Law of Contract Flashcards
Definition of Contract
A contract is a legally binding agreement, that is, one which the courts will recognise and enforce.
Types of contracts
- Contracts under seal is a formal contract which is in writing and is witnessed, and which originally had to be sealed and delivered.
- simple contracts (or informal contracts) - all others
unilateral contract (unilateral offer)
only one party is legally bound e.g A promise to pay a reward for lost property may be legally binding but only
on the party who offers the reward. No one is legally obliged to find the property and hand it in, but the owner must pay the reward if somebody does so.
bilateral contract
each party makes a promise to the other and both are
legally bound e.g Under an insurance contract the insured is bound to pay the premium and the insurers are legally bound to pay valid claims in return.
void contract:
has no binding effect because a void contract is no contract at all, the expression is really a contradiction in terms however, the expression is useful to describe
agreements which neither party can fully enforce
voidable contract
is biding but one (or possibly both) of the parties will have the right, if they wish, to set it aside. contracts may be voidable on a number of different grounds e.g misrepresentation, drunkenness or insanity
5 essentials for the formation of a valid contract:
- there must be an agreement, which in English law is generally shown by offer and acceptance;
- there must be the intention to create legal relations; non-consumer (business) agreements are assumed to be legally binding. Domestic or social arrangements are assumed not to be binding
- there must be consideration (in the case of simple contracts);
- the agreement must be in the form required by law (if any);
- the parties must have capacity to contract.
How does an offer end
time limit or reasonable time, death, acceptance, revocation, Rejection, counter-offer
acceptance must be unqualified
it must exactly match the terms of the offer. If the offeree tries to vary the offer or to add conditions
of their own, it is ineffective as an acceptance.
de minimis’ principle
Trivial variations from the terms of the offer will not affect the validity of an acceptance. This is merely the application of a broad legal rule: ‘de minimis non curat lex’ (‘the law does not concern itself with trifles’),
acceptance is not effective until it is communicated.
There are two main exceptions to the rule concerning communication.
1.Where the offer dispenses with communication
The terms of the offer may indicate that the other party can accept simply by carrying out their part of the agreement, without bothering to tell the offeror.
2.Where the ‘posting rule’ applies- a letter containing an offer, revocation or rejection will only take effect when it is received.
5 Rules of consideration
- Consideration must be real or genuine-The courts will not enforce vague promises
- Consideration need not be adequate.
- Consideration must not be past.
- Consideration must move from the promisee.
- imposes no extra duty on the promisee
Promissory estoppel (equity principle)
If X promises not to enforce their strict contractual rights against Y, and the promise is intended to be binding and intended to be acted upon, X may be ‘estopped’ (that is, prevented) from going back on this promise if Y has in fact acted on the strength of it.
Forms of contracts
-contracts which must be under seal- deed must be signed and witnessed;
• contracts which must be in writing;
• contracts which must be evidenced in writing by a ‘note or memorandum’;
• contracts where one party must give certain written particulars to the other.
contracts which must be in writing;
• bills of exchange;
• cheques and promissory notes;
• the transfer of shares in a registered company;
• some consumer credit (‘hire-purchase’) transactions;
• contracts of marine insurance.
-Since 1989, all contracts for the sale or other disposition of land
groups of people subject to special rules which restrict their contractual capacity.
minors, people who are mentally ill or drunk, and corporations
Contracts made by minors fall into three categories
- contracts which are binding- minors r bound by contracts for ‘necessaries’ e.g foodstuffs clothing, provision of education, contract of apprenticeship, No luxuries
- Contracts which are binding unless they are repudiated- the minor can avoid liability by repudiating the contract, discharging them from any further liability e.g leases, partnerships and shareholder agreements.
- Contracts which are not binding on the minor-
All contracts e.g buy goods not necessaries and contracts to borrow money.
Minors’ Contracts Act 1987.
The Act provides that the court may, ‘if it is just and equitable to do so’, require the minor to transfer
to the other party any property acquired by the minor under the contract or any property representing it.
Contracts for patients with a mental health condition and/or Drunken persons
- can ratify a contract, which previously did not bind them, after they are cured
- must also pay a reasonable price for necessaries supplied to them
ultra vires doctrine
Corporations created either directly by Act of Parliament or indirectly by registration under the Companies Acts are subject to the ultra vires doctrine.
Under the ultra vires doctrine, a contract may be invalid if it is ‘ultra vires’ (‘beyond the powers of’) the corporation.
In the case of a statutory corporation, these powers are expressed in the Act of Parliament which created it. In the case of a company formed by registration under the Companies Acts, they will be found in its memorandum of association
Classification of the terms of a contract
Express terms- arise from the words used by the parties in reaching or recording their agreement.
Implied terms - form part of the agreement even though the parties never put them into words.
Terms may be implied in on three ways
- Terms implied in fact
A term which is not actually stated but is presumed to be intended by the parties. Maybe so obvious. In other cases, the implied term may be necessary to
give ‘business efficacy’ to the contract. - Terms implied by custom or usage
Terms can be implied by the custom of the market in which the parties to the contract operate, or the usages of a particular locality or trade. - Terms implied in law
In many contracts, the rights and duties of the parties may be based on terms which the law automatically applies to the agreement ( consumer rights act)
Implied terms under Consumer Rights Act 2015 (which, where consumer protection is concerned, has largely replaced the Sale of Goods Act 1979
- there is implied in every contract for the sale of goods a condition that the seller has a right to sell the goods (s.17).
- where goods are sold by description, there is an implied condition that the goods will correspond with the description (s.11).
- when the seller sells goods in the course of business, there is an implied condition that the goods supplied under the contract are of satisfactory quality and are reasonably fit (suitable) for the purpose supplied (s. 9–10).
- where goods are sold by sample there is an implied condition that the bulk will correspond with the sample in quality (s.13).
Standard term contract (adv/disad)
save time and to simplify dealings of a day-to-day nature
risk of abuse- the consumer usually has little chance of negotiating any changes in the written contract presented to him, and often does not bother to read ‘the small print’. If, therefore, the supplier of goods or services has included exemption clauses (also known as exclusion clauses) which exclude his liability to the customer, or limitation clauses which reduce it, the latter may find that he has little redress when things go wrong.
Rules to deal with risk of abuse ( unfair contracts)
- Common law rules
- Unfair Contract Terms Act 1977- business to business contracts
- Consumer rights act 2015 (Consumer contracts.)
Common law rules applicable to exclusions
The person who seeks to rely on an exclusion clause must show that it has been incorporated in the contract – which means that the other party must have agreed to it either before or at the time that the contract was concluded.
Incorporation can be achieved in a number of ways:
a) signing of written document
b) notice e.g notice displayed in premises or tickets
Key provisions Unfair Contract Terms Act 1977 (excludes insurance contracts)
- Section 2 – negligence liability
cant exclude their liability for death or bodily injury
arising from negligence. they may exclude liability for other forms of loss caused by their negligence.
2.Section 3 – contractual liability
Where one party deals on the other party’s written standard terms of business, then the other party cannot exclude or restrict their liability for breach of contract, except subject to a requirement of reasonableness. - Section 6 – sale of goods and hire-purchase
Key provisions Consumer Rights Act 2015
- Section 62 provides that an unfair term of a consumer contract or notice is not binding on the consumer. It defines an unfair term or notice as that which, contrary to the requirement of good faith, causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer.
Section 65 – exclusions
A trader cannot exclude or restrict liability for death or personal injury resulting from negligence n/a transfer of land and insurance.
Section 31 – implied terms
A term that excludes implied terms relating to, for example, correspondence with description or sample, fitness for purpose and satisfactory quality is not binding on the consumer.
UCTA vs 2015 Act
- Applies 2-a) Business-to business contracts. b) Consumer contracts
- Scope a) Restricted mainly to exclusion and limitation clauses. b) Cover all types of term.
- Effect a) Makes frequent reference to a ‘reasonableness’ test, with the burden of proof of reasonableness on the party seeking to rely on the
restrictive term. b) Subjects terms to a ‘fairness’ test, with the burden of proof (of unfairness) on the consumer.
The terms of a contract can be further classified into conditions and warranties.
Warranty- Affects only some relatively minor aspect of
the agreement. Injured party has a right to claim damages but not to terminate the contract.
conditions -Relates to an important aspect of the agreement: it ‘goes to the root’. Victim has a right not only to claim damages but also to terminate the
agreement.
Defective contracts may result from
• illegality;
• improper pressure;
• mistake;
• misrepresentation; or
• non-disclosure (this needs care as it has only very limited exceptional application in
general contract law and in the insurance context only in business insurance).
Illegal contracts fall into three categories
- contracts which are contrary to law;
- contracts which are contrary to public policy; and
- contracts in restraint of trade e.g Restraints on contracts of employment or Restraints on the seller of a business
Contracts which are contrary to law
contracts involving the commission of a crime or tort.
• forge banknotes;
• steal property; and/or
• kill or injure other people.
Contracts which are contrary to public policy
- Contracts tending to sexual immorality
- Contracts affecting the freedom of marriage
- Contracts of trade with an enemy
- Contracts to break the law of a friendly foreign state
- Contracts to deceive public authorities
- Contracts to corrupt public life
- Contracts to deceive public authorities
- Contracts which pervert the course of justice
contracts in restraint of trade are ‘prima facie’ (‘on the face of it’) void but will be upheld if they are
reasonable
An illegal contract is generally void, and the court will not assist a party to the agreement. However, there are some exceptions, when it may be possible for the claimant to recover property transferred under an illegal contract
-when the parties are not in pari delicto (equal in wrongdoing) e.g one party entered the contract through improper pressure, fraud or mistake; • when one party ‘repents’, i.e. voluntarily abandons the illegal purpose; • when the illegality arises under a statute passed to protect a particular class of people (such as tenants or people who borrow from moneylenders), in which case a member of that class will be able to recover their property.
severance
if a contract is illegal in part only, the court may in some cases be willing to enforce the valid portion of the contract and refuse assistance with regard to
the illegal part.
When does illegality arise in an insurance contract
- No insurable interest.
- Purpose of contract illegal- taking out motor on vehicle to be used illegaly
- Unlawful use of insured property.
- Close connection with a crime.
Form of improper pressure
- Duress- any threat to commit a legal wrong
2. Undue influence - subtle forms of persuasion.product of equity
mistake which makes a contract void is likely to fall into three main categories
- Mistake concerning the subject matter of the contract. No consensus ad idem
- Mistake as to the identity of the other party
- Mistakes in recording agreements – rectification
Misrepresentation
misrepresentation is, thus, a false statement of fact which induces the other party to enter into the contract. It may be:
fraudulent;
innocent; or
negligent.
The broad effect of misrepresentation is to make the contract voidable
For misrepresentation to have damaging effect on the contract, the following requirements must be met:
- The misrepresentation must be one of fact
- The misrepresentation must be made by a party to the contract.
- The misrepresentation must induce the contract.
Remedies for misrepresentation
- Rescission- The claimant may bring an action to rescind (avoid) the contract. Only where misrepresentation is innocent
- Damages- fraud , may also be awarded in innocent misrepresentation , negligent
- Refusal of further performance
- Affirmation- Since the contract is voidable the injured party may choose to affirm the contract (treat it as binding) if they wish.Be aware
Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA)
consumers are under the duty to take reasonable care not to misrepresent facts before the insurance contract is concluded. Due to the nature of the duty (to take reasonable care not to misrepresent), the Act does not allow a remedy for insurers in the case of an innocent misrepresentation. However, where the duty is either deliberate, reckless or careless, the insurer is entitled to a remedy- avoidance of the contract or deduction from the insured indemnity or treating the contract as if it was made under different terms
A contract may be discharged by:
1. performance- duty n time breach; frustration; agreement; or operation of law.
Anticipatory breach
breach which takes place before the date for performance has arrived
A contract may be ended by frustration due to:
- change in law or operation of law;
- destruction of a thing necessary for performance of the contract;
- non-occurrence of an event on which the contract depends;
- commercial purpose of the contract frustrated;
- death or personal incapacity.
Frustration brings the contract to an end. Both parties are freed from their obligations and no need to rescind the agreement. Law put the parties back to where they were before the contract was made.
Waiver Vs accord
Waiver-parties can make an agreement to release each other from their obligations. By releasing each other, the parties both give up a benefit and, thus, provide consideration.
Accord-if one party has performed their duties under the contract, a subsequent promise to release the other will not be binding in itself because there is no consideration for it.
If the promise is to be binding it must, therefore, be made in the form of a deed or the party to be released must give some fresh consideration for it. They can provide consideration by doing something different from that which was originally required of them, even if it is only a small favour
remedies in the law of contract
- termination- refusing to perform their own obligations under the agreement, refusing to accept further performance from the other party (e.g. by rejecting goods) (this is called repudiation) or claim for restoration of the situation which existed prior to the contract
- an action for damages-
- an action for specific performance- order the defendant to do something which they have promised to do
- an action for an injunction-Forbid the defendant to do something which they have promised not to do
- An action for agreed sum
- form of a claim for restitution, a claim for the return of money which has been paid or other property which has been transferred.
- action on a ‘quantum meruit’ (‘as much as they have earned or deserved’).
Claims for breach of contract are governed by the Limitation Act 1980 . The main limitation periodsare ( do not apply to equitable remedies)
periodsare:
- 6 years in an action on a simple contract;
- 3 years where the claim is in respect of personal injuries;
- 12 years in an action brought on a speciality contract(deed).
The limitation period begins on the date on which the cause of action accrues. so the date is normally the date of the breach of contract.
Privity of a contract
Privity of contract is a doctrine which restricts the rights and duties created by a contract to the persons who originally made i.e Only a person who is a party to a contract can sue upon it’.
Assignment
under the doctrine of privity of contract only the parties
to a contract may sue on it. An original party to the contract may be able to assign (transfer) their rights under the contract to another who then stands in their place. Example is marine insurance, life insurance
chose in action vs chose in possession
a. valuable but intangible piece of property. It cannot be physically seized but only enforced through an action in court.
b. piece of tangible property which can be seized or
physically controlled.
types of assignment
- Statutory assignment under the Law of Property Act 1925 s.136
- Equitable assignment
types of assignment that are relevant to insurance contracts
- assignment of the subject matter of the contract;
- assignment of the benefit of the contract; and
- assignment of the contract itself -note Personal contracts are not freely assignable except life
