offer by doing what the father has asked. If they start paying the instalments, it would be unfair if the father could revoke his offer.
Even though a unilateral offer is irrevocable once performance has begun, when is the contract formed and what is the effect of this for the offeree?
The contract is formed when performance is complete.This allows the offeree to withdraw from performance at any time, even though the offeror cannot revoke after they begin.
A supplier emails a manufacturer offering to purchase 1,000 hammers at £7 per hammer. The manufacturer begins boxing up the hammers for shipment. Has a contract been formed?
Yes, the offer is construed as an offer to form a bilateral contract because it does not limit the method of acceptance to performance. The manufacturer could accept by sending a return email agreeing to the deal or by shipping the 1,000 hammers. As the manufacturer has begun to package up the hammers, they have begun performance and the contract is formed.
Even though beginning performance under a unilateral and bilateral offer both make the offer irrevocable, what are the differing reasons for this?
- Unilateral: beginning performance would make it unfair for offeror to revoke, even though contract is not formed until completion* Bilateral: beginning performance accepts the offer and a contract is formed (note, this is only where the offeror has not stipulated the method of acceptance)
How may an offeree terminate an offer?
- By rejection, either expressly, or impliedly e.g. through a counteroffer (Note, a mere enquiry is not a counteroffer)* By failing to accept the offer by the deadline/within a reasonable time.
What is an express rejection?
- A statement by the offeree that they do not intend to accept the offer. * This will terminate the offer; the offeree cannot accept the offer in the future if the offeree changes their mind. This would instead be a new offer. * Effective: when received by the offeror. Example: A farmer offers to sell his farm to an interested party for £1 million. The offeree refuses to pay this amount, saying that the farm is worth only £950,000. A week later, the offeree has a change of heart and tries to accept the offer to buy the farm for £1 million. There is no contract because the initial offer was rejected.
When is a rejection effective?
When received by the offeror
What is the effect of a counteroffer?
- It rejects the original offer and makes a new one, reversing the roles of the parties* It relates to the same subject matter as the original offer but differs in its terms (e.g. “I’ll take the house at that price, but only if you paint it first.”). * Note, a mere enquiry/request for further information will not terminate the offer when it is consistent with the idea that the offeree is still keeping the original proposal under consideration.
What is the test for whether a communication is a counteroffer or a mere enquiry consistent with the original offer being live?
- Whether a reasonable person would believe that the original offer had been rejected* A mere enquiry/request for further information will not terminate the offer when it is consistent with the idea that the offeree is still keeping the original proposal under consideration. Example: A farmer offers to sell his farm to an interested party for £1 million. The offeree replies by asking whether the farmer would reduce the price by £50,000. This is a mere enquiry. A reasonable person hearing the conversation would not believe that the original offer had been rejected.
Does rejection or counteroffer regarding a collateral contract affect the offer that the collateral contract concerns?
No.Example: A offers to sell her farm to B for £1 million and says she will keep the offer open for 90 days if B pays her £1,000 to keep the offer open. B replies that she will not pay £1,000 to keep the offer open, but she will pay £500. B has rejected A’s offer to enter into a collateral contract, but A’s offer to sell the farm for £1 million is still open for acceptance.
How is an offer terminated through lapse of time?
- If offeree does not accept within a time specified by the offeror, or within a reasonable time if no time is specified. * Reasonable time will be determined by the courts, taking into account the subject matter of the contract e.g. perishable goods will have a different reasonable time frame than goods with a long shelf-life.
What does the court take into account when determining if a time period is reasonable for the purposes of lapse?
The subject matter of a contract, e.g. a reasonable time in which to accept an offer for perishable goods will be shorter than non-perishable. Fluctuation in value e.g. shares would also be relevant.
What are the four ways in which an offer may be terminated by operation of law
- Death of offeror/offeree2. Destruction of subject matter of offer/proposed contract3. Supervening illegality4. Failure of a condition contained in the offer (this may be a condition implied by the courts)
How might failure of a condition contained in an offer cause it to be revoked by operation of law?
Express condition: “I will hire your boat on Wedneday unless there is a storm” and a storm happensImplied condition: A offers to buy B’s car. There is an implied condition that the car will be in the same condition on acceptance as it was at the point that A made the offer. IfB then wrecks the car, A’s offer to purchase thecar is terminated.
What is acceptance?
- A manifestation of unqualified assent to the terms of an offer. This is an agreement to be bound.* Only the offeree may accept (may be a member of a class)* Offeree must know of the offer and it generally must be communicated
Who has the power to accept an offer?
- Anyone (including anyone within a particular class) to whom the offer was made* Generally, an offeree’s power of acceptance cannot be assigned. However, bear in mind the rules of agency, whereby an agent may accept the terms of an offer on their principal’s behalf, even though the resulting contract will be between the offeror and the principal Example: an offer may be addressed to all the readers of a particular newspaper. In such a case, any reader of the newspaper may accept the offer.
Can the power to accept be assigned?
No (note, rules of agency may apply)
Why does an agent accepting the terms of an offer on behalf of a principle not breach the prohibition on assigning the power to accept?
Because the agent is entering the agreement on behalf of the principal, and it is the principal who will be party to the contract
Can a person accept an offer they are not aware of?
- No (true for unilateral and bilateral contracts).* Even if they unknowingly perform what would be required of an offeree, there is no contract if they were not aware of the offer.Example: B places an advertisement in a local newspaper offering to pay £50 to the person who finds and returns her watch. If A finds B’s watch and returns it to B without knowing that B had offered a reward for its safe return, A has no contractual right to the reward, even if A sees the ad on the way home and calls B about it.
Can a cross-offer situation constitute acceptance?
No. If A sends B an offer, and B sends A an offer completely unaware of A’s offer but containing exactly the same terms as A’s offer, no contract is formed, even though the crossing offers contained the same terms.
How can an offer be accepted?
Unless a specific method is stipulated in the offer, an offer can be accepted in any reasonable manner and by any reasonable medium under the circumstances.* Unilateral: full performance is required (these contracts will always stipulate a method of acceptance)* Bilateral: promise to perform/beginning performance
What is the effect of an offeree accepting the offer but not through a method stipulated in the offer?
The acceptance is not valid, unless the method is just different but no less advantageous to the offerorExamples: * An offer specifies acceptance by second class post. The offeree uses first class post instead and the acceptance is received within the same timescale. It is likely that a contract will have been formed. * A orders a latte and tells the assistant they can accept by turning 3 times. Ringing up the sale on the till wouldn’t be as advantageous as A wouldn’t get the entertainment so unless the assistant turns 3 times, there will be no contract.
Can silence constitute acceptance?
Generally no. * An offeree cannot be forced to speak or have silence treated as acceptance - and offeror usually can’t stipulate silence as a method of acceptance* The law requires positive steps to be taken by the offeree before they can be bound by a contract. Silence is not a positive step, as the reason for the offeree’s silence is ambiguous. * There are exceptions to this general rule but they are rare. Example: An uncle offers to buy a horse from his nephew saying, “If I hear no more I shall consider he is mine”. There is no contract.
How is a unilateral offer accepted?
- Complete performance* Notifying the offeror within a reasonable time after performance has been completed
Is someone who accepts a unilateral offer by performance obligated to complete performance?
No. Example: A offers a reward of £200 to anyone who can find his missing laptop. S has some idea of where it might beand starts looking for it, unsuccessfully. She is under noobligation to continue looking for it, because no contract isformed until she finds it.
Is the offeree in a unilateral offer required to notify the offeror that they have begun performance?
No(applies to unilateral only)
What is the offeree in a unilateral offer required to notify the offeror of?
That performance has been completed, within a reasonable time after completion
If a general offer is to be accepted by conduct, what must the offeree do?
Make the offeror aware, so as to satisfy the communication of acceptance requirement (this need not be by words) e.g. in a sale of goods context, it is common for acceptance to take place by the seller delivering the goods or by the buyer accepting delivery of the goods.
A supplier offers to sell a retailer 50 packs of card games for £10 each. The retailer rejects the offer by making a counteroffer to purchase the packs at £9 each. If the supplier then proceeds to deliver the packs without rejecting the retailer’s counteroffer, is there a contract between the parties?
Yes, the seller’s conduct in delivering the packs will amount to acceptance of the retailer’s terms.
A retailer places an order for 50 card game packs for £10 each. That card game has been discontinued by its manufacturer, but the seller has a newer version of the card game by the same manufacturer in stock. The seller makes a counteroffer by sending the retailer an email saying that it will ship the new packs instead. It then sends the retailer 50 of the new packs. The retailer accepts delivery of the cards. Is there a contract between the parties?
Yes, by accepting delivery of the cards, the retailer accepted the seller’s counteroffer.
Must acceptance always be communicated?
Yes, unless the offer provides that acceptance need not be communicated* The offeror can waive the requirement that acceptance of an offer must be communicated. They may do this expressly e.g. a buyer may offer to buy 100 tonnes of wool and tell the seller that they can deliver the wool if they are happy with the price. * A court may also find that the offeror has waived the requirement for communication even though they never actually said so. This means that, in a contract to buy goods, the seller can often accept the order by simply preparing the goods for dispatch and sending them to the buyer. The buyer would be deemed to have impliedly waived the requirement that acceptance be communicated.
Must waiver to communication of acceptance be express?
No, it can be implied through conduct, e.g. merely sending goods without other communication can be deemed acceptance of an offer to buy
Does a contract exist?* Offeror sends offer* Offeree posts acceptance* Offeree sends rejection* Offeror receives acceptance* Offeror receives rejection
Yes, postal rule applies. Acceptance was effective when posted.
Does a contract exist?* Offeror sends offer* Offeree sends rejection* Offeree posts acceptance* Offeror receives rejection* Offeror receives acceptance
Yes, postal rule applies. Acceptance was effective when posted. Rejection only effective on receipt.
Does a contract exist?* Offeror sends offer* Offeror sends revocation* Offeree posts acceptance* Offeree receives revocation
Yes, postal rule applies. Acceptance was effective when posted. Revocation only effective on receipt.
Does a contract exist?* Offeror sends offer* Offeror sends revocation* Offeree receives revocation* Offeree posts acceptance
No contract, receipt of revocation terminates power of acceptance.
What is the postal rule?
Acceptance by post creates a contract at the moment of posting unless: * the letter is not properly addressed and stamped * it was not reasonable for the acceptance to be communicated by post (e.g. offer was to sell last icecream in a box in the garden) or * the offer stipulates, expressly or by implication, that acceptance is not effective until received, that is, the parties have effectively contracted out of the postal rule. The postal rule applies only to acceptance. It does not apply to other events in the contract, such as rejection or revocation. The postal rule does not apply to instantaneous methods of communication such as email. A contract accepted by one of those methods will therefore be formed at the time the offeror receives the acceptance, for example, by opening the relevant email.
What are 3 instances in which the postal rule will not apply?
- Letter not properly addressed and stamped2. Unreasonable for acceptance to be communicated by post3. Offer stipulates, expressly or impliedly, that acceptance is not effective until receive
What is the only element to which the postal rule applies?
Acceptance
Does the postal rule apply to instantaneous communication, e.g. email?
No
What is the battle of the forms?
In a battle between parties regarding whose standard terms to use, the last party to make an offer on their own terms is likely to win the battle, because the other party will have accepted that offer by their conduct.Note, prevail clauses are rarely effective. If the offeree makes a counteroffer to enter into the contract on their own terms, by making the counteroffer the offeree is rejecting the whole of the original offer, including the prevail clause.
What is a prevail clause?
A clause in a party’s draft contract stating that their terms will prevail over any terms which the offeror seeks to introduce
What difficulty do prevail clauses present?
When the other party makes a counteroffer to enter into the contract on their terms, they are rejecting the whole of the original offer, which would include the prevail clause
For a contract to be binding, what do both parties need to intend?
To be legally bound by it (this must be mutually communicated, either expressly or impliedly)
How must intention to be legally bound be communicated?
Mutually, either expressly or impliedly
What is the presumption regarding intention to be legally bound in domestic situations (married couple, family member)?
That the parties do not intend to be legally bound.* This presumption can be rebutted by objective evidence to the contrary (e.g. parties go to a lawyer and get a contract drawn up). * However, if either party has actual knowledge that the other does not intend to be legally bound, the agreement will not be legally binding even if objectively there was evidence to support intent to be bound.
What is required to rebut the presumption against intention to be legally bound in domestic situations?
Objective evidence to the contraryExample: A married couple forming an agreement to share responsibilities for caring for a pet would not normally be legally bound by that agreement. However, if the couple made this agreement while in the process of agreeing the terms of their separation, that might be sufficient objective evidence that the parties intended to be legally bound.
Even where objective evidence to the contrary is used to rebut presumption against intention to be legally bound in domestic situations, what will prevent it from being rebutted?
If either party has actual knowledge that the other does not intend to be legally boundExample: A married couple forming an agreement to share responsibilities for caring for a pet while in the process of agreeing the terms of their separation. If one of the parties said to the other that they didn’t want the arrangement for the pet to form part of their legal agreement, then the arrangement would not be binding.
What is the presumption regarding intention to be legally bound in social situations?
That the parties do not intend to be legally bound.* This presumption can be rebutted by objective evidence to the contrary (e.g. parties go to a lawyer and get a contract drawn up). * The presumption is rebutted in cases where the friends or family members club together to enter a race or competition.* However, if either party has actual knowledge that the other does not intend to be legally bound, the agreement will not be legally binding even if objectively there was evidence to support intent to be bound.
What is a situation in which the courts have found the presumption against intention to be legally bound in social situations to be rebutted?
Where friends or family members join together to enter a race or competitionExample: If family members and a lodger club together to enter a newspaper competition (including sharing the entry fee and postage), and agree to share the winnings, in the event that they actually win the competition, the law would require a proportion of the winnings to be paid to the lodger. The usual presumption will be rebutted because the situation is akin to an informal syndicate.
What trap on the exam concerning a social situation should we look out for?
Social parties, e.g. friends or family, acting within a commercial context
What is the presumption regarding intention to be legally bound in commercial situations?
- Strong presumption that the parties intend to be legally bound.* This is not easy to rebut and there must be clear and unambiguous evidence before a court will do so, taking an objective view of the evidence.Note: if an agreement is in draft form and this is clear, the parties will not be bound e.g. they state in their agreement that it is “binding in honour only” or “subject to contract”.
What is required to rebut the presumption against intention to be legally bound in commercial situations?
Clear and unambiguous evidence to the contrary
If a commercial party does not intend to be legally bound, what should they do to rebut the presumption?
State that their agreement is “subject to contract” or “binding in honour only”* Both record that negotiations have taken place but that at the time of the agreement there is no intention to be legally bound. In the case of “subject to contract’, the implication is that the legally binding agreement will follow. A statement made in the heat of the moment, or in anger, may also be enough to rebut the presumption of legal intent.
What is the implication in a commercial situation where an agreement is subject to contract?
That a legally binding agreement will follow
A agrees with B, a consultant working for A’s company, that A will pay B £15 million if the company’s share price doubles from £4 to £8. Whilst all the other necessary ingredients for a contract are present, the conversation takes place in a pub after a large amount of alcohol has been consumed. The agreement is reached after A has asked the others around the table “What should I do to incentivise B?” Everyone laughs at the proposal to pay B £15 million. No further details of the arrangement are discussed and no written record of it is made. Is there a binding contract?
All the indications are that there was no intention to create a binding contract. Note, it can sometimes be difficult to decide whether a conversation is social or commercial. In this situation, the courts will look at all the surrounding circumstances to decide whether the parties intended to create a binding contract.
What is the effect of a contract entered into by a minor?
Voidable by the minor (but the minor can enforce them), with some exceptions (‘necessaries’, employment contracts and contracts for the acquisition of a permanent interest in property)Note, the contract can be ratified making it binding when the minor turns 18.
When is a minor bound by a contract?
When they ratify the contract
What are three exceptions to the general rule that a contract cannot be binding on a minor?
- Contracts for necessaries2. Employment contracts that benefit them3. Contracts for the acquisition of a permanent interest in property
What contracts for ‘necessaries’ are binding on a minor?
Any contract for necessary goods or services at a reasonable price‘Necessaries’ are defined by the Sale of Goods Act 1979 as goods suitable to the condition in life of the person concerned and to their actual requirements at the time of the sale and delivery. What is deemed necessary will invariably differ from one person to another.
In the context of a contract for necessaries with a minor, what is deemed “necessary”?
This is subjective, based on the minor in question. Extravagant purchases will not be ‘necessaries’Examples:* An agreement between a 17-year-old Cambridge University student and a tailor for the supply of clothing would be held to be unenforceable if the student had sufficient of this type of clothing already.* If the same 17-year-old student ordered and received food from a food delivery service, the student would be obliged to pay a reasonable price for the food.
When is a contract for the acquisition of a permanent interest in property (e.g. shares) not binding on a minor?
When the minor expressly repudiates the contract. This is because they have acquired rights of ownership over the property under the contract e.g. payment of dividends/requirement to pay taxNote, this rule appears only to apply to minors and not others lacking mental capacity.
Why is a contract for the acquisition of a permanent interest in property binding on a minor?
Because under the contract, an ownership interest passes to the minor
Under the Minors’ Contracts Act 1987, what will the court do in a situation where under a contract, the other party has transferred property to the minor under a voidable contract?
Require the minor the send the property back, if it is just and equitable to do so.
What is the effect of a contract entered into by an individual lacking mental capacity?
Voidable by that individual, if the other party knew that they lacked capacity. Note, the individual can ratify the contract if they later recover.
What are four factors to consider when judging if a person lacks capacity?
They are unable to make a decision for themselves in relation to the matter:1. Unable to understand information relevant to the decision2. Unable to retain such information3. Unable to weigh up such information4. Unable to communicate their decision| Mental Capacity Act 2005
If a person lacking mental capacity enters into a contract, can they ratify the contract?
When they recover.
Does the necessaries exception apply to mental incapacity?
Yes
Is intoxication considered a mental incapacity?
- Yes, if someone becomes so intoxicated that they are unable to understand what they are doing * They will have to pay a reasonable price for necessaries, but they are not bound by other contracts if the other party was aware of their incapacity e.g. 2 business people making a deal over lunch with alcohol will be binding unless one party was extremely drunk and the other was aware.* There is no authority on the position as regards drugs or other similar substances, but it can be presumed that the position would be held to be the same.
What does the Companies Act 2006 say about corporate capacity?
The validity of an act done by a company cannot be called into question by reason of anything in the company’s constitution
What is the most basic definition of consideration?
An act (e.g. pay money) or forbearance (e.g. agreement not to sue) of one party, or the promise of such. * Courts will only enforce an agreement if there is consideration on both sides or a substitute of consideration.* It is the price for which the promise or action of the other is bought* Consideration can be either positive or negative* It must move from the promisee* It must be sufficient but need not be adequate
Jeff promises to sell his used television to Kristen for £100in exchange for Kristen’s promise to pay £100. What is the consideration?
Jeff’s promise to Kristen is consideration for Kristen’s promise; Kristen’s promise to Jeff is consideration for Jeff’s promise.
A father tells his daughter, “I’ll give you £100 if you stopsmoking”. What is the consideration?
If the daughter doesn’t then smoke, this negativeact is consideration for the father’s promise.
What is the difference between executory and executed consideration?
Executory: act or forbearance to be performed in future (i.e. a promise)Executed: state of consideration when it is performedNote: the same act can constitute both acceptance of the other party’s offer and performance of consideration. This happens most commonly in the case of unilateral contracts e.g. when the offeree completes performance of the required activity (e.g. finding the lost dog or watch), the act comprises both acceptance of the offer and performance of consideration by the offeree, as the two things happen simultaneously.
A bilateral contract to supply building materials may be agreed with delivery in three weeks’ time, with payment on delivery. Is the consideration executory or executed?
This is an executory contract.
When a customer buys a newspaper in a shop, is the consideration executory or executed?
This is an executory contract. The customer takes the newspaper to the shop assistant. The contract is concluded when the assistant accepts the customer’s offer to buy it. The assistant is agreeing to pass ownership of the newspaper to the customer, and the customer is agreeing to pay for it. Whilst everything happens very quickly, nonetheless this is an executory contract because the customer pays for the newspaper and the assistant allows the customer to take it from the shop after the contract has been formed.
At a self-service petrol station, when you fill your car, at what time is a contract formed and is the consideration executory or executed?
There is a contract with the station that they will supply petrol and you will pay. The contract is formed at the moment the nozzle is put in the tank and some petrol is taken. The act of supplying the petrol:* creates the contract* provides the stations consideration (executed)The buyer’s consideration is executory.
Must consideration be provided by parties to the contract, or can a third party provide it?
Only parties to the contract (i.e. consideration must move from the promisee)A party who has not provided consideration will usually be unable to enforce the contract unless:* it was entered into by way of a deed or * the Contracts (Rights of Third Parties) Act 1999 applies
What is required for a third party to enforce the terms of a contract under the Contract (Rights of Third Parties) Act 1999?
- The third party must not be a party2. The third party must be named in the contract3. The term is to be enforced for the third party’s benefit
The owner of a newly built hotel enters into a contract with a supplier to purchase 200 Russell Hobbs electric kettles to furnish the hotel’s guest rooms. Can Russell Hobbs enforce the contract?
Unless Russell Hobbs can prove that one of the parties specified the kettles were to be Russell Hobbs kettles because of a close relationship to the company, they would not be able to enforce the contract because they did not supply any consideration for the contract under the facts given.
A parent hires a quartet to play music at their child’s wedding. The contract specifies that the music is to be played at the child’s wedding for the benefit of the child and their partner. Can the child enforce the contract?
Although the child is a third party and did not provide consideration for the contract, the child does have some rights to enforce it under the Contracts (Rights of Third Parties) Act 1999.
Are the courts concerned with whether consideration is adequate?
No, just that it is sufficient (i.e. economic value of consideration need not be equivalent). * For consideration to be sufficient, it must have some value, even if very small (e.g. £1 or peppercorn rent in leases). The courts will not be concerned as to whether that bargain represents a good deal for either or both of the parties* Note, inadequacy of consideration may be evidence of a vitiating factor that could render a contract void or voidable because of mistake or duress.* Illusory consideration will not be sufficient
What is one situation in which the inadequacy of consideration may be taken into account?
When it is used as evidence of a vitiating factor concerning mistake or duress
A wealthy patron of the arts agrees to donate £10 million to a local art museum if trustees of the museum agree to name the museum building after the patron. Is there valid consideration for the promise?
Yes. It is difficult to say whether having a local building named in one’s honour is worth £10 million. What matters here is that the parties have each agreed on an exchange of promises; the courts won’t even try to put a value on them.
Coupons printed on the back of cereal packets that can be exchanged for something of much greater value (e.g. a toy) may have printed on them a monetary value of only £0.0001p. Is the coupon valid consideration for the exchange?
Yes, this is sufficient and therefore would amount to good consideration so that a person sending the coupons in in accordance with the offer has formed a contract.
What is illusory consideration?
Consideration without some value in the eyes of the law. It is too hard for the courts to enforce e.g. a promise to stop complaining is not sufficient consideration.
Whilst performance of an existing obligation is generally not good consideration, what are three exceptions to this?
- A promise going beyond the original obligation2. Where performance conveys a practical benefit on the party offering additional consideration, e.g. avoidance a monetary fine by virtue of a time penalty clause in a construction contract (except in a duress situation)3. Performance of an obligation owed to a third party
Why is a promise going beyond the original obligation good consideration?
Because it is effectively a new contract. Examples: * A group of factory workers are promised £100 to complete an important order on time. On completion they are not given the promised money. They would be unsuccessful in any attempt to claim the amount owed as they have done nothing more than the job they are contracted to do. * A group of factory workers are promised £100 to complete an important order on time. There are several members of staff off sick, so the remaining work force are required to work harder and for longer and possibly to carry out extra tasks in order to complete the order. The workers may have gone above and beyond their contractual requirements so that they can claim the £100. The work they are now expected to undertake is different from what they were originally contracted to do.
Hollis Industries is shipping goods by sea to a customer in China. Hollis promises that it will not sue the dockers who load and unload the goods for any damage done to the goods. The dockers are employed by the port of Southampton so have an existing contractual duty in carrying out the work which is owed to the port of Southampton. Is this existing contractual obligation sufficient consideration to enforce the promise of Hollis Industries?
Yes, the performance of the dockers’ existing contractual duty in carrying out the work, owed to the port of Southampton, is sufficient consideration for the dockers to enforce a promise by Hollis Industries to refrain from suing the dockers if they damage the goods.
A man agrees to pay an electrician a quoted from for the electrician to fix his light. If the electrician rings the man before arriving an asks for an extra £200 and the man agrees, is this extra £200 enforceable?
Generally, no. The electrician has provided no further consideration.* Note, if the electrician agreed to come 3 days early in exchange for the extra £200, this would be valid consideration and it would be enforceable.* If the contract had no due date and then something happened meaning the man needed his light fixed next week so he could work from home, the electrician could ask for an additional £200 to do it this week. Although electrician has not agreed to anything new, he may well have fixed the light this week anyway, he has given a new practical benefit in exchange for the consideration (i.e. the man knows he can WFH next week)
FD Designs agrees to design software for Acme Solutions for use in a system which Acme is supplying to its customer, Hollis Industries. FD Designs’ contract with Acme requires FD Designs to finish the design work by 31st October. Acme’s contract with Hollis Industries makes Acme liable for £5,000 in damages for every week that the completion of the system is late. The design work goes slowly, and as a result it is likely Acme will become liable to Hollis for damages. If Acme agrees to pay FD Designs extra money to persuade it to complete the design work on time, is the extra money enforceable?
Yes, there is good consideration because FD Designs is conferring a practical benefit on Acme.
Is performance of an existing statutory duty good consideration?
No, unless performance goes above and beyond that dutyExample: * police have a public duty to maintain law and order, so if the owner of a pub offered to pay a police officer £50 per night to keep the peace around the pub while the officer was on duty, the officer would have given no consideration to support the public house owner’s promise to pay for the officer. * However, there are cases where the police go over and above their existing duty and are able to charge for their additional services e.g. additional policing at football matches and policing a strike.
Is past consideration considered valid consideration?
Generally, no, acts that were performed or promises that were made prior to the contract being formed will not be sufficient consideration. There is an exception where there was an implied understanding of payment.Example: A promises to walk B’s dog (and does so), and B subsequently promises to pay A for doing so. B then changes her mind. A would have no claim against B if B did not then pay, as there is no consideration to support B’s promise because B’s promise to pay does not form part of the bargain between the parties.
What is an exception to the general rule that past acts or performance are not good consideration?
When the act or performance was done at the promisor’s request, and there was an implied understanding that payment would follow.The subsequent promise to pay is seen as merely fixing the amount previously promised e.g. leaving a car at a mechanics to be fixed.Conditions required for this exception to apply: * The act must have been done at the promisor’s request * The parties must have understood that the act was to be remunerated either by a payment or some other benefit and * The payment or other benefit must have been legally enforceable had the promise been made in advance.
Is a promise to accept part payment of a debt enforceable?
Generally, no. Note there are exceptions to this general rule.
What is the rationale behind the general rule that part payment of a debt is not consideration for the having the debt discharged?
There is no fresh consideration to make the creditor’s promise to accept less legally binding
What are some exceptions to the general rule that part payment of a debt is not consideration for the having the debt discharged
- Debt of uncertain value, disputed in good faith: the promise to pay something is deemed consideration2. Unliquidated claims generally (amount owed is uncertain)3. Payment at a different place or earlier payment4. Payment through a different means (if the creditor requests it) e.g. goods/services instead of money5. A third party makes the payment (on the basis that an agreement reached in good faith would discharge the debt)6. A composition between debtor and ALL creditors to accept less (e.g. IVA)
What is promissory estoppel?
An equitable principle which gives legal effect to an agreement unsupported by consideration.Promissory estoppel can be used only as a shield, not a sword, that is, as a defence, not as the basis for a claim.Conditions for application:1. Clear and unequivocal promise (express or implied) by the promisor that they won’t rely on existing legal rights (e.g. accepting payment of a lesser amount)2. The promisee has altered their position in reliance on the promise3. It must be inequitable for the promisor to go back on their promiseNote: Where it relates to continuing obligations, such as the payment of rent, promissory estoppel can have only suspensory effect, i.e. the original rights are revived after the conditions that caused the estoppel in the first place no longer exist or after reasonable notice has been given.
Can promissory estoppel be used as grounds for a claim as well as a defence?
Just a defence (shield not sword)
What are the three criteria for promissory estoppel to apply?
- Clear and unequivocal promise (express or implied) by the promisor that they won’t rely on existing legal rights2. The promisee has altered their position in reliance on the promise3. It must be inequitable for the promisor to go back on their promise
A landlord agreed to a reduction of rent during theSecond World War was initially stopped from claiming thefull amount. Was this agreement binding for the whole tenancy?
No, the estoppel was only suspensory, so his claim for the full rent was resurrected after the war had ended.
A and B are divorcing. During negotiations, A promises to pay B £100 per year as maintenance. Can B rely on this promise?
There was no consideration for this promise. If B tried to sue A in reliance on the promise, they would not be able to as promissory estoppel cannot be used as the basis of a claim.
A builder agreed a price of £5000 to do work in a man’s house. The man doesn’t pay when the work is done. 3 months later, the builder is desperate for money so accepts £3000. Can the man rely on the builder’s promise to accept £3000?
No, the man’s behaviour was unfair and inequitable therefore he cannot rely on promissory estoppel.
What are the key aspects of the doctrine of privity of contract?
- Only parties to a contract can sue and be sued under it2. A third party generally cannot acquire rights under a contract3. A third party cannot be burdened by a contractExample: A’s fence needs to be repaired. A’s gardener, B says her brother, C, will fix it for £300. A agrees. A and B are parties to the contract, C is not - he didn’t agree to anything. If A changes his mind and C loses work, C can’t do anything about it because he isn’t in privity.
What are the statutory and common law exceptions to the doctrine of privity of contract?
Statutory* Contracts (Rights of Third Parties) Act 1999Common Law* Agency * Assignment * Subrogation* Collateral Contracts* Trusts
What is the Contracts (Rights of Third Parties) Act 1999?
- The CRTPA was introduced after the common law and equity had already developed various common law exceptions to the privity doctrine. Many of the cases on the use of collateral contracts and trusts to deal with privity problems are now likely decided using the CRTPA instead. * The CRTPA allows third parties to enforce a term of a contract in certain circumstances (subject to certain exclusions) and protects a third party with rights from variation and recission of the contract.
What are the the criteria for third party to enforce a term of a contract under Contracts (Rights of Third Parties) Act 1999?
- Contract expressly provides the third party may enforce the term OR2. The term purports to confer a benefit on the third party AND it appears from the terms of the contract that the parties intended the term to be enforceable by the third partyThe person must be expressly named in the contract or be a member of a benefiting class of people described in the contract (although the person need not have been in existence at the time the contract was entered into). Note: The CRTPA does not allow obligations under a contract to be imposed on third parties-it only allows a third party to benefit from a contract.
To enforce a term of a contract under Contracts (Rights of Third Parties) Act 1999, must the third party be named in the contract?
Either named, or be a member of a benefiting class of people described in the contract (but who need not have existed when the contract was made)Example: A’s fence needs to be repaired. A’s gardener, B says her brother, C, will fix it for £300. A agrees. C comes to look at the fence and says “Pay B £100 and me £200”. He fixes the fence and the man pays him but not her. Becayse the contract confers a benefit on B, she can enforce it under the CRTPA (Note, the contract doesn’t outright say she can enforce it).
Does the Contracts (Rights of Third Parties) Act 1999 allow obligations under a contract to flow to third parties?
No, only benefits
A promises B that he will give her a brand new Jaguar convertible if she will work for him for six months. Can Jaguar enforce the contract under the CRTPA?
No, a court is likely to find that the reason for specifying in the contract that the convertible should be a Jaguar was to define the payment due to B rather than to benefit the Jaguar car company. Therefore, Jaguar would have no rights under this contract under the CRTPA.
What are some contracts to which Contracts (Rights of Third Parties) Act 1999 does not apply?
- Employment contracts2. Articles of association of a company3. Contracts which expressly exclude the Act from applying (most commercial contracts do this)
What are the three criteria, any of which will prevent parties to a contract from changing the contract to the detriment of a third party without consent?
- Third party has communicated his agreement to the term benefiting him, or2. Third party has relied on the term of the contract and the party to the contract is aware, or3. The party to the contract can reasonably be expected to have foreseen that the third party would rely on the term, and the third party did rely on it
A owes B £1,000. To raise the funds to pay B, A contracts to sell his car to C, and the sale contract provides that C will pay B the £1,000 purchase price. A informs B of the arrangement and she nods with approval. Subsequently, A and C decide to cancel their contract. Does B have any remedy?
Because B nodded her agreement, A and C had no power to modify their contract without B’s approval. Therefore, she has a right under the contract to sue for damages.
What is agency?
- An agency relationship arises when a person, the ‘principal’, authorises another person, the ‘agent’, to negotiate and enter into a contract on their behalf with third parties. * The ultimate contract will be between the principal and the third party: the agent is not a party. * Strictly speaking, agency is not an exception to the privity doctrine, as the principal is ‘privy’ to the contract. * However, if an agent acts for an undisclosed principal (i.e. the third party is unaware of the existence of the principal and thinks they are dealing only with the agent), then an exception to the privity rule arises: under the law of agency, both the agent (acting with authority) and the undisclosed principal can sue or be sued under the contract.
Where an agent enters into the contract on behalf of a principle, who are the parties to the contract?
The principle and the third party only
What is an exception to the rule that a contract entered into by an agent on behalf of a principle is binding only on the principle and the third party?
Where the agent acts for a principal undisclosed to the third party, both the agent and the principle can sue and be sued under the contract
What is assignment?
- Assignment is a method whereby a contractual right can be transferred to a third person outside of the terms of the original contract. * To be fully effective, notice of the assignment must be given to the party liable to perform the obligation which has been transferred. * Only the benefit of a contract can be assigned, not the burden. * If the parties want to transfer obligations under a contract as well as the benefit, then the old and the new parties need to enter into a contract known as a ‘novation agreement’, under which the former parties are released from the arrangement and the new parties become party to it.
Can both the benefit and burden of a contract be assigned?
Just the benefit
How can parties transfer obligations under a contract and what is the effect of this measure?
By entering in a novation agreement, which releases the former party/parties, and binds the new party/parties
What is subrogation?
- Where a party, by e.g. paying an insurance or making a guarantee payment, stands in the shoes of the contract party and have all the rights the contract party would have against the person responsible for the loss or to whom guarantee was paid.* In paying a claim to a policy holder, the insurer is subrogated to the rights of the policy holder e.g. A insures her car with Eagle Insurance. A’s car is stolen by B. Eagle Insurance pays A’s claim for the loss of her car. If B is then identified as the thief, Eagle Insurance can exercise A’s rights to claim damages against B.
What is the collateral contract exception to privity?
- Where there is a collateral contract between the promisor and a third party, running alongside the main contract. * The agreement does not need to be expressly stated. Instead, the courts find that the parties must have intended that there was an agreement with the non-party but this is fairly limited in practice.* Many of the situations where the courts have previously found collateral contracts would now be covered by the CRTPA, because the contract purports to confer a benefit on a non-party. There are, however, still a few cases where the Act will not apply.
A paint manufacturer promises a building owner that its paint will last for seven years. The building owner hires a contractor to paint its building and asks the contractor to use the manufacturer’s paint on the strength of the manufacturer’s promise. The contractor purchases the manufacturer’s paint and uses it to paint the building. Is there a collateral contract in place?
A collateral contract will be implied between the building owner and the paint manufacturer. This allows the building owner to bring a claim for damages against the manufacturer if the paint fades or starts peeling two years after being applied-even though the manufacturer was not a party to the main contract between the building owner and the contractor. The consideration for the paint manufacturer’s obligation is the building owner’s agreement to use the manufacturer’s paint.
How can trusts be used to avoid privity issues?
- If A makes a promise to B for the benefit of C, the courts may find that B holds A’s promise on trust for C, which allows C to enforce the promise directly against A.* A trust relationship may be implied even if the words ‘trust’ or ‘trustee’ are not used. * It must at least be possible to find that there is an irrevocable intention to benefit the third party. The courts are unlikely to find a trust where there is no indication that this was the parties’ intention.
A broker negotiates a contract for the hire of a ship between a shipper of goods and a shipowner. In the contract, the shipper promises the shipowner that the shipper will pay commission to the broker. The broker is acting as an agent and so is not party to the contract. Can the broker enforce the contract?
The courts may conclude that the shipowner holds the shipper’s promise on trust for the broker, so that the broker can enforce the shipper’s promise against it. (A case like this would probably now be decided under the CRTPA.)
What are the two types of contract terms?
Conditions and warranties* Both can be either expressly agreed between the parties during their negotiations (express terms) or implied into a contract by statute, by the courts or by custom and usage (implied terms).* Express terms may be expressly stated by the parties, or they may be ‘incorporated’ into the contract. It is much more likely that terms will have been incorporated into a contract if the contract is oral, but incorporation can also be relevant to written contracts.
What are the two categories of contract terms?
Express and implied
What is the difference between a term and a representation?
Both are statements of fact or law made during the negotiations for a contract.* A term is intended by the parties to form part of the contract (incorporated).* A representation is made merely to induce a party to enter into the contract (not incorporated).
How is it determined whether a statement is a term or a representation?
Based on the intentions of the parties, viewed objectively through their conduct from the perspective of a reasonable person.Statements made orally that are not included in a written contract are likely to be considered to be representations.The court will consider:1. Importance of the statement 2. Stage of negotiations at which the statement was made3. Whether the party making the statement had any specialist knowledge, information or skill
How will the court likely classify a oral statement which was not included in a written contract?
As a representation
What are the three factors a court will take into account when determining whether a statement is a term or a representation?
Importance of the statement * This is from perspective of party to whom it was made i.e. would they have entered the contract if it wasn’t for that statement? If no, more likely a termStage of negotiations at which the statement was made* If made at the time of the contract, more likely a term* If made during preliminary negotiations, more likely a representationWhether the party making the statement had any specialist knowledge, information or skill* If it is a factual statement that should be within the scope of their knowledge, intending that the buyer will act on the statement, it is much more likely that the statement would be viewed as a term of the contract. * If, however, the seller makes a statement of belief of which they have no direct knowledge, it is more likely to be a representation.
What is the question to ask when considering whether a statement is important?
If the other party wouldn’t have entered into the contract but for the statement, it is likely to be deemed important, and therefore a term
What is the question to ask when considering specialist skill?
Did the seller make a factual statement that should be within the scope of their knowledge, intending that the other party would act on the statement
A goes to a lawnmower dealer and says they need one that can handle their big garden. The dealer shows them one they say is suitable. Is this likely to be a statement or a representation?
Statement. A should be able to expect the dealer to know what they are talking about. The machine’s capabilities are really important to A. Note, if A bought the mower off a private individual selling it second hand, they could likely only guess and their response would more likely be a representation.
A car dealer makes a statement about the model year of a car. Is this statement a term or a representation?
It is likely that this statement would be treated as a term of the contract.
A private seller refers to a car’s registration document to ascertain what year it was first registered and communicates this information to a potential buyer. Is this statement a term or a representation?
This statement is more likely to be treated as a representation.
Why is the distinction between term and representation important?
If the statement turns out to be untrue, the available remedies depend on whether it was a term or representation* Term: any failure to comply with the term will be a breach of contract and, therefore, the innocent party may be able to claim damages. * Misrepresentation: the remedy will depend whether the misrepresentation was made innocently, negligently, or fraudulently. Damages may still be available, but the amount recoverable is likely to be less than for a breach of contract.
What is the impact of a statement being deemed a term?
Any failure to comply will be a breach of contract, entitling the other party to damages
What is the impact of a statement being deemed a representation?
If it is untrue and it has not been incorporated into the contract, the remedy will depend on whether the misrepresentation was made innocently, negligently, or fraudulently
Why is the distinction between condition and warranty important?
It determines the remedies which are available upon breach.* Condition: gives the innocent party the option of terminating the contract in addition to damages.* Warranty: innocent party may receive damagesWhether a term is a condition or a warranty is not determined merely by the label given to the term in the contract: the courts will look behind any label to the actual effect of the term on the operation of the contract as a whole and may find that a term classified by the parties as a condition could not have been intended to allow the innocent party to terminate the contract.
Along with condition and warranty, what is the third category of term, where it is unclear whether it is a condition or warranty?
Innominate term
What will the courts give more weight to: the term’s label or its effect on the operation of the contract?
The term’s weight on the operation of the contract
What is a condition?
A term so fundamental that it goes to the root of the contract, and the contract does not work without it* A breach of a condition is sometimes referred to as a ‘repudiatory breach’, because a party who breaches a condition is effectively repudiating the contract altogether. * An innocent party has the option to terminate the contract and claim damages for their loss. If the innocent party chooses to carry on with the contract (‘affirm’ it), they lose their right to terminate but can still sue for damages. Note: this is not the same as a condition precedent, which must be fulfilled before the contract comes into effect.
An opera singer who is contracted to sing in an opera misses the opening and subsequent nights due to illness. Is this likely to be a breach of a warranty or a condition?
The singer has breached a condition of the contract. The producer of the opera can treat the contract as repudiated, terminate it, and hire an alternative singer.
A goes to a lawnmower dealer and says they need one that can handle their big garden. The dealer shows them one they say is suitable. The lawnmower turns out not to be powerful enough. What remedies are available to A?
The fact that the lawnmower is not powerful enough is fundamental to A. The mower is of no use to A so the breach is therefore of a condition. A can decide to terminate the contract and get their money back and claim damages.
What is another name for a breach of condition?
Repudiatory breach
What options are available to the other party upon a breach of condition?
They can terminate the contract and sue for damages
What is the effect of the other party affirming a contract after breach of condition?
They lose the right to terminate, but can still sue for damages
What is a warranty?
A term that is incidental/collateral to the main terms of the contract.* The court will view any breach of warranty as less serious than breach of condition. * Breach will give rise to the right to claim damages but not the right to terminate the contract.
Can the other party terminate the contract for breach of warranty?
No
A goes to a lawnmower dealer and says they need one that can handle their big garden. The dealer agrees to deliver a can of petrol with the mower on delivery. The can is missing when the mower arrives. What remedies are available to A?
A can sue for damages only as this is a breach of warranty. The lawnmower would still be ok to use so this breach is not fundamnetal to the contract and therefore not a condition.
An opera singer who is contracted to sing in an opera misses several days of rehearsals due to illness but is available for the opening night and subsequent nights. Is this a breach of condition of the contract?
No, it is only in breach of warranty. The producer of the opera would not be entitled to treat the contract as repudiated but would be able to sue for damages for any losses incurred.
What is an innominate term?
A term as to which it is unclear at the outset whether it is a condition or warranty, as it has not been designated as either a condition or a warranty and when the contract is concluded it is not clear how severe the consequences of a breach would be. * If the term is then breached, the courts will look at the effect of the breach of the term to determine what remedy should be available to the innocent party. * If the breach of such a term results in the innocent party losing substantially the whole of the benefit of the contract, it will be treated akin to a condition,* If, however, the breach is only incidental to the overall purpose of the contract, it will be treated as a warranty
With innominate terms, how does the court determine what remedy should be available?
By looking at the effect of the breach
A man buys a second hand car from a woman. She says she recently had a new motor fitted (she would know so it’s likely a term). This turns out to be untrue.Is this innominate term likely to be treated as a condition or warranty where:* the man has to turn the key a few times for the engine to start* the motor fails and needs to be replaced, costing more than the man paid in the first place?
- Warranty where the man has to turn the key a few times for the engine to start* Condition where the motor fails and needs to be replaced, costing more than the man paid in the first place
A contract for the hire of a ship and crew for a 24-month period includes a term that the ship will be ‘fitted in every way for ordinary cargo service’. The contract does not state what happens if this term is breached. The ship’s engines are old and the engine room staff are inefficient, so that the ship is in port for maintenance work for 20 weeks of the hire period.
In determining the remedy available to the innocent party, a court is likely to consider whether the breach has deprived them of substantially the whole benefit of the contract. The conclusion reached was that the loss of 20 weeks out of a 24-month contract did not deprive the hirers of substantially the whole benefit of the contract, so they were entitled only to damages and could not terminate the contract for repudiatory breach.
In what instance will the court deem an innominate term to be a condition?
Where the other party loses substantially the whole of the benefit of the contract due to the breach
What is the effect of time being of the essence on whether a term is a condition or warranty?
- Time of the essence: the term is a condition (late performance gives rise to right to terminate)* Time not of the essence: the term is a warrantyNote, many contracts will make it clear whether time is of the essence of a particular obligation. There is a general presumption in commercial contracts that time will be of the essence for delivery if a time for delivery has been agreed. There is no presumption for consumer contracts
When is time presumed to be of the essence?
In commercial contracts, where a delivery time has been agreed
A manufacturer agrees with a builder to deliver windows for installation in a new house. The contract provides that the windows will be delivered on or before 1 August. The manufacturer fails to deliver by the deadline. What remedies are available to the builder?
- It is presumed that time is of the essence, so that the builder can terminate the contract for breach of condition and claim damages. * Note, if the contract had provided specifically for what would happen if the manufacturer failed to deliver the windows on time, then the provisions in the contract would displace the normal presumption. The builder’s rights would then be governed by the terms of the contract instead.
Regarding notice, what is required for a term to form part of a contract?
The parties must have reasonable notice of it (this applies whether the contract is oral or written)Example: A customer in a restaurant orders a main course from the menu. The price shown on the menu is £20. The customer does not expressly say that they agree to pay £20. However, they have notice of the price and it will be deemed to be incorporated into the oral contract between the customer and the restaurant.
Which 3 issues need to be considered when examining express terms of a contract?
Incorporation of terms* Often many terms to be incorporated into an oral contract.* Terms may also be incorporated into written contracts, though this can be more difficult. * The question of incorporation is particularly important if the term is a written exclusion of liability.The Parole Evidence Rule* There is a general presumption that external evidence cannot add to, subtract from, contradict, or vary the terms of a written contract. Entire Agreement clauses* A common term in written contracts which provides that the written document constitutes the entire agreement between the parties.
What is the parol evidence rule?
There is a general presumption that external evidence cannot add to, subtract from, contradict, or vary the terms of a written contract.This rule applies whether the external evidence is written (e.g. correspondence between the parties) or oral. Exceptions: * Implied terms * Secondary (collateral) contracts i.e. the courts could find that there were two contracts between the parties: the first contract which has been reduced to writing, and a second oral collateral contract. * If the court finds that the contract was always partly written and partly oral, so that the oral terms always formed part of the contract.
What are three exceptions to the parol evidence rule?
- Implied terms2. If there is a secondary (collateral) contract3. Where the court finds that the contract was always partly written and partly oral
A company imports machinery into England from Italy. The Italian company organising the shipping of the machinery makes an oral promise that the machinery will be stored below deck. The Italian company and the English company then enter a written contract which makes no mention of the oral promise. A machine is shipped on deck and is lost overboard. Is the promise of the Italian company part of the contract between the parties?
Yes, a court may find that the oral promise forms part of the contract because the contract was intended to be partly written and partly oral.
A is offered a job and goes to the office to sign the contract. A askes the partners if the term is 2 years. One says yes and A signs. A rents a flat near the firm. A week after A starts, the partner says they can’t keep A on due to the economic downturn. A checks the signed contract and the 2 year term is not written in it. Can A rely on the partner’s promise?
Due to the parole evidence rule, A can’t bring evidence of the partner’s statement into a claim. A would need to show there was a collateral contract for which they must show they provided consideration.
A is looking at a car in a dealership and is on the fence about buying it. The salesperson says if they buy today, they will throw in free car washes for a year. A buys the car. The following week, A comes back with the car looking to get it washed but the salesperson refuses. Can A rely on the promise?
Yes, A can argue there was a separate oral contract because they provided consideration. A bought the car that day (as opposed to another day) in exchange for the washes.
What is an entire agreement clause?
A term in written contracts which provides that the written document constitutes the entire agreement between the parties* Purpose: to uphold the parol evidence rule by preventing any other evidence capable of being considered as a term of the contract from forming part of it.* The courts are willing to uphold such provisions, unless they are seen as an attempt by a party to avoid liability for misrepresentation
What is one instance in which the courts are unwilling to uphold an entire agreement clause?
Where it is being used by a party to avoid liability for misrepresentation
What is the binding effect of an implied term?
Same as if it had been expressly agreed between the parties. Implied terms are used to fill gaps in the contract.
What is an implied term?
Implied terms are used to fill gaps in contracts.* Implied terms are equally as binding on the parties as express terms.* They will constitute either a condition, a warranty, or an innominate term. * Implied terms are an important exception to the parol evidence rule. * Contract terms can be implied by: Statute; The courts; Custom and usage; or A course of dealings between the parties.
What are four ways through which terms are implied?
- Statute2. Courts3. Custom and usage, or4. A course of dealing between the parties
What are the three main sources of law through which contract terms are implied?
- Sale of Goods Act 1979 (private sales and B2B)2. Consumer Rights Act 2015 (B2C), and3. Supply of Goods and Services Act 1982 (private sales and B2B)These statutes give wide-ranging rights to buyers of goods and services, as they ensure that all contracts contain terms that, among other things, make sure that the seller has the right to sell the goods (good title) and that the goods sold are fit for purpose and of satisfactory quality.
What is the SGA?
The Sale of Goods Act 1979 applies mainly to private sales and B2B transactions. Implied terms* Seller has legal title* Goods match any description applied to them by the seller* Goods be of satisfactory quality (if seller is a business), and* Goods be fit for any particular purpose made known to the seller by the buyer (if seller is a business)SGA implied terms are treated as conditions, however, f the breach is so slight that it would be unreasonable for the buyer to reject the goods, the breach is treated as a breach of warrantyThe Unfair Contract Terms Act 1977 makes it difficult to exclude liability for breach of terms implied by the SGA.
What is an important term implied by the SGA?
That the seller has legal right to sell the goods
What is the impact of a seller not having title?
There is no consideration, and therefore no valid contract
What are other terms implied by the SGA?
Goods sold should:1. match any description given by the seller2. be of satisfactory quality (if seller is a business), and3. be fit for any particular purpose made known to the seller by the buyer (if seller is a business)
What does satisfactory quality mean under the SGA 1979?
- Fit for the purpose for which such goods are generally used (e.g. underpants causing a skin complaint to wearer would not be of satisfactory quality)2. Free from minor defects3. Safe and durableNote, exceptions apply where the defect was brought to the buyer’s attention and if the defect would have been obvious if the buyer had inspected the goods prior to sale.
What defects are excluded when considering satisfactory quality?
- Defects brought to the buyer’s attention2. Defects that would have been obvious to the buyer had they inspected the goods prior to sale
Are terms implied under SGA conditions or warranties and what is the importance of this?
- Conditions, meanings that if they are breached, the buyer can terminate the contract, reject the goods, and refuse to pay, but must return the goods* Note, if the breach is so slight that it would be unreasonable for the buyer to reject the goods, the breach is treated as a breach of warranty
When is a breach of terms implied under the SGA a breach of warranty?
When the breach is so slight that it would be unreasonable for the buyer to reject the goods
What does the Unfair Contract Terms Act 1977 provide regarding SGA implied terms?
- UCTA prevents a seller from excluding the implied term as to title2. Exclusion of liability for all other implied terms will be valid only if reasonable
What is the SGSA?
The Sale of Goods and Services Act 1982 applies mainly to private sales and B2B transactions, including contracts for the hire of goods and contracts for services. Implied terms (service contracts)* Supplier will carry out the service within a reasonable time (if no time is agreed) and with reasonable care and skill. Implied terms (goods supplied as part of service contracts)* SGSA implies conditions similar to those implied in the SGA. It may be possible to contract out of the relevant provisions of the SGSA, subject to the Unfair Contract Terms Act 1977 (test of reasonableness on any attempt to exclude or limit liability for breach of these implied terms)Implied terms under the SGSA are ‘innominate’ terms rather than conditions, so if they are breached, the court will determine the remedy on the basis of the seriousness of that breach.
A tradesperson agrees to supply and install an air conditioning unit into a business’s office. No deadline is agreed to finish the work. What statute will govern the contract?
The contract will be governed by the SGSA. It will imply terms that the work be carried out with reasonable care and skills and within a reasonable time. These are innominate terms. The SGSA will also imply conditions that the tradesperson has a good right to sell the unit, that it complies with any description, that it is of satisfactory quality, and that it is fit for any purpose made known by the customer.
What are some terms implied by the Supply of Goods and Services Act 1982?
- Supplier will carry out service with reasonable care and skill2. Supplier will carry out service within reasonable time (if no time is agreed)
Are terms implied by the SGSA conditions, warranties, or innominate terms?
Innominate terms
What terms are implied under SGSA for goods supplied incidental to the provision of services?
Similar terms to those implied under SGA
What does the Unfair Contract Terms Act 1977 provide regarding SGSA implied terms?
- UCTA prevents a seller from excluding the implied term as to title2. Exclusion of liability for all other implied terms will be valid only if reasonable
What is the CRA 2015?
The Consumer Rights Act 2015 applies to the supply of goods and services in a consumer context, defined as sales contracts between a trader and a consumer (note, doesn’t apply C2C)Implied terms for goods* All goods supplied under a consumer contract (including digital content) should match their description and be of satisfactory quality and fit for purpose (similar definition and exceptions to SGA). Implied terms for services* Carried out with reasonable care and skill* Completed in accordance with any information which the consumer relies on e.g. price quotations;* Completed for a reasonable price (if no price has been expressly agreed) * Completed within a reasonable time (if no times- cale has been expressly agreed).A big difference from the SGA is that liability for a breach of the implied terms cannot be excluded or limited at all.
What is the scope of the Consumer Rights Act 2015?
Supply of goods/services in a consumer context, i.e. between trader and consumer
What is a big difference between CRA and SGA/SGSA?
Under CRA, liability for breach of implied terms cannot be excluded at all
What are four terms implied by the CRA into contracts for services?
- Carried out with reasonable care and skill2. Completed in accordance with information relied upon by the consumer (e.g. price)3. Completed for a reasonable price4. Completed within a reasonable time
Although the courts are reluctant to interfere with the presumed intentions of the parties generally, other than in the statutory contexts, when are they prepared to imply terms into contracts?
- To give business efficacy to the contract, i.e. make it work in a way which reflects the parties’ intentions and expectations* These are known as ‘terms implied in fact’.* The courts are likely to imply a term only if the term to be implied is so obvious to a reasonable person that it goes without saying. (This test is also known as the ‘officious bystander’ test.)* Note, the test is not whether it is ‘reasonable’ to imply the term. A term will be implied only if it is necessary for the contract to work as intended.
What is the officious bystander test in the context of a court implying terms into a contract?
They will only do so if the term to be implied is so obvious to a reasonable person that it goes without sayingExample: In respect of a contract between a shipowner and the owner of a wharf for the mooring of a ship on the side of the River Thames in London, a term would be implied that the riverbed would be safe for the ship at low tide. If the ship ran aground and was damaged, the term implied into the contract would allow the shipowner to sue the owner of the wharf. The contract would be incomplete without the implied term.
What are terms implied by custom and usage?
- If there is an industry or market standard in respect of the particular area where the parties to the contract are dealing, this may be enough to imply terms into the contract that are normal for that particular industry or market.* However, a custom can also be excluded by an express term of the contract agreed between the parties, and a term will not be implied by custom or usage if it contradicts an express term in the contract.
What kind of term are the courts unlikely to imply in the context of terms implied by custom and usage?
One that contradicts an express terms
What is required for the courts to imply a term through course of dealings between the parties?
- The parties have contracted on the same terms on several occasions (e.g. standard terms), enough to show a regular and consistent course of dealings.* The courts will imply the same terms into a contract between the parties if, e.g., the usual terms and conditions were not supplied in error.
In which type of contracts will the courts not get involved?
- In the absence of a complete agreement the courts will be reluctant to get involved to make the contract between the parties work as it would be impossible to conclude the parties had the same intention * The courts will not speculate about agreements to agree i.e. ones using wording like ‘to be agreed’ (or similar) in relation to an essential term.* “On hire purchase terms” was considered too vague to be enforceableExample: A trading company agrees to buy a cargo of soya beans. The contract says the seller will supply a ‘quantity’ of beans ‘to be agreed’ by the parties. Courts might decide this is void for uncertainty unless there is a mechanism to resolve the uncertainty in the contract.
Whilst the courts will generally not get involved to make an incomplete or vague contract work, what is required of a contract before they would get involved?
- Test: Sufficient certainty (but cases are decided on a case-by-case basis)
What is one instance where the courts will not get involved with a contract?
Where the court is unable to conclude that the parties intended to be bound
What 3 options are available to the court where they decide to help a party by finding a contract does exist?
They can:* resolve uncertainty in certain circumstances* seek statutory assistance* sever uncertain terms
What are four instances in which the courts will get involved in a contract which is uncertain?
If the courts are satisfied that the parties intended to be bound by the terms of the contract as they stand they are likely to try to give effect to this intention. Usually this is where:1. There is a mechanism, e.g. a clause, between the parties to resolve uncertainties by allowing one party to unilaterally decide or by involving a third party or an arbitrator (note, if these mechanisms do not work, the agreement is likely not to be binding)2. Commercial cases in which the parties are familiar with the trade3. Future performance over a period of time (parties leave matters to be adjusted in the working out of their contract), and4. Where there has been partial performance, or one party has invested on the basis of the agreement
What is one term the statutes will help resolve if it is not dealt with in the contract?
If no price has been agreed and none can be determined from the dealings between the parties, the buyer must pay a reasonable price* The SGA 1979 implies this into all contracts for the sale of goods, including B2C. * In the case of services, the SGA 1982 implies a similar term into B2B sales.* The CRA 2015 does the same thing for sales B2C.
In deciding to sever an uncertain term, what is the test the courts will use?
Whether the term can be severed without affecting the substance of the bargain between the parties
What is the effect of an uncertain term not being able to be severed?
The entire contract is void for uncertainty
What is an exclusion clause?
A term of a contract that attempts to exclude/limit liability of one of the parties i.e. the term will say the party won’t be liable if they breach the contract or the party is only liable up to a certain amount.Three issues must be considered:* Incorporation* Drafted so it is construed as excluding liability effectively* Statutory prohibitionsExclusion clauses are often particularly important in complex business arrangements for construction projects where there are lots of parties (e.g. architect, owner, contractor supplier) who likely have insurance to cover their liability. Each party will allocate risk and if they exclude liability, the risk will fall on the owner instead.
What three criteria must be satisfied for an exclusion clause to be valid?
The clause must:1. Have been incorporated into the contract (by signature, notice or custom/previous dealings)2. Be properly drafted so it is construed as excluding the actual, exact liability (i.e. harm suffered) effectively - consider what liability might exist but for the exclusion and only then consider whether the clause is effective to exclude/limit it, and3. Not be prohibited by statute (UCTA or CRA)
At what time must an exclusion clause be incorporated into a contract?
At the time or before the contract is concluded
What are the three ways an exclusion clause, and any clause for that matter, can be incorporated into a contract?
- By signature2. By notice3. Through custom or previous dealings
What are 2 key points to watch out for on the exam regarding incorporation of terms in contracts?
- Look for an option that does the most to bring the clause to the customer’s attention - this will be the most likely to create a binding contract* If the contract is already formed and the question asks if the clause is binding, it may not be unless the party seeking to rely on it took extra steps to point it out e.g. when it is in tiny print.
How are terms to a contract incorporated by signature?
A party who signs a contractual document is bound by its terms. It is no defence not to have read or understood the terms, including any exclusion clause, in the ‘small print’. Two defences apply:* A party is induced to enter into the contract by some form of oral misrepresentation which will operate to override the written contractual terms. * ‘Non est factum’, which means that a party has no understanding of the document they have signed and that there was a fundamental difference between what they signed and what they thought they had signed (difficult defence to rely on)
Why does a signature incorporate a term?
Because a party who signs a contractual document is generally bound by its terms
What are two situations in which the incorporation by signature rule will not apply?
- Inducement by oral misrepresentation2. Non est factum
What is the inducement by oral misrepresentation exception to the incorporation by signature rule?
Where a party is induced to enter into the contract by an oral misrepresentation, this will be deemed to override the written contractual terms
What is the non est factum exception to the incorporation by signature rule, and what is required to avail of it?
The party is deemed to have no understanding of the document they have signed because of a fundamental difference between what they signed and what they thought they were signing* The burden on a party seeking to rely on the defence of non est factum is a heavy one* Only a party who has special difficulties understanding the document is likely to succeed with it. * It will not assist a party to whom the document was properly explained.
What is required for incorporation by notice?
The party seeking to rely on incorporation by notice must have taken reasonable steps (based on the nature of the clause) to bring it to the attention of the other party. The more unusual or onerous the more notice is required particlarly to exclude personal injury liability. Contractual document is required* To be valid, the clause must have been incorporated or referred to in a document (e.g. link to T&Cs) intended to have contractual effect. * A receipt/invoice would be insufficient, as it is provided after the contract is concluded. * A train ticket is usually assumed to have contractual effect because it is provided at the time that the contract is concluded. Timing* Any exclusion clause must have been brought to the attention of the other party before or at the time the contract was concluded. Note, illiteracy doesn’t prevent incorporation
Does the innocent party being illiterate/unable to read the exclusion clause have any relevance to its incorporation by notice?
No
What is the contractual document requirement in relation to incorporation by notice?
The clause must have incorporated/referred to in a document intended to have contractual effect
A buyer of goods signs the front of an order form which has terms and conditions printed on the back. Are they bound by these terms?
They may not be bound by the terms and conditions unless they were very clearly referred to on the front. If they contain exclusions, and particularly if the exclusions are unusual, the buyer is more likely to be bound by them if the presence of the exclusions is also mentioned prominently on the front of the form.
An exclusion clause is printed on the back of a hotel room door. Can the hotel rely on the clause?
No, it would not be possible to rely on an exclusion clause on the back of a hotel room door. The contract for the hotel room was concluded earlier, at the front desk.
A traveller buys a train ticket which has the words “see reverse “ printed on the front, and on the reverse are terms, one of which excludes liability for any loss to property. Is the traveller bound by the terms?
Yes, the law assumes the traveller will read the terms at the time of purchase.
What is the timing requirement for the notice in the context of incorporation by notice?
At the time or before the contract was concluded
How are terms to a contract incorporated through custom or previous dealings?
These are usually a last resort if signature/notice fail. * Industry custom alone may be enough to incorporate a term into a contract. * If it can be shown that the parties have an established record of contracting with each other on standard terms and conditions, the courts are likely to find that, on a subsequent occasion, the terms and conditions that had previously been brought to their attention would still apply. * A party attempting to rely on an exclusion clause must be able to show a regular and consistent course of dealings. What constitutes a regular and consistent course of dealings is unclear (it is a fact based determination), but three to four dealings between the parties over a five-year period has been found to be insufficient
What is required of the course of dealings between the parties if an exclusion clause is to be incorporated in this way?
It must be regular and consistent
A delivered barrels of juice to B for storage. After each delivery, B sent a receipt which included a clause that B didn’t accept liability if any juice was lost. One day, the barrels were empty. Could B rely on the exclusion clause?
Yes, the court said the receipt for the latest delivery had come too late to be incorporated but the exclusion clause formed part of the contract because A had notice of it from previous deliveries. There was a regular and consistent course of dealings between the parties.
What are the 2 rules of construction that apply to exclusion clauses?
Wording Must Be Clear and Unambiguous and Cover the Loss Suffered * As the effect can be onerous, the courts require exclusion clauses to be drafted in clear and unambiguous language, particularly if the clause is attempting to exclude liability for negligence. * The wording of the exclusion clause must be effective to exclude liability for the loss that has been suffered (i.e. the event that may happen and the type of loss excluded). Therefore, the precise nature of the liability should be identified before considering whether the clause is effective in excluding it. Contra Proferentem Rule * If there is any ambiguity when interpreting an exclusion clause, the courts will interpret the ambiguity against the party seeking to rely on the clause.
What is the effect of the contra proferentum rule?
Any ambiguity when interpreting an exclusion clause (or any clause) will be interpreted against the party seeking to rely on itExample: An insurance company included a clause excluding liability for accidents where the car carried ‘an excessive load’. 6 people were sitting in a 5 seater. The court held ‘load’ was ambiguous and construed it against the company meaning the exclusion clause did not apply.
What is the UCTA 1977 and what are the 5 rules under it?
Legislation that regulates exclusion clauses (full exclusions and limitations of liability) in B2B contracts.Under the UCTA: * Exclusion clauses for liability for death or personal injury caused by negligence (arising in contract or tort) will be automatically void* Exclusion clauses for liability for any other loss caused by negligence e.g. damage to property, will be void unless reasonable* Liability for breach of the implied condition as to title under the SGA 1979 or the SGSA 1982 cannot be excluded or restricted by contract* Liability for breach of obligations as to compliance with description, quality, or fitness for purpose under the SGA 1979 or the SGSA 1982 cannot be excluded or restricted by contract unless reasonable and * If one party contracts on its standard form T&Cs, it cannot rely on a term that (1) excludes or restricts its liability for breach of contract, (2) reserves the right to render contractual performance substantially different from what was expected, or (3) renders no contractual performance at all, in each case unless reasonable.
What is the ambit of the Unfair Contract Terms Act 1977 when it comes to exclusion clauses?
Business to business contracts only
Under UCTA, what is the fate of a clause which attempts to exclude liability for death or personal injury caused by negligence (in tort or under contract)?
Automatically void
Under UCTA, what is the fate of a clause which attempts to exclude liability for any other loss caused by negligence (in tort or under contract)?
Void, unless reasonable
Under UCTA, what implied condition under statute cannot be excluded?
Implied condition as to title(Sale of Goods Act 1979 or Supply of Goods and Services Act 1982)
Under UCTA, breach of obligations as to compliance with what three things cannot be excluded, unless reasonable?
- Description2. Quality3. Fitness for purpose(SOGA 1979 or SGSA 1982)
Under UCTA, if a party contracts on its standard terms and conditions, what are three terms they cannot rely on, unless reasonable?
Terms which:1. Exclude liability for breach of contract2. Reserve the right to render contractual performance substantially different from what was expected3. Render no contractual performance at all
A contract for the sale of goods by one business to another contains clauses which seek to exclude (1) the implied statutory term as to title and also (2) the implied statutory terms as to satisfactory quality and fitness for purpose. Are these exclusion clauses valid?
First exclusion: void. Second exclusion: may be valid if it is reasonable.
A contract for the sale of goods by one business to another is concluded on the seller’s standard terms and conditions. The contract contains a clause seeking to exclude the seller’s liability for late delivery. Is this exclusion clause valid?
This clause is valid only if it is reasonable, because it is excluding liability for breach of contract.
What is the reasonableness requirement under the UCTA 1977?
The term in question must “have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made”. Factors considered (non-exhaustive list):* The strength of the bargaining positions of the parties relative to each other* Whether there was any inducement received by the customer to agree to the term in question, or whether the customer had the opportunity to enter into a similar contract but without having to accept a similar term* Whether the customer knew or ought reasonably to have known about the existence and extent of the term in question (referring in particular to any custom or trade or course of previous dealings between the parties)* When the term in question excludes or restricts liability if a condition was not complied with, whether it was reasonable at the time of the contract to conclude that compliance with such a condition was practicable and * Whether the goods were manufactured, processed, or adapted to the special order of the customer (in which case the clause is more likely to be reasonable).
How could the reasonableness requirement under UCTA be described?
The term should be a fair and reasonable one to include having regard to the circumstances which were or ought reasonably to have been known or in the contemplation of the parties when the contract was made
What are five factors among which the court will consider in determining whether the term was fair and reasonable to include under UCTA?
- Bargaining positions of the parties2. Whether the customer received any inducement to accept the term3. Whether the customer knew/ought reasonably to have known about the existence and extent of the term4. Whether compliance with a condition was practicable (in situations where the term excludes liability if a term is not complied with)5. Whether the goods were made pursuant to a special order
From what point in time is reasonableness assessed under the UCTA 1977?
At the time the contract was included i.e. is the clause reasonable in terms of how it could apply to any breach that could happen not if it is reasonable with respect to the particular breach that has happned
A contract for the supply of computer hardware and software is concluded on the seller’s standard terms and conditions. These include a clause limiting the seller’s liability to the contract price and excluding liability for consequential and indirect losses. The seller and buyer are both experienced commercial parties and of roughly equal bargaining power. During negotiations, the buyer asked the seller about the limitation clause but failed to persuade them to remove it. Are the exclusions clauses reasonable under the UCTA 1977?
If the software fails to perform satisfactorily, a court may conclude that the parties, given their business experience, will have taken account of the risk of the software failing to perform and decided to accept the limitation clause as a fair allocation between them of the resulting cost.
Under the UCTA 1977, how does reasonableness work in practice in terms of:* limitation of liability* incorporation* burden of proof
Limitation of liability* It is common for exclusion clauses in a commercial contract to limit liability (e.g. with a cap) rather than seek to exclude it altogether as limitation clauses are more likely to be found to be reasonable. * Specifically, courts must consider (in addition to the other factors) the resources available to the party relying on the clause to meet the liability and whether it was open to them to protect themselves using insurance. Incorporation* Test: whether it was reasonable to include the clause in the contract, not whether it is reasonable to rely on it i.e. reasonableness is considered at the time the contract was concluded, having regard to what the parties knew at the time. Burden of proof* The party relying on the clause must prove that it is reasonable. * In practice, it is difficult to predict whether a clause will be found to be reasonable or not. The best that a lawyer can do is to warn their client of the risk that it may not be upheld.
A contract for the supply of a computer system to a local authority limits the supplier’s liability to £100,000. The system fails to perform properly and the local authority suffers losses of £1.3 million. Is the exclusion clause likely to be reasonable?
The court will look at the parties’ resources and the availability of insurance. The only way that the local authority can recoup the loss, other than under the contract, is to increase the council tax payable by its residents. The supplier has product liability insurance for claims up to £50 million. The clause is likely to be unreasonable.
What is the difference between an exclusion clause and a limitation clause?
An exclusion clause seeks to exclude liability outright. A limitation clause seeks only to limit liability.
In addition to the factors which the court will consider in determining whether an exclusion clause was reasonable under UCTA, what two things will they also consider when determining the same for a limitation clause?
- The resources available to the party relying on the clause to meet the liability2. Whether it was open to them to protect themselves using insurance
What does the reasonableness test under UCTA concern specifically?
Whether it was reasonable to include the clause, not whether it was reasonable to rely on it
Who has the burden of proving a clause was reasonable under UCTA?
The party relying on the clause
What is the position of exclusion clauses under the CRA 2015?
- It prohibits certain terms relating to sale of goods and provision of services (there is an indicative, non-exhaustive list of potentially unfair terms) in consumer contracts between traders and consumers. * Any clause in a trader/consumer contract that attempts to exclude liability for death or personal injury as a result of the trader’s negligence is prohibited. * It makes other ‘unfair’ terms unenforceable. * Certain terms are outside the scope of the fairness test* It also requires that contract terms be transparent and legibile
Under the Consumer Rights Act 2015, what is the definition of trader?
A person acting for purposes relating to the that person’s trade, business, craft, or profession, whether acting personally or through another person acting in the trader’s name or on the trader’s behalf i.e. someone acting in the course of business
Under the CRA, what is the definition of consumer?
An individual acting for purposes that are wholly or mainly outside the individual’s trade, business, craft, or profession i.e. someone acting outside the course of business
How is an unfair term defined under the CRA?
- Contrary to requirements of good faith2. Causes significant imbalance in the parties’ rights/obligations to the detriment of the consumerThis is determined on the basis of the subject matter of the contract, the other terms (and the terms of any related contracts) and the surrounding circumstances when the contract was agreed.
Under the CRA, what statutory implied terms concerning goods cannot be excluded or limited?
- Title2. Compliance with description3. Quality4. Fitness for purposeNote if they are in a consumer contract, these terms are not binding on the consumer but the rest of the contract won’t be affected.
Under the CRA, what statutory implied terms concerning services cannot be excluded or limited?
- Provided with reasonable care and skill2. Provided within a reasonable time where no time has been agreedNote if they are in a consumer contract, these terms are not binding on the consumer but the rest of the contract won’t be affected.
Under the CRA, what is the fate of a clause which attempts to exclude liability for death or personal injury caused by negligence?
Prohibited. Same as under UCTA for B2B contracts.
What are two characteristics the CRA requires of contract terms?
- Transparent (i.e. drafted in plain, intelligible language - legal jargon will fail the test)2. Legible (strange font will fail the test)If a term does not meet this test, it will likely be unfair. Any ambiguity will be resolved in favour of the consumer
Under the CRA, in whose favour must ambiguities be resolved?
The consumer’s
What the effect of a term deemed to be unfair under the CRA?
Not binding, unless the consumers choose to rely on it.A finding of unfairness will not render the entire contract unenforceable, just the unfair term. The rest of the contract will continue to be binding.
What power do government enforcement authorities have under the CRA 2015 where traders use unfair terms?
They can obtain a court injunction to restrain traders from using unfair terms.
What are six examples of potentially unfair terms?
- Excluding/limiting liability in event of death/injury caused by act/omission other than negligence2. Requiring disproportionately high fees to terminate the contract3. Enabling the trader to terminate the contract without reasonable notice (except where there are serious grounds)4. Enabling the trader to unilaterally alter the contract for reasons not expressly provided in the contract5. Giving the trader the discretion to decide price after the consumer has become bound where no price or method of determining proce was agreed before becoming bound6. Excluding/limiting the consumer’s right to take legal action/any other legal remedy
In what two circumstances will a term not be assessed for fairness under the CRA?
When the term:1. Specifies the main subject matter of the contract2. Is related to the price payableProvided the relevant term:* is transparent (plain, intelligible language and if written, legible) and prominent (brought to the consumer’s attention, such that the average consumer would be aware of it)* is not in the list of potentially unfair terms
Even where it falls within one of the two categories, what is required of the term for it not to be assessed for fairness under the CRA?
It must be:1. Transparent (expressed in plain, intelligible language, and if written, legible)2. Prominent (brought to the consumer’s attention, such that the average consumer would be aware of it)
The main subject matter of an agreement is on the back of a 2 page contract in size 6 font. Can this term be assessed for fairness under the CRA 2015?
Yes, even though the term goes to the heart of the deal (and generally is outside the scope of the fairness assessment), it can be assessed for fairness on the grounds that it is not prominent.
What 6 factors make contracts that meet all the normal requirements for validity void or voidable?
- Mistake (void)* Duress (voidable)* Undue influence (voidable)* Illegality or contravention of public policy (void)* Misrepresentation (voidable) * Lack of capacity (voidable)
What is a void contract?
A contract that is totally without any legal effect from the beginning, which cannot be enforced by either party (no remedy will be available for breach).
What is a voidable contract?
- A contract which operates as valid until a party elects to ‘avoid’ i.e. rescind it.* Until a voidable contract is rescinded, it remains in full force and effect* A voidable contract can also be affirmed which prevents rescission.
What is the effect of recission?
Rescission has the effect of putting the parties back into the position they would have been in had the contract not been entered into.
What is the difference between a void and voidable contract as they relate to title to goods which are subject to these contracts?
- Void: title does not pass under a void contract and can never be passed on* Voidable: title can passed on if a third party buys in good faith and for value
What are the factors which can render a contract void?
- Mistake2. Illegal/contrary to public policy at formation
What are the factors which can render a contract voidable?
- Duress2. Undue influence3. Misrepresentation
Who cannot enforce a legal contract which was performed illegally and who can?
Can enforce: Innocent partyCannot enforce: The party who committed the illegal act
What is mistake in contract law?
A contract can be void for mistake either at common law or in equity. This is known as an operative mistake (which either prevents formation i.e. never existed ab initio or makes what was agreed fundamentally different from what was intended). The types of mistake are:* Common/idential mistake* Mutual mistake * Unilateral mistake * Mistake as to identity* Non Est FactumSometimes, mistakes can be resolved through rectification.
What are the two criteria, either one of which is enough, under which a contract will be void for mistake?
Mistake is so fundamental that it:1. Prevents formation of a contract in the first place (parties not properly in agreement ab initio), or2. Makes what has been agreed between the parties fundamentally different from what was intended
What is common mistake and what aspect of the contract will it typically relate to?
Both parties have made the same mistake.Typically concerns the existence rather than quality of the subject matter of the contract A common/identical mistake will render the contract void.
Two parties contract to buy a ship. They didn’t realise it sank last week. Is the contract valid?
No, the contract is void for common/identical mistake. The common mistake is the existance of the ship. * Note, if the ship sank after formation of the contract, it would be frustrated, not void.* If the parties had agreed the ship would be suitable to carry grain but it turned out not to be, this would be a mistake as to the quality so would not count as a common mistake and the contract would not be void.
What is mutual mistake?
- Where the parties are both mistaken, but about different things (i.e. at cross purposes)* Courts will consider whether a reasonable person would take the agreement to mean what each party did. If the court applies this test and the result is a totally ambiguous contract, then there is no agreement between the parties and the courts will consider the contract to be void.Example: parties agree to buy and sell a ship called the Chimera but neither know 2 ships called the Chimera exist and they are completely different. Both think the contract is about a different ship so it is void for mutual mistake.
What will the courts consider in evaluating a mutual mistake?
Whether a reasonable person would interpret the agreement to mean what each party did
A catalogue in a wine auction advertises an auction lot consisting of cases of vinsanto. There are two types of vinsanto -a strong dessert wine from Italy and a more expensive wine from Greece. The seller owns stocks of both. A bidder bids for the lot thinking that they are bidding for the Greek wine and prices their bid on that basis. The seller is intending to sell the less expensive Italian wine. The bid is successful. Is the contract binding?
The contract formed at the auction is void because the bidder bid on the lot thinking that it was one thing whilst the seller thought it was something else i.e. mutual mistake. A reasonable person in this scenario would not have been clear on what the lot contained.
What is a unilateral mistake?
- Where one party is mistaken as to the terms of the contract, and the other party is aware or should be e.g. error in price. * This will cause the contract to be void as there is no agreement between the parties.* Note, a mistake as to the quality of the subject matter will not be sufficient e.g. buying a diamond for £2000 thinking it is top grade and colourless. An expert would say it is second grade. This is not a unilateral mistake. There would be a contract and the seller may have breached it.
A homeowner wants some work done on their garden and asks three gardeners to submit bids. The first gardener sends a bid of £1,500. The second gardener sends a bid of £1,700. The third gardener submits a bid of £600. The homeowner accepts the £600 bid. The third gardener informs the homeowner the work cannot be done for that amount as it was due to a typographical error and should have been £1,600. Is there a contract between the homeowner and the third gardener?
There is no contract because the homeowner should have been aware of the mistake given that the bid was substantially different from the other two bids.
When does mistake as to identity occur?
When an innocent party thinks they are contracting with Party A, but it is actually Party B pretending to be Party ACourts consider whether the innocent party would have contracted irrespective of the identity of the other party. * If that is the case, the innocent party might have a remedy for misrepresentation, but it is unlikely the contract would be void for mistake. * However, if the other party’s identity was fundamental to the first party’s decision to enter into the contract, then it will be void for mistake.
Only when will mistake as to identity void a contract?
When Party A’s identity was fundamental to the innocent party’s decision to enter into the contractExample: A sells her car to B in the mistaken belief that B is a famous actor. B pays by cheque, which later bounces. B subsequently sells the car to C. If B’s identity was fundamental to the contract, then there would have been a mistake as to identity and the contract would be void for mistake. Title to the car would therefore still be with A.
In the context of mistake as to identity, where Party A’s identity was not fundamental to the innocent party’s decision to enter into the contract, what avenue for remedy is available?
Remedy for misrepresentationExample: A sells her car to B, who then sells it to C. If B’s identity was not a crucial factor, B would have merely misrepresented the position to A. This would make the contract voidable. Under the Sale of Goods Act 1979, C would have good title to the car provided that it was bought with no knowledge of the misrepresentation and for value.
What are the two requirements to void a contract for mistake under non est factum?
- Fundamental and radical difference between what was signed and what the signatory thought they were signing, and2. The mistaken signatory must not have been careless Note, the doctrine is very limited in scope, the burden on a party seeking to rely on the defence is a heavy one. Only a party who has special difficulties understanding the document is likely to succeed with it.
Before a match, a fan asks a football player for an autograph. The fan hands the footballer a booklet and the footballer quickly signs the booklet and moves on. The booklet was actually a cleverly disguised contract. Is the footballer bound?
No, the doctrine of non est factum will apply and the contract will be void.
When is rectification by the court available in the context of mistake?
- When the parties agree on the terms but the terms are recorded incorrectly when the contract is reduced to writing, such that the written document failed to express the common intention of the parties. That common intention can be deduced from evidence of each party’s actual understanding.* Rectification will not be possible if it is inequitable e.g. if third parties have acquired any rights under the contract as written.Example: As part of a divorce settlement, a husband agreed to make regular payments to his ex-wife “free of income tax”. Tax law does not allow such payments to be made without deducting income tax and paying it to the tax authorities. The settlement document was rectified so as to require the husband to pay his wife such greater amount as would ensure that, after deduction of income tax, she received the amount originally intended.
When will rectification in the context of mistake not be available?
If it would be inequitable, e.g. if a third party has acquired rights under the contract as written
What is duress in the context of contract law?
Duress deals with the situation whereby illegitimate pressure has been exerted over one of the parties by the other so that it cannot be said that the contract was entered into freely i.e. the illegitimate pressure was a factor in the innocent party’s decision to enter the contract.* A contract entered into under duress is voidable by the innocent party, but it is not automatically void. The innocent party must take steps to rescind the contract if they want to avoid it. * Duress is governed by the common law but the remedy of rescission is an equitable remedy, so it is subject to the same defences as other equitable remedies * Types of duress are: duress of the person, duress of goods and economic duress.
What is required to succeed with an allegation for duress?
Illegitimate pressure which is a factor in the innocent party’s decision to enter into the contract
What is duress of the person?
Physical duress.The innocent party must show that the duress suffered e.g. threats to kill/injure them if they do not enter into a contract, was one of the reasons that they entered into the contract. There is no requirement for the duress to be the only reason.
Does physical duress have to be the only reason the contract was entered into?
No
What is duress of goods?
One party unlawfully keeping goods belonging to another to exert some form of influence over them to enter into a contractClaim for duress of goods is less likely to succeed than a claim for duress of the person. Example: A mechanic fixes your car and the agreed price was £300. When you go to retrieve it, he won’t give it to you unless you give him £500.
What is economic duress?
Where there is inequality of the bargaining positions of the parties, and the stronger party uses this position in an illegitimate manner to force the other party to enter into the contract* Economic duress must have been a significant factor (i.e. not just one factor) in the innocent party’s decision to enter into the contract. * Mere commercial pressure is not enough. * A “coercion of the will so as to vitiate consent” is required, together with illegitimate pressure which induces the other party to enter into the contract. * Economic duress may arise after contract formation when an attempt is made to vary the consideration payable.
How much of a factor much economic duress have been in the decision to enter into the contract for it to be available?
A significant factor
Is mere commercial pressure commercial pressure enough to amount to economic duress?
No. There must be coercion of the will so as to vitiate consent together with illegitimate pressureExample: when booking flights and all cheap deals are gone and only expensive ones left. This is normal commercial pressure, not economic duress.
What factors will the court consider when dealing with economic duress?
- Does the threat deprive innocent party of practical choice?2. Is the threat unlawful (and made not in good faith)?3. Did innocent party seek to rely on contract?4. Did innocent party protest?Note, the courts are unwilling to set out a list of situations which will constitute illegitimate pressure, the above factors are used instead. All factors don’t need to be present for a claim to succeed.
A washing machine manufacturer has contracts with suppliers for specific parts. One supplier threatens to stop supplying the parts unless they pay more. Is this economic duress?
Yes, the supplier is threatening a breach.However, if the supplier had a good reason e.g. if the manufacturer was late in paying or didn’t accept delivery with no good reason, the supplier might think it had a right to require more money as compensation. Here they would be acting in good faith so there would be no economic duress.If the washing machine manufacturer paid the extra and placed more orders they probably have affirmed the contract and it would be too late to rescind. To rely on economic duress, they should have protested and made it clear they were only paying extra because they had no choice.
Can economic duress arise after contract formation?
- Yes, many cases of economic duress arise when an attempt is made to vary the consideration payable under a contract after negotiations have concluded and the contract has been formed. * The party seeking a change to the contract would need to provide additional consideration to support their request. Sometimes this consideration will consist of a “practical benefit’ obtained by the innocent party. However, even if consideration from both parties can be demonstrated, if the consideration was obtained under duress then the contract would be voidable. * If the threat was lawful, the courts will only find that there has been duress in exceptional circumstances. These include blackmail - where one party threatens to report something that the other party has done, unless the other party enters into a contract.
A manufacturer entered into a contract with a haulage company for the transportation of the manufacturer’s goods to shops around the country. The agreed price was £1.10 per carton. The contract did not specify how many cartons there would be in each load. The first load was smaller than the haulage company expected. It refused to make any more deliveries unless the manufacturer agreed to pay a minimum price per load. The manufacturer had no choice but to agree to pay the extra amount. However, it did not actually make the payment and the haulage company brought proceedings. Is the manufacturer’s promise enforceable?
No, the court found that the manufacturer’s promise to pay the extra amount was unenforceable because it had been procured by economic duress. (It also found that there was no consideration for its promise.)
What are the key differences between duress and undue influence?
- Duress is concerned with illegitimate pressure (narrower) but conduct can be undue influence even if it isn’t unlawful or in bad faith - the concern is whether there was true consent* Undue influence is based on the personal relationship between the parties (unlikely to arise in commercial situations)* Undue influence arises in equity, duress arises in common law.
What is the doctrine of undue influence?
An equitable doctrine to ensure that one person’s influence over another is not abused. If undue influence is proved, the contract is voidable and the innocent party may take steps to rescind it.There is no settled legal definition, but case law has categorised it as requiring coercion from an external source, which the influencer has exploited for some degree of personal gain. There are two ways of proving undue influence: 1. actual undue influence by reference to overt acts and 2. presumed undue influence as a result of the relationship between two parties (presumption is rebuttable).Actual and presumed undue influence should not be viewed as separate: they are two different methods of reaching the same legal result.Note, undue influence of third parties may also result in a contract being voidable.
Is the pressure giving rise to undue influence more or less serious than duress?
Less
What is required for undue influence?
Coercion from external source, which the the influencer has exploited for personal gain
What are the two ways in which undue influence can be proved?
- Actual undue influence: overt acts2. Presumed undue influence: based on relationship between the parties
What is actual undue influence?
It requires the innocent party to prove that the other party overtly influenced them into entering into a contract by improper pressure. * This can either be directly (e.g. blackmail) or indirectly (e.g. misleading or tricking when a relationship of trust and confidence exists, or putting excess pressure on them). * Closest type to duress but conduct constituting undue influence need not be in bad faith or unlawful. The party must have exerted excess pressure, or abused their relationship with the other party. * It needs to be a factor (i.e. not the only or principal) leading the innocent party to enter into a contract. * If actual undue influence is proved, there is no requirement for the innocent party to show that the transaction was disadvantageous to them. They are entitled as of right to have it set aside. Example: An elderly aunt is told by her nephew to sign a contract in relation to a family trust or face court proceedings. She is afraid of her nephew and intensely dislikes confrontation. The threat is entirely lawful, but the contract will still be set aside for undue influence. The nephew has put excess pressure on his aunt.
What is required to prove actual undue influence?
That the other party overtly influenced them to enter into a contract by improper pressure
What are the way improper pressure can be applied in the context of actual undue influence?
- Directly, e.g. threats like blackmail2. Indirectly, e.g. by misleading or tricking where a relationship of trust and confidence exists
What is a key difference regarding the conduct requirement for undue influence compared to duress?
The conduct for undue influence does not need to be in bad faith or illegal
Does actual undue influence have to be the only or principal factor in causing the innocent party to enter into the contract?
No, it only needs to be a factor
When there is actual undue influence, must the innocent party show that the transaction was disadvantageous to them?
No. The innocent party is entitled to have the contract set aside as of right.
What is presumed undue influence?
Presumed undue influence requires:* a relationship of trust and confidence between the parties (automatic or if proved by the innocent party) e.g. a fiduciary relationship. This is a question of fact. * A transaction, when viewed objectively, is so unfavourable that it requires explanation i.e. innocent party need only show that the relationship between the parties does not readily explain the transaction e.g. when a gift is so large it would not seem reasonable on the basis of their relationship. The accused party then has to prove there was no undue influence and the other party entered into the contract of their own free will and with informed consent.Classic scenario is where a solicitor convinces a client to leave them money in the will.
What is the first requirement for presumed undue influence?
Relationship of trust and confidence, usually a fiduciary
What are some other relationships where the trust and confidence element will be deemed to exist automatically for the purposes of presumed undue influence?
- Parent/child2. Medical advisor/patient3. Guardian and ward4. Solicitor/client
When does a relationship of trust and confidence arise for the purposes of presumed undue influence?
Automatically* fiduciary relationship e.g. partners in a partnership or directors in a company* Parent and child* Medical adviser and patient* Guardian and ward* Solicitor and client. If proven by the party alleging the undue influence* Spouses* Situations where the innocent party trusted the other party to make all their important decisions for them.
For the purposes of presumed undue influence, is there a relationship of trust and confidence between spouses?
Only if it is proved
For the purposes of presumed undue influence, what one situation may also give rise to a relationship of trust and confidence?
Where the innocent party trusted the other to make all the important decisions for them
What is required for a presumption of undue influence to apply?
- Relationship of trust and confidence2. Transaction, viewed objectively, calls for an explanation
When the presumption of undue influence arises, who has the burden to rebut?
The non-innocent party
When trying to rebut the presumption of undue influence, what is the non-innocent party essentially trying to show?
That there was no undue influence, the innocent party entered the contract of their own free will and with informed consent
When trying to rebut the presumption of undue influence, what is one factor that will be strong evidence that there was no undue influence, albeit not conclusive?
That the innocent party obtained independent advice before entering into the contract
What is third party undue influence?
- Where the undue influence (actual or presumed) does not come from a party to a contract, but a person connected to one of those parties e.g. a spouse.* If a party to a contract is aware that there may have been undue influence on the other party but does not take reasonable steps to ensure that the other party is entering into the contract of their own free will (e.g. by obtaining independent legal advice), the transaction may be set aside.
Where there has been third party undue influence, when may the transaction be set aside?
- Non-innocent party is aware there may have been undue influence2. They did not take reasonable steps to ensure the innocent party is entering the contract of their own free will
A husband uses undue pressure to convince his wife to agree to a charge over the family home to secure a guarantee to his bank for debts owed to the bank by his business. The husband is not a party to the agreement between the woman and the bank. Can the transaction be set aside?
If the bank knows that the loan is intended as security for the husband’s business debts and it has not taken reasonable steps to ensure that the wife has made the decision of her own free will, the bank will be said to have constructive notice of the undue influence and the transaction may be set aside. The bank is put ‘on inquiry’ by the relationship between the husband and wife and the nature of the transaction. The influencer is the husband, but he is not a party to the transaction.
On the exam, when considering duress and undue influence, what is the order in which these should be considered?
- Check for duressif the conduct falls short of duress:2. Check for actual undue influenceif there is insufficient evidence of actual undue influence:3. Check for presumed undue influence, including by third parties
What is an illegal contract/a contract contrary to public policy?
An illegal contract is void and unenforceable. This may be a contract to carry out criminal behaviour or a contract that is seen as being of detriment to society as a whole and are, therefore, contrary to public policy (i.e. not illegal but still void).Contracts may be:* Illegal as formed* Performed in an illegal mannerThe types of illegality are:* Contracts illegal by statute* Contracts illegal at common law* Contracts contrary to morality or the institution of marriage* Contracts damaging to the government* Contracts that interfere with justiceRestraint of trade agreements must be reasonable for the protection of legitimate interests and anti-competitive agreements (e.g. not to compete with eachtother, price fixing, market apportionment) are likely void as they are breaches of competition law.
In what two ways can a contract be illegal?
Illegal as formed * Not enforceable, no remediesIllegal as performed (i.e. not illegal at formation)* Rights are withheld from the party that committed the illegal act, but this does not preclude remedies being available to the innocent party (provided they were not aware of, and had not taken part in, the illegality).* If they later learn of the illegality then they must cease performing the contract, and no rights can accrue to them under the contract from that point onward. * It may also be possible for the courts to sever the offending part of an illegal contract and for the remainder of it to be performed by the parties.
What is the status of a contract which is illegal as formed?
Void and unenforceableExample: contract between 2 people to rob a bank
What is the status of a contract which is illegal as performed?
- Rights withheld from the party who committed the illegal act2. Remedies available to other party, as long as they were not aware and did not take partExample: If a long-distance lorry driver does not obtain the appropriate driving licence required by statute to drive the lorry legally, a contract between the driver and their employer would be illegal in performance, and the driver would not be able to enforce its terms.
In the context of a contract being illegal as performed, what is the impact of the other party not knowing but subsequently finding out that performance was illegal?
No rights can accrue from that point onwards and they must cease performance.
In the context of a contract being illegal as performed, what option does the court have to preserve the elements of the contract which weren’t performed illegally?
They can sever those parts, so the remainder can be performed by both partiesTest: will the bargain remain the same if the illegal part is removed. If it can be removed, both parties can enforce the rest of the contract.
What are the 5 types of illegality in contract?
- Contracts illegal by statute (illegal and void)* Contracts illegal at common law (agreements to commit crimes at common law and torts)* Contracts contrary to morality or the institution of marriage (morality in this context often relates to sexual morality but perceptions evolve over time - old cases likely would be decided differently today)* Contracts damaging to the government (e.g. trading with an enemy during times of war)* Contracts that interfere with justice (e.g. agreement to conceal a crime)
A prostitute hires a fancy caravan to drive around so she can ply her trade. Can she enforce this agreement?
Whilst it is not illegal to hire a caravan, the prostitute would not be able to enforce the contract against the caravan owner because she knew it was to be used for prostitution and so the contract would be void for illegality in its performance. Thus, if the caravan owner discovered the prostitute’s intent before she took possession of the caravan and refused to give her possession, the owner would not be liable for damages in contract. If the owner did not know of the prostitute’s intent when the contract was concluded, the owner could enforce the contract against her for payment for the hire, unless and until they learn what the caravan is being used for. On the other hand, if the owner also knew of the illegal purpose when the contract was concluded, the owner would not be able to enforce the contract against the prostitute.
What are restraint of trade clauses?
A term in a contract attempts to restrict the freedom of parties to contract as they see fit e.g. non-compete/non-solicitation clauses in employment contracts i.e. “restrictive covenants”.* Such a term will be void unless the restriction is reasonable. This will depend on matters such as whether the parties could be viewed as acting in a normal commercial relationship and whether the terms of the contract were negotiated with the benefit of legal advice.* The courts will also consider whether the activities covered by any clause, its geographical scope, and its duration are proportionate. This means that the party seeking to rely on a restraint of trade clause must be able to show that it is reasonably necessary for the protection of its legitimate interests.
What is the effect of a contractual term which purports to restrain trade?
Void, unless the party seeking to rely on the restriction shows it is reasonably necessary for the protection of legitimate interests
An employee’s contract prohibits the employee from divulging trade secrets upon departure from the employment. Is this restraint of trade clause likely to be binding?
This clause may be viewed as reasonable because an employer has a legitimate interest in protecting its trade secrets, but a clause restricting the employee’s ability to use the general skills they have obtained during the course of their employment is unlikely to be upheld because an employer is not likely to be found to have a legitimate interest in preventing a former employee from using their general skills.
A baker in London hires an employee to mind the front of the bakery as the baker bakes. The baker requires the employee to sign an employment contract which contains a clause prohibiting them from working in a bakery within one mile of the baker’s shop for six months after their employment ceases. Is this restraint of trade clause likely to be upheld?
Such a clause is likely to be upheld as it merely prevents the employee from trading on the bakery’s reputation/goodwill close to the bakery for a short duration. However, if the clause prohibited the employee from working for any bakery in London for five years, it is likely that it would be found to be an unenforceable restraint of trade because it would prevent the employee from earning a living and is not proportionate in geographic scope or duration to the baker’s legitimate interest-preventing the employee from competing based on the bakery’s reputation/goodwill.
What are the consequences of the following vitiating factors:* Mistake* Duress* Undue influence* Illegality/contrary to public policy at formation* Illegality/contrary to public policy in performance* Misrepresentation
- Mistake: Void (no agreement)* Duress: Voidable* Undue influence: Voidable* Illegality/contrary to public policy at formation: Void* Illegality/contrary to public policy in performance: Unenforceable by party committing the illegal act* Misrepresentation: Voidable
What is a required for an actionable misrepresentation?
- False statement of fact or law * made by one party to another * to induce them to enter into the contract i.e. a pre-contractual statement
What is required of the statement for the purposes of misrepresentation?
Clear and unambiguous pre-contractual statement, made to the innocent party by the party to the contract or a third party
What counts as a false statement of fact or law?
The statement can be either words or conduct (e.g. a vendor covering up a defect in a property to deceive potential purchasers/ordering a meal in a restaurant represents by conduct you have money to pay for it). * ‘False’ means not substantially correct. * Statements of fact are statements of present or past conditions. * A statement of opinion is not a statement of fact, as long as the opinion is honestly, genuinely, and reasonably held. * A promise goes beyond a statement of fact, and is therefore not a representation (but it may be a term of the contract) * A statement about future events cannot be a statement of fact, as there is no way of knowing the truth when the statement is made. * A statement of intention may be a misrepresentation if the person making the statement knew that it was false when they made it.
For the purposes of misrepresentation, what is the definition of false?
Not substantially correct
For the purposes of misrepresentation, is a statement of fact limited to just present conditions?
No, it can also concern past conditions, but not future events
For the purposes of misrepresentation, hat is required for a statement of opinion to not be a statement of fact?
The opinion must be honestly, genuinely and reasonable held
When will a statement of intention be false?
When the person making the statement knew it was false when they made it
A farmer told a potential buyer that he thought his land would support 2000 sheep. Both parties knew the farmer had never farmed sheep on the land. The land was not capable of supporting 2000 sheep. Was this a misrepresentation?
No, both parties knew it was an opinion, not a statement of fact and therefore not a misrepresentation. Note, if the farmer didn’t honestly hold the opinion, he could have been liable.
A director of a company told a lender that he was borrowing money to expand the company’s business. After receiving the money, the company was hit with a large, unexpected expense and the director used the borrowed money to cover it. Does this amount to a misrepresentation to the lender?
No, as the director did not know about the expense at the time of taking out the loan. If he had knew all along the money would be used on this debt and lied to the lender, then it would be a misrepresentation.
Can silence amount to a misrepresentation?
Generally noNote:* Disclosure can be required in fiduciary relationships* Uberrimae Fidei contracts require full disclosure.* A partial nondisclosure (half-truth) can be a misrepresentation* Failure to correct a representation that becomes false can be a misrepresentation
What are uberrimae fidei contracts?
- Contracts of utmost good faith, where it is incumbent on the parties to make full disclosure. The reason is that one of the parties has knowledge essential to the contract which is impossible for the other party to check e.g. insurance contracts* Silence is not acceptable in a contract of this nature, and failure to disclose is an actionable misrepresentation (even if the insurer doesn’t specifically ask a relevant question).
Can a partial non-disclosure (half truth) amount to an actionable misrepresentation?
YesExample: An investor is considering buying an office building. The seller tells the investor that the building is fully let. The seller does not mention that the main occupier has given notice to terminate its lease. This is a misrepresentation.
Can a failure to correct a representation that was initially true amount to misrepresentation?
Yes, the maker of the statement has a duty to correct the information, as silence in this situation is not acceptable.Example: In negotiations for the sale of a business, if a statement is made about the turnover of the business and that figure substantially falls during the course of negotiations because the owner becomes ill, the owner would have a duty to correct the statement. It would constitute a continuing representation, and remaining silent about the change would be a misrepresentation.
Does the misrepresentation have to be the only reason the innocent party entered into the contract?
No, but it needs to be a substantial reason. In considering inducement, the courts will look at: * whether the representation was material, and * whether, viewed objectively, a reasonable person in the claimant’s position would have been influenced by the false statement. There will be no misrepresentation if:* the innocent party did not believe the statement to be true, or * the statement was not actually communicated, or* it did not affect the party’s decision to enter into the contractA court may dismiss a statement which appears to be no more than ‘advertisers’ speak’ as ‘mere puff’, and conclude that it cannot have induced the innocent party to enter into the contract.
A seller tells B that there is nothing wrong with the roof of a house. B relies on that statement and buys the house. The roof is a disaster. Does B have a claim in misrepresentation?
Yes, the statement induced B to enter the contract.Note, if the seller said “I think the roof is ok but I’m not sure” and then B asked a surveyor to check the roof and the surveyor said it was fine, there would be no misrepresentation claim against the seller because B didn’t rely onthe statement. B may have a claim against the surveyor.
In what three instances will there be no actionable misrepresentation?
- Innocent party did not believe the statement2. The statement was not actually communicated3. Statement did not affect party’s decision to enter into contract
What are the three categories of misrepresentation?
- Fraudulent2. Negligent3. Innocent
What are the three ways in which fraudulent misrepresentation can arise?
There must be an element of fraud. The statement must be made:1. Knowingly2. Recklessly (careless as to truth)3. Without belief in its truthThis is the most serious type of misrepresentation and has its origins in the tort of deceipt. It is very difficult to prove
What negligent misrepresentation is actionable under the Misrepresentations Act 1967?
- Any misrepresentation is actionable unless the person making the statement can prove they had reasonable grounds for believing and did believe, until the contract was entered into, that the statement was true.* The party who made the statement must disprove negligence (i.e. prove they had reasonable grounds for their belief). This is an easier claim than fraudulent misrepresentation for the claimant.
To clarify, who has the burden of disproving a claim of negligent misrepresentation?
The party who made the statement
What is an innocent misrepresentation?
An innocent misrepresentation is a representation that is not made fraudulently or negligently. The maker of the statement has reasonable grounds for believing that it is true.
What are the three remedies available to the innocent party in the context of misrepresentation?
- Voidability2. Rescission3. DamagesThe remedies depend on the type of misrepresentation that has taken place
Is a contract voidable for misrepresentation?
Yes, whatever the type of misrepresentation, it has the effect of making the contract voidable but not void.The innocent party can choose whether to rescind the contract, or carry on with it and possibly claim damages for any losses arising as a result of the misrepresentation.
What types of misrepresentation is rescission available for, and what is the effect of this?
Fraudulent, negligent and innocent. It unwinds the contract and puts the parties back in the position there were if the contract has never existed.* The innocent party must notify the other party of their intention to rescind the contract or obtain a court order to that effect (if not, the other party is entitled to treat the contract as ongoing). * If the innocent party rescinds the contract, the court may order an indemnity from the party who has made the misrepresentation to assist in restoring the parties to their pre-contractual position, and it is paid to cover any expenses or obligations necessarily incurred as a result of entering into the contract. Note, rescission is an equitable remedy and is therefore available only at the discretion of the court. It is a very restricted remedy and there are bars to recission including: affirmation, lapse of time, impossibility of restitution and third-party rights.
As a general aside, how is rescission different to termination?
Termination brings the contract to an end and only affects the parties’ future rights. Rescission makes it as if the contract never existed at all, therefore prior rights cannot be enforced
Is rescission always available?
No, it is an equitable remedy and is therefore at the discretion of the court - there are also bars to recission including affirmation, impossibility of restitution, third party rights and lapse of time.
What is required if a party wishes to rescind for misrepresentation?
They must notify the other party of their intention to rescind or obtain a court order to that effect
If the innocent party rescinds the contract, what indemnity might the court seek from the party who has made the representation, and what is it limited to?
An indemnity to assist in restoring the parties to the pre-contractual position, and is limited to any expenses or obligations necessarily incurred as a result of entering into the contract
What are four bars to rescission?
- Affirmation2. Lapse of time3. Impossibility of restitution4. Third party has rights under contract
What is affirmation?
When, upon discovering the misrepresentation and having full knowledge of it, the innocent party carries on with the contract. * Affirmation can be by way of a statement made to the party who made the misrepresentation or by conduct (i.e. continuing to carry on performing its obligations)* Affirmation is a bar to recission
How can a contract be affirmed?
- Statement affirming it2. Continued performance
Why does a lapse of time bar rescission?
Because rescission is an equitable remedy and delay defeats equity* Except in cases of fraudulent misrepresentation, the clock starts running when the innocent party discovers/should have discovered the misrepresentation. * In the case of fraudulent misrepresentation, the clock starts to run from the date the fraud is uncovered.
With regard to lapse, when does the clock start running for fraudulent misrepresentation?
When the fraud is discovered
With regard to lapse, when does the clock start running for negligent and innocent misrepresentation?
When the innocent party discovers or should have discovered the misrepresentation
A makes a claim for rescission due to misrepresentation on the basis that a painting purchased five years earlier was a fake and not the work of a famous artist as previously thought. Is this claim likely to succeed?
No, it will be unlikely to succeed. Five years is not a reasonable time and the buyer has therefore affirmed the contract. However, if the misrepresentation is proven to be fraudulent, the court will consider the length of time between the discovery that the painting was a fake and when the claim was made.
When will ‘impossibility of restitution’ arise as a bar to recission?
If it is impossible to restore the parties to their pre-contractual position because:* the goods in question have declined in value or * the nature of the** subject matter has changed substantially**The innocent party will only be able to bring an action for damages and recission will not be available. Note, if substantial restoration is possible, this will usually be sufficient.
What happens to the innocent party if it is impossible to return the parties to their pre-contractual position?
The innocent party will lose the option to ask the court to rescind, and will only be able to bring a claim in damages
A buys a car from a dealer, in reliance on a representation that the car has done only 30,000 miles. Things go wrong with the car. After three months, A gets it checked out and it turns out that the car has done closer to 150,000 miles. The dealer knew the truth, so the misrepresentation was fraudulent and A is still in time to rescind the contract. Can A rescind the contract?
Possibly. He has had the car for three months and driven it for several thousand miles more. This will affect its value and may well prevent him from rescinding the contract. However, if he can show that the car is in substantially the same condition as when he bought it then he may not lose the right to ask the court to rescind.
B has bought a house and knocked down a number of walls and moved some windows. It turns out that the seller made a misrepresentation to B. Can be rescind the contract?
No, the subject matter of the contract (i.e. the building) has substantially changed. The courts generally won’t grant recission in this situation.
When will third party rights bar rescission?
When a bona fide third party has acquired any rights under the contract (i.e. a buyer in good faith and for value who was not aware of the misrepresentation)Example: A sells her car to B. B pays for the car by cheque. B’s bank refuses to honour the cheque. A court decides that, by paying by cheque, B has impliedly represented that his cheque will be honoured. But suppose that by that time B has sold the car on to C, who has bought it from him in good faith, not knowing of his fraud, and paid him for it. C has now acquired good title to the car, and A can no longer rescind her contract with B.
If a bona fide purchaser acquires rights under a contract which was formed due to a misrepresentation, will be they be required to return the goods?
Only if they are aware of the misrepresentation
What are the damages for fraudulent misrepresentation based on?
- The tort of deceit. Therefore, claims are made in tort.* Aim: put the innocent party back into the position they would have been in had the representation not been made. * Where the representation is fraudulent, the innocent party can recover all their losses incurred as a result of the transaction. They do not need to prove that their losses were reasonably foreseeable.
In a damages claim for fraudulent misrepresentation, does the innocent party have to show their loss was reasonably foreseeable?
No
What are the damages for negligent misrepresentation based on?
The same as fraudulent,. i.e. the tort of deceit, but also the tort of negligent misstatement. Therefore, claims are made in tort.
Are damages generally available for innocent misrepresentation?
No. Note, this does not preclude damages being awarded by the courts in lieu of rescission pursuant to the Misrepresentation Act 1967.
What is one instance in which damages could be awarded for innocent misrepresentation?
Where damages are awarded in lieu of rescission
What types of misrepresentation do the courts have discretion to award damages for in lieu of rescission?
Negligent and innocent only if it would be equitable to do so. Not fraudulentNote, such damages are not available if the right to rescind has been lost by reason of any of the bars. In practice, damages in lieu of rescission are most likely to be awarded if the misrepresentation was minor and the court considers it inequitable to deprive the other party of the benefit of the contract.
When will damages in lieu of rescission for negligent and innocent misrepresentation not be available?
If the option to as the court to rescind has been lost by one of the bars, e.g. affirmation, lapse, etc.
What is the most likely scenario in which damages in lieu of rescission would arise?
Where the misrepresentation is so minor that it would be inequitable to the person who made the statement to deprive them of the full benefit of the contract
What is the measure of damages for misrepresenation?
All losses incurred as a result of entering in the contract and also any incidental expenditure* Damages can be recovered by the innocent party even if the contract has been rescinded.* Note, the innocent party must take all reasonable steps to mitigate their loss once the fraudulent misrepresentation has come to light* Damages will be reduced by the value of any benefit the innocent party received as a result of entering the contract.Contrast breach of contract: damages are to put the parties back into the position they would have been in had the contract been performed properly
Can an innocent party recover damages even if the contract is rescinded?
Yes
What is the obligation on the innocent party once the misrepresentation comes to light?
Take all reasonable steps to mitigate their loss
To what extent will damages for misrepresentation be reduced?
To the extent of the value the innocent party may have already received
A hairdresser who owned two salons sold one to a buyer, based on a representation that the seller would not continue to work regularly in their remaining salon. The seller continued to work full time in the other salon, and competition from the seller meant that the buyer was unable to make a profit at the salon that they had bought. Can the buyer claim damages for misrepresentation?
Yes, the buyer succeeded in a claim for fraudulent misrepresentation. The court awarded the buyer an amount to put them back in the position in which they had been if the misrepresentation had not been made. This meant that they recovered damages to compensate them for the profits that they would have made if they had used their money to buy another, profitable, salon, instead of the one that they did buy.
A car was worth less than paid for because there was a misrepresentation by the seller regarding mileage. If the contract isn’t rescinded, what is the starting point for calculation of damages?
The starting point is the difference between the vlaue of the car and what was paid for it.Buyer was told it had done 30,000 miles and was therefore worth £20,000. It had actually done 130,000 and was therefore worth £12,000. If no representation was made, the buyer would have £20,000 but would not have a £12,000 car. Therefore, damages would be £8,000. Note, the buyer may have additional expenditure e.g. £200 for getting the car checked which they could also claim for.
What is the status of any clause which attempts to exclude liability or limit remedies available for misrepresentation?
Void, unless reasonable (UCTA reasonableness test)An exclusion for fraudulent misrepresentation is unlikely to be reasonable.
For each of the following, is recission available?* Fraudulent misrepresentation* Negligent misrepresentation* Innocent misrepresentation
- Fraudulent misrepresentation: Yes* Negligent misrepresentation: Yes* Innocent misrepresentation: Yes
For each of the following, are damages available?* Fraudulent misrepresentation* Negligent misrepresentation* Innocent misrepresentation
- Fraudulent misrepresentation: Yes, for deceit* Negligent misrepresentation: Yes, unless misrepresentor can prove that misrepresentation was innocent* Innocent misrepresentation: No
For each of the following, are damages in lieu of recission available?* Fraudulent misrepresentation* Negligent misrepresentation* Innocent misrepresentation
- Fraudulent misrepresentation: No* Negligent misrepresentation: Yes* Innocent misrepresentation: Yes
For fraudulent misrepresentation are the following available?* Recission* Damages* Damages in lieu of recission
- Recission: Yes* Damages: Yes, for deceit* Damages in lieu of recission: No
For negligent misrepresentation are the following available?* Recission* Damages* Damages in lieu of recission
- Recission: Yes* Damages: Yes, unless the misrepresentor can prove that misrepresentation was innocent* Damages in lieu of recission: Yes
For innocent misrepresentation are the following available?* Recission* Damages* Damages in lieu of recission
- Recission: Yes* Damages: No* Damages in lieu of recission: Yes
What are the 7 ways in which a contract can be discharged?
- Fixed term ends2. Specified event happens (e.g. notice is given)3. Agreement4. Variation5. Performance6. Breach7. Frustration
How is a contract discharged by agreement?
All parties essentially form a new agreement (which must be supported by consideration) to end the old agreementThis can happen where a contract does not make provision for discharge where:* all parties still have unperformed obligations* one party has performed their obligations in full (must be by deed or supported by consideration)
How can obligations amount to consideration for the new contract to end the previous one by agreement?
If both parties have unperformed obligations, each will be suffering a detriment by ending the contract, and the acceptance by both of this detriment is valid consideration for the benefit of each of being excused from their obligations.
A cleaning company enters a contract with a firm of solictors under which the cleaning company will clean the solicitors’ offices every day for a price of £2,000 per month. The contract has a fixed duration of two years. After six months, it becomes clear that the contract just isn’t working. The cleaning company has underestimated the amount of work involved, so they are rushing it and the solicitors are not happy with the result. What do the parties have to do to end the agreement?
The parties can agree to end the contract as they both have unperformed obligations under the contract. The solicitors are giving up their right to require the cleaning company to do the work, and the cleaning company are giving up the right to claim payment. Both parties are suffering a detriment, so both are giving consideration for the agreement to terminate the contract
If one party has performed their obligations under a contract in full, how can they end the contract by agreement?
Any release of the other parties from their obligations is akin to allowing them to walk away from a debt. * The agreement will need to be entered into by deed as it will be unsupported by consideration. * If there is no deed, then some new consideration will be required for the release.
How is a contract discharged by variation?
All parties agree to vary the original agreement, and this must be supported by consideration (note, variation my be implied)* The requirement for consideration will be met if all the parties are giving up rights under the contract (waiver/implied waiver may get around this requirement in a limited way)* Otherwise, the variation must be by deed in order to be binding. A classic situation where these rules apply is where more time is given to complete a job
A enters into an agreement with Bob’s Builders for the builders to construct a conservatory at A’s house. As part of their agreement, Bob’s Builders promise that the work will be finished by 1st June. They do not agree anything about extending the deadline if the work is delayed. Bob’s Builders get held up on another job. A agrees to let them have until 1st July to finish the conservatory. Is this agreement to extend the deadline binding?
- There is no binding variation to the contract, because Bob’s Builders have not given any consideration for A’s promise to vary the original deadline. * However, Bob’s Builders may have an argument that A has waived his right to insist on the original deadline. However, A can reinstate the deadline by giving reasonable notice. (On these facts, the difference between 1st June and 1st July is quite short and so it is unlikely that any amount of notice given by A will be sufficient to be ‘reasonable.)
How does the equitable doctrine of waiver apply in the context of variation?
- If a party promises not to enforce another party’s obligations under a contract, the court may conclude that the first party has waived its rights in respect of non-performance. This can be used to get around the requirement for consideration* Note, the doctrine is limited because the party waiving their rights can reinstate the original terms by giving reasonable notice.
Where a party promises not to enforce another party’s obligations, how can the first party reinstate the original terms?
By giving reasonable notice
When will the implied variation or waiver arise?
- When the parties have proceeded as if there is a varied agreement between them but nothing is actually said. This is common in practice.* Courts will often find that there is an implied variation to the contract, if all the parties have acquiesced in the new understanding and there is consideration. If there is no consideration, then there may still be an implied waiver.
Is consideration required for implied variation?
Yes
Is consideration required for implied waiver?
No (however, note implied waiver is limited and the party can reinstate the original terms by giving reasonable notice)
Why is consideration not required for implied waiver?
In the same way it is not required for waiver generally, the courts are applying an equitable remedy to get around the legal requirement of consideration
What is the entire obligations rule in the context of performance?
- Generally, only full (exact and precise) performance will discharge a contract i.e. partial performance will not be enough.* This rule can become unfair.Example: If a sailor enters a contract to serve as a member of a ship’s crew for a particular voyage, with payment on completion of it, and the sailor is unable to complete the journey because he dies during the voyage, there will be no performance of the contract sufficient for the sailor (or his heirs) to claim payment of the money due to him under the contract.
What is an exception to the general entire obligations rule?
- Substantial but imprecise performance can be sufficient to discharge a contract (i.e. the main conditions), and any minor breaches would be considered breaches of warranty only* This is a common law exception to the entire obligations rule. * This applies to lump sum contracts, not divisible contractsExample: If a builder substantially performs their obligations under a contract to fit a new kitchen, they can enforce the contract and claim payment. The homeowner can claim damages if some minor features are missing e.g. decorative elements.
An interior decorator agrees to furnish a customer’s flat for a lump sum payment of £750. After the work is completed, it is found that a wardrobe door needs replacing and a bookshelf is too short and will have to be altered. The cost of remedying the defects is approximately £50. Can the interior decorator enforce the contract?
The interior decorator will succeed in a claim for payment as there has been substantial performance of the contract. The defects (and the cost of remedying them) are not sufficient to amount to substantial non-performance. However, the customer can claim the cost of rectifying them from the decorator as damages for breach of warranty (and in practice will offset it against the price of the work).
A builder agrees to install central heating in a customer’s house for a single lump sum payment. After the work has been completed, it is found that the whole installation is defective, the system lets off fumes into the customer’s property and the heating does not work adequately. The defects are expensive and difficult to remedy. Can the builder enforce the contract?
As there has not been substantial performance, the builder will not be able to recover anything under the contract.
Does the substantial performance exception to the entire obligations rule apply to divisible contracts?
- No. Different rules apply where a contract is drafted in such a way that the court can subdivide the obligation to perform into components, even if this division is not express in the contract e.g. delivery of goods by instalments.* If the contract is not completed, the party performing the contract in exchange for payment will be entitled to payment for components/instalments already received. * The court will only do this if they can identify each party’s obligations for each instalment. If they can’t it will be treated as an entire contract requiring at least substantial performance.
A car manufacturer enters into a contract with a supplier of leather for car seats. The supplier agrees to deliver leather at intervals as required by the manufacturer. The price for the deliveries is based on an agreed price per square metre of leather. If the manufacturer does not complete every delivery, is it entitled to enforce the contract?
Even if the contract doesn’t say so, a court is likely to find that delivery of each instalment is a separate obligation, triggering a separate payment. This is because a separate price can be determined for each instalment, depending on the amount of leather delivered. If the supplier stops delivering leather, it will be entitled to be paid for the instalments already delivered.
A modern construction contract will usually expressly divide the overall building project into stages, with a separate payment due for each. If the contract is not completed in full, do any payments need to be made?
Such stage payments mean that each ‘stage’ can be enforced independently, and so performance of each stage will be sufficient to trigger the payment agreed for that stage, even if the contract is not performed in full.
A supplier agrees to deliver a conveyor system for installation in the new factory to a company. The conveyor system is complex and delivery is to take place in stages over several weeks. The supplier delivers 2/3 of the system and then goes bust and ceases trading. Is the supplier entitled to payment for the 2/3 of the system?
No, this isn’t a contract where it’s going to be possible to work out a price for the separate instalments so a court is unlikely to decide that it is divisible. In practice, parties will have agreed what would happen in that sort of situation.
Is partial performance generally sufficient to discharge a contract?
No.* Partial performance is agreed to voluntarily: Courts will find there is a new contract if supported by consideration. * New terms have been agreed but no price agreed: Amount due under a partially performed contract will be assessed on a quantum meruit basis* Partial performance and other party had no choice but to accept: No new agreement
What will the court conclude if partial performance is voluntarily agreed?
That the parties have agreed a new contract on revised terms, as long as there is consideration. This will usually apply where they have agreed a new price.
In the context of voluntary agreement of partial performance, what generally serves as the fresh consideration?
Revision to the price to be paid
If a revised price is not agreed, how is payment determined under a partially performed contract?
On a quantum meruit (amount deserved) basis, i.e. pro rata to the work done
What is the situation if the other party is given no choice but to accept partial performance?
This will not be enough to constitute agreement on the new terms
A builder is building a conservatory for an agreed lump-sum price for B. They can’t finish it and leave the job half done. What are the two possible outcomes for the builder?
B finds someone to finish it. B may agree with the builder that they will pay them a sum of money for the half finished job. If B does that, then both parties are giving some consideration. This will amount to a contractual variation. If the builder just gives the job up and B nevers agree a price for what they’ve done, in that case, the builder may not be entitled to anything. The contract was an entire contract and they haven’t performed it. B got the benefit of a half built conservatory but B doesn’t actually have any choice about accepting it because it’s sitting on B’s land. It would cost B thousands to remove it again. Here the builder would be unlikely to be entitled to anything.
C has a contract is with a cabinet-maker to build a table. Halfway through, they give up the job leaving the half finished table in C’s house. What happens if C decides to keep the half finished cabinet?
If C decides they want it and will get someone else to finish it and the parties can’t agree on a price, then the cabinet-maker is entitled to a reasonable amount for the work they’ve done and the materials used, ‘a quantum meruit’. This isn’t a payment under the contract. The cabinet-maker hasn’t performed their obligations in full so they’re not entitled to be paid the contract price and we haven’t reached an agreement on a variation to the contract. Instead quantum meruit is a way of fixing a payment outside the contract.
What happens if one party prevents the other from performing their obligations under a contract?
The first party’s conduct may amount to a breach of contract. * In that case, the innocent party can terminate the contract and claim damages. * However, if the contract is not capable of being performed, it is said to be frustrated
What is a breach of contract?
When one party does not fulfil its obligations under the contract, through either:1. Non-performance or defective performance (actual breach), or2. Indicating it will not perform in future (anticipatory breach)Effect of the breach and the rights available to the innocent party will depend on the nature of the breach. * If the party in breach repudiates the contract altogether, or if it breaches a condition, the innocent party can terminate the contract and claim damages The innocent party has the choice to terminate (which must be communicated to the party in breach) or carry on with the contract, that is, to affirm it.* A breach of a warranty will give rise only to a claim for damages.
What are the different options available to the innocent party depending on whether a contract is repudiated totally, a condition is breached, or a warranty is breached?
Repudiation/breach of condition:May terminate the contract, and claim damagesBreach of warranty:Damages only
How does termination differ from rescission in the context of previously accrued rights and obligations?
Termination:Accrued rights and obligations remain in placeRescission:Prior rights and obligations disappear (i.e. it is as if they never existed)
What is the innocent buyer’s option if goods have been delivered under the contract but there has been a breach because the goods do not conform to the contract?
The buyer is not obliged to pay, but must return the goods. The buyer may also claim damages.
What happens to the right to terminate once a contract is affirmed?
It is lost. The innocent party must therefore take great care not to take steps to carry on with the contract or affirm it (e.g. by retaining defective goods delivered under a sale of goods contract, after the innocent party has discovered the defect).
What is an actual breach?
A breach taking place at the time of performance with no prior indication
What is an anticipatory breach?
Before performance is due, one party indicates (expressly or impliedly) that they are not going to fulfil their obligations under a contract.If the anticipated breach is of a condition:* innocent party has an immediate right to ‘accept’ the breach, terminate, and claim damages. They do not have to wait until performance is due.* They can choose to wait until performance is due, and their rights under the contract are preserved until this time. Affirming the contract can be a risky course of action for the innocent party, as some event may intervene before the due date for performance (e.g. frustration) that means that their rights are lost.
What must be true of the anticipatory breach for immediate remedies to be available to the innocent party?
The breach must be of a condition or be otherwise fundamental to the contract
A manufacturer agrees to hire a ship from a shipping company. The contract allows the manufacturer to cancel it if the ship is not ready to load before 1 July. On 30 May, the manufacturer emails the shipping company to cancel the contract. What options are available to the shipping company?
This is an anticipatory breach. * The shipping company could have accepted the breach, terminated the contract, and sued for damages. * However, if it doesn’t, it can affirm the contract so it remains in effect. The ship is not ready to load before 1 July. The manufacturer then emails the shipping company to cancel the contract because the ship was not ready to load. The shipping company has lost its right to claim damages for the original breach and the manufacturer has now cancelled the contract validly.
What is required for a contract to be discharged by frustration?
Performance is now either:* impossible* illegal or * radically difference from what was envisaged under the contract (even though technically still possible)The frustrating event must occur:* without any fault on the part of either of the parties* after formation of the contract * but before it has been performed in full, * due to external events that are outside the control of the parties.A frustrated contract will be automatically discharged
When will a contract become impossible to perform?
- Subject matter no longer exists because it was destroyed or has become unavailable *through no fault of the parties** Unavailability can apply equally to people (due to death or illness) or to objects. Note, courts may view the illness of a party as a breach of contract, but if the illness is long term or permanent, then the courts are more likely to conclude that the contract has been frustrated.
A agrees to hire a venue from B for a concert. Prior to performance of the contract, the venue burns down. Is this a breach of contract?
No, the contract would be frustrated because it was impossible to perform.
How do the courts view illness in the context of frustration for inability to perform?
The longer-term the illness, the more likely the court is to conclude a contract has been frustrated
What is supervening illegality in the context of frustration of contract?
- The conduct expected under a contract, whilst legal at formation, has now become illegal* Note, where a contract was illegal at formation, it will be void, not frustrated.
What are two requirements for frustration through radical difference?
- Radical difference must be fundamental to the contract2. Supervening event must not have been in the contemplation of the parties when the contract was formedNote: * Performance may still technically be possible* Usually there is no frustration if there is no illegality/impossibility. Radical difference is rare.
A popular parade is to occur on a particular day. Because of the parade’s popularity, hotels along the parade route are charging triple their normal rates for rooms overlooking the route. After a person hires out a room overlooking the route, the parade is cancelled. Is the contract frustrated?
Under these circumstances it is clear both parties knew the room was hired for the purpose of viewing the parade. Therefore, the parade is fundamental to the contract so that the contract was frustrated by the parade’s cancellation (even though the hirer could still use the room for other purposes).
A party hires out a room overlooking a parade route for the purpose of viewing a parade. The parade goes ahead, but certain elements of the parade are missing. Is the contract frustrated?
No, the missing elements are unlikely to be viewed as fundamental to the contract.
What 3 events will not constitute frustration?
- Contract becomes more difficult or expensive to perform* Self-induced frustration* Events that could be foreseen
Is a contract frustrated just because it is more difficult to perform?
NoExample: A company hired a ship to transport goods by sea from India to London. It is intended that the ship’s route will be through the Suez Canal, to bypass the need to sail around the whole of Africa via the Cape of Good Hope. At the point in time that the ship is due to pass through it, the Suez Canal is shut. It would take longer and be more expensive for the ship to change course and sail around Africa, but performance is still possible. The law would not view this as a frustrated contract.
Is a contract frustrated if it has been caused by one of the parties?
- No. This is just a breach by the offending party. * The burden of proof is on the party alleging frustration to show that it was not self-induced. Example: Failure by one party to take the necessary steps to acquire any licences necessary for the contract to be performed is self-induced frustration
What is the effect of either or both of the parties foreseeing the frustrating event?
The contract is not frustrated, parties would be liabile for breach instead.Example: a building contract provides that if the cost of labour increases by more than 20% during the term, there will be a 10% increase in the contract price. The cost increases by 50%. This will not amount to frustration as the contractor foresaw that the cost may increase.
What is the likely way in which frustration will be tested on the exam?
The classic Krell v. Henry case where someone has hired a venue for a specific purpose known to the owner and a subsequent event occurs removing the reason for which the venue was hired
What is the effect of frustration?
- The parties are released from any further liability to each other. * No breach of contract is committed (and therefore no damages are recoverable) by either party for failing to complete their obligations under the contract* The contract is effectively discharged from the moment when the frustrating event occurred. This may disadvantage one or both of the parties, for example, if they have spent money or done work in order to perform the contract.
If frustration applies, at what point is the contract deemed discharged?
From the moment the event occurred.
If a contract is deemed frustrated, what two things does the Law Reform (Frustrated Contracts) Act 1943 require?
- All sums paid in respect of the contract before discharge will be recoverable, and all sums payable before discharge cease to be payable, and2. If any expenses have been incurred before the time of discharge, the court may allow retention of sums paid to account for expenses incurred. Any valuable, non-monetary benefit obtained before the discharge may have to be paid for
A engages B, a self-employed dressmaker, to make her wedding dress. A’s wedding is planned for 31 July, so the dress must be ready before then. The price for the dress is £1,000. A agrees to pay B a £300 deposit before she starts work, a further £200 after the first fitting, and the balance when the dress is finished. A pays B the £300 deposit. B spends £250 on materials. The first fitting takes place, but B falls seriously ill before A can pay the next £200. The contract is frustrated because B is unable to finish the dress on time. Under the LRFCA 1943, how is loss apportioned?
In theory A can recover the £300 deposit. The unpaid instalment of £200 has fallen due but is no longer payable. However, B is allowed to retain the £250 that she has spent on materials. A may also be ordered to pay for the partly finished dress.
How can parties override these requirements of the Law Reform (Frustrated Contracts) Act 1943?
Express term in the contract, agreed by the parties
In addition to expressly overriding the application of the Law Reform (Frustrated Contracts) Act 1943, to which three types of contracts will it not apply to?
- Charterparties (contract for hire of ship and delivery of cargo)2. Contracts of insurance3. Contracts for the sale of goods where the reason for the frustration is the perishing of the foods
What is a force majeure clause?
- A force majeure clause allows for the termination of the contract on the occurrence of an event outside the control of the parties which prevents (or delays) performance of the contract, such as the outbreak of war or an Act of God. * The parties will try to anticipate supervening events and draft a clause in the contract so as to allocate the risk of those events. This is to try to avoid the contract being frustrated
What are the five types of damages?
- Expectation damages (‘loss of bargain’)2. Reliance damages3. Non-monetary losses4. Punitive damages5. Nominal damages
What is the intent behind the expectation measure of damages?
To put the party back in the position they would have been in had the contract been performedThey are compensatory and generally not punitive. Claimant shouldn’t receive more than they have lost.
Are damages available if the claimant has suffered no loss?
Yes but they will be nominal
What is the expectation interest in measuring damages?
- The expectation measure of damages is designed to put the innocent party back in the position they would have been in had the contract been performed. * Also referred to as damages for loss of bargain. * In the case of construction contracts, the expectation interest in a contract can be determined by either (1) how much it would take to cure the defects, or (2) the difference in value between what was actually provided and what should have been provided under the terms of the contract.
What is another term for expectation damages?
Loss of bargain damages
In one of what 3 ways are expectation damages calculated?
- The cost of curing the defects, or2. Difference in value between what was actually provided and what should have been provided under the contract3. Value of loss of amenity (more unusually)The courts decide between the first two depending on the facts of the case to produce the fairest result e.g. if a full replacement is required to correct discolouration of PVC windows, court will go with difference in value instead.
