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.
