Introduction to Contract

Question 1

What is a contract?

Answer 1

• Two or more parties
• Agreement on terms
• Capacity to contract
• Intention to create legally binding obligations
• Consensus in idem

Question 2

Contract vs promise

Answer 2

A contract is a voluntary obligation arising out of an agreement between two parties which creates legal obligations between them

A promise is a gratuitous unilateral obligation (not requiring promisee’s consent) which can only be enforced by the promisee against the promissor

Question 3

Consensus in idem

Answer 3

• ‘Meeting of minds’
• Objective test
• Muirhead and Turnbull v Dickson (1905), Lord President Dunedin:
  “commercial contracts cannot be arranged by what people think in their inmost minds. Commercial contracts according to what people say.”
• Mathieson Gee (Ayrshire) Limited v Quigley (1952), Lord Reid:
  “No doubt, if an agreement could be spelled out from the documents, the Court in such circumstances would be inclined to do that and proceed to determine what were its terms. But, if it clearly appears to the Court that the true construction of the documents is such as to show there was no true agreement, then it is plainly an impossible task for the Court to find the terms of an agreement which never existed.”

Question 4

Dissensus

Answer 4

• Evidence of dissensus must be very strong to infer that no agreement was ever reached. Scottish courts tend to uphold rather than cut down bargains.
• R&J Dempster Limited v Motherwell Bridge and Engineering Limited (1964), Lord Guthrie:
  “the object of our law of contract is to facilitate the transactions of commercial men, and not to create obstacles in the way of solving practical problems arising out of the circumstances confronting them, or to expose them to unnecessary pitfalls.”
• Courts therefore analyse negotiations between parties in terms of offer and acceptance, to conclude as to whether agreement has been reached by unqualified acceptance.
• How easy this task is depends on the nature of the contract, and the extent of the negotiations.

Question 5

Formation of contract - offer

Answer 5

• Contract = offer + acceptance
• Offer must be:
  Capable of acceptance
  Communicated in clear terms
  Intention to be legally bound
• What can form basis of an offer?
  A telephone call
  Statement made in meeting
  An email
  A letter
  A Purchase Order (or equivalent)
  A formal written contract

Question 6

Formation of contract - acceptance

Answer 6

• Oral – “yes, that is fine”
• Email or letter – “I would like to proceed on the basis…”
• Conduct – eg. Giving instructions following a proposal, doing or accepting work done
• Silence?
• Signing a formal contract

Question 7

Formation of contract – intention to create legal relations

Answer 7

“In the course of a jocular conversation with three investment bankers in a pub on the evening of 24 January 2013, Mr Ashley said that he would pay Mr Blue £15million if Mr Blue could get the price of Sports Direct shares (then trading at around £4 per share) to £8. Mr Blue expressed his agreement to that proposal and everyone laughed. Thirteen months later the Sports Direct share price did reach £8. But no reasonable person present in the Horse & Groom on 24 January 2013 would have thought that the offer to pay Mr Blue £15million was serious and was intended to create a contract, and no one who was actually present in the Horse & Groom that evening – including Mr Blue – did in fact think so at the time. They all thought it was a joke. The fact that Mr Blue has since convinced himself that the offer was a serious one, and that a legally binding agreement was made, shows only that human capacity for wishful thinking knows few bounds.”

Blue v Ashley 2017

Question 8

Formation of contract – invitation to treat

Answer 8

Offers do not include:
* Invitations to treat
* Requests for quotations
* Tenders
* Willingness to negotiate

Invitations to treat

See: Carlill v Carbolic Smoke Ball Company Limited [1893]
Fisher v Bell [1961]
Pharmaceutical Society of GB v Boots Cash Chemists [1953]

Question 9

Invitation to treat

Answer 9

For example, requests for quotations or tenders are not offers. Rather, they are inviting offers. Willingness to negotiate, in of itself, is not offering anything. And in the law, we have a concept called “invitations to treat.”

An invitation to treat is when somebody gives an inducement for somebody else to make an offer.

In commerce, you might have heard, for example, of an invitation to tender. An invitation to treat happens, though, in many scenarios. It’s often when, effectively, something is presented, inviting somebody else to come and make an offer.

For example, Carlill against Carbolic Smoke
Ball Company Limited from 1893, the Pharmaceutical Society of GB against Boots Cash Chemists from 1953, and also the case of Fisher against Bell from 1961.

Question 10

Invitation to treat - Fisher vs Bell (1961)

Answer 10

This is an English case, but the key principles from it can be applied to Scotland. In the case, the defendant was a shopkeeper who displayed in his shop window a flick knife accompanied by a price ticket just behind it. Now, at that time, the offering for sale of a flick knife was specifically contrary to Section 1, Subsection 1
of the Restriction of Offensive Weapons Act, 1959.

The terminology is crucial here. The offence was the offering for sale. In the case of Fisher against Bell, the court had to consider whether the display of the knife constituted an offer for sale… and if it did, the defendant was therefore guilty… or whether the display of the knife was an invitation to treat, in which case the shopkeeper was not.

The court held that, in accordance with the general
principles of contract law, the display of the knife was not an offer for sale, but rather an invitation to treat.
The window display invited somebody to make an offer to the shopkeeper. So in Fisher against Bell, the shopkeeper was not guilty of offering for sale.

Question 11

Importance of having contractual terms

Answer 11

“The different [court] decisions demonstrate the perils of beginning work without agreeing the precise basis upon which is to be done. The moral of the story is to agree first and start later”
RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH 2010

“… in the absence of a full contract to regulate the parties’ rights and obligations… the result is confusion and acrimony”
Cunningham v Collett and Farmers 2006

Question 12

Formation of contract – acceptance, and counter-offer

Answer 12

An offer can be revoked at any time before acceptance – unless a time limit has been imposed – otherwise “reasonable” time is applied.

Acceptance:
* = unqualified assent to the offer
* Offeror is free to prescribe the method of communication of the acceptance
* In words, or in conduct?
* No contract exists until the acceptance has actually been communicated to the offeror
Entores Limited v Miles Far East Corp [1955]

Counter-offer:
* Wolf & Wolf v Forfar Potato Company Limited 1984

Question 13

Formation of contract – postal rule

Answer 13

• Contract is made as soon as the acceptance is posted.
• Rule is simple – when an unqualified acceptance is posted the contract is formed when the letter is posted, rather than when it is actually communicated to the offeror.
• Important implications – for example, where an offer contains a time limit for acceptance, a contract will be formed if the acceptance is posted within that period even although it does not reach the offeror until the time limit has expired.
• Most important effect of postal acceptance is it will defeat the offeror’s (as yet) uncommunicated withdrawal - Thomson v James (1855)

Question 14

Formation of contract – postal rule (cont.)

Answer 14

Consider:

Day 1 – A posts offer to B
Day 2 – B receives offer from A
Day 3 – B posts acceptance to A
Day 3 – A posts a withdrawal of offer to B
Day 4 – A receives acceptance from B
Day 4 – B receives withdrawal of offer from A

Countess of Dunmore v Alexander (1830) - retraction

Question 15

Form of contract

Answer 15

As a general rule, writing is not required for the constitution of a contract in Scots law.

There are some exceptions to this rule, the most significant being for the transfer of rights relating to land.

Requirements of Writing (Scotland) Act 1995
Incorporation of terms:
* Thornton v Shoe Lane Parking Limited [1971]
* Olley v Marlborough Court Limited [1949]

Statutory obligations, including implied terms:
* Consumer Rights Act 2015 (satisfactory quality)

Question 16

Implied terms

Answer 16

Courts may imply terms into a contract
* Marks and Spencer plc v BNP Paribas 2016

Cumulative test applies. Must be:
* Reasonable and equitable
* Necessary to give business efficacy to the contract
* So obvious it ‘goes without saying’
* Capable of clear expression
* Not contradictory of any express term of the contract

Question 17

Interpreting contracts

Answer 17

Various cases in recent years at the Supreme Court have sought to definitively answer how a contract should be interpreted.

Cases include Rainy Sky v Kookmin Bank 2011 and Aberdeen City Council v Stewart Milne Group Limited 2011.

Arnold v Britton 2015 is regarded as the lead case on interpretation:

• Focus first on the language used in the contract
• The court should not “embark on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning.”

Question 18

Interpreting contracts (cont.)

Answer 18

What about commercial common sense?

• “While commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit or wisdom of hindsight. The purpose of interpretation is to identify what parties have agreed, not what the courts think they should have agreed.”
• “When interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or penalise an astute party.”

Question 19

Problems with contracts

Answer 19

Lack of Consensus – consensus in idem v dissensus
* Mathieson Gee (Ayrshire) Limited v Quigley (1952)

Error – unilateral, essential, induced, bilateral

Lack of Consent
* Balfour v Balfour [1919] – be careful as to context

Lack of Capacity
* Age of Legal Capacity (Scotland) Act 1991
* Adults with Incapacity (Scotland) Act 2000
* Corporate bodies – and officers thereof

Lack of Formality

Question 20

Breach of contract

Answer 20

Failure to perform contractual obligations either in full or in part.

Consider materiality of breach, particularly when considering remedies.

Different types of breach:
* Repudiation / anticipatory breach
* When a party indicates it is not going to perform its obligations under the contract, and this is accepted by the other party.
* Repudiation does not terminate the aggrieved party’s obligations of performance automatically. The aggrieved party has a choice:
* accept the repudiation and treat the contract as terminated; or
* affirm the contract and insist upon the contract performance, either by specific implement or action for payment

Late (or non) performance

Defective performance
* Consider in sale of goods, compared to construction of property (replace v repair).

Question 21

Remedies

Answer 21

Remedies?

• Contractual (eg interest clauses, or liquidated damages)
• Damages (eg court action for compensation)
• Action for payment
• Specific Implement
• Recission
• Retention

Question 22

Capacity to contract

Answer 22

• Capacity to contract means that the party has the legal
  ability to enter into the contract. This effectively means the party is competent to contract.
• Someone’s capacity is determined by whether or not
  they are of an appropriate age or if they are mentally capable of understanding the appropriate contractual terms.
• Capacity can also be considered from the authority conferred on someone within an organisation.
• A contract is only binding if those entering into the
  contract have the capacity to do so.

Question 23

Age of Legal Capacity Scotland Act 1991

Answer 23

• Section 1 of the Act says, “A person under the age of 16 years shall, subject to section 2 below, have no legal capacity to enter into any transaction.” It then says, “A person of or over the age of 16 years shall have legal capacity to enter into any transaction.”
• Section 2 states, “A person under the age of 16 years shall have the legal capacity to enter into a transaction of a kind commonly entered into by persons of his age and
  circumstances, and on terms which are not unreasonable.”

What this Act says, therefore, is that a person over the age of 16 is free to contract. However, someone the age of under 16 can still contract subject to it being a reasonable transaction for a person of their age.

Question 24

Age of Legal Capacity Scotland Act 1991 - Exceptions?

Answer 24

Section 3 of the Act relates to what’s referred to as “prejudicial transactions.”

• Section 3 says, “A person under the age of 21 years may make an application to the court to set aside a transaction which he entered into while he was over the age of 16 but under the age of 18 years and which is a prejudicial transaction.”
• It then goes on to say, “In this section, ‘prejudicial transaction’ means a transaction which an adult, exercising reasonable prudence, would not have entered into in the circumstances of the applicant at the time of entering into the transaction, and has caused or is likely to cause substantial prejudice to the applicant.”
• So somebody between the ages of 16 and 18 can seek some protection for a prejudicial transaction.

An example might be the sale of alcohol, which is prevented by legislation rather than by the law of contract for people of a certain age.

Question 25

Adults with Incapacity Scotland Act of 2000

Answer 25

• This Act provides a framework for safeguarding the welfare and managing the finances of adults, namely, people over the age of 18 who lack capacity due to mental illness, learning disability, dementia or a related condition, or an inability to communicate.
• The Act allows for individuals to be appointed as guardians or to be powers of attorney, effectively giving them the ability,
  under certain and controlled conditions, to act on behalf of another individual.

This is a complicated area of law and, by its nature, sensitive. It is important that anyone contracting with a guardian or an attorney is satisfied that that person has the requisite authority to enter into a particular contract.

Question 26

Institutional capacity

Answer 26

• Who has the power to contract on behalf of an organisation.
• When you contract with organisations,
  therefore, parties need to be satisfied that parties can guarantee both parties can guarantee the appropriate level of organisational capacity.
• In commercial settings, this is often referred to as the sign-off level. And often, directors of a company or other senior, specified individuals are the only people who are able to sign off a contract.
• This may vary and depend on the nature and value of a particular contract.

Question 27

Contractual terms

Answer 27

As a general rule writing is not required for the constitution of a contract in Scots Law.

There are some exceptions to this rule. The most significant being the rights of the transfer of land. This can be found in the Requirements of Writing (Scotland) Act, 1995

Much will depend on what type of contract is in place. The reason for understanding contractual terms is that there can be problems if the terms of a contract are not clear - RTS Flexible Systems Limited against Molkerei.

In that case the court said, “the different court decisions demonstrate the perils of beginning work without agreeing the precise basis upon which is to be done. The moral of the story is to agree first and start later”

Cunningham vs Collitt - in that case it was said, “in the absence of a full contract to regulate the parties’ rights and obligations… the result is confusion and acrimony”.

Assumming the contract is written form and the terms of the contract will derive from the contract itself. The contract would, you expect, set out the key terms that have been agreed between the parties. Often terms are implied into a contract, whether that contract be written or verbal.

Implied terms - can be implied from statute or the common law. An example from statue is the Consumer Rights Act 2015. This act implies terms into contracts and products, namely that they are sold and must be of satisfactory quality. Parties can choose to contract out of such implied terms, this would involve some express drafting.

Parties may

If contracts need not be written the terms of the contract may therefore not be obvious and in turn be disputed.

Question 28

Contract interpretation

Answer 28

Assuming that a contract is in existence, the terms are known. Or at least can be found from the express terms of the contract. Together with those terms that may be implied or incorporated.

The challenge then becomes how do you interpret that contract? By interpret we mean how do you understand it? What do parties mean by a particular clause? And what is the desired impact?

Now disputes happen when, for example, one party has a different impression or belief as to what a particular clause may mean from the other party. This leads to contractual disputes about the terms and this leads to the requirement for courts to have to step in and interpret contracts. The position of the courts are setting in case law. Various cases in recent years at the Supreme Court have sought to definitively answer how a contract should be interpreted

• Rainy Sky against Kookmin Bank in 2011.
• Aberdeen City Council against the Stewart Milne Group Limited in 2011.
• Arnold against Britain from 2015 - arguably regarded as the leading case on interpretation in the UK.

Question 29

Contract interpretation - Arnold vs Britain 2015

Answer 29

Arnold against Britain from 2015 - In that case, they emphasised the focus should always firstly be on the language used in the contract. The judgement stated that the court should not embark on an exercise of searching for light, alone constructing, drafting in facilities. In order to facilitate a departure from the natural meaning. In the case of Arnold. The court gave recognition to the concept that they should or might apply commercial common sense. In his judgement, Lord Neuberger said. While commercial common sense is a very important factor to take into account when interpreting a contract. A court should be very slow to reject the natural meaning of a provision.

Question 30

Restriction on contract

Answer 30

A contract is a voluntary obligation arising out of an agreement between two parties, which creates legal obligations between them. The voluntary nature of this is important. No one forces you to contract with someone. Therefore, contractual obligations are voluntarily assumed by the parties. However, there can be restrictions on how contracts are formed and what’s contained within them.

There are different ways in which restrictions can be imposed on contracts.
- Pacta elicitor (illegal contracts)
- Statute (the Unfair Contract Terms Act from 1977 and the Consumer Rights Act of 2015)