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Anglais Juridique : Université Paris I – Cours de Madame MOUTON

ANGLAIS JURIDIQUE

MAÎTRISE EN DROIT

CAVEJ 2007-2008 ET 2008-2009

COURS DE MADAME MOUTON

LITERAL ENGLISH TRANSCRIPT BY J. MITCHELL

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GLOSSARY

I first want to make a preliminary remark. As you might already have realized, English and French legal terms are not strictly equivalent. So translation is quite difficult as some English words do not have exact equivalents in French. Therefore, rather than translate, I will explain some words both in English and in French.

TO ENFORCE: donner effet à ; c’est un verbe qui ne s’applique qu’à un juge ou à une cour de justice.ENFORCEABLE et son contraire UNENFORCEABLE

ENFORCEABLE : susceptible d’être appliquéUNENFORCEABLE: inapplicable ou ne pouvant avoir d’effet.

BINDING (VIENT DU VERBE TO BIND : lier, contraindre) : participe présent binding suivi de la préposition on means that a contract must be fulfilled. BOUND (participe passé) (s’utilise dans to be bound by = être lié par un contrat)

A PREREQUISITE : une condition

TO PERFORM : exécuterPERFORMANCE : son substantif dérivé

TO BREACH : ne pas respecter, manquer à To breach a promise, to breach a contractA BREACH (substantif) : a breach of contract

TO DEFAULT : ne pas respecter. IN DEFAULT : the party in default = la partie qui n’a pas respecté ses obligations et contrats

UNCONSCIONABLE: inacceptable car allant à l’encontre des valeurs morales d’une société donnée

GROSS (adj.), GROSSLY (adv.) : en droit, désignent le caractère excessif et donc condamnable d’un acte. Par exemple, on parle de gross negligence, une négligence qui est presque d’ordre pénal, qui implique une culpabilité.

A CONSUMER : un consommateurTO CONSUME : consommerCONSUMPTION : substantif.Mais la société de consommation : the consumer societyUn contrat impliquant un consommateur : a consumer contract

CASE LAW : l’ensemble des règles de droit d’origine jurisprudentielle.STATUTE LAW : l’ensemble des règles de droit d’origine législative.STATUTORY (adj) = LEGISLATIVE

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LECTURE 1 : GENERAL INTRODUCTION TO ENGLISH LAW OF CONTRACTS


A PRACTITIONER: (verbe TO PRACTICE) : un praticien du droit= A LEGAL PRACTITIONER

VOID : nulVOIDABLE : susceptible d’être considéré comme nul, susceptible d’être résilié pour nullité

TO WRITE : écrireWRITING (participe présent) : a contract in writing, un contrat couché par écrit WRITTEN (participe passé) : a written contract, un contrat écrit.Notez l'utilisation des deux participes dans l'expression suivant, a contract in writing ou a written contract. Les deux expressions signifient la même chose, donc vous avez le choix, mais il ne faut pas confondre les deux formules. On peut aussi utiliserA WRITING : désigne un écrit

A DISPUTE : une contestationTO DISPUTE : contester

TO ADJUDICATE : jugerADJUDICATOR : un juge

TO AWARD : pour un arbitre, rendre sa sentenceAN AWARD : une sentence arbitrale

AN OATH : un sermentTO SWEAR : jurer, prêter serment

TO REVIEW : examiner de manière critique

LEAVE : autorisationTo appeal on leave : faire appel sur autorisation, qui s’oppose à la notion de appeal as of right, un appel de droit.

TO CONSTRUE : interpréter (uniquement dans un contexte juridique)CONSTRUCTION :interprétation

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#3

LECTURE 2 :WHAT IS A CONTRACT AT ENGLISH LAW ?

Before we actually go into the details of the characteristics of English contracts, it is necessary to define what precisely a contract is.

Essentially, in English law, a contract is an agreement between two or more parties that the law will enforce. That is to say an agreement to which the law will give effect. In other words, a contract is an agreement which is binding on the parties, that is to say it binds the two or more parties who agreed to it.

Once the parties have exchanged their promises in accordance with the prerequisites as to the formation of English contracts, they are bound by those promises. In the case they do not perform the obligations they promised they would, or in the case they perform them partially or poorly, the law will enforce the contract, that is to say judges will hear the case brought to court by the party who suffered the damage as a result of non or partial or poor performance by the other party.

Depending on the court’s decision, damages, that is to say monetary compensation, may have to be paid by the non performing party or the party at fault for partial or poor performance for the loss suffered by the other party to the contract.

Moreover, in limited circumstances, the court may issue an order, called specific performance, whose aim is to order the party in default to perform what he promised he would perform.

Contracts are a very old story. They were used very early in the history of western countries to enable men to make their own arrangements to buy or sell or otherwise deal with their property. Today, contracts encompass such different acts as simple everyday transactions, like catching a bus or a train, buying food in a supermarket; important family transactions like buying a house or taking out policies of insurance and major commercial enterprises like taking over a company or building huge works.

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#4

THE PRINCIPLE OF FREEDOM OF CONTRACT

Much of the English law of contract has roots going back to the midde ages. Yet most of the general principles of the law governing English contracts were developped in the 18th and 19th centuries. Historically, it is clear that the general approach to contracts was that individuals were free to make their own arrangements, particularly concerning their property, so that the principle of freedom of contract has always been a strong principle.

However, 18th century judges adopted a paternalistic attitude to contracts which led them to mitigate the harshness of the strict application of such a principle and attempt to protect some people who might have constituted weak parties when negociating contracts. On the contrary, 19th century judges were influenced by the doctrine of «laisser faire» which prevailed in the economic domain and reverted to a strict application of the principle of freedom of contract. To their minds, the law of contract had to be concerned with the enforcement of private arrangements which the parties had agreed upon, whether or not the outcomes were fair or just. In their views, the function of contract law was merely to assist one of the contracting parties when the other breached his promises and therefore defaulted in the performance of his contractual obligations.

Closer to us, in the 20th century, both judges and legislators attempted to restrain what they considered to be unconscionable contracts, that is to say, contracts grossly detrimental to one of the parties, while very much to the benefit of the other party. As it was, many of these contracts involved consumers who were imposed contracts for goods or services on a « take it or leave it » basis, by economically powerful firms and companies. We shall come back to that specific protection granted to consumers later on in the course.

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#5

RULES GOVERNING ENGLISH CONTRACTS

From what has just been said, it is clear that from the historical perspective, the rules governing English contracts have historically originated in judges decisions first, that is to say case law, and only more recently in legislation, that is to say statute law. To that extent, the English law of contracts is most characteristic of the English common law system. The rules governing English contracts are mainly the results of law in practice, that is to say, the work of practitioners (lawyers) which means both solicitors and barristers and of judges.

Moreover, what is remarkable is that when Parliament intervened by voting a new act of Parliament in the field of contracts, that act very often was a consolidation act, i.e. an act that contains statutory provisions which clarified and harmonised existing case law on a given subject. Very rarely did such acts actually set out completely new concepts. For instance, the Sale of Goods Act in 1893 which was the first act of Parliament that clarified and harmonized all the preexisting case law as far as contracts for the sale of goods were concerned, is a remarkable exemple of such a consolidation act. The act basically contained no new provision but simply discarded irrelevant or contradictory case law. By the way, it is quite interesting that in a country where legal rules are not codified, the need was felt as early as the 19th century to collect and harmonize all the case law governing sales of goods in a statute, which was in fact very close to some kind of partial codification. This probably goes to show the importance of contract of sale in a modern western country and trace men’s economic need of clear and precise rules, which they could rely on with certainty. I shall come back to the specific characteristics of contracts for the sale of goods in another lecture.

To better appreciate the respective roles played by judicial precedents as opposed to statutory provisions as sources of rules for English contracts, I would like to make a practical remark. When one looks at a book about the English law of contracts, it is interesting to notice in the first pages of the book the number of pages devoted to decided cases, the table of cases as it is called, and those devoted to legislation, the table of statutes. While the number of pages giving the list of cases decided by the various English courts up to the time when the book was published amounts to several dozen, the number of pages recapitulating the various statutes applicable to English contracts is limited to only very few pages, probably no more than 4 or 5 pages. Then, a further remark concerns the scope of the such statutes. Each statute has a very limited scope and is concerned with some very precise aspects of contracts or with very specific contracts.

For instance, the Law Reform Act of 1943 is concerned with the circumstances that may render a contract impossible to be performed.

The Misrepresentation Act of 1967 is concerned with misrepresentation, i.e. a false statement of fact by one party that induces the other party to enter into the agreement. Such misrepresentation act has a viciating factor rendering the contract void or voidable.

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The Unfair Contract Terms Act of 1977 in spite of its title only covers unfair and therefore unenforceable exclusion clauses, whereby a party limits or even excludes his liability in case of damage to the other party resulting from the performance of the contract.

The most recent example is the Contracts - Rights of Third Parties - Act of 1999 whose aim is to limit the scope of the doctrine of privity of contract, according to which only the parties who actually signed the contract may be bound by it. According to the provisions of the new act, in limited circumstances, third parties are entitled to some benefits deriving from the performance of the contract even though they did not sign it and are not, technically, parties to it.

Besides those acts, that set out specific rules concerning specific most often technical aspects of contracts, a few other acts set out all the rules for specific contracts. As a matter of fact, such legislation is rare. I have already mentioned the Sale of Goods Act of 1893. Another outstanding example is that of Contracts for the Sale of Land, whose main rules like those applying to the contracts sale of goods were consolidated into statutory provisions at the beginning of the 20th century in the Law of Property Act of 1925.

Apart from contracts for the sale of goods and contracts relating to the buying, selling and otherwise disposing of real property, the other category of contracts which is extensively regulated by the statutory provisions is that of consumer contracts. Consumers, as parties to contracts, are not in a position that enables them to negociate the terms of the contracts they enter with the other party. First, they do not have the same bargaining power and they are economically weaker than the professional with whom they enter into contract. And secondly, most often, professionnals use preprinted contracts which consumers without legal knowledge find difficult to read and to understand. So it became increasingly necessary, in the second half of the 20th century, to envisage some legal protection for that new class of contractors and successive governments left it to Parliament to enact laws that protect consumers against unfair dealing on the part of the professionals. I will deal with consumer contracts more in detail in lecture 10.

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#6

CONTRACTS TO BE MADE IN WRITING

The general principle is that at English law, there is no requirement that contracts be in writing unless a statute actually provides that it should be written. This has been the traditional approach for several centuries and the first statutory exceptions were contained in the famous Statute of Frauds which the English Parliament enacted in 1677. This statute, whose aim was to prevent frauds and perjuries, gave a list of contracts that must be made in writing in order to be enforceable. Such contracts were:

contracts of guarantee whereby one person agrees to answer for the debts of another person;

contracts for the sale of an interest in land;

and contracts for the sale of goods when its value is above a certain sum of money.

This act remained in effect until 1954 when it was repealed because it was obsolete. Yet by that date, most of its provisions had been included in acts of Parliament regulating specific contracts. So we can say that the provisions of the very old Statute of Frauds of 1677 still prevail, though not in their original form. By the way, it is quite interesting to remark that the USA which received the Statute of Frauds at the time when they were still English colonies have kept the statute as part of their legal rules and contracts to be made in writing are said to be within the statute.

So essentially today, at English law, two kinds of contracts must be made in writing in order to be enforceable:

contracts of guarantee;

contracts for the sale of or other dispositions of an interest in land.

A contract of guarantee involves a debtor and the party who guarantees that, in the event of default by the debtor, he, the guarantor, will pay the creditor. The guarantor’s promise is made to the creditor, not to the debtor. Under such a contract, the guarantor does not become liable to pay the creditor unless and until the principal debtor is in default of payment.

As for contracts for the sale or other disposition of land or any interest in land, section 40 paragraph 1 of the Law of property act of 1925 provides that they must be made in writing in order to be enforceable. This provision applies to almost all contracts to do with land such as sale, lease, right of entry, the sale of gravel taken from the land, or the conferring of the right to enter and cut and take away a growing crop. So evidence in writing makes the contract enforceable. That is to say actionable which means that in case of non or partial or defective performance, the victim party may start a legal action in court.

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Both acts are rather vague about the source of written evidence that the courts will recognize as such. The law of property act just mentions some memorandum or notes from all the cases that judges have had to decide involving such contracts. It seems established that the note or memorandum submitted by the claimant must contain :

1. The name or description of the parties;2. a description of the whole subject matter to be transferred;3. this applies only in the case of contracts for the sale of land : the consideration to be given for the

subject matter; 4. the material terms agreed upon;5. the signature of the defendant or his agent.

If the claimant is unable to bring such written evidence to the court, the contract will not be enforceable, that is to say the court will not be able to force the defaulting party to perform the obligation he already promised to fulfill.

As such a settlement in the case of a contract to do with land may prove quite harsh on the claimant, particularly when the contract seems to have been clearly agreed upon orally, courts will use the rules of equity to enforce the contract. They will enforce the contract under the doctrine of part performance. Part performance may constitute sufficient evidence if the claimant can show that his acts of part performance prove:

1. That they must have been some contract between him and the defendant2. That the acts in question are consistent with the contract alleged.

Furthermore, the claimant must be able to show that the circumstances are such that it would be fraudulent on the part of the defendant to take advantage of the contract not being in writing.

That is quite characteristic of the rule of equity in English law. As a matter of fact, one of the maxims of equity is that «Equity will not allow a statute to be used as an instrument of fraud.»

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#7

KEY NOTIONS AND VOCABULARY CONCERNING CONTRACTS

A contract is any legally binding agreement whether written or unwritten. Therefore, it is distinct from a mere promise which is not legally binding though the person to whom the promise was made ( the promisee) will expect the person who made the promise (the promisor) to fulfill it. So contract law is concerned with certain types of promises, essentially those which involve some form of exchange. Only a promise given in exchange for another promise will be enforceable at law. A promise for which nothing is given in return is called a gratuitous promise and is not usually enforceable in law unless it has been put into a formal document called a deed.

A valid contract is a contract that the law will enforce. A valid contract therefore creates legal rights and obligations. To be valid, a contract must fulfill five requirements :

1. It must contain an offer;2. The acceptance of this offer;3. Consideration;4. A clear intention to create legal relations and;5. The two parties must have capacity to enter a contract.

The exchange of offer and acceptance constitutes an agreement. In order for the agreement to be enforceable, it must be supported by consideration. Intention to create legal relations means that the two parties are willing to be bound by the agreement. That is to say they are willing to fulfill the promises they are making to each other. In addition, as we have already seen, a valid contract may have to be in writing in order to be enforceable.

A void contract has no legal validity and does not create legal rights or obligations. A contract that lacks one or more of the five requirements essential for a valid contract to exist is void. We could even say void ab initio, i.e. void from the beginning. The parties must be put back in the situation as if the contract had never existed.

A voidable contract is a valid contract that is defective in some of its terms or in the manner in which it was negociated and formed. The party who has suffered a damage as a result of this defect, at his choice, is allowed to rescind the contract. A voidable contract remains valid and can therefore create legal rights and obligations until it is rescinded. The party with the right to rescind may lose that right if he affirms the contract, that is to say if he agrees to continue with performance of the contract or if he delays court action too long or when the rights of an innocent third party may be harmed.

An unenforceable contract is a valid contract that is defective as to its terms or from a technical or procedural point of view. Most unenforceable contracts are illegal, either in their formation or their performance.

An illegal contract is one that offends public policy, which is a common law concept, or a statute.

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#8

VARIOUS PROCEDURES

So now let’s examine the various procedures available in case of disputes arising from default or the non performance of a contract.

The vast majority of contract claims are for debt, that is to say money that is due under a contract for the delivery of goods, for instance. Such claims are brought in the high court or a county court. Yet, most of these claims are not generally disputed so the court functions more as an administrative agency than an adjudicator. As a matter of fact, only major cases involving large businesses are heard by the high court, which has for many years operated a division competent to hear such commercial disputes. This division is called the commercial court and it is staffed by highly specialized judges who have developped great expertise in commercial matters.

As for disputed claims, all of them are not taken through the normal court procedures. Large claims are often taken to private arbitration.

CIVIL COURTS AND CONTRACT CLAIMS

Debt claims start in the same way as personal injury claims, i.e. a writ or summons must be issued. In practice, most debtors have no defence and therefore, they will either fail to respond or they will admit liability. In that case, the creditor may proceed directly to judgment.

When the claim is for a liquidated sum, that is to say a sum that the parties agreed in advance at the time of the making of the contract in case of breach by one or the other party, the court does not even have to hear the case to determine the amount of money, technically called the quantum to be awarded to the victim party. In such cases, judgment is given for the liquidated sum and the whole process is a mere formality.

When the debt is large, it is clearly in the debtor’s interest to delay judgment and increase the time during which he can earn interest with the money, even if he has no grounds for doing so. To counter such a behavior on the part of the debtor, there is a specific procedure known as Order 14 whose aim is to obtain a summary procedure (a summary procedure means a brief procedure which is quicker than the normal ordinary procedure) and the parties have the same legal protection as in any full-fledged court procedure. Under this summary procedure, the plaintiff applies to the court with an affidavit i.e. a statement which he delivers under oath in which he states that there is no defence to the claim. The defendant must ensure that there is what is called a triable issue, a legal question that the judge will have to decide. And if he fails to show that, judgement is given for the plaintiff. Very rarely does the defendant manage to show that there is a triable case. Yet if he does, perhaps on the ground of the goods or services supplied were useless, the case will follow the ordinary procedure in county court or in the high court.

Obtaining judgment in a debt claim is not particularly difficult. What probably is more difficult is trying to enforce the judgment against the debtor who may be unwilling to pay. There are different types of enforcement orders that the courts can issue but the consequence of the English judicial procedure being adversarial, thus leaving the conduct of litigation in the hands of the parties, it is up to the plaintiff, referred to as a judgment creditor once judgment is obtained, to choose the order and chase the debtor to make the order effective. The commonest method chosen is a seizure of debtor’s goods under a writ of fieri facias (writ of Fi Fa) from the high court or an execution order from the county court.

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In most cases, the mere issue of such writs is sufficient to freighten the debtor into paying his debt.

There are other orders in the case of a business debtor. Payment may be obtained through what is called a garnishee order which allows the creditor to be paid out of the credit balance in the debtor’s bank account.

In the case of a petty debtor, payment may be obtained through an attachment of earnings, which can be given only by a county court, whereby the debtor’s employer makes regular deductions from the debtor’s earning and pays them to the creditor.

#9

ARBITRATION

Disputed contract claims involving large sums of money occasionally crop up among professionals. Business men are very much aware that bringing a case to the high court is very costly, both in terms of legal expenses and in terms of trading relationships. That is why business people, professional tradesmen frequently resort to alternative methods of dispute resolution such as out of court settlements or arbitration away from public confrontation in a public high court trial. For example, the party in the wrong may prefer to agree on an out of court compromise (un arrangement à l’amiable) rather than run the risk of losing future business in a competitive market place. This may be well be the best solution whenever the parties to the contract are not used to dealing with one another.

When, on the contrary, the two parties have close business links, and are used to dealing with each other, or when two parties contract in a very specialized and long term agreement, as in the case of civil and engineering contracts or defence contracts, the party may include a specific means of resolving a dispute if such a dispute arises over the performance of the contract. They may even include an arbitration clause which means that in case of a dispute, the parties agree to refer it to an outside arbitrator chosen by themselves.

Commercial arbitrations are governed by various arbitration acts. The latest of these acts was voted by the British Parliament in 1979. According to the statutory provisions of the act, the arbitrator is empowered to conduct the proceedings very much in the same was as a court case, including pleadings, discovery and so on. Eventually, the arbitrator gives an award, which shall be enforced as if is were a high court judgment.

Private commercial arbitration is the private equivalent of the public litigation. Arbitration then is attractive, first because it is private and away from the publicity of a court trial, secondly because the arbitrator is chosen as being a person of great expertise and thirdly because the right to appeal from the arbitrator’s award is limited. For instance, the arbitration act of 1979 provides that awards can only be reviewed by the high court on a question of law and on leave of that court. From cases which have been decided after the act went into effect, it is clear that leave will be given only when the arbitrator appears to have been obviously wrong on the point of law or when there is a point of law which will affect many contracting parties such as the construction of a term in a standard form contract.

To finish on the subject of arbitration, let me just say a few words about the arbitration scheme which is available in county courts as an alternative to the trial procedure. Arbitration in county courts is available for small claims of less than GBP 500 which generally involve consumers against suppliers of goods or services. Basically, after the claimant has taken out a summons, the case is referred to a county court registrar who then holds a preliminary discussion with the parties in order to get agreement on as many facts as possible and advise them to what they should prepare for the

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arbitration itself.

This arbitration procedure is informal and fairly short. And the county court registrar issues an award as an arbitrator does. Only in very specific circumstances may the award be set aside. Only if it can be shown that the registrar acted contrary to the rules of natural justice in not granting the parties a fair hearing or in case the records of the proceedings show that he made an error of law.

#10

LAY-OUT OF THE ENGLISH DECISIONS

Finally, I want to make a few remarks concerning the actual court decisions. As contract law is essentially case law, I will often refer to cases which were decided in court by judges. Civil cases are referred to by the names of the two parties linked by the latin word versus which abbreviated v in a written document and which is pronounced «and». All cases are extracted from books in which major cases are reported. Such books are called law reports. Though case law has always been the only or major source of legal rules in the English legal system, there has never been any official reporting of court cases. As a matter of fact, several publishing companies actually publish law reports.

A most reliable publication is that of The Law reports . Though the cases are reported by barristers who are salaried employees of the publishing company, as it is the case for all law reports, before publication, the report of each case included in those law reports is checked for accuracy by the judge who tried it. The law reports are divided into several sub-series corresponding to the court which heard the case. For instance, appeal cases containing decisions of the Court of Appeal, the House of Lords and the Privy Council, Queen’s Bench containing decisions of the Queen’s Bench Division of the High Court and the appeals to the Court of Appeal.

Another collection of law reports is also most reliable. It is The all England Law Reports which gather major cases decided in the High Court, the Court of Appeal and the judicial comittee of the House of Lords .

All reported decisions are laid out in the same way.

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1. First, the names of the parties in large capital letters. Second, the name of the court where the case was heard and the name of the individual judge or judges who heard and decided the case. One judge in the high court, three in the Court of Appeal and five or more in the House of Lords.

High Court judges are called justices. So their family names are followed by the letter J. if only one judge heard the case or double J.J. if more than one judge heard the case.

Judges who sit in the Court of Appeal are called Lord Justices of Appeal so in the report, their family names will be followed by the letters L.J. in case of one judge and L.J.J. in case of more than one judge.

You may come across two other sets of initials. L.C. which stands for Lord Chief Justice who is the President of the Queen’s Bench Division of the High Court and President of the Criminal Division of the Court of Appeal and M.R. which stands for Master of the Roles which is the official title of the President of the Civil Division of the Court of Appeal.

2. The names of the court and of the judges are written in brackets. It's interesting to notice that the judges who decide cases are named. So lawyers and the public actually know which judge decided the case and what his legal reasoning was in that case. We should see that this is an important feature of an English judicial decision. Moreover, each of the judges who decide a case actually gives the legal arguments which he used to reach his decision in the case.

3. Third, in italics, the heading, i.e. the key notions that the case involves in the order in which they appear in the recapitulation of the facts of the case and of the legal issues raised by those facts and that the judges examine and decide over the trial.

4. Fourth, introduced by the word «HELD» the actual decision of the case. When it is given by an appellate court, the Court of Appeal or the House of Lords, the decision is collective. Yet in case of disagreement between the three or four or more judges, minority opinions are reported and lawyers and the general public may know which judge or which judges disagreed with their collegues.

Minority opinions are reported and they are preceded by the name of the judge or the judges who supported the opinion followed by the verb «dissenting» in brackets, which means that this judge’s opinion about the case differed from the majority decision that was eventually reached by his collegues. The verb «held» is the preterit form of the verb to hold, which in a legal context means to decide. The subject of that verb is in fact the judge or judges named at the top of the report. If we were to translate this verb, we would say « a, ont décidé que ».

The decision is made up of as many short paragraphs usually a few lines, four or five generally, as the number of legal issues raised by the facts. Each paragraph is numbered, 1, 2, 3 and more, as the case may be. Occasionally, one judge or all the judges may want to clarify a point of law which is related to the case or they may want simply to stress a legal definition in a definite manner. In that case, they add a paragraph starting with the following words in brackets : «per justice so and so, in case of one judge, or per curiam in case of all the three or more judges…», meaning an additionnal remark on behalf of that judge or of all the judges.

At the end of the decision when it is an appellate decision, there is an indication that the decision of the law reports is reversed or affirmed as the case may be.

5. Then you find the list of cases referred to in the judges' opinions. The cases are referred to by the names of the parties, and the law report from which they are extracted. This is quite important for, as I have already mentioned, there are various collections of law reports and therefore each collection does not report the same cases and therefore it is essential to know which publication was used.

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6. If the decision is an appeal, a short paragraph entitled APPEAL recapitulates the previous decisions in the trial court. That is to say the first instance court or the court with original jurisdiction and, as the case may be, the decision of the Court of Appeal.

7. Then in italics, you find the names of the lawyers that defended the parties. Very often, in appellate cases, you find that a party was defended by two barristers, one being Q.C. which is to say a Queen’s Counsel and the other one being what is called a junior barrister.

8. Then there very often is the following sentence : «their lordships took time for consideration», which means that the judges did not deliver their decision straight away after hearing the case but took some time to think out and write out their personal arguments to settle the case.

9. Then you find each judge's arguments developped in detail. Each judge fully explains what legal points the case raised and how he, personally, understood the legal implications of the case, and how he, personally, reached his decision. This part of the report is most interesting because judges explain the law as they construe it and as they think it should evolve. This is the part of the report that lawyers read very carefully as it gives them an indication as how judges, in the future, will decide cases involving similar facts or how they may decide cases arising from slightly different facts. So as a matter of fact, the reporting of the judges opinions goes to the root of the English legal system based on case law.

Since judges actually explain their decisions in a most detailed way, there is no need for legal experts or legal academics to do it. That’s why in common law countries, there are no such books as Gazettes or Bulletins in which learned experts or academics try to construe what the judges collective and anonymous decision actually means. The only construction that stands is that given by the judges themselves.

10. The report finally lists the name of the solicitors who assisted the barristers and ultimately, the report is signed by the barrister who wrote out the report. Traditionnally, only barristers are allowed to report court decisions for publication, as I have already mentionned, those barristers work as salaried employees of the publishing companies specialized in law reporting.

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#11

We have just seen

that at English law, a single promise is not legally binding and that in order to develop into a binding and therefore enforceable contract, an agreement must include some kind of exchange between the two parties.

Such exchange between the two parties results from the combination of the five criteria which are fundamental to a binding contract which are :

Offer Acceptance Consideration Intention to create legal relations Capacity to enter contracts.

To put it in a different way, a contract may be described as an agreement constituted by an offer and an acceptance, supported by an exchange of consideration between two or more persons who clearly intend to create legal relations between them and who are legally capable of entering into such an agreement.

In this lecture, I will examine how and when an agreement is reached. In other words, this lecture is going to deal with offer on the one hand and acceptance of the offer on the other hand. In English law, agreement is usually reached by the unconditionnal acceptance of an offer. So those are the topics that I will discuss.

Before starting, a last preliminary remark. One must distinguish between the situation when negociations are in progress and the situation where a binding agreement has been reached. During negociations, each side is free to withdraw without any sanction. After agreement has been concluded, withdrawal usually amounts to a breach of contract.

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LECTURE 2 : OFFER AND ACCEPTANCE


#12

GLOSSARY

TO REACH AN AGREEMENT : conclure un accord

TO WITHDRAW : to withdraw an offer : retirer une offreto withdraw from negociations : se retirer des negociationspreterit : withdrewparticipe passé : withdrawnsubstantif dérivé du verbe : withdrawal

TO BREACH = not to fulfill one’s contractual obligations

TO OFFER : the person who offers is the offerorthe person to whom the offer is made is the offeree

BE WILLING TO : être prêt à, manifester la volonté deWILLINGNESS : la volonté

TO STATE : déclarer, direA STATEMENT : une déclaration

TO CANCEL : annuler

A REQUEST : une demande a request for informationto request : demander

A TENANT : un locataireTO RENT : louer ( du point du vue du locataire)

TO ADVERTISE : faire de la publicité pour ; advertise a carADVERTISEMENT : une publicité

A TENDER : une offre

A BAR : un obstacle, une interdiction (time bar = la prescription du fait des années qui s’écoulent entre une infraction et un éventuel procès)

TO BOAST : se vanterA BOAST : une vantardise

THE TRIAL JUDGE : la notion française de juge du fondA REWARD : une récompenseTO REWARD : récompenser

TO RELY ON : compter surRELIABLE : sur qui ou sur quoi on peut compter, i.e. fiable

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TO LAPSE : tomber, s’éteindre en contexte juridiqueINSTALMENT : une mensualité

A FORM : un formulaireA STANDARD FORM : un formulaire standardA PREPRINTED STANDARD FORM : un formulaire prêt à l’emploi

A QUOTATION : un devis, dans contexte commercial, juridique

TO DELIVER : livrerDELIVERY : la livraison

TO CHARGE : faire payer

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#13

WHAT IS AN OFFER ?

So I am going to examine what an offer is and what it is not.

An offer is a statement of the terms on which the party who makes the offer (the offeror) is willing to be bound. If the offer is accepted as it stands, agreement is reached.

An offer may be made to a specific person and only open to him to accept. For instance, John offers his car to Jack for a stated price. But an offer can also be made to a class of persons, anyone of whom may accept. For instance, an offer may be open only to the employees of a company or the members of a particular club.

Besides, an offer may be made to the whole world as the phrase goes. That is the case when the owner of something that is lost offers a reward to anyone who returns the thing lost. Therefore, an offer is distinct from other types of statements which are not considered as offers in the legal sense, which means that such statements do not show any willingness or readiness to be bound on the part of the person who makes the statement. For instance, an offer is more than a mere declaration of intention whereby a person advertises his intention to organize an auction sale. If in the end, he cancels such a sale, a person cannot claim damages to cover his travel expenses, because the advertisement was never an offer meant to be accepted by making the journey.

Similarly, merely giving information does not constitute an offer. Communication of a price of some goods upon the request by a customer potentially interested in buying the goods does not constitute an offer. It is merely an answer to a request for information.

#14

AN OFFER IS NOT AN INVITATION TO TREAT

An offer is distinct from an invitation to treat and intention to treat is a technical legal term which indicates that the person is willing to enter into negociations but is not yet willing to be bound by the terms contained in the statement.

The leading case that illustrates this point is the case decided by the House of Lords in 1979 involving Mr Gibson v Manchester City Council. Mr Gibson was a Council tenant, that is to say he rented a flat in a block of flats which was owned and run by Manchester City Council (la municipalité de Manchester). The Council informed all the tenants that it was prepared to sell the flats to those tenants who expressed an interest in buying them. Mr Gibson wrote back asking for more information. He then received a letter from the Council stating that the Council « may be prepared to sell the flat » at a fixed price and required the tenant « to make a formal application to buy » the flat.

Mr Gibson sent the application form duely filled in. Soon after the Council received Mr Gibson's application to buy the flat, due to a political change as a result of local governement elections, the Council refused to sell. The House of Lords held that Council's letter was merely an invitation to treat, that is an invitation to make an offer to buy. Therefore, there is no contract and the Council had committed no breach. Note that in that action, Mr Gibson sought an order of specific performance, which if it had been granted, would have placed an obligation to perform that contractual promises on the Council. As a matter of fact, Mr Gibson was not

19


interested in obtaining damages. What he wanted was that the Council sold the flat.

Other examples of invitations to treat are catalogues and circulars advertising goods. So are tenders made by large companies for the supply of goods or services. So are company prospectuses inviting investors to buy their shares. It means that the company may refuse to allow the shares to those members of the public who applied for them. In fact, where a person indicates that he is willing to deal with anyone in the world, this will be treated as a mere invitation to treat. Otherwise, the offeror would be in an impossible situation if an advertisement to sell a car was held to be a firm offer and 20 persons accepted the offer.

Goods in a shop window even with price tags attached are invitation to treat, as the Queen’s Bench Division confirmed when it decided the case Fisher v Bell in 1960, which involved a shopkeeper who had displayed a flick knife (couteau à cran d’arrêt) in his shop window, had that been considered as an offer to sell, the shopkeeper would have been found guilty of an offense under the provisions of the Restriction of Offensive Weapons Act of 1959 which forbade the offering for sale of offensive weapons.

Very much along the same line of thinking, the display of goods in a self service store is an invitation to treat and not an offer to sell on the part of the shop owner or the shopkeeper as confirmed by the Court of Appeal in the case Pharmaceuticals Society of Great Britain and Boots Cash Chemist Southern Limited in 1953. In that case, the court decided that in a shop where customers selected pharmaceuticals goods from self service shelves and paid later at a cash desk, the display of the goods on the shelves was a mere invitation to treat, that is to say such display constituted an invitation for the customer to make an offer to buy by taking the goods from the shelves and placing them in a basket and taking them to the cash desk, and therefore, the customer's offer to buy was eventually (en fin de compte) accepted by the cashier at the cash desk acting as an agent of the shop.

That is quite interesting and a major remark is necessary at this point. English law has a completely different approach from French law. At English law, it is the customer who makes an offer to buy and technically speaking, the shopkeeper is in a legal position to accept or to refuse this offer made by the customer. So an English shopkeeper would be legally allowed to refuse the offer to buy made by the customer. Now, obviously, this is not likely to happen as it would be economically nonsensical for a shopkeeper to refuse to sell. Yet legally there is no bar to his refusing.The French approach is totally different since it is the shopkeeper who makes an offer to sale, which is eventually accepted or not by the customer, which implies that the shopkeeper cannot legally refuse to sale.

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#15

ADVERTISEMENTS

Now let's examine and comment on advertisemments and look at the case Carlill v Carbolic Smoke Ball Company. An offer is not a mere puff or boast which no one could take seriously, such as statements included in advertisements, as when a brand of washing powder advertises that it washes whitest. That is a mere puff, a mere boast to attract customers. And no legal action may arise from such a statement.

Yet, if general rule is that advertisements are not offers but mere invitations to treat, there may be exceptions. That was settled in one of the most famous cases of the English law of contract, almost as famous as the case Donaghue v Stevenson in the English law of negligence. The reference of the case is Carlill and Carbolic Smoke Ball Company, which was decided by the Court of Appeal in 1893, which in fact affirmed the original decision made by Justice Hawkins in the Queen's Bench Division.

Mrs Carlill read an advertisement inserted in a newspaper by the Carbolic Smoke Ball Company which manufacted and sold a medical preparation called « The Carbolic Smoke Ball », which was advertised as follows : « a hundred pounds reward will be paid by The Carbolic Smoke Ball Company to any person who contracts the increasing epidemic of influenza, colds or any disease caused by taking cold after having used the ball 3 times daily for 2 weeks according to the printed directions supplied with each ball. 1000 pounds is deposited in the Alliance Bank, Regent Street, showing our sincerity in the matter. During the last epidemic of influenza, many thousand carbolic smoke balls were sold as preventives against this disease and in no ascertained case was the disease contracted by those using the carbolic smoke ball. One carbolic smoke ball will last a family several months, making it the cheapest remedy in the world at the price of 10 shillings, post free. The ball can be refilled at the cost of 5 shillings, adress : Carbolic Smoke Ball Company, 27 Princess Street, Hanover Square, London. »

After reading this advertisement then, Mrs Carlill bought one of the balls at a chemists and used it as directed 3 times a day from November the 20th 1891 to January the 17th 1892. Unfortunaly, Mrs Carlill contracted influenza. On the faith of the advertisement, she wrote to the company and claimed the 100 pounds reward as promised in the advertisement. As the company refused to pay the reward, she started a legal action in the Queen's Bench Division for breach of a contractual promise by the company.

Justice Hawkins, the trial judge, held that she was entitled to recover the 100 pounds. On appeal by the defendants (the company), the judges of the Court of Appeal unanimously affirmed the original decision. According to Lord Justice Bowen whose legal arguments and reasoning was supported by the other two Lord Justices of Appeal, Lord Lindley and Lord Smith. Lord Justice Bowen held that though generally speaking advertisements must be considered as invitations to treat according to well established precedents, exceptionally an advertisment might be considered as an offer likely to be accepted by any person to whom it was adressed if it was sufficiently clear, precise, unambiguous and if it showed a clear intention on the part of the offeror to be bound by his promise.

The advertisment issued by the Carbolic Smoke Ball Company was clear and any ordinary citizen who happened to read it inevitably understood it to mean that the money was ready for him if he used the smoke ball as directed and yet caught influenza.

Quite interestingly in this decision, the judges made an additionnal remark which very well shows English

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judges approach to contracts. The company contended among other things that the advertisement had never been envisaged as contract, i.e. as an offer likely to be accepted and to ripen into a contract. As there was no means by which the company could check that the people concerned had used the smoke ball as directed. Then Lord Justice Bowen stated that : « if a person chooses to make extravagant promises, he probably does so because it pays him to make them, and if he has made them, the extravagance of the promise is no reason in law why he should not be bound by them. »

In other words, people are free to enter contracts, however extravagant, and once a contract has been made, they are bound by it even though they might realize afterwards that some of the promises they made were totally extravagant. The role of English judges is essentially to enforce contracts once they have been convinced that such contracts exist. In fact, Carlill v Carbolic Smoke Ball is interesting for other legal reasons. I will refer to the case again later in this lecture and in Lecture No. 3.

#16

LEGAL CHARACTERISTICS OF AN OFFER

Let's now survey some technical criteria that contribute to the validity of the offer.

1. First, an offer must be communicated to the other party. Unless the offeree is aware of the offer, he is unable to accept it. For instance, if John finds a wallet and returns it to the owner, he cannot claim any reward that may have been offered if he knew nothing about the promise of such a reward.

2. Secondly, what about the duration of the offer? Obviously, an offer cannot continue indefinitely. So an offer can come to an end in different ways.

So communication of the offer and its duration are the two topics I am goint to talk about now.

First, the offeror may revoke or withdraw his offer at any time up to acceptance. The offeror is entitled to withdraw his offer even if he has promised to keep the offer open for a certain time unless the offeree has paid a sum of money or given some kind of consideration ( I shall explain what consideration is in lecture 3) in exchange for the promise to keep the offer open for that specified time. This is called buying an option, which is a sort of subsidiary contract.

Even then, the offer can be withdrawn before the agreed time, but then withdrawal will be considered as a breach of the subsidiary contract to keep open the negociations. That was decided in a very old case, Routledge v Grant in 1828. Mr Grant offered to buy Mr. Routledge's house and gave him six weeks to decide whether to accept his offer. Before the 6 weeks had elapsed, Mr Grant withdrew his offer. This was held to be legal. Mr Grant was entittled to withdraw his offer at any time before acceptance.

Now, revocation or withdrawal of an offer is only effective if it is communicated to the offeree, either expressly or by conduct which clearly shows the offeror's intention to revoke his offer. For instance, selling the goods elsewhere or to someone else is an example of such conduct, but it will revoke the offer only when the first prospective buyer learns of the sale. Communication of revocation or withdrawal may be made by the offeror himself or by any other reliable person.

Secondly, an offer will lapse if the offeror imposes a time limit for acceptance and the offeree does not

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accept within that time. If no express limit is imposed, the offer will lapse after a reasonable time. What is reasonable will depend on the circumstances and judges have a discretionnary power to assess what is reasonable or not.

The death of either party before acceptance will normally terminate the offer, certainly from the moment the other party learns of the death and when the identity of the other party is vital as is the case in a contract for personal services (that is to say contract of employment), from the time of the death.

Fourthly, once the offeree has rejected an offer, he cannot later go back and purport to accept it. Similarly, a counter offer will operate as a rejection. A case was decided in 1840 Hyde v Wench in which an offer was made to sell a farm for 1000 pounds. A counter offer to buy the farm for 950 pounds was made by the offeree (the buyer) and refused by the offeror (the vendor). Then the potential buyer tried to accept the original offer of 1000 pounds. The court decided that the seller was entitled to refuse it because the original offer had been rejected.

Acceptance subject to conditions will also be a rejection because the offeree is trying to introduce new terms into the bargain. That was clearly decided in the case Neil v Merritt in 1930 in which a defendant had offered to sell land to the plaintiff for 280 pounds. The plaintiff supposedly accepted the offer, sent a check for 80 pounds and promiseed to pay the rest by instalments of 50 pounds. The court held that there was no contract, the plaintiff purported acceptance introduced credit terms which had not be included in the offer.

Rejection, like offer and withdrawal, must be communicated and is only effective from the moment when the offeror learns of its acceptance. If therefore the offeree sends a letter of rejection and then changes his mind and telephones his acceptance before the letter of rejection arrives, there will be valid contract.

Fifthly, an offer may be conditional upon other circumstances. If the conditions are not fulfilled, the offer will lapse. Such conditions may be expressed or implied.

Sixtly, and finally, acceptance by completing the contract will bring the offer to an end. If an offer capable of acceptance by only one person is made to a group of people and one accepts, the offer then ceases to exist so far as the rest of the group is concerned.

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#17

ACCEPTANCE

Acceptance must take place once the offer is still open. To be valid, acceptance must be absolute and qualified or in other words, unconditional.

If, when purporting to accept the offer, the offeree adds terms or conditions, in fact the offeree does not accept but he makes a counter-offer, which amounts to a rejection of the original offer. Acceptance completes the agreement and subject to the existence of consideration, it completes the contract. Therefore, the place where acceptance is made is the place of the contract. This helps to determine in which court an action for breach should be brought.

Acceptance may take the form of words, spoken or written, or it may be implied by conduct as where the offeree performs some specific act required by the offeror. Mere mental assent is insufficient. Silence is not enough. In other words, some positive act must be made showing acceptance.

Consequently, when unsollicited goods arrive through the post with a note saying that unless they are returned within a specified time, the recipient will be bound to pay the price, such a note can be ignored as long as the recipient does not treat the goods as his by using or deliberately destroying them, his silence will not amount to acceptance. Under the unsollicited goods and services act of 1971, the recipient will become the owner of the goods as against the sender, unless the sender collects them within 6 months.

A specific difficulty may arise when two businesses enter a contract by exchanging preprinted standard forms that do not include the same terms. Then arises what is called a battle of the forms. In such cases, it is sometimes difficult to know on which terms the parties eventually bound themselves, whether it was on the offeror's or on the offeree's terms.

This technical difficulty is illustrated by the very famous case Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (England) Ltd, which the Court of Appeal had to decide in 1969. In response to an inquiry by the buyers, the sellers made a quotation offering to sell a machine tool to the buyers for 79.535 pounds, which was to be delivered in 10 months time. The offer was stated to be subject to certain terms and conditions which « were to prevail over any terms and conditions in the buyer's order ». These conditions included a price variation clause that provided that the goods would be charged at the price ruling at the date of delivery. A few days later, the buyers replied by placing an order for the machine on one their own preprinted forms. The order was stated to be subject to certain terms and conditions, which were materially different from those on the seller's preprinted form. Specifically, there was no provision for a variation in price. At the foot of the buyer's order, there was a tear-off of acknowledgment of receipt of the orders stating : « we accept your order on the terms and conditions stated thereon ». The sellers duely filled in and signed acknowledgment slip and sent it back to the buyers with a separate letter stating that the buyer's order was being entered in accordance with the sellers quotation. When the sellers delivered the machine, they asked for an increased price as they claimed there were entitled to as a result of the price variation clause in their terms and conditions.

Of course, the buyers refused to pay the increased price and relied on the terms and conditions of their own order, which they claimed the buyers had accepted by signing and sending back the acknowledgment slip.

The trial judge held that the contract had been concluded on the seller's terms but on appeal by the buyers, the Court of Appeal reversed the decision and held that the contract had been concluded on the buyer's terms. Their decision was based on the strict application of the rules of offer and acceptance, thus considering that

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the buyer's order had constituted a counter- offer, which had been accepted by the sellers by sending back the acknowledgment slip. They ruled that the seller's letters that accompanied the acknowledgment slip did not actually include the terms of the original offer back into the contract. And Lord Denning who was then Master of the Roles, (the President of the Civil Division of the Court of Appeal and a very active judge all over the second half of the 20th century) delivered a special note saying that the role of the court in such battles of the forms was « to discover the consensus of the parties by reasonable implications if the conflicting terms and conditions of both parties were irreconcilable», thus applying to the so-called theory of the one that fires the last shot.

#18

COMMUNICATION

Let's examine now how acceptance must be communicated. The general rule is that acceptance must be communicated to the offeror. There can be no contract until the offeror knows that his offer has been accepted. The acceptance must be communicated by the offeree himself or his authorized agent. Unlike revocation, acceptance cannot be communicated by an unauthorized third party, however reliable.

However, there are two notable exceptions to the rule that acceptance must be communicated.

1. The first exception is that the offeror may indicate that the offeree should, if he accepts the offer, simply carry out some act without bothering to communicate his acceptance of the offer to the offeror. For instance, if a customer wrote to a supplier ordering some goods and without further communication, the goods are delivered in accordance with the order, the delivery will be accepted as acceptance of the offer to buy. Another example is of the so-called reward cases in which a person who has lost something of value offers a reward to whoever will find the lost something and will bring it back to him. The mere fact of bringing the lost objet or animal back to the offeror will constitue acceptance of the offer. This point was very well emphasized in Carlill v Carbolic Smoke Ball Company. Lord Justice Bowen set aside the claim by the company that Mrs Carlill should have communicated her acceptance of the offer. « As an ordinary rule of law, an acceptance of an offer made ought to be notified to the person who makes the offer in order that the two minds may come together. There can be no doubt that were a person in an offer made by him to another person expressedly or impliedly intimates a particular mode of acceptance as sufficient to make the bargain binding, it is only necessary for the other person to whom such offer is made to follow the indicated method of acceptance and if the person making the offer expressedly or impliedly intimates in his offer that it will sufficient to act on the proposal without communicating acceptance of it to himself, performance of the condition is a sufficient acceptance without notification. »

2. The second exception results from the application of the postal rule. The postal rule applies when the parties have conducted their negociations by post and therefore, when it is firmly established that it must have been in the contemplation of the parties that the post would be used as a means of communicating the acceptance. When the postal rule applies, a letter of acceptance properly addressed, stamped and posted is effective from the moment it was posted even if it never reaches the offeror. Obviously, there must be some evidence of posting. It will probably not be enough to give the letter to some other person to post or even to hand it to a postman; it must be put into the hands of a postal authority in the normal way. At any rate, the postal rule applies only to acceptance. We saw that an offer or a letter of revocation are effective only on arrival.

A last remark concerning the scope of the postal rule. It is not mandatory, not even when parties exchange

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their promises and enter their agreement by post, so the offeror is free to decide to set the postal rule aside and make it plain that he is prepared to be bound only when acceptance reaches him. This was clearly confirmed in a case that the Court of Appeal decided in 1974 Holwell Securities v Hughes . An offer to sell required that acceptance be made « by notice to the intending vendor » within six months. Notice was posted but never reached the vendor : the Court of Appeal then held that there was no contract. The words of the offer made it very clear that the vendor was not prepared to be bound unless and when he received the letter of acceptance.

To finish on the subject of the postal rule, it must be said that it applies also to telegrams but not to the use of the telephone or telex. Obviously, when the telephone or the telex is used, the communication is virtually instantaneous. Acceptance is operative when it reaches the other party.

#19

ELECTRONIC COMMERCE AND ON-LINE CONTRACTS

English law has not introduced any specific legislation to regulate and guide contracting on line. The distance selling regulations do set out minimum information requirements and a right to cancellation and have provided some protection for consumers buying on line. The Electronic Communication Act of 2000 provided for legal recognition of digital signatures but largely English law has been left to cope with transactions in the fast developping virtual world of the internet by using the existing common law and statutory framework.

In general, English law allows contracts to be formed in any available manner: orally, in writing, by telephone or by fax. In very specific circumstances, it even allows contracts to be formed on the basis of the conduct of the parties. Therefore, making contracts by email or on the web is just another available means of entering into a binding agreement. The virtual or digital nature of the contract does not affect its recognition under English law. In accordance with the model law on e-commerce of the United Nations Commission on international trade law (UNCITRAL) which states that in the contract of contract formation unless otherwise agreed by the parties, an offer and the acceptance of an offer may be expressed by means of data messages. Such data messages have been defined as information generated, sent and received through electronic, optical or similar means, including electronic mail.

If contracts for the sale of goods and services over the internet raise no difficulty and are governed either by the Sales of Goods Act of 1979 or the Supply of Goods and Services Act of 1982, there remains a legal difficulty over contracts for the sale of digitized services, that is to say the sale of products such as software, video books, music newspapers, magazines and films. English courts are still uncertain whether to consider them as goods or services. So far, no definite ruling has ever been made by English courts and a strong tendency is to consider such contracts as sui generis which is not altogether very satisfactory.

I shall not go into the technical specificities of making contracts on line. As far as precontractual negociations and arrangements are concerned involving advertising, checking the identity of the customer or his capacity to enter into a binding agreement, I just want to emphasize the specific issues involved in the exchange of offer and acceptance in this context of online contracts.

Article 11 of the Electronic Commerce Directive voted by the European Parliament in 2000 provides that « except when otherwise agreed by the parties who are not consumers, in cases where the recipient of the services places his order through the technilogical means, the service provider has to acknowledge the receipt of the recipient's order without undue delay and therefore, the order and the acknowledgment of the

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receipt are deemed to be received when the parties to whom they are adressed are able to access them. »

These provisions aiming at protecting consumers when buying on line have been integrated into the distance selling regulations. Since no writing is required as a prerequisite in most contracts at English law, email and webcontracts are not particularly affected. And in case the parties actually want some kind of written evidence to support their agreements there seems to be no obstacles to English courts being prepared to find that the computer floppy disk constitutes a writing within the meaning of the interpretation act of 1978, which defines writing as « typing, lithography, photography, and other modes of representating or reproducing words in a visible form ».

Then remains the issue of the signature requirement. A signature is normally assumed to involve the writing of some name or identifying mark on a document. Yet the courts have both extended the definition of writing and broadened the concept of signature. In Goodman v Eben limited in 1954, the court validated the use of a rubber stamp as a signature, adding that « the essential requirement of signing is the affixing in some way whether by writing with a pen or pencil or by otherwise impressing upon the document what's name of or signature so as to personally authenticate the document ».

More recently, in 1995, it was held that the fax copy of a signature satisfied a statutory signature requirement. Therefore, basic electronic signatures such as typing one's name at the end of an email are acceptable provided that the signer or sending party does his best to protect against any attempt at fraud by a dishonest person who might simply « cut and paste » an electronic signature.

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Now, what about web contracts in which the customer accepts by clicking a button ? Those contracts are known as click wrap contracts. The clicking of the button does amount to acceptance but it does not serve the purpose of a signature that is authenticating a document. One possible solution is to find a signature, some kind of authentification elsewhere in the contracts such as the customers names and personal data. However, besides authentification, the signing of a document also serves a cautionnary purpose. On signing a document, the signer becomes aware of the contractual terms and conditions and may better understand the danger or legal implications of the contract. To that extent, click wrap contracts may eventually trap customers into terms and conditions which they were not aware of and which had they known about them in good time they may never have accepted.

To conclude about the rules governing the formation of contracts related to e-commerce, there does not seem to exist any discrepancy between English law and the United Nations Commission on International Trade Law otherwise known as UNCITRAL model law, which seems to indicate that this model law will most probably influence English judges when having to decide cases involving disputes over online contracts.

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#20

GLOSSARY

TO ENFORCE A PROMISE : faire respecter une promesseENFORCEABLE : an enforceable promise, a promise likely to be enforced by a courtUNENFORCEABLE : an unenforceable promise

TO BINDA BINDING AGREEMENT ( the parties are obliged to perform)

TO PROMISE A PROMISOR: the person who promiseA PROMISEE: the person to whom the promise is made

TO SUE : to start legal action in a civil courtA SUIT

TO PERFORM (AN AGREEMENT)PERFORMANCE

TO FURTHER : aller plus loin, approfondirFURTHER adj : autre ; a further promise = une autre promesse

TO WAIVE : to give up, to abandon

EQUITY : une source de règle de droit a part entiereEQUITABLE : qui relève de l'equityLe concept d'equity ne correspond pas a la notion d'equité et l'adj equitable ne veut pas dire équitable.

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LECTURE 3 : CONSIDERATION


#21

GOOD AND BAD CONSIDERATIONThe modern English law of contract developed during the 15th and the 16th centuries and by the beginning of the 17th century, some essential principles had been firmly established and are still fundamental rules for English contracts today.

Consideration is one of those fundamental principles. Since contracts may be defined basically as exchanges of promises which are enforceable, then it became necessary to distinguish between promises that were enforceable and those that were not. Thus, it was settled that to be enforceable promises must be « supported by a consideration » which means a good reason for enforcing them.

Originally, the doctrine of consideration was concerned with the reasons, whether good or bad for enforcing promises. That’s why today still, consideration may be qualified as good or bad.Good consideration fulfills the requirement of consideration whereas bad consideration does not.

Quite early as well, case law came to define consideration as conferring a benefit to the defendant or a charge to the plaintiff. That means that consideration must consist of something which is either of benefit to the promisor or detriment to the promisee, the person to whom the promise is made.

Now, the words benefit and detriment must be understood in a technical way, meaning something which is gained and something which is lost. As an example, imagine the situation where the owner of a vintage Rolls Royce agrees to sell it for 100 pounds. From an economic or financial point of view, the deal is most detrimental to the seller the owner who sells his car and highly benefical to the buyer. Yet, from a legal point of view, the deal is totally enforceable because it satisfies the requirement that such enforceable contracts must result from the exchange of promises by the parties. The seller's promise to give away his car is is exchanged againt the buyer's promise to pay the agreed price, whatever price was agreed upon.

In fact, English judges never question the economic value of what is given in exchange for a promise. They are satisfied simply with the actual exchange of promises which fulfills the requirement of good consideration. Another way of putting it is that a binding promise must have been bought by some counter-promise or action. In most cases, the ‘price’ will the counter-promise by the other party. In such cases, consideration is said to be executory. In other cases, when the promise of a reward of money is made for the return of something lost, consideration is the act of returning the something that was lost and such consideration is said to be executed.

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#22

PAST CONSIDERATION

Since consideration is the price of a promise, it must usually have been given in exchange for it. Thus a promise to pay for something which has already been done would be not be considered as having been done in exchange for it and therefore will not be considered as good consideration.

That is what the Court of Appeal confirmed in the case Re McArdle in 1951. Work was done to improve a house and the defendants who were entitled to the house after the death of their mother had promised to pay the sister-in-law for the work. When eventually they refused to pay, the Court of Appeal held that as the work had been completed before the promise to pay was made, there was no consideration for it.

Yet, there is a long standing exception to that rule governing past consideration. When the work which is done before the promise to pay for it was made is carried out at the request of the promisor, then the court will accept it as good consideration and will hold that there is a binding contract between the two parties. The legal justification for that exception is that the original request for the work to be done carries with it an implied promise to pay and the later promise to pay is the explicit recognition of that implied promise. So English judges have consistently held that a request to do something often carries with it an implied promise to pay a reasonable price for doing so.

#23

CONSIDERATION MUST MOVE FROM THE PROMISEE

Another important characteristic of consideration is that consideration must move from the promisee, i.e. from the person to whom the promise to do something was made. That means that the person who seeks to enforce the promise must be the person who provided consideration for that promise.

Yet you must bear in mind that at English law, a contract is an exchange of promises by the two parties to the contract. Therefore, each party is in fact both a promisor and a promisee, i.e. each party makes a promise and in exchange for that promise, he receives consideration given by the other party, so that eventually in a contract each party receives a benefit (the consideration given by the other party) in exchange for a promise to do something and suffers a detriment (the consideration he must give for the other party's promise).

So for instance in a contract for the sale of goods, the seller promises to sell goods in exchange for the buyer's promise to buy them (i.e. to pay the price I asked for them). In that case, the seller receives a benefit (money equivalent to the price of the goods) but he also suffers a detriment (i.e. he gives up his title to the goods by transferring it to the buyer).On the other hand, the buyer suffers a detriment as he must pay the money requested by the seller but he gains a benefit since he obtains a title to the goods he promised to buy.

Now, obviously this is quite straightforward when contracts involve just two parties who exchange promises. But there exist contracts where promises are made to third parties as with a contract of insurance, the insurance company promises to pay a sum of money to the insured person's widow after the insured person's death. It is easy to understand that the widow is not a party to the contract and may not even have known about the very existence of the contract. In that category of contracts, the third person never provided any consideration for the insurance company's promise to pay a sum of money. Yet the contract is binding. At any rate, this sort of contract also contradicts another fundamental rule governing contracts, which is the rule of

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privity of contract. (conference 4).

#24

CONSIDERATION MUST BE SUFFICIENT

To be valid, consideration must be sufficient. It need not be adequate. This essentially means that when deciding cases arising from disputes about consideration, judges must be satisfied that the exchange of promises by the parties was supported by good consideration. Yet, they do not inquire into the adequacy of consideration. Judges do not have to decide whether the price paid by the buyer in exhange for the seller's promise to sell some goods actually matches the quality of the goods sold.

So to take up a very traditional example, if an old Englishman decides to sell his vintage Rolls Royce car in exchange for a peanut or for a pepper corn, the contract is perfectly valid under English law. It is none of English judges' business to say that the price paid was too low compared to the quality of the goods sold. Remember what Lord Bowen stated in the case Carlill v Carbolic Smoke Ball Company: “if people chose to make extravagant promises, then let them be bound by them, however extravagant they may seem to an ordinary reasonable citizen.” It is none of an English judge's business to protect parties that enter into an unreasonable, foolish contracts, to protect them against such foolish promisees.

Once a promise is made and consideration was given in exchange, then at law, the promise becomes binding and judge's role is to enforce it. Judges do not, as a general rule, inquire into the fairness or the genuineness of bargains. Yet in very specific circumstances, judges will set aside contracts as being unfair to one party on the basis of misrepresentation or duress or undue influence.

For the moment, let me just stress the principle that the lack of equality in the exchange, however great, does not in itself make the contract invalid.The question of genuineness of contracts at English law is quite interesting. Judges never do inquire into it. The consequence is that it is then quite easy for anyone who knows the law to dress up a gift as a contract by providing a minimal consideration. At English law, citizens who make transactions must know what the law is about and make the most of it. CAVEAT EMPTOR means that the buyer must beware, that is to say the one who buys must be careful about what the deal he is actually entering into. It is his responsibility to see that his interests are protected so that if he is ignorant of a legal rule to his detriment or if he does not use legal rules to his best advantage, the deal might not prove beneficial to him. But then, a court action will be no help. Judges enforce valid deals as if there were conducted and their reasoning is based on legal concepts only, not on what average citizen would consider as fair.

So imagine the two following situations :

Situation 1 - a father promises his daughter he will give her a car on her 18th birthday

Situation 2 - a father promises his daughter to give her a car on her 18th birthday if she gives him 1 pound on the day he makes this promise.

From a legal point of view, the two situations are completely different. In situation 1, a promise is made without anything promised in exchange, that is what is called a gratuitous promise and such a gratuitous promises are not legally binding.

On the contrary, in situation 2, the father's promise is exchanged for something given in return. The father deliberately followed the legal criterion for consideration to be valid. Therefore the father's promise in

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situation 2 is a legally binding promise and the whole transaction is a full-fledged(à part entière) contract.

Now, the example may seem rather hypothetical as it is possible to render a gratuitous promise binding by making under seal as it is called, which means that the promise is registered in a deed which is an official document that any individual person may establish with a solicitor in England.

#25

THE ECONOMIC VALUE OF CONSIDERATION

In a 19th century case, the court pointed out that consideration must be something which is of value in the eye of the law, which in fact has been construed as meaning that consideration must have some economic value. What exactly is economic value is not very clear nor consistent.

Let me give you some examples. In the case of White v Bluett which was decided in 1853, a father promised not to enforce a promissory note, which is a document acknowledging a debt against his son, provided his son stopped complaining about the distribution of his father property (the way the father intended to share his property after his death). Eventually, the father enforced the promissory note and the son went to court claiming that his father had breached his contractual obligation. The court held that the agreement was not an enforceable contract because the father's promise had been given without the son giving any consideration in exchange. As a matter of fact, the son had no right to complain and his father was free to distribute his property as he wished to do, so that the fact that the son abstained from doing something which he had no right to could not amount to consideration.

It is interesting to compare that case with a well known American one which was also decided in the 19 th

century: this was the case Hammer v Sidway decided in 1891 in which an uncle promised his nephew a large sum of money, 5000 dollars, upon his 21st birthday if the nephew promised to stop drinking alcohol, stop smoking tobacco and playing cards or billiards until he was 21. Eventually, the nephew complied with his promise and therefore stopped drinking alcohol, stopped smoking tobacco and stopped playing cards and billiards. Yet the uncle's testator, because the uncle had died in the meantime, refused to pay the promised sum of money to the nephew.

The American court that tried the case held that the uncle's promise had been given in exchange for the nephew's promise to waive his right to drink and to smoke tobacco and to play cards and billiards, which in fact was a right that every citizen enjoys. So the waiving of that right did constitute consideration. The court confirmed the general principle that « a valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other ». Therefore it is enough that something is promised, done, foreborne or suffered by the party to whom the promise is made as consideration for the promise made to him. In general, the waiver of any legal right at the request of the other party is a sufficient consideration for a promise.

Yet, as I said, this concept of economic value is not fully consistent. More recently, in 1960, the House of Lords decided a case involving a customer, Mr. Chappel (Chappel & Co. Ltd v Nestlé, 1960), and a big food company, Nestlé. The case arouse from a special offer from Nestlé under which a person who sent in three wrappers from bars of their chocolate could buy a record at a special price. The court had to decide whether the chocolate wrappers were part of the consideration in the contract to buy the record. The House of Lords decided that yes, the wrappers were part of the consideration despite the fact that it was established that they were thrown away by Nestlé and therefore had no direct value for them.

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So the term « economic » must be construed not in its strict sense but in a broader sense, meaning something of value to which the person was entitled and the waiving of which constituted a loss for him.

To finish on the subject of the economic value of consideration, I would like to mention a more recent case which raised the issue in a totally different context. In Edmonds v Lawson in 2000, the Court of Appeal had to consider whether there was a contract between a pupil barrister and her chambers in relation to pupillage, which is the name given to the training period that a student lawyer in England must undergo before becoming a full-fledged barrister. The problem was to identify what benefits the pupil applied to his pupil master or the chambers during the pupillage. The court decided that the pupil was not obliged to do anything which did not contribute to her own professional developpment. In other words, the pupillage was meant to be for the benefit of the pupil only, which was confirmed by the fact that when the pupil did work of real value for the barrister, then that work was remunerated as there was a professional obligation on the pupil master to do so. So the court concluded that there was no contract between the pupil and the pupil master because there was no consideration. What was interesting though was that the court established that there probably was consideration in the agreement between the pupil and the chambers. Chambers make offers to train pupils in a potentially very professional and productive relationship and pupils accept such offers and in exchange for the benefit of being trained in the chambers, the pupils accept to use their skills for the benefit and reputation of the chambers. So the court concluded that there probably was a contract between the pupils and the chambers.

As a last remark concerning what consideration may consist of, consideration can be a promise not to sue. If a person has a possible civil claim against the other party, a promise not to enforce that claim is good consideration for a promise given in return. Imagine the following situation. If for example, Ann crashes into Ben's car, Ben might agree that he will not sue Ann if Ann promisees to pay for the damage. Thus Ben's promise not to sue will be consideration for Ann's promise to pay for the damage.

#26EXCEPTIONS TO THE RULES OF PAST CONSIDERATION

Before I examine exceptions to the rule of past consideration, I just want to mention a specific contractual situation where a contractor may be enforced despite the fact that no consideration was given by the beneficiary. That is the case when the term in a contract is enforceable by a third party. Such a situation was legally impossible until 1999 when the British Parliament voted the Contracts (Third Party) Act allowing a third party within certain conditions to enforce a contractual term without having given consideration since that third party was in no way party to the contract and is simply a beneficiary mentioned as such by the actual parties to the contract.

So now I am going to examine the various cases for which the courts have recognized and accepted that a promise which was made after some act had been performed may nevertheless be enforceable. For instance, when a promisee already owes the promisor a legal duty, then in theory, performing that duty should not in itself be consideration. If the promisee does nothing more than what he is already obliged to do, then he is not suffering any detriment and the promisor is only getting a benefit to which he or she was already entitled.

Such existing duties fall into three categories :

1. existing public duties (fonctions) or duties imposed by law2. existing contractual duties to the very promisor3. contractual duties owed to a third party

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In all cases, the test that is used to appreciate whether a promise made after the performance of an act is nevertheless enforceable is the one stated by Lord Carmont in a famous case that the Privy Council had to decide in 1979. By the way, the appellate committee of the Privy Council is the equivalent of the judicial committee of the House of Lords. It deals with cases originating in Commonwealth countries. The reference of the case is Powon v Lau Hu Long. It involved two companies in a rather complex contractual relationship, including a contract for the sale of shares and a contract of guarantee. So Lord Carmont stated that « an act done before the giving of a promise to make a payment or to confer some other benefit could be consideration for the promise where, first, that act was done at the promisor's request, second, that parties understood that the act was to be remunerated either by payment or the conferment of a benefit and three, the payment or conferment of benefit was legally enforceable ».

1. Existing public duties or duties imposed by law

So what about a promise exchanged in return for the performance of a public duty ? One thing seems clear from the start. Where a person is merely carrying out duties that he or she is legally obliged to perform such as a police officer whose duty is to protect citizens and maintain law and order, so as to ensure peace and safety, then doing that alone will not be good consideration.

However where a promisee is under a public duty but does something more, something extra which goes beyond what he or she is bound to do under that duty, then that extra act may amount to consideration.

A good illustration of such extra act beyong the existing public duty is given in the case Harris v Sheffield United Football Club Limited, which was decided in 1988. The football club argued that they should not have to pay for police officers attending their football ground when matches were played. The matches were played on Saturday afternoons to get a maximum number of viewers. So they argued a big police presence was necessary to maintain law and order. Since a lot of people came to see the matches, a proportionnaly high number of police men was necessary to maintain law and order. In that particular case, the court decided that what the football club expected from the police went beyond the normal duty, therefore the club must pay for the extra number of police men necessary. The fact that more police men were needed as a result of organizing the matches on Saturday afternoons so that more people could attend, resulted from the club's more or less implied request that policemen be more numerous and therefore the club's willingness to pay the extra cost.

2. Existing contractual duties to the same promisor

Now, the next category of exceptions to the rules governing consideration is that of an existing duty to the same promisor. This raises the question whether performance of an existing duty owed to the same promisor can be good consideration for a promise by the promisor to pay an extra sum of money for what is performed.

Let's imagine that A et B have a contract and A promises additionnal money for the performance by B of the same obligation. Is such a promise binding? Traditionally, the answer was no, as exemplified by several cases such Stilk v Myrick which was decided in 1801 where two sailors deserted a ship during a voyage and the captain was unable to find replacement for them. So he promised the remaining crew that they would be given extra wages for sailing the ship back home. Yet, when the crew arrived back in London, the captain refused to pay the extra money he had promised. The sailors sued for it but the court held that there was no consideration for the captain's promise. The sailors have contracted to sail to their destination and back and that was what they had done, so the captain's promise of extra money was not enforceable.

#27

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An interesting point is that in 1990, in the case Williams v Roffey Bros , the Court of Appeal took a different approach. Roffey was a building firm with a contract to refurbish a block of flats. They subcontracted the carpentry work to Williams. Before the whole work was finished, it became obvious that Williams had financial difficulties that would prevent them from completing the work on time. Roffey’s agreement with the owner of the flats contained a penalty clause which meant that Roffey would have to pay penalty money if the work was not finished on time. So after he recognized that the original contract price was too low and caused Williams their financial difficulties, he entered into an agreement with Williams offering to pay extra money in exchange for the work to be finished on time. Eventually, Roffey refused to pay the extra money, so Williams sued for breach of contract.

The Court of Appeal found that Roffey’s promise to pay extra money was supported by valuable consideration, that is in return for Williams making extra efforts to finish the job on time, i.e. incurring an extra detriment, in exchange he received extra money and as to Roffey, in exchange for the extra detriment of paying more money, he gained an extra benefit which consisted in avoiding having to pay the owners penalty money under the penalty clause. The decision in the case Williams v Roffey was quite unexpected as it seems to mean that if a party’s promise to perform an existing contractual duty to supply goods or services confers an additional practical benefit on the other party, then it will be sufficient consideration to make a promise given in return binding, even though in strict legal terms, the two parties are only agreeing to carry out their existing contractual duties. As a matter of fact, the decision caused a lot of legal debate and up to now, no other case has yet followed the new principle set by the judges of the Court of Appeal in that case. Therefore, it is not quite clear whether the principle established is actual law.

To conclude about this issue of an existing contractual duty to the same promisor, I just want to mention the special rules that apply to contractual duties regarding debts. Where someone owes the other party money and cannot pay the full amount, they will sometimes offer to pay a smaller sum on condition that the creditor promises to accept it as full settlement of the debt. In other words, on condition that the creditor agrees not to sue later for the full amount. Such an agreement is valid only if the debtor gives some consideration for it by adding some extra element. This is the so called rule in penal case.

3. Contractual duties owed to a third party

What about contractual duties owed to third parties? This may happen when two parties made a contract to provide a benefit to someone who is not a party to the contract. Such a person is known as a third party. If one of the parties to the original contract makes a further promise to that third party to provide the benefit they have already contracted to provide, that further promise can be good consideration for a promise made by the third party in return, even if nothing more than the contractual duty is promised by that party.

#28

THE DOCTRINE OF PROMISSORY ESTOPPEL

The last point in this chapter devoted to consideration is a review of the so called-doctrine of promissory estoppel. In short, the doctrine of promissory estoppel makes it legally possible to consider a promise, which is not supported by consideration, binding.

Before I go into the technicalities of promissory estoppel, let me just say a few words about another kind of promise which is binding, though it is not supported by consideration. In certain circumstances, one party to a contract may agree not to enforce their strict, their full rights under the

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contract. For example, they may accept delivery later than agreed. Such an agreed restriction over the enforcement of his rights by one party is called a waiver. If for instance, the late delivery is made at the buyer’s request or if work is completed later than agreed originally but the delay was accepted by the party who pays for the work to be done, then that party who waives has the right to sue the defaulting party.

Now, more about promissory estoppel. This doctrine is derived from equity. That is why it is sometimes refered to as equitable estoppel. Promissory or equitable estoppel originated in a case that English court decided in 1877. The case involved a land owner and his tenants over their contract of lease. Under the lease, the tenants were obliged to keep the premises in good repair. At one point in their contractual relationship, the landlords gave them a six months notice period to achieve the repairs. They notified the tenants that should the repairs not be achieved at the end of the notice period, the lease would be forfeited, i.e. the lease would be cancelled. In the meantime, the landlords and the tenants entered into negociations for the tenants to buy the lease. At the same time, the two parties agreed that repairs would not have to be carried out then.

Eventually, the negociations failed. And at the end of the six months period, the landlords forfeited the lease against their promise not to. The dispute had to be settled in court. And at the end of the court procedure, the House of Lords held that the landlords conduct was an implied promise to the tenants that they would not forfeit the lease at the end of the six months period. And that the tenants had not done the repairs because they had relied on the landlords promise. The Lords held the promise to be binding and established that a new six months notice period started again the day the negociations broke down. The lords stated that in such circumstances, it would be inequitable not to enforce the landlord’s promise. Therefore, the latter were estopped from starting legal action as a result of the promise they had made to the tenants to suspend repairs during the negociations.

The same sort of case came up in court in 1947 and very much the same legal reasoning was made by Lord Denning. The case involved two parties, the Central London Property Trust Limited v High Trees House Limited. The plaintiff owned a block of flats in London that they leased to the defendants in 1937. The defendants planned to rent out the individual flat, thus recovering money that would enable them to pay the lease and to make profits. Unfortunately, the Second World War broke out and the defendants were unable to rent out the flats as they had expected since most people who lived in London went outside London to escape German bombs. An agreement was reached between the parties in 1939 under which the owner accepted a lower rent, in fact he accepted to be paid only half the rent. In 1945, at the end of the war, the flats were occupied again as people moved back to London and the plaintiff (the owners) claimed the full rent to be paid again but they also claimed arrears (arriérés) for the period between 1939 and 1945, contrary to the promise they had made to accept only half rent. The court accepted the claim that the full rent must be paid as soon as the war ended and the flats were fully occupied again. But it rejected the plaintiff’s claim that arrears must be paid. Though there was no consideration for the promise made by the landlord to accept half rent, the court considered that it would be inequitable to entitle the owners to recover such arrears, as the tenants had relied on their promise not to and had organized their financial situation on the basis on that promise.

Thus, the doctrine of promissory estoppel was confirmed. The doctrine according to which under certain circumstances a promisor is estopped from denying the enforcability of a promise he gave though no consideration was given for it.

So what are the conditions in which promissory estoppel may apply ?

1. First, there must already be a contractual relationship between the parties.

2. Second, there must be an obvious and unambiguous promise from the promisor not to enforce

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his full legal rights. The promise may be implied by conduct but silence or failure to act will not be sufficient.

3. Third, the promisee must have acted in reliance on the promise, that is the promise must have influenced his conduct. In Central London Property Limited v High Trees House Limited, for example, the lessees continued to rent out the flats rather trying to sell their leasehold interest to someone else. Therefore they organized their financial situation upon their reliance that they would pay only half rent.

4. Last, the main point about the equitable doctrine of promissory estoppel is that it would be inequitable for the promisor to go back on what was promised and to insist on their strict legal rights.

As a conclusion, it must be stressed that promissory estoppel is usually only used to prevent full rights being exercised for a period of time. It does not destroy them indefinitely.

Furthermore, promissory estoppel cannot be used to create entirely new rights or extend the scope of existing rights. It can be used only to prevent the enforcement of rights already held. « Promissory estoppel acts as a shield not as a sword », i.e. promissory estoppel can be used by the courts when deciding a claim in a legal case brought by the promisor who tries to enforce his full legal rights, thus denying the existence and he validity of a promise he made to restrict those such rights. Unlike the way it applies in the USA where promissory estoppel can be invoked by a defendant to oblige the plaintiff to comply with a promise he made, this cannot be done in England. Promissory estoppel is a defence tool, not a ground for a legal action. In a recent case decided in 2001, the Court of Appeal reversed the finding of the Queen’s Bench Division which had recognized promissory estoppel as capable of creating a course of action. The Court of Appeal acknowledged that it might be a good idea for reform, since in the USA and many Commonwealth countries, promissory estoppel did create a course of action. Yet, the Court of Appeal left it to the highest court in the English judicial system (i.e. the House of Lords) for it to change the law.

As a last remark to conclude, there is a possibility for a party to make a binding promise that need not be supported by consideration. That is to include that promise in what is called a deed. A deed is a formal document signed by the party who is to be charged with it in the presence of a witness. Deeds are usually signed at a solicitor’s office. Deeds are used to give binding legal effect to promises which are not supported by consideration and which therefore would not be binding at law. Such promises not supported by consideration are called gratuitous promises and, I repeat, are unenforceable at common law unless they are included in a deed.

#29

CONCLUSION

So now we come to a general conclusion concerning consideration. As we have just seen, the requirement of consideration may allow parties who make gratuitous promises that ought morally to be binding to escape liability. That is why today, English courts sometimes give a rather artificial interpretation of the principles of consideration in order to prevent unjust, inequitable avoidance of an agreement. In practice, the courts are reluctant to hold that mere lack of consideration prevents a business agreement which is satisfactory to the parties to the contrat who made it from being legally binding. The rules of consideration have been criticized as highly artificial. A gratuitous promise is not binding for lack of consideration no matter how seriously it was made and how much the other party relies on it. Yet, the same promise made in exchange of a pepper

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corn, i.e. made in exchange of some act or some money of little value, will be binding.

That is why the doctrine of promissory estoppel and the decision in Williams v Roffey were seen as major steps toward a reform of the rules of consideration. Yet, it is not clear whether judges of the higher courts are actually ready to confirm the principles established in those cases. A reform was already advocated by the law revision committee in 1937. Seventy years later, controversial debate is still going on and the old artificial rules of consideration still apply.

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#30

GLOSSARY

TO BINDpreterit : BOUNDparticipe present : BINDINGparticipe passé : BOUNDto be legally bounda binding agreement

TO BEHAVE : se comporterBEHAVIOR : le comportement

RELEVANT and the opposite IRRELEVANTRelevant means correct, suitable, significant, logical and irrelevant means the opposite

EVIDENCE : nom singulier qui ne se met jamais au pluriel, i.e. l'ensemble des preuves

A PROOF, (to PROVE) : une preuve

TO ENFORCE : to cause a contract or an agreement to be performedan enforceable agreementan unenforceable contract

TO WRITEpreterit : wroteparticipe présent : writingparticipe passé : written

a document which has been written may be qualified as a written document or a document in writing

PER SE (latin): itself alone, by itself

AN ONLOOKER : somebody who sees things, who observesTO LOOK ON : regarder, observer

AN ALLOWANCE : is a sum of money paid by one person to another to cover special needs. For instance, parents may give their student children allowances to pay for their living expenses or a divorced husband may pay an allowance to his former wife, etc.

AN INSTALMENT : is a part of a whole payment

TO DEAL WITH : to do business withA DEAL : an agreement, a contract

A TRADE UNION : un syndicat

TO SUPPLY : to supply goods, fournir

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LECTURE 4: INTENTION TO CREATE LEGAL RELATIONS; CAPACITY TO CONTRACT; PRIVITY OF CONTRACT


SUPPLY AND DEMAND : l'offre et la demande

TO INCORPORATE A COMPANY : to give a company corporate personality, i.e. to register it officially as a company.

ON BEHALF OF : in the name of, pour le compte de

TO BYPASS : to avoid something by going around, contourner

TO ADVOCATE : to speak in support of an idea or a course of action, proner

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#31

This chapter is very much a mixed bag. I shall examine three different topics : intention to create legal relations capacity to contract doctrine of privity of contract

1. INTENTION TO CREATE LEGAL RELATIONS - INTENTION TO BE LEGALLY BOUND

If two or more parties make an agreement without the intention to be legally bound by it, that agreement will not be considered by the courts as a contract. So to that extent, intention to create legal relations is one of the five requirements at English law for a contract to be valid.

This intention to create legal relations is a requirement per se and must exist independantly of the other requirements unlike in American law where this intention to create legal relations is implied in the exchange of offer and acceptance by the parties. The courts establish the parties' intention objectively, that is to say, if to onlookers, the parties behaviour or words would suggest that they intended to be bound, the fact they secretly had reservations would be irrelevant.

As far as intention to create legal relations is concerned, contracts are divided into two categories:

1. domestic and social arrangements

2. commercial agreements

Two opposite presumptions apply to these two categories of agreements. While domestic and social agreements are presumed not to be binding agreements, i.e. not to contain any intention by the parties to create legal relations, on the contrary, commercial agreements are presumed to be binding and parties who enter such agreements are presumed to intend them to be binding.

However, such presumptions are rebuttable. Ie they may be rebutted. To rebut a presumption means to bring evidence that the presumption is false. So parties to a family or a social arrangement may bring the proof that, in their specific case, they intented such an arrangement to create legal relations and to be binding. Similarly, parties to commercial agreements may bring evidence that the agreement was not intented as a binding contract.

So now let's go into more details.

Domestic agreements

Domestic agreements refer to agreements between husband and wife and between parents and child. As to agreements between husband and wife, the general rule is that where a husband and a wife who live together as one household, as one family, make an agreement, courts will assume that they do not intend to be legally bound unless there is evidence to the contrary. This rule was firmly established by the case Balfour v Balfour decided by the Court of Appeal in 1890.

A more recent case in 1969 Merritt v Merritt gave an illustration of arrangements between an husband and a

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wife which was intented to be binding. After Mr Merritt decided to leave his wife to go and live with another woman, Mr Merritt and his wife met to make various financial arrangements, one of which being that Mr Merritt would pay his wife a monthly allowance in exchange for his wife to continue paying the mortgage of their house. They agreed that eventually, Mrs Merritt was to become the sole owner of the house. At the end of meeting, Mrs Merritt insisted that the agreement be made in writing. When later, Mr Merritt refused to transfer ownership of the house to his wife, the Court of Appeal upheld the wife 's claim that the agreement had been intented as a legally binding enforceable agreement.

US courts are much more willing to give effect to domestic arrangements. For instance, in the case Maroney v Maroney which aroused from the dispute between the two partners of a cohabiting couple over an agreement in which the man had agreed to support the woman financially in exchange for her help in running their home and also in his business.

As to agreements between parent and child, they are presumed not to be intended to be binding unless there is sufficient evidence that proves the contrary, as was the case in Jones v Padavatton which was decided by the Court of Appeal in 1969. That case involved a mother and her daughter who entered into two agreements. In the first one, the mother agreed to pay a monthly instalment to her daughter while she studied law to become a barrister and in the second one, the mother gave up paying the monthly instalments and instead bought a house for her daughter who used it as her home and rented part of it to make an income that replaced her mother's instalments. None of these agreements was ever confirmed in writing. Eventually, the mother and the daughter fell out and the daughter claimed the house as hers. The Court of Appeal considered that the two agreements had been arrangements that are usual between a parent and a child. They therefore held that the mother had never intended her daughter to become the legal owner of the house, thus confirming that family arrangements are not intended to be binding.

Social agreements

Lastly, what about social agreements? Such agreements are passed between people who are not related, such as between friends and neighbors for instance. Yet, whether or not such agreements are to be legally binding depends upon the circumstances in which they were entered.

Two cases that were decided in the second half of the 20th century involved persons who shared the price of lottery tickets or that of bingo cards and who therefore seemed to bind themselves to sharing the proceeds of the game. At least, that was what the courts decided in both cases. The two cases I am referring to are Simpkins v Pays in 1955 and Peck v Lew in 1973.

#32

Commercial agreements

As I mentioned above, in the case of such agreements, the presumption is that they are intended to be legally binding. Yet parties can rebut the presumption if they can bring evidence that such agreements were never intended to be, actually, legally binding contracts.

For the presumption to be rebutted, however, there must be strong evidence to the contrary. The most recent leading case is Esso Petroleum Ltd v Commissionners of Customs and Excise which was decided in 1976. The case arose from a publicity campaign conducted by Esso, the multinational oil company, in which coins showing members of the England football squad for the 1970 world cup were given away free, one every four gallons of petrol. The courts had to decide whether or not there was a contract of sale for these coins. In other words, did the motorist who bought four gallons of petrol have a contractual right to one of the coins ? The

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House of Lords held by a majority that the coins were not being sold but that there was an intention to create legal relations. One judge pointed out that « the whole transaction took place in a setting of business relations » , that Esso knew that despite the coins' negligible monetary value, they would be attractive to motorists and Esso would therefore derive considerable benefit from their advertising campaign.

In another case, John Evans & Son Portsmouth Ltd v Andrea Merzario Ltd, also decided in 1976, yet involving a completely different commercial setting, the Court of Appeal held that the promise made by one company to another, whereas the two had been used to dealing with one another for many years, and though the promise was made orally during a courtesy call and was never confirmed in writing, such a promise meant that an intention to be legally bound could be inferred. Parties had previously done business together and it was clear that the conversation when the promise was made was a business conversation and any statement made then was meant to be binding.

So as I mentioned earlier, courts will rebut the presumption in case of commercial agreements only where there is particularly strong evidence to the contrary.

To finish on this issue of intention to create legal relationships, I would like to mention a special category of commercial agreements namely collective bargaining agreements. Such collective bargaining agreements involve an employer and a trade union representative on behalf of all the workers in a company or an industrial sector. The aim of such agreements is for the employer or the employers or the workers and their representative to bargain (to negociate) pay and work conditions. Whereas such agreements are binding in most countries, at English law such agreements are considered by courts as not intended to be legally binding as it was held in 1969 in a case involving the Ford Motor Co. v Union of Engineering and Foundry Workers. The court referred to the general opinion prevailing in the industrial world that such agreements, though carefully negociated and put in writing, were not legally enforceable so that neither party could argue that they actually intended to be bound. Such an approach to collective bargaining agreements was given statutory form in the Trade Union and Labour Relations Consolidation Act passed in 1992. One provision of the act clearly states that collective agreements are presumed not to be intended to be legally binding unless they expressly state they are in writing. In practice, this presumption is very expressed.

As a conclusion about intention to create legal relations, it is important to remember that very few court cases raise the issue. In most cases where intention to create legal relations is at stake, the agreement is invalid for lack of consideration. This is particulaly true in the case of domestic and social arrangments. In such cases, the lack of consideration - and remember that consideration lies at the heart of English contract law - plus the absence of clear intention to create legal relations combine to confirm a mere promise that the law cannot enforce. That is why American lawyers have altogether dropped the separate requirement of intention to create legal relations and are satisfied with a contract fulfilling the requirement of offer, acceptance and consideration to be considered binding.

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2. CAPACITY TO CONTRACT

Capacity is, after intention to create legal relations, the fifth requirement that the English contract must fulfill in order to be valid. The aim of this brief survey of capacity is to examine to what extent some categories of people such as minors, people suffering from mental disorders or drunkenness and artificial persons are capable or totally incapable of making contracts.

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MINORS

As a result of a Family Law Reform Act of 1969, the age of majority was reduced to 18 so that anyone under 18 is regarded by the law as a minor. Some years later, the British Parliament voted the Minor's Contract Act which provides the rules that govern contracts made by minors today. The general rule which confirms the traditional common law approach is that contracts do not bind minors. Yet some types of contracts are binding on minors and some others are merely voidable.

The only contracts which are binding on a minor are contracts for the supply of «necessaries». Necessaries may be broadly defined as including all necessary goods and services necessary to the minor, but also contracts of service for the minor's benefit.

The statutory definition of necessaries is « goods suitable to the condition in life of the minor or other person concerned and to his actual requirements at the time of sale and delivery ». Therefore, necessaries include more than just essentials such as food, shelter and clothing and it is up to the court to determine which items may be included, taking into account the social status of the particular minor.

How English courts do it is quite impossible to systematise. In practice, this means that a minor will be bound by most consumer contracts, be it for goods or services, but usually not by commercial contracts. This rule was established by case law, mostly in the 19th century and no recent case law has modified this traditional approach. Moreover, the sale of goods act provides that if necessaries are sold to a minor but before receiving them, the minor decides that he no longer wants them, he is under no obligation to accept them and pay for them. Nor is a minor bound by a contract which contains oppressive and exceptionnaly onerous terms, (onerous means causing trouble, needing great effort). Again, it is up to the court taking into account the circumstances of each case to decide whether the contract contains a term which is onerous to the extent that it excludes the minor's liability.

Finally, in case of a contract for necessaries, the minor is only bound to pay a reasonable price for the goods, which may be different from the contract price.

Contract of services for the minor's benefit are contracts of employment under which the minor gains some training, experience or instruction for a future job. It is clear how such contracts are for the minor's benefit. Such contracts will be binding and enforceable if the benefit derived by the minor is clearly established. Most case law on that subject is also found in 19th century cases. Yet there is no general principle that a contract for the benefit of a minor is automatically binding on him or her.

As I have already mentionned, c ommercial contracts are never binding on a minor even they are for their benefit.

For all other contracts, the general rule at common law is that the minor's contracts are voidable. Which means that those contracts are not binding on the minor but that they bind the other party. Still in other words, these contracts are valid when they are made but the minor can terminate them at any time before becoming 18 or within a reasonable time after he is 18. According to case law, still mostly 19th century, such contracts are concerned with long term interest in property, such as land, shares or partnerships. In case the minor terminates the contract, he would be still liable to pay any debt arising before termination. Where a minor has already paid money under a contract that he eventually terminates, whether that money that he paid may be recovered depends on whether the minor got anything in return for it.

This brief survey makes it clear that case law and statute law aim at protecting minors against detrimental bargains. Yet the rules which are protective for the minor may turn out to be most unjust for the other parties.

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For example, take the case of an adult who did not realize that he was entering into a contract with a minor. So, under s ection 3 of the Minor's Contracts Act of 1987 , where an adult has entered into an unenforceable contract with a minor or one that the minor terminates, the courts may give any property acquired by the minor under the contract back to the adult if it finds it « just and equitable » to do so. If an adult realizes that he is making a contract with a minor, he may ask for a guarantee from an adult, as in a case of a loan which is made to a minor. In that case, even if the contract made by the minor is unenforceable, the guarantee is enforceable. Thus the adult who provided that guarantee will have to compensate the other contracting party for their loss according to the terms of the guarantee.

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MENTAL INCAPACITY

Now let's say a few words about mental incapacity which covers the state of people suffering from mental disability and those who are drunk.

The general rule is that contracts made with either a mentally disabled person or a drunk person will be valid unless the person who was mentally ill or drunk was incapable of understanding the nature of the transaction and the other party knew this. The contract is said to be voidable, i.e.the party suffering from mental disability or drunkenness can choose to terminate it.

However, if one party is incapable because of mental disability of drunkenness of understanding the nature of the transaction and the other party did not realize it, the courts will ignore the incapacity. This was confirmed in a fairly recent case, Hart v Connor decided by the Privy Council in 1985, which arouse from an agreement to sell land in which the seller was of unsound mind without the buyer realizing it.

More recently in a case decided in 1995, and which involved a Romanian, the Court of Appeal held that a poor understanding of English and illiteracy did not render a person incapable of entering into a contract. It simply placed an additionnal duty on such persons, that's of making sure that the contract was explained to them.

To finish on the subject of mental incapacity, contracts made by a mentally disabled person whose property is under the control of the courts are void.

COMPANIES AND CORPORATIONS LEGAL CAPACITY

Companies and corporations are legal entities. Legally speaking, they are artificial persons whose legal identity is distinct from that of the persons who make up the company or the corporation. As artificial persons, they can make contracts within certain conditions.

Most commercial companies are so-called registered companies. To register, companies must provide a document called « a memorandum of association » which contains different categories of information. One item is the object clause which lays down the type and the range of activities that the company will carry out. Under the Companies Act of 1989, any contract outside the company's stated range of activities was ultra vires (ultra vires means outside the orbit of the company's activities). Therefore, such contracts were considered as invalid. Under the 1989 Companies Act,, a company may be liable for a contract made outside its stated activities if the other party has acted in good faith.

There are other types of corporations such as statutory corporations, that is to say corporations created by acts of Parliament. Such corporations are created for very precise special purposes and the range of activities

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is precisely specified by the act of Parliament creating them. Any contract outside the powers specified in the act of Parliament will be declared void.

The third type of corporations are chartered corporations, that is to say corporations set up by royal charter. A royal charter is granted by the Crown. Such corporations are charities or educational institutions mainly. Such chartered corporations have full legal capacity like any adult human being and can make any kind of contract.

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3. PRIVITY OF CONTRACT

A SURVEY OF THE DOCTRINE OF PRIVITY OF CONTRACT

The doctrine of privity of contract is the long established rule according to which only the parties to a contract may incur rights and obligations under such contract. This means that under this traditional common law rule, a third party that is to say a person who is not a party to the original contract cannot sue nor be sued under the contract.

The justification for the rule of privity of contract is that only the parties who have exchanged consideration may actually benefit from the contract and obviously third parties have given any consideration. Under this long standing rule, even where a contract was made for the benefit of a third party, that party still had no rights under it.

The famous case of Beswick v Beswick in 1968 reaffirmed this rule. The case involved Mrs Beswick, whose husband had died, and her husband's nephew. Some years before he died, Mr Beswick, the uncle, sold his business to his nephew in return for a sum of money to be paid to himself and after his death, to be paid to his wife. After he had died, his nephew refused to continue paying the allowance to Mrs Beswick. The dispute eventually had to be settled in court and the court followed the traditional common law approach and held that Mrs Beswick had no right under the contract between her deceased husband and his nephew and that there was no legal justification for Mrs Beswick who was a third party to the contract to benefit from it. Therefore, Mrs Beswick had no right to go to court and sue her husband's nephew and ask the court to enforce the contract for her benefit.

The outcome of the case seemed most unfair from a personal point of view since Mr Beswick, the husband, had foreseen his wife's financial situation after his death so as to benefit her and in the end, his nephew, who was dishonest and refused to fulfill his contractual promise, had the law on his side. However, the final outcome went the right way since Mrs Beswick, who was her husband's widow, was able to sue her nephew as the executor of her husband's estate. So though the final decision in Beswick v Beswick was morally acceptable, the legal controversy it raised well illustrated the harshness of a strict application of the rule of privity of contract. As I shall explain later, the common law developped a large number of exceptions to the rule of privity of contract in order to avoid extreme injustice.

This legal controversy led to a significant reform through the passing by Parliament of the Contracts (Rights of Third Parties) Act in 1999. Before examining the statutory provisions contained in that act to the benefit of third parties, I just would like to recapitulate the main points that led to that significant reform.

The rule of privity negates any right to a third party under a given contract. That means first that a third party cannot be obliged to perform any act envisaged in the contract which the third party never negociated and never agreed to and second that a third party cannot enforce a benefit that the parties to the contract willingly

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and clearly granted to him.

While the first point is totally acceptable. (How could a third party be obliged to do something as a result of a contract he never signed?) the second point is not. What is the point of depriving a person of a benefit that two parties to a contract unambiguously wanted to confer to him? All along the 20th century, the need for reform was advocated. As early as 1937, the law revision committee called for legislation to enable a third party who was expressly granted rights under a contract to enforce those rights directly. In various decisions, judges insisted on the urgent need for reform in order to set aside a rule that was often qualified as unjust.

More recently the law commission in 1996 issued a report that proposed that the rule should no longer apply in certain circumstances. Eventually, the Contract (Rights of Third Parties) Act was passed in 1999. Though the impact of the act is significant, it does not in any way abolish the rule of privity of contracts which still stands. According to the very words in the law commission’s report, the aim of the act was or is to establish « a general and wide ranging exception to the third party rule but it leaves that rule intact for cases not covered by the statute ». So the 1999 act established a new statutory exception to the common law doctrine of privity. As I have already mentioned, because of the strict application of the rule caused injustice, courts had developped several exceptions either by statute (legislation) or at common law thanks to the discretionary power of English judges to make up legal rules or also thanks to the rules of equity.

So what are the rights of third parties according to the 1999 act?

The act enables third parties to enforce contractual terms beneficial to them in mainly two situations.

1. First, when the contract expressly provides that they may do so

2. Second when the contract purports, that is to say seems to indicate, that a benefit is intended for third parties, unless it is clear that the parties to the contract did not intend such a benefit to be enforceable.

The first situation is quite straighforward. Parties to a contract may expressly provide for a third party to be able to enforce a term of a contract.

The second situation is more complex. It applies when a term of a contract « purports to confer a benefit » on a third party. Yet, this is subjet to the limitation that the parties to the contract may very well, if they wish, expressly state that they do not want to have such a right conferred to third parties. A benefit can be the performance due under the contract such as a payment of money, a transfer of property, the rendering of a service, or the benefit of an exclusion or of a limitation clause. The term must purport to confer a benefit on the third party, i.e. the benefit must be clearly established.

In either situation, it is not necessary for the third party to be specifically named. The beneficiary may be identified by his name or as a member of a class or as answering to a specific description. The person need not exist at the time of the making of the contract. Rights may be conferred to a company which is not incorporated, (which is not officially set up yet), or to an unborn child or to a future spouse.

The third party's rights are protected against any change of mind of the parties to the contract. The contract cannot be rescinded nor even modified so as to abolish the third party's rights without his or her consent if as a result of the contract, the third party has communicated to the promisor or to the promisors his assent to the term or the terms which include reference to the benefit envisaged. Or if he has relied on the term and the promisor knows he has, or if he has relied on the term and the promisor can reasonably be expected to have

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foreseen that reliance. In such cases, any variation or cancellation can only be made with the consent of third party.

Within those conditions, third parties can enforce the contract. As a matter of fact, they have the same remedies as they would if they were contracting parties, which includes the right to damages and to specific performance as the case may be.

To conclude, I would like, once more, to stress that the act does not apply automatically. It does if parties to the contract do not reject it. And they can decide that the provisions of the new act will not apply. In that case, the third party concerned has no legal recourse, whatsoever. They do so by expressly excluding the application of the act in a specific clause, stating for instance « the operation of the Contract (Rights of Third parties) Act of 1999 is hereby excluded and no person who is not a party to this agreement shall have any right to enforce it as a result of the application of the Contract (Rights of Third parties) Act of 1999".

The Contract (Rights of Third Parties) Act is only the most recent statutory exception to the common law rule of privity.

There are other exceptions established through legislation, i.e. statutory exceptions. Here are the main ones.

As early as the end of the 19th century, in 1882, the Married Women's Property Act established that the husband or a wife may suscribe a life insurance policy for the benefit of their spouse or children. In such cases, the spouse or the children or third party beneficiaries are then legally entitled to enforce the contract.

Various road traffic acts make it obligatory for motorists to insure against liability for injury they may cause to other road users. And in certain circumstances, those people injured are entitled to claim directly against the insurance company, though they are technically speaking third parties.

Under the Law of Property Act of 1925, privity of contract does not apply to what are called restrictive covenants, which are agreements not to do something on a plot of land that one buys for instance. To be valid, restrictive covenants must be registered in a specific register called the Land Register. Such restrictive covenants work this way : A sells a piece of land to B for him to build a house. And only a house for his private enjoyment. To make sure B does not build a factory or a night club that would generate a lot of nuisance, A makes a restrictive covenant with B thereby forebiding him and later buyers of the plot of land to comply with this restriction. Future buyers will have to comply with the restriction, though they are, technically speaking, third parties to the original contract.

Finally, the Bills of Exchange Act of 1882 allowed a third party to sue on a bill of exchange. The most common form of a bill of exchange is a check. Imagine the following situation. John does some work for Betty who pays him with a check. John who owes that very same amount of money to Darry endorses the check (i.e. he signed the check on the back so that it becomes payable to whoever John gives it to) and pays Darry with it. If the check bounces (if Betty's bank account is overdrawn, meaning that no money is available), then Darry can sue Betty on it, though there is no contract between them.

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COMMON LAW EXCEPTIONS TO THE RULE OF PRIVITY OF CONTRACT

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I. Agency altogether

The legal concept of agency altogether constitutes an exception to the rule of privity of contract. Legally speaking, an agent is an individual who makes a contract on behalf of someone else who is called a principal. So when making a contract, the agent is a sort of intermediary of the principal, rather than a true party to the contract. Such a situation is very common in the field of business contracts where a corporation enters into a contract through an agent acting on their behalf and who is an employee.

Traditionnaly, there are three sets of circumstances in which a person will be treated as an agent. A person may be considered as an agent :

1. by express authority;2. by implied authority;3. by apparent or ostensible authority.

In the case of express authority, the agent specifically has been asked to make the contract. Implied authority means that the agent has been asked to do something which by implication, requires the contract to be made. Imagine, for instance, the situation in which a driver is asked to take a car from London to Edinburgh, this would probably imply that the driver must buy petrol on the way on behalf of the principal. Therefore, the contract for the purchase or the sale of petrol would involve the driver as an agent of the principal.

Apparent authority is a little more difficult. It arises when the principal's past behavior gives the other party to the contract reason to believe that the agent has authority to enter contracts on behalf of the principal. Imagine the situation where a firm employs someone whose duty includes buying stationery for the company, and the agent simply orders the goods from the usual suppliers and has the bill sent to the firm. The employee later leaves the firm but the stationery supplier is not told. If the employee then comes and collects an order as usual, the firm may be liable for the price though the employee no longer has legal authority to buy for them.

Where an agent is covered by any of the three types of authority, the principal will be bound by any contract made that falls within that authority.

Where an agent makes a contract which lies outside the authority granted by the principal or where the agent has in fact no authority at all, the principal may nevertheless choose to ratify the contract so long as the agent was purporting to act on the principal's behalf at the time the contract was made and the principal had the capacity to make the contract at the time. Once the contract is ratified by the principal, it becomes binding on the principal.

There is still another difficult situation which is that of the undisclosed principal. That concept covers situations where an agent may act for the principal without disclosing the principal's identity or even without disclosing that fact that there is a principal.The law is that it is the principal with whom the contract is made. So it is perfectly possible to make a contract with someone without even knowing that they exist. As far as liability is concerned over the performance of the contract, the agent is personally liable on the contract while the principal remains disclosed. Once the principle is disclosed if there is a claim, the other party can choose to sue the principal or the agent.

II. Assignment

The second category of common law exceptions to privity is assignment. To assign means to sell the

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benefit of a contract without the permission of the other party. It is possible to assign only the benefit of a contract. It is not possible to assign the burden of a contract without the other party's permission. The easiest example to illustrate this procedure of assignment is the assignment by businesses of debts owed to them by others to what are called factoring houses. The factoring house buys the debt at less than its value and then makes a profit when it collects the full debt from the creditor. The purpose of such a transaction is for the party who assigns the debt to get his or her money sooner than the time when the debt was due even if it means losing a little on the total amount. Once a debt has been assigned, the creditor owes the money to the party to which it was assigned and no longer to the party they originally contracted with. The factoring house is a third party to that original contract.

Another example of assignment is the legal relationship that results from what are called negociable instruments of which the commonest examples are checks. Let me recapitulate the parties at stake in such a transaction : a check represents money owed, so to speak, by the bank, to the check holder. The check holder trusts the bank with his money and the bank only possesses the money of the checkbook holder. When he writes a check to a shopkeeper, the checkbook holder in fact assigns the benefit of the bank's debt to him or her to the shopkeeper. Generally, the shopkeeper banks the check but he may very well in his turn endorse the check by signing it on the back and then use it to pay someone else, thus assigning the benefit of the bank's debt to that new party who in their turn can do the same, and the same process can be repeated indefinitly, without having to notify the bank or the checkbook holder.

III. Damages on behalf of another

Another interesting common law exception to the rule of privity is what has come to be called 'damages on behalf of another'. This exception was worked out by judges when they had to try more and more cases arising from a contract for which one party had contracted for himself and on behalf of others, but not as an agent, as in the cases of agency, but for instance on behalf of members of his or her family. Such cases arouse in the second half of the 20th century and are linked with goods or services available in the so called consumer society. So progressively, the courts accepted that in case of breach of contract by the goods or service provider causing a definite loss for the party and also for the members of his family who were envisaged as beneficiaries of the contract, not only the party to the contract could claim damages to compensate for the loss suffered as a result of non performance or faulty performance, but also those members of his or her family who were envisaged in the contract could also claim damages, though not themselves parties to the contract. And in such cases, the rule of privity of contract had to be disregarded.

The first case that raised this legal issue was Jackson v Horizon Holidays Ltd, which was settled in 1975 by the Court of Appeal. Mr Jackson booked a package holiday for himself and his family, with the travel agent Horizon Holidays. Eventually, the holiday proved a total disaster and Mr Jackon sued the travel agent for breach of his contractual obligations. His claim for damages was perfectly valid as he was a party to the contract with the travel agent, but as a result of the strict application of the rule of privity, his family, not being part to the contract, had no claim for damages under the contract.

Yet, eventually, the Court of Appeal decided that Mr Jackson could receive damages for himself, both for his own prejudice and for the disagreement he suffered as the result of his wife's and children's dissatisfaction with their holidays. So it was clear that the Court of Appeal which was bound to apply the rule of privity of contract had no wish or no power to exclude it and yet managed to find a way of reaching an acceptably fair decision, which included compensation for both Mr Jackson and his family, thus bypassing the harshness of the rule of privity of contract. The decision raised legal debate and the House of Lords in a case decided later commented on Jackson v Horizon Holidays Ltd and insisted that the rule of privity be adhered to and suggested that an alternative might exist consisting in treating contracts arranged by one person to the benefit of others as special cases.

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Other more recent decisions show a greater willingness of the courts to award damages to reflect the loss of someone other than the claimant. Yet, courts insist that third parties do not have a direct claim to damages but that the non failing party can claim damages for himself and the potential beneficiaries, so that beneficiaries can receive a share of the damages from him.

IV. Collateral contracts

Another device used by English courts to bypass privity of contract is to apply the notion of collateral contracts. This can be used when one party makes a contract with two other parties, thus establishing a collateral contract between the two parties.

The leading case that illustrates this approach is Shankling Pier Ltd v Detel Products Ltd (1951). The case involved the owners of Shankling Pier who had it repainted. They contacted Detel to inquire about the quality of their paint and were satisfied that it was the quality which they needed to paint the pier. Then, they entered into a contract with contractors for them to paint the pier with Detel paint of the quality which had been recommanded to them. Yet, within a short time, the painting deteriorated. There was no point for the pier owners to sue the contractors who had painted the pier because they had done nothing wrong in their painting work. What had been wrong was the quality of the Detel paint. The legal difficulty was that the pier owners had no contract with Detel since the paint had been bought by the painters. Yet, they brought a legal action again Detel and the court did accept their claim and held that Detel was liable as a result of a collateral contract that existed between Detel and the pier owners.

But remember, for a valid contract to exist, there must be consideration. So the court had to find consideration to support the contract and they held that the exchange of promises had consisted in Detel promising that the paint would last and the pier owners promising to use Detel paint. Again, we see here that the strict adhesion to common law concepts sometimes obliges English courts to extend the interpretation of rules to their extreme limit. Here we see that both the concept of consideration and the rule of privity of contract remain fundamental and English judges are not ready yet to discard them or at least to adapt them so as to fit modern legal issues.

V. Constructive Trust

Now, I am going to explain the last category of exceptions to the rule of privity which are exceptions governed by the rules of equity. In fact, the essential exception in equity is possible under the concept of constructive trust. The notion of trust goes to the root of equity since equity has a body of rules originated in the practice of trusts back in the middle ages.

Trust in everyday langage means confidence, based on loyalty and honesty. So at equity something held in trust is something which someone has given away to another person for him or her to administer it as if it were his or hers. In the end, that other person never becomes the actual owner of the something in question. Either it passes on to the actual third party beneficiary after a certain time or it goes back to the original owner who can again administer it in his or her own name. So in contracts, a contracting party can specify that the benefit of the contract is held by him or by her in trust for a third party. In such a case, the third party will have enforceable rights to the benefit.

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CONCLUSION

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As a conclusion about the rule of privity of contract, it is clear that the rule is justified on several grounds and yet it is also clear that the rule needs to be adapted in order better to correspond to legal relationships in the 21st century. To justify the existence of the rule of privity according to the notions of freedom of contract and free will, which underly the rules concerning English contracts, it does not seem acceptable that the party who has not given his assent to a contract should be able to benefit from it. Then, if a third party may derive benefits from a contract, he is not a party to, he cannot be sued on it and that defeats another fundamental concept of English contract law, that is to say reciprocity.

Moreover, the existence of a third party beneficiary may make it impossible for the parties to the contract to modify or terminate their contract since they may have to obtain the third party beneficiary's approval before doing it, which reduces or even cancels the contracting parties' rights to change their minds and modify the provisions in the contract.

Now, another very strong argument against allowing third parties to benefit from an existing contract contradicts the essential requirement of consideration, and thus renders gratuitous promises, i.e. single promises not given in return for any promise, enforceable. And that goes very much agains English legal philosophy.

Finally, English judges use what is called the "Flood Gates" argument to keep things as they are. Literally, flood gates are gates which can be opened or closed to control a flow of water. Such gates are found on canals where flood gates are used to adjust the level of water from one portion of the canal to another. The flood gates metaphor is used at law to refer to the danger of extending a precedent or a new rule to completely new, fairly different situations, thus extending the scope of a legal rule beyond what should be a progressive, reasonable evolution. English judges nowadays are very reluctant to make major changes in the law unless they are absolutely sure they are doing the right thing. In fact, English judges are careful not to develop the law in a way that might not suit the needs of today's British society and they'd much rather Parliament, which has greater legitimacy as it is composed of British citizens' elected representatives, make legislation when significant changes in the law are required.

On the other hand, there are strong arguments to advocate a change in law, so as to minimize the impact of the rule of privity. Changing the rule would probably reduce the amount of litigation since the third party beneficiaries would then be able directly to sue the party to an original contract that is at the source of his prejudice. For instance, imagine the situation in which a customer has suffered a prejudice as a result of a manufacturer's faulty production, as the law stands today, the customer cannot sue the manufacturer directly because he has no contract with him. He must first sue the retailer who in turn will sue the distributor who in turn will sue the manufacturer.

Secondly, it does not seem fair to deny a third party rights which are conferred to him as the result of the free will of the two parties to the contract. That is what a Law Lord stated in a decision in 1995: « the case for recognizing a contract for the benefit of a third party is simple and straighforward. The autonomy of the will of the parties should be respected. The law of contract should give effect to the reasonable expectations of contracting parties. » and he continues « there is no doctrinal, logical or policy reason why the law should deny effectiveness to a contract for the benefit of a third party, where that is the expressed intention of the parties. »

Thirdly, as was very clear in the case Beswick v Beswick, the rule of privity may in some instances be an instrument of fraud and dishonesty. If Mrs Beswick had not been the executor, the nephew would have been able to escape his contractual liability to pay for the business his uncle had sold him. And such an unjust enrichment would definitely not have been fair.

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Then in many cases, third parties may incur a loss if a contract between two parties is not performed the way it should. Those third parties may have relied on the performance of the contract, so those third parties need protection and, as third parties, they have no recourse at common law under the rule of privity.

A last argument, that may be used, is that in most legal systems, for example in the US or in most European countries, a more flexible approach to the rule of privity has been adopted. So the Contract (Rights of Third Parties) Act of 1999 was a sensible step forward, even if by adding an exception to the rule of privity, it seems to make the matter still more complex.

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#40

INTRODUCTION

So far, I have examined the requirements that an agreement must fulfill in order to be accepted as a valid contract. Now, in this lecture, I am going to survey all the various factors that may, as it is called, viciate the contract. If such factors are proved to have existed at the time of the making of the contract, then judges will decide that the consent of the parties or at least the consent of one party to the contract was viciated, i.e. was obtained by fraud, or undue pressure, and therefore was not genuine, which will lead them to decide that the contract is invalid.

Viciating factors, as they are called, include :

misrepresentation

mistake

duress

undue influence

The existence of one of these factors at the time of the making of the contract undermines the contract, that is to say, invalidates the contract because the contract no longer is the expression of the parties' free will.

Depending on which factor affected the parties' will,

the contract will be declared void, i.e. it will be as if the contract has never existed

or it will be declared voidable, i.e. the party who fell victim of the viciating factor can choose to let the contract stand or not.

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TYPES OF MISREPRESENTATION

Misrepresentation

The word misrepresentation is composed of the prefix mis which has a negative connotation and which indicates that something has been done wrongly or has gone wrong and of the word representation which corresponds to the verb represent (to show, to describe, to express, to state). Therefore, the legal definition of misrepresentation is a false statement, (a false statement of fact) by one party to the contract in order to induce, that is to say to convince, the other party to enter into the contract.

As we are going to see, misrepresentation renders the contract voidable and it may also entitle the victim party to an award of damages, depending on the type of misrepresentation that has occurerd.

For misrepresentation to be actionable, it must fulfill three requirements :

1. The statement must be false, untrue

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LECTURE 5 : VICIATING FACTORS AFFECTING THE VALIDITY OF CONTRACTS


2. It must be a statement of fact, not of law

3. It must have induced to other party to enter the contract

1. False statement

Misrepresentation originates in a false statement. This statement may be spoken, written or may result from a person's conduct. Yet there must be some actual sign or act. In other words, silence will not amount to misrepresentation, except in very exceptional circumstances. That is a most striking characteristic of the English law of contracts. Silence which may mean the fact for one party to the contract of concealing, of not mentioning a major element, a major information does not constitute misrepresentation.

That approach is linked to one fundamental principle in the English law of contract, which is expressed in a latin phrase: caveat emptor, which means literally let the buyer beware. This means that when parties are about to enter into a contract, when they are negociating, they must be careful about their promises and about the legal consequences of their promises, because once the contract has been agreed upon, the parties are bound by their promises and it is too late then to negate such promises that were made in the contract.

So at English law, it is up to the buyer to ask the questions which he thinks adequate really to understand what his obligations are, what risk he is taking and what the consequences may be for him. If he's not able to do that, he should not enter into any contract and at any rate, English courts and English judges will not help him. As justice Bowen stated in Carlill v Carbolic Smoke Ball, « the extravagance of the promise is no reason in law why he should not be bound by them ».

Now, the fact that silence does not constitute misrepresentation is also linked to another major characteristic of English law. The rules governing English contracts are not supported by any underlying principle of good faith. Parties who decide to enter contracts should know that the party they are negociating contracts with may have their own interest only in mind or may not be honest and it is up to them to be careful and to take precautions so as not to reach bargains that may end up in being most detrimental to them. Again, taking the example of a contract of sale, it is easy to understand that the seller may not be ready to volonteer information which he knows will put the buyer off. So even if one contracting party knows that the other has misunderstood some elements of the contract, he is under no duty to point this out to the other party.

However, there are exceptions to that approach to silence. In some instances in some contractual relationships, the law imposes a duty to give information and in such cases, the fact of remaining silent will amount to misrepresentation.

The first exception is that of contract uberrimae fidei which means requiring the utmost good faith (la plus grande bonne foi).

Contracts of insurance;

offers for shares in a company;

contracts for the sale of land;

certain family arrangements

are the main categories of contracts of utmost good faith. In the case of such contracts, failure by one party to

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give information, failure to disclose information will be actionable and will entitle the innocent party to rescind the contract but not to claim damages. A good example is that of insurance contracts where the party taking out the insurance policy must tell the insurance company about all elements which are strictly indispensable for the company to decide or not to accept the risk and to accept to cover it if it materializes it. If the insured party fails to disclose the necessary information, the contract is voidable, i.e. the insurance company will not be required to pay out any money.

The second exception concerns a statement which was made at some point during negociations and which later becomes false before the contract is actually agreed upon. In such circumstances, the party who made the statement which in the meantime had become false is under a duty to correct it. If he does not, then he commits a misrepresentation.

The third exception results from the relationship between parties to the contract. If two parties are on what is called fiduciary relationships (i.e. if two parties are used to dealing with each other and trust each other), then they will have a duty to disclose any information that they may think necessary to the other party so that they make up their minds about the contracts totally safely. Courts have established such a duty in contracts involving a parent and his child, a solicitor and his client, a trustee and a beneficary and a principal and his agent. In fact, any party may be able to prove that his relationship with another party to a specific contract was one of trust and loyalty so that it imposed on that other party a duty to disclose information.

2. A statement of fact, not law

The second element of misrepresentation is that the false statement must be one of fact, which excludes statements which simply express opinions. Whether a statement is a statement of fact, therefore actionable on the ground of misrepresentation, or a statement of opinion will very much depend on circumstances in which this statement was made. For instance, a statement that a car is in « beautiful condition » may be considered as a statement of opinion if it is made by an ordinary citizen trying to sell his car to another ordinary citizen, whereas it may be well be considered as a statement of fact if it is delivered by a professional car dealer whose expertise and knowledge of cars are relied on.

Yet, even in the case of an ordinary person giving what may, at first sight, seem to be a statement of opinion, and not a statement of fact, the courts will consider that a party who falsely gives his opinion does in fact commit a misrepresentation of fact. Therefore, he is liable for misrepresentation. For instance, if A wants to sell a clock to B and states that he thinks that the clock is 200 years old, whereas he knows it is a modern one, then A's state of mind is a fact and as he is lying, the courts will consider that he made a misrepresentation of fact. In any case, where it can be established from the surrounding circumstances that the party giving an opinion was in possession of facts upon which the opinion can reasonably be based, then that party is in fact stating that he or she is in possession of such facts and if it is not the case, the statement will be considered as a misrepresentation.

To be actionable, a statement dubbed to be a misrepresentation must refer to an existing fact, not something in the future. In the case of the statement of intention, in which a party says that he intends to do something in the future, the existing fact is the actual intention.

To conclude, what professionals qualify as « sales talk » , whereby a professional salesman recommends a product to a potential customer, does not usually amount to a representation of fact, and therefore is not likely to be considered as a possible misrepresentation. Again, there may be borderline cases since the distinction between various statements, whether they are simply vague praise or more precise claims is sometimes difficult to make.

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3. Inducement

The third element of misrepresentation is inducement. In other words, for a misrepresentation to exist and to be actionable, the false statement of fact must have been made in order to induce the other party, that is to say to convince the other party to enter into the contract. It is enough that the misrepresented statement be one of the reasons why the other party entered into to the contract. It need not be the only one. Such inducement also implies that the innocent party relied on the misrepresentor's statement without being able to conduct his own investigations.

#42Categories of misrepresentation

English law distinguishes between various types of misrepresentation. The distinction is significant since different remedies exist for each category.There are basically three categories of misrepresentation :

Innocent

Negligent

Fraudulent

- all three implying different states of mind on the part of the person making the false statement of fact.

1. Innocent misrepresentation

It applies when one party has entered into a contract as a result of the other party's false statement. In such a case, the innocent party can claim and will obtain damages unless the misrepresentor can show that at the time he made the false statement, he did not know he was making a false statement. Therefore, he believed the statement to be true or at least, he had reasonable grounds to believe it to be true. This defence is laid down in the Misrepresentation Act of 1967.

2. Negligent misrepresentation

Before this kind of misrepresentation was statutorily defined in the Misrepresentation Act of 1967, common law established the concept of negligent misrepresentation based on the existence of a special relationship between the parties to a contract. Though this concept of special relationship has never been defined precisely, it seems to imply that such a relationship will arise where the maker of the false statement has some knowledge or skill relevant to the subject matter of the contract and can reasonably foresee that the other party will rely on his statement. The Misrepresentation Act of 1967 does not give a precise definition of negligent misrepresentation. Yet it establishes that, in cases where the representor made a false statement, he shall be considered as having committed a negligent misrepresentation and will be liable to pay damages to the innocent party unless he can prove that he believed or had reasonable grounds to believe that at the time he made them, his statements were true. So what the Misrepresentation Act of 1967 eventually achieved was to reverse the burden of proof in case of negligent misrepresentation since it is the person who made the disputed statement, who must prove that he or she was not negligent.

The first leading case that raised the issue of negligent misrepresentation was decided in 1978 and one of the judges of the Court of Appeal that heard the case commented that his new statutory provision placed « an absolute obligation not to state facts which the representor cannot prove he had reasonable grounds to believe ».

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The principle was repeated in a recent case that involved the Spice girls and a company that manufactors motocycles and scooters over a contract whereby Aprilia World Service, the manfacturing firm, agreed to sponsor the group in return for the rights to use the Spice Girls' images and logos. Before the agreement was signed on May the 6th 1998, Geri Halliwell, one of the Spice Girls, had decided to leave the group, which she officially did on May the 29th. As Aprilia refused to pay for the advertising campaign and Spice Girls Ltd sued for payment, Aprilia claimed that the contract had been induced by a misrepresentation, though Geri Halliwell had decided to leave the group before the contract was signed, Aprilia had not been told about it. So the commercial that they had shot in May and which included the five members of the group was no longer relevant since the Spice Girls were only four now. Therefore, Aprilia claimed they had incurred expenditure and suffered loss from not being able to use the commercial as they had planned.

Eventually, the Court of Appeal ruled that by allowing a member of the singing group to participate in filming a television commercial, the group represented that she would remain a member for the period in which the commercial was to be used. As the group knew she intended to leave during that period, it was a misrepresentation. The Spice Girls Ltd was ordered to pay Aprilia damages. The full reference of the case is Spice Girls Ltd v Aprilia World Service and it was decided in 2002.

3. Fraudulent misrepresentation

The concept was defined by the judges of the House of Lords in a case decided in 1889. Fraudulent misrepresentation, of course, involves a false statement of fact, which is made either knowingly or without belief in its truth or recklessly (totally carelessly about the possible result of one's statement to whether it is true or false). So fraudulent misrepresentation involved a false statement of fact made whereas the party who makes it knows it is untrue. Fraudulent misrepresentation involves what American lawyers call the « scienter element » that is to say the knowledge that what is said is not true and, as can be expected, the remedy in case of fraudulent misrepresentation is rescission that is to say the possibility for the innocent party to choose to set the contract aside.

#43

REMEDIES IN CASE OF MISREPRESENTATION

So let me recapitulate the various remedies available when misrepresentation is established. The general effect of a misrepresentation is to make a contract voidable rather than void. So the contract continues to exist unless and until the innocent party chooses to have it set aside by means of rescission.

Where a contract is entirely executory, the innocent party simply chooses not to perform his side of the bargain and misrepresentation prevents the other party from forcing the innocent party to perform.

In some cases, damages are available, either instead of or as well as rescission.

Rescission

Let me just say a few words about rescission : rescission is an equitable remedy whose aim is to put an end to the contract and allow the parties to come back to the position they were in before the contract was made. It is available in all categories of misrepresentation. Yet, being an equitable remedy, it is a discretionary one, i.e. it is up to the judges deciding the case to grant it or not.

In case property has been exchanged under the contract, the court will order the misrepresentor to

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revert it, to give it back to its former owner.

In case a misrepresentation is fraudulent, the innocent party who rescinds the contract does not have to give back whatever he received under the contract. For instance, if someone makes a fraudulent misrepresentation when suscribing an insurance policy with an insurance company, the insurance company not only is entitled to refuse payment of a claim against the policy but also to keep any premiums paid.

There are three categories of circumstances in which it is clearly unreasonable to put the contracting parties back in their precontractual position. In such cases, the injured party loses the right to rescission. This happens :

(1) When restitution is impossible because the subject matter of the contract has been used up or has been destroyed.

(2) Where a third party has acquired a right under the contract, as for instance when A sells his car to B who then sells it to C. If the contract of sale between A and B is viciated by misrepresentation, it cannot be remedied by restitution since C has already acquired a legal title to the car.

(3) Where the innocent party who realises that he was a victim of a misrepresentation nevertheless accepts to continue with the contract. In such situations, the victim party is said to affirm the contract which cancels his right later to rescind the contract. Rescission will no longer be available though he will be able to claim damages to compensate for any loss suffered.

So damages are possible in all cases of misrepresentation either alone or along with rescission. The aim of damages is to put right some loss suffered by the innocent party. Only in cases of innocent misrepresentation are damages left to the discretionary power of the judges deciding the case.

#44

MISTAKE

So now let's pass on to mistake as another viciating factor that prevents a contract being fully binding since the victim party has not given his or her genuine consent out of his or her own free will. As we should see, the legal meaning of the concept of mistake is much more restrictive than what it means in everyday life. In other words, it is not enough for a party to say that he was mistaken about the exact nature of the contract and the resulting obligations for him to be excused from performance and being entitled to consider the contract as void or voidable.

In all claims raising the issue of mistake, the court will assess the so-called mistake objectively, i.e. they will not ask what the parties themselves believed they were agreeing to but what an onlooker (a person who watches something that is happening but is not involved in it and therefore who can be totally objective about it), so what an onlooker would have thought the parties were agreeing to.

This was clearly establised many years ago. At the end of the 19th century in a case in which one of the judges stated that « if whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party and that other party upon that belief entered the contract with him, the man thus conducting himself would be equally bound as if he had intented to agree to the other party's terms ».

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As in the case of misrepresentation, mistake must have happened before the contract was completed, i.e. before the contract was actually agreed upon beween the parties. And for the innocent party to be entitled to any redress, mistake must have induced the mistaken party to enter the contract. Traditionally at common law, only mistakes of facts were actionable but two recent decisions of the House of Lords seem to establish the possibility of grounding a receivable action on a mistake of law as may be the case when money has been paid to an institution as a result of a mistaken interpretation of a statutory rule for instance.

#45

TYPES OF MISTAKE

As in the case of misrepresentation, various categories of mistakes may affect a contract.

(1) The first category is common mistake, also known as identical mistake or shared mistake. In such situations, the two parties make the same mistake and that will render the contract void when such a mistake relates to the existence of the subject matter of the contract or when the mistake concern the ownership of the subject matter of the contract or when the mistake is classified as a fundamental mistake.

Mistake as to the existence of the subject matter of the contract most often occurs in contracts for the sale of goods when the parties to the contract agree without realizing that the subject matter of the contract no longer exists. For instance, because it has been destroyed. Such a common mistake about the existence of the subject matter of the contract obviously renders the contract void.

Mistake as to the ownership of the subject matter of the contract is very rare. A leading case was decided in the 19th century and involves a contract of lease in which the parties had not been aware that the lessee owned the property that he agreed to lease under the contract. In that case, the House of Lords set aside the lease as void.

A fundamental mistake may render a contract void. A fundamental mistake is a mistake that goes to the roots of the contract in a way that it negates the business efficiency of the contract. As a judge once said, a contract will be void if both parties are mistaken « as to the existence of some quality which makes the thing without the quality essentially different from the thing it was believed to be ». Courts have never actually given a definition of fundamental mistake. However they have hinted at what a fundamental mistake most of the time cannot be. For instance, a mistake as to the quality of the subject matter of the contract will not affect the validity of the contract even in cases where the quality of the goods is a major factor in the decision by the parties to enter the contract.

(2) The second category of mistake is cross purpose mistake or non identical mistake. Such a kind of mistake occurs when each party has a different view of the situation. Such mistakes may be mutual mistakes in which each party is mistaken though on different points and unilateral mistakes in which only one party is mistaken. Though claims are brought to court on the ground of cross purposes mistake, courts seldom accepts to make contracts void on such grounds. Probably because they take the traditional view that parties must take time to negociate their agreements which allows them time and opportunity to make sure what agreement they are about to enter and thus avoid mistakes and misunderstandings as to the actual content of the terms of their agreement.

However, courts may accept to make a contract void :

First, when the mistake was negligently induced by the other party who therefore acted as what is commonly referred to as « a rogue »

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Second, when the parties' minds are at such cross purposes that the reasonable onlooker, an objective observer, would not be able to say what the parties actually agreed upon

Third, when one party knows of the other's mistake, yet does nothing to correct his mistaken belief, again acting in a dishonest way as a rogue.

(3) The latter category involves a unilateral mistake concerning the identity of one of the parties or the terms of the contract.

Thus, it has been a long established principle that where a party is mistaken as to the terms of the contract, and the other knows it, then the contract will be void, whether the term is fundamental or not. So for instance, if a seller accepts to sell goods at a certain price per piece, as is the custom in the train, and mistakenly offers to sell them per pound, and the other party knows about the custom and therefore is aware of the mistake, then the court may render the contract void. The important element that the court will take into consideration is that the other party must be aware of the mistake and yet does nothing to inform the party inadvertently making the mistake. It is clear that in such cases, the non-mistaken party intends to take advantage of the mistaken party's mistake which is totally unfair and might lead to some kind of unjust enrichment.

As to cases involving a unilateral mistake as to the identity of the other party, for such a mistake to be actionable, the identity of the other party must be a major element in the contract. And the mistaken party must show he took all reasonable steps to check the identity of the other party. In the famous leading case on that matter, Lewis v Avery which was decided by the Court of Appeal in 1972, Mr Lewis sold his car to Mr Green who was a rogue and introduced himself under a false identity of a well known TV star. When Mr Lewis realized that the check that was given in exchange for the car he sold was worthless, the so- called Mr Green had disappeared after having resold the car to Mr Avery who was an innocent third party. Though Mr Lewis claimed he had been taken on by Mr Green under a false identity, the court rejected the claim as Mr Lewis had been in a position to check the buyer's identity and that at, any rate, the identity of the buyer was not a major term of the contract. As a matter of fact, Mr Lewis had wanted to sell his car to whoever wanted to buy it.

The case is also interesting because the court confirmed that, even if Mr Lewis' claim had been received and the contract had been declared void, Mr Lewis' car might not have been given back to him since Mr Avery was an innocent third party who had acquired the car totally legally. There is no way this innocent purchaser might be deprived of a car he had bought in complete good faith.

Another category of cases involves a fraudster or a rogue who has lied about his genuine identity by pretending to be another person, the fraudster buying goods from a supplier under a false identity then selling them to an innocent third party purchaser and disappearing without trace. Then a dispute arises between two innoncent parties, the supplier of the goods and the innocent purchaser who both claim they have a title to the goods. So the supplier may bring a legal action on the ground of mistake, that renders the contract void immediatly.

#46

SPECIFIC REMEDIES IN CASE OF MISTAKE

Lastly, mistake relating to written documents results in very specific remedies.

(1) When a person signs a document believing it to be totally different from it actually is, the contract may be

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declared void on the ground of non est factum if the person who signed can prove that his signature was induced by a fraud, that he made a fundamental mistake as to the nature of the agreement and that he was in no way careless about the document that he signed. A leading case which was decided in 1971 involved a very old lady who was tricked into a contract for the sale of her house by a rogue who claimed that he was arranging a contract of guarantee involving the old lady's house. Yet the court rejected the claim on the ground that the old lady had taken no step whatsoever to ascertain the agreement she was about to enter. Which means, in practice, that the plea non est factum is available almost exclusively to those persons who suffer from a physical handicap such as being blind for instance or a mental one, being illiterate, which unables them to understand the terms of the agreement.

(2) The second specific remedy in case of mistake is rectification, that is the actual modification of a written document in order to better reflect the true agreement that was passed in a written form between the parties. For this remedy to apply, three conditions must be satisfied.

The party must have agreed about the point in question during the negociations prior to the execution (to execute a contract = to lay it down in a written form), so prior to the execution of the contract;

Secondly there must have been no alteration on that point throughout the precontractual negociations;

Finally the written document must fail to express the parties' agreement on that point.

Rectification is an equitable remedy that serves to rectify a written document when a typing or a computing mistake was committed at the time of the execution of the contract.

#47

UNDUE INFLUENCE

As the common law doctrine of duress was originally and still is quite restrictive, the courts had to develop another concept which could be used in contracts passed between individuals where it was clear that one of the parties had used its influence to induce the other party into a contract which eventually proved very detrimental to him.

Thus the courts developped the concept of undue influence based on the rules of equity to set aside contracts which, though valid from a formal point of view, produced effect that was not morally acceptable and therefore that the law should not allow to exist.

Case law developed the concept and developed a distinction between cases where undue influence was presumed and opened up the concept of undue influence by the notion of actual undue influence which makes it possible for anyone to claim that he was persuaded into entering a detrimental agreement if he can bring the proof of such undue influence.

Presumed undue influence, which is by far the most common form of undue influence, applies to a contract made by parties between whom there existed a relationship of confidence before that contract was actually made and where evidence can be found that one party used the trust put in him by the other party to trick him into a manifestly disavantageous agreeement. The purpose of this presumption is that it shifts the burden of proof from the victim party who claims he was unduly influenced into the contract onto the other party who will have to bring evidence that he did not unduly influence the claimant. Such presumed undue influence may be raised in disputes over contracts passed between a parent and a child, a religious adviser and disciple, a guardian (tuteur) and a ward, a solicitor and a client, a trustee and a beneficiary and a doctor and a patient.

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Given the fiduciary relationships, and the trust put in a parent, a religious adviser, a guardian, a solicitor, a trustee or a doctor by the other party, be it a child, a disciple a ward, a solicitor's client, a beneficiary or a doctor's patient, any contract passed between such two parties is presumed to have been improperly made. And therefore may be declared void unless the presumption is rebutted (unless the party in the position of trust can show that he never exercised any improper influence at all).

Quite a lot of case law involves banks and their clients. One key element to establish undue influence, be it actual or presumed, is that the contract must have been manifestly, grossly disavantageous to the party influenced, i.e. where the manifest disavantage would have been « obvious as such to any independant or reasonable person who considered the transaction at the time with knowledge of all the relevant facts ».

#48

DURESS

So far we have seen that under certain circumstances resulting from misrepresentation or mistake, parties actually agreed to a contract to their detriment as a result of a false statement or an erroneous belief concerning the extent of their agreement.

Now, other factors may affect the validity of a contract which are based on the fact that though the contract is perfectly valid as to its terms, one of the party's consent was obtained through pressure, either physical, economic or psychological pressure. Though courts accept that parties are supposed to negociate the terms of their agreement and that negociations necessarily involve some kind of persuasion which includes some pressure, they reject all kinds of pressure that they consider excessive and accept to render contracts entered into under such circumstances void.

Let's examine first duress which consists in physical pressure.

Duress consists in actual physical force or threat of such physical force in order to induce a party to enter into an agreement.

To be actionable,

duress must have been exercised by the contracting party onto the other;

must have been illegitimate;

must have induced the other party to enter the contract who therefore had no other choice but to agree to the contract;

the victim party must have protested at the time the contract was made or shortly afterwards.

The traditional common law approach to duress only included violence or threat of violence to the person. But case law progressively extended the concept of duress to duress against the claimant's close family or against the claimant's property. More recently, in the seventies, the courts also developped the concept of economic duress which in fact consists of excessive, therefore improper and undue pressure, exercised by one party in a superior bargaining position to the other in a lower bargaining position in a commercial contract. So far, case law has accepted economic duress where a party was forced, through commercial pressure that he could not resist, to accept the modification of the terms of an original contract or where a ship was blacked into a harbor

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(forced to stop in a harbor) until some demands put by the seaworkers' union had been satisfied.

Duress makes a contract void unless the victim party chooses to carry on with the contract, however detrimental it may be, which might in any case allow him to recover damages for his prejudice.

#49

CONCLUSION

As a conclusion, I just want to raise a possible extension of the notion of duress and of undue influence which is inequality of bargaining power. So far, English courts have resisted this extension of duress and undue influence into the broader concept of inequality of bargaining power, which nevertheless could prove useful to set aside contracts where one party is a professional tradesman and the other an inexperienced member of the public, such as a consumer for instance. Such a concept was suggested in one of the leading cases raising the notion of undue influence. The name of the case is Lloyd's Bank v Bundy in 1972 and this suggestion was made by one of the leading judges of the second half of the 20th century, Lord Denning.

English judges have been reluctant to confirm this concept. Very much unlike their American colleagues who used the concept of inequality of bargaining power and established a long time ago the category of what they call unconscionable contracts which they describe as being so one-sided that they are not acceptable at law.

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LECTURE 6: THE TERMS OF THE CONTRACT

#50

Now that I have examined the prerequisites for an agreement to be qualified as a valid contract, I would like to proceed with the actual terms of the agreement once the parties have agreed to them by, most of the time, signing a written document. So now the focus is on the terms of the contracts.

1. Some statements made during the precontractual negotiation stage of the agreement, technically called representations, will become actual terms of the contract, whereas other representations will not be included.

2. Other terms than those contained in the written document signed by the two parties may be added by the courts.

The Express Terms of a Contract

English contract law is not concerned with the form into which the parties put their agreements. A lot of contracts, in particular business agreements such as export sales, building contracts or high purchase agreements along with most consumer contracts are based on standard forms, i.e. pre-printed standard contracts on a “take it or leave it” basis. Other contracts are entirely in written form or may be partly written and partly oral. Some contacts indeed are wholly oral. Adittionaly, certain contractual obligations are simply implied from the parties conduct. For instance, if you take your newspaper from the pile outside the shop and nobody is actually there to collect the money but a tin is there to leave the money in it and you do leave the money, it is clear that a contract has been formed although not a word has been spoken nor any form signed. I have already mentioned that in the name of freedom of contract, English law rarely demands for particular form except in very specific instances.

The famous case Evans & Sons Portsmouth Ltd v. Andrea Merzario Ltd (1976) well illustrates the various forms a contract may take. For several years, Merzario made the transport arrangements for the importation of machinery by Evans from Italy. The parties used standard form contracts which in fact incorporated the long-established conditions fixed by the freight forwarding trade. Indeed a clause in their contract provided that “subject to express instructions in writing, given by the customer, the company reserves to itself complete freedom in respect to means, routes and procedure to be followed in the handling and transportation of goods”. After 8 years of many individual contracts by the parties that all incorporated the terms of the standard form, Evans proposed that the machinery be transported in containers and Merzario’s manager in the course of discussions in Portsmouth with Evans’ manager, assured him that such containers must not be carried on deck because the machinery might go rusty. Nothing about the oral condition that the containers should be carried below deck was put in writing and contracts kept on being made between the two parties. Eventually, one container fell into the sea was lost and the two parties disagreed over the exact terms of the contract.

The Court of Appeal held that Evans was entitled to damages for breach of contract on two grounds: (a) that the oral assurance amounted to an express term of the contract which was partly in writing partly implied by conduct and partly oral. Since the new oral term contradicted the clause in the original standard form contract, the Court held that oral assurances overwrote (i.e. prevailed over) the written term in the standard form.

Evans & Sons is mainly concerned with express terms i.e. what was written or expressed orally by the parties and what was written down in the standard form they used in their commercial dealings. Now, I am going to examine another category of terms called implied terms, i.e. terms that, at no moment, were discussed or integrated into the contract by the parties but which were added by the judges who had to settle a

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disagreement between the parties over the performance of the contract.

# 51

Implied Terms

As a preliminary remark, it is important to remind that as a general principle parties are free to enter a contract on the terms which they choose to agree upon and that the Courts in no way make contracts for the parties. Given that, there still remains the possibility for Courts or legislation terms in a contract i.e. to, say, “find” or, in plain language, impose a term that the parties never intended to be part of the contract.

There are three categories of implied terms:

1. Terms implied in fact, i.e. on the basis of what the parties must have intended. In other words, such terms are implied on the assumption that had both parties really and thoroughly thought out their agreement they would inevitably have included such terms. Though they are not expressly stated in the contract, “it goes without saying” that the parties could not have envisaged their agreement without contemplating such terms.

In fact, such terms must be implied by established usage within a particular business context and they are so well established that the parties do not even need to mention them or they give what is called “business efficacy” to the contract which means that without them the contract would be meaningless and the parties could not have genuinely envisaged their agreement without such terms.

In a case decided in 1969, judges tried to provide a definition: “that which in a contract is left to be implied and need not to be expressed is something so obvious that it goes without saying so that if while the parties were making their bargain an officious bystander was to suggest some express provision for it in the agreement, they would testily suppress him with the comment ‘of course’. For instance, in a charter party, i.e. a contract involving the hire of the ship, it is implied that the ship is sea-worthy.

To conclude on terms implied it must be stressed that terms can only be implied on the grounds of necessity and not mere reasonableness. In other words, it must be necessary common sense to imply the terms because the parties themselves would have agreed to them. Again, to quote a judge in a case decided in the early 20th c., “a term can only be implied if it is necessary in the business sense to give efficacy to the contract i.e. if it is such a term that is can be confidently be said that at the time the contract has been negotiated someone had said to the parties what would happen in such a case they would have replied of course so and so will happen we did not trouble to say that it’s too clear.”

2. Terms may be implied in law. Now, this is altogether a completely different situation: such terms have nothing to do with the common intention of the parties. As a matter of fact, these terms are included on the ground of duties that arise in certain types of contracts as a matter of policy. The implication of such terms in a contract amounts to imposing an extralegal duty to the parties that they did not originally envisaged as part of their obligations under the contract.

A famous case, decided by the Court of Appeal in 1977, gives a good example of what a term implied in law may be. The case involved Liverpool City Council that owned a 15-storey tower block in which flats were let to individual tenants. Mr Owen was one of those and he complained about the bad state of repairs of the common parts that kept being vandalised and therefore deteriorated rapidly. Though the tenancy agreements contained no obligation whatsoever for the City Council, the Courts implied

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terms “such as the nature of the contract itself implicitly required” and one of these terms included the Council’s duty to take reasonable care as regards the state of the common parts. In another case, also decided in 1977, Lord Denning confirmed that terms implied in law are to be found in “those relationship which are of common occurrence (seller and buyer, owner and hirer, master and servant, landlord and tenant, carrier by land or sea, contractor for building works and so on). In all those relationships, the courts have imposed obligations on one party or the other saying there are implied terms”. The Court in Liverpool City Council v. Owen examined the existing law of landlord and tenant to see if it contains the solution to the problem and having found that it did not, they imposed an obligation on the landlord to use reasonable care.

As a conclusion concerning terms implied in law, it seems that by implying terms into a contract, judges at achieving equal justice between the two parties and preventing one party from taking advantage of the other so that in various sectors of business and commerce, terms implied judicially i.e. by judges, as imposing legal duties have become general rules.

3. Terms may be implied by the existence of trade usage, provided that such trade usage reflects common business practice. Obviously, it is better and more secure for parties to secure those common trade usages within the overall terms of the contract. Although, if they do not or if they eventually disagree about the exact scope of their contractual obligations, then the Court will imply such terms into the contract.

The case that best illustrates such an approach by English Courts is British Crane Hire Corporation Ltd v. Ipswich Plant Hire Ltd in 1975. British Crane Hire supplied a dragline crane to Ipswich Plant which needed it to excavate marshy soil. The two companies agreed to the contract on the phone and neither mentioned the terms and conditions of hire which both parties knew well as they were common understanding in the trade and similar to those used by all firms in the plant hire business. Eventually, British Crane sent their printed conditions but in the mean time, i.e. before those were signed and returned by Ipswich Plant Hire Ltd, the Crane sank during the excavation work and was badly damaged. According to the conditions common to the trade, the hirer was liable to indemnify the owner of equipment against all expense in connection with its use. Yet, Ipswich Plant Hire Ltd refused to pay such indemnity and while they were sued over payment for the indemnity they claimed that they were not liable at British Crane’s conditions because the latter were not incorporated into the agreement orally on the phone. In that case, the Court held that as Ipswich Plant Hire Ltd knew that such conditions were in common use in the business, British Crane was entitled to conclude that Ipswich Plant Hire Ltd were accepting that Crane on that condition.

Those conditions had therefore be impliedly incorporated into the oral agreement on the basis of the common understanding of both parties. That case confirmed that a term may be implied or incorporated into a contract because it is reasonable and in common use in a trade which both parties knew well. Similarly, a term may be incorporated into a contract between two parties if those two parties are used to dealing with each other meaning that they are in a regular course of dealing as the phrase goes and even if they are not in the same line of business. For instance, details of a previous contract or previous contracts may be used to fill out a new contract which does not expressly contains such terms.

#52

Now that I have seen in what circumstances Courts may supplement the clauses agreed upon by the parties and incorporate them to give “business efficacy” to the contract, I am going to explain how legislation may also impose terms into a contract though the parties may not have known about this legislation or may not

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have wanted to incorporate such legislation into the contract. Indeed, for various reasons linked to social welfare for which government and parliament are in charge of, legislation obliges people not only to enter a certain type of contracts, such as motor insurance coverage, but also regulate the terms of many contracts such as high purchase agreements, rent-controlled tenancies, contracts of employment or package holidays.

It is clear that the aim of such statutory intervention is to restore some kind of balance in the contractual relation between professionals and consumers. In other words, parliament intervenes to protect the party in a weaker bargaining position, or in no bargaining position at all, against pressure and possible abuses by professionals whose main aim out of such contracts is to make as much money as possible. For instance, as far back as 1935, in the field of carriage of goods, English judges had to strike a balance between the interests of the carriers and those of the good owners. Those contracts have become more and more complex, as a result of the development of new means of communication and as a result of the internationalisation of goods carriages. The Courts found that it was becoming urgent to establish goods that will protect the interests of both parties particularly for the question of the responsibility and to the extent to which carriers could exempt i.e. exclude their liability particularly where they have been negligent or they have deviated from the terms of the agreement or have used un-seaworthy vessels. As one judge commented at the time that part of English commercial law reflected “the interplay of purely economic consideration and those of legal theory”. By intervening in such a way, parliament also aimed at redressing the imperfections of a free market.

Such a double trend is clearly seen in the legislation regulating contracts for the sale of goods. Originally, i.e. before legislation played any significant role in contracts, contracts for the sale of goods were regulated by the general principle ‘caveat emptor’ which is Latin for ‘let the buyer beware’. As face-to-face commercial situations became rarer and were replaced by commercial situations being made at a distance and, therefore, by way of description, then it became necessary for the parliament to intervene and to fix firm rules regulating the seller’s obligations as to the quality of the goods he was selling in order to protect the buyer against defective or worthless goods or abusive fraudulent practices on the part of the seller.

Thus, quite early and quite unexpectedly for a country which never codified its legal rules, parliament passed the ‘Sales of Goods Act’ in 1893 which actually both codified the main case-law in the field of sales contracts but also provided new rules aiming at curbing the effect of the traditional doctrine of caveat emptor offering some protection to buyers not yet called consumers. The 1893 Act is what is technically called a consolidated Act i.e. an Act whose purpose is to collect and harmonise existing case-law without actually creating new legal rules. Thus, section 14 of the Act provides that goods sold for a special purpose shall be deemed to be fit for that specific purpose even if the parties never actually included such a term into their contracts. Therefore the 1893 Act spoke of implied warranties thus obliging the parties to apply statutory terms they have not necessarily envisaged as part of their agreement. Other implied conditions concern the correspondence with description or merchant ability of the goods sold.

# 53

Conditions and Warranties

The terms of a contract can be qualified as conditions or warranties and until the last quarter of the 20th century such qualification made by the parties or imposed by the court played a determining role in the assessment of the remedies to be granted to the plaintiff in case of disagreement over the performance of each parties contractual obligations.

To put it shortly, a condition is an essential term of a contract. It goes to the roots of the matter so that failure to perform it could render the performance of the rest of the contract substantially different, I have just quoted what a judge had said who decided the breach of a term of a contract in 1876.

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In other words, breach of a condition was or is a serious matter that may entitle the innocent party to be discharged from any further obligations under the contract in addition to damages.

On the other hand, a warranty is a non-essential term of a contract which means that the breach of a warranty renders the contract different but not substantially different. As a breach of warranty is of lesser importance it only allows the innocent party to sue for damages unlike the breach of a condition it does not allow the innocent party to be discharged from further performance of the contract. Eventually, case-law made it clear that assessing the importance of the terms of the contract was an objective task regardless of the language of the contract since in several cases brought to their attention, judges put aside the qualification envisaged by parties and substituted their own.

Such an approach led to a certain degree of uncertainty since parties who have entered an agreement containing conditions and warranties that matched their expectations under the contract found themselves contradicted by the court that settled disputes that resulted from the contract they had signed.

An additional difficulty concerning the terms of a given contract resulted from the absence of qualification of the terms of the contracts by the parties. Quite often indeed, parties to a contract do not even bother to qualify their obligations and in case of dispute, the court found itself having to decide whether such innominate terms also called terms intermediate terms must qualify as conditions or warranties. As I have just mentioned, it was more than just a matter of qualification as the right to terminate the contract depended upon the nature of the breach of the innominate terms.

Case-law was never consistent over the issue, which eventually led the courts to ignore the qualification of terms by the parties but rather contemplated the consequences of a breach upon an innocent party. If such consequences were substantial then it might be said that a condition had be breached and the innocent party was entitled to terminate the contract. If the consequences of the breach were minor then it might be deemed that only a warranty had been breached. Yet, this judicial approach has always been very much criticised as it introduces an element of uncertainty as to what each party’s rights actually are under the contract. Of course all the terms of a contract are worthy of attention.

# 54

Exclusion Clauses

The present judicial approach to exclusion clauses shows how willing the parliament is to interfere with the notion of freedom of contract in order to mitigate the effect of extreme behaviour on the part of the party in the superior economic and therefore bargaining position.

There are mainly two types of exclusion clauses: exemption clauses and limitation clauses. With an exemption clause, one party to a contract seeks to exclude his liability whereas with a limitation clause the party aims at limiting his liability. In a consumer transaction for instance, the aim of an exclusion clause is to eliminate for a professional the risk to having to pay damages to the other party for breach. In business transactions, where parties are more likely to have equal bargaining power and to be at arms length, exclusion clauses tend to be less common whereas limitation clauses are more frequent. Such limitation clauses allocate the risk of loss between the parties who can insure accordingly. More often than not, in contracts between professionals, the parties use a variety of device whose aims are to avoid or minimise the risk of litigation. So, therefore, such clauses emphasise common interest rather than distrust or conflict.

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The main preliminary remark concerning exclusion clauses is that parties approach and courts’ approach to them has changed considerably. In a famous case decided in 1934, L'Estrange v. F. Graucob Ltd, Ms L’Estrange bought a cigarette machine under a sales agreement which stated that “any express or implied condition, statement or warranty, statutory or otherwise, not stated herein is thereby excluded”. After the machine broke down and was no use at all, she took her case to court and lost her action since all or most of Ms L’Estrange contractual rights and remedies were removed as a result of the existence of an exclusion clause. Such an exclusion of liability by the seller would, nowadays, be unthinkable. Very much to the contrary, present contracts very much emphasise the existence of implied statutory terms that co-contractors cannot simply ignore.

It is quite clear that courts approach the issue of unfair clauses in contracts and, in particular, of unfair exclusion clauses by balancing the needs of autonomous individuals who want to be as free as possible to make contracts on the terms that best suit their interest and the need to introduce more substantive notions of fairness in the contracts. When, on examining specific cases, judges need to assess the validity of an exclusion clause, they will divide their analysis into five main questions:

1. Is the clause whereby a party seeks to exclude his liability actually part of a contract? In other words, was it legally included into the contract at the time of its making?

2. Does the clause cover the loss or damage at issue?3. Is the clause valid under the provisions of the Unfair Contract Terms act of 1977?4. Does the clause fulfil the requirement of reasonableness?5. If the clause is part of a standard form contract, does it perform the test of fairness according to the

provisions of European regulations?

As a matter of fact, these five question constitute a sort of test that English judges will subject any exclusion clause to in order to decide whether a clause is valid or not.

# 55

Let’s examine the first question: was the exclusion clause incorporated into the contract? Concerning that issue, it must be said that case-law laid down the path by establishing basic rules that legislation later confirmed and possibly reinforced. Through such case-law, it was increasingly clear that judges became reluctant to enforce exclusion clauses in contracts involving parties in a relative weak bargaining position where the enforcement of such clause would be very detrimental to them. Most case law is concerned with situations in which one party seeks to rely on written terms contained in documents at the place of business or on documents exchanged between the parties in the course of negotiations. In those cases, for those written terms to form part of the contract, they must have been brought to the attention of the party whose rights are being restricted. It is a well-established rule that, as a result of signing a document containing the terms of the agreement, parties declare that they will be bound by those terms that they have signed. Therefore, signing a document is evidence that the terms of a contract, possibly including an exclusion clause, were brought to the notice of the two parties. The court implies that notice has been given in certain circumstances even if the signatory has not read the clause and has no working knowledge of it.

Now, some contracts do not involve signatures. In that case, it is necessary to prove that the party alleging a breach of contract, i.e. the party victim of a breach was aware or ought to have been aware of the written conditions the other party was trying to incorporate into the contract to exclude the liability. So case-law requires that reasonable notice must be given of an exclusion clause, either in a written document or displayed at the place the contract is entered into. A lot of case-law is concerned what is called ticket cases, i.e. with contracts which are made by the issuing of a ticket. Such tickets, either contain some small print indication of the terms and conditions of the contract and in particular may include some kind of exclusion clause, or they

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refer to the place where such conditions are set out for the potential customers to read them before entering the contract. Whether such a document, may be considered as part of the contract is left to the judge to decide case-by-case. Therefore incorporation by a reference to a written document or to a clearly exhibited printed notice may, in some circumstances, be the only visible means of communication for the party relying on the clause. Now, today of course, the increasing use of the Internet to make contracts puts consumers in a better condition since the Internet gives ample opportunity to read easily accessible terms. Most of them the terms are called up on the screen and the purchaser is supposed to have read them before he can actually conclude the contract. Whether he had read them thoroughly or superficially is none of the court’s business. The terms are there for the purchaser to read them and the court is satisfied that reasonable notice has been given. However, the courts have always been prepared to intervene and set aside exemption clauses especially those that are particularly onerous, i.e. highly detrimental to the weaker party against whom they are used.

Already in 1971, in the leading case on the subject, Thornton v Shoe Lane Parking Ltd, Lord Denning insisted on the special steps to be taken by a party wishing to incorporate usual or unexpected protective terms into a contract. The case involved Mr. Thornton who parked his car for the first time at Shoe Lane Parking’s car park. A notice outside the entrance stated that “All cars parked at owner’s risk”. At the entrance, Mr. Thornton received a ticket from a machine and an automatic barrier was raised. In small print on the ticket it was stated that “this ticket is issued subject to the conditions of issue displayed on the premise”. Inside the building was another notice which purported to exempt Shoe Lane Parking from any liability resulting from damage to a car or personal injury. When he collected his car, Mr. Thornton was injured partly as a result of Shoe Lane negligence, the court then decided that the clause relating to personal injury had not been incorporated into the contract. In fact, the court clearly stated that Shoe Lane Parking had not taken sufficient steps to draw Mr. Thornton’s attention to the personal injury disclaimer which was not typical in that kind of contract.

Much later on, in another leading case decided in 1989, Interfoto Picture Library Ltd. v. Stiletto Visual Programmes Ltd, the court decided that because the plaintiffs had failed to take exceptional steps to bring the defendants attention to a particular onerous clause. Such clause did not become part of the contract for lack of reasonable notice and therefore was invalid. The term in question included discharges for late return of photographs, loaned to the defendants. A two week delay in returning them incurred a charge of nearly £ 4000 which was well above comparable rates practiced by other companies in the same trade. The term was described as “unusual and extortionate”, because the term was unusual, the company should have taken extraordinary care to bring to the attention of their clients. Needless to say that the court also examined the time of the notice, it must be given before or at the time of making the contract. In no way, a party can add a clause and particularly an exemption clause after the contract was signed.

Yet, courts accept the incorporation of an exemption clause from a specific course of dealing. Earlier I mentioned the case British Crane Hire Corporation Ltd v. Ipswich Plant Hire Ltd to exemplify the concept of implied terms resulting from a regular course of dealing between two professionals. The term that caused the legal conflict was the inclusion or not of an exclusion clause and the court made no difficulties in recognising that the two parties knew about the regulations of a apportionment of liability in their line of business and therefore had entered the agreement on the basis of such regulations. If the clause does not pass this first test, then the court shall decide that the party to whose benefit it was included will not be allowed to rely on it.

If, on the contrary, the clause passes this first test, then the clause is submitted to the second test, i.e. to the second question which is: does the clause cover the damage or the loss suffered? One element that judges have always taken into account when assessing exclusion clauses is whether the clause is expressed in clear, unambiguous words. If not, then the clause will not be effective. So, for instance, the clause must clearly cover the liability which it seeks to exclude. To appreciate this element, English courts have adopted a rather literal approach to wording: the clause must be clear from a reasonable man’s point of view, i.e. objectively by

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a person who knows nothing about the specific relations between the parties. This point of view is sometimes referred to as the ‘bystander’s point of view’. Moreover, if there is any ambiguity about the scope or the meaning of an exclusion clause, courts will construe it against the party who seeks to rely on it. This is known as the contra proferentum rule. Thus, English courts interpret exclusion clauses in the interest of justice and of the weaker party.

As I have already alluded to in the introduction, English courts have always taken a more moderate approach to limitation clause. For such clauses, the rules of construction do not apply so strictly. Such clauses, mainly to be found in contracts between professionals, do not aim at evading liability but rather they aim at limiting it at ways that amount to a sharing of the risk between the two parties of the contract, risks against which the party can insure.

So, to conclude, the more extensive the attempt to exclude liability, the clearer the words used must be, particularly, in the case of liability for negligence.

In addition to the contra proferentum rule, English courts have developed another concept, the so-called ‘main purpose rule’ according to which when main clauses are inconsistent with the main purpose of the contract then they can be rejected because they deprive the contract from its business sense. To take a very plain example, an exclusion clause which may seek to exclude liability for the road worthiness of a new car may be considered as non-sensical as it would contradict the object of entering into a contract to buy one. This rule which was originally developed by the English judiciary, is now statutory as a result of the passing of the Unfair Contract Terms Act in 1977.

So far, it is clear that English judges played a major role in developing the regulation of unfair clauses in contracts by establishing and confirming case-law on the subject long before protecting weak parties, most often consumers entering contractual relations with professionals thanks to standard form contracts, became a matter of public policy and parliament passed an Act to consolidate these case-law rules and give them statutory form.The much-awaited Act was passed in 1977, it is the Unfair Contract Terms Act (UCTA) whose title is misleading since it is concerned with only one category of unfair terms, i.e. exclusion clauses. It was passed when parliament and government became worried in case the interventionist approach developed by English judges on the issue of interpreting contracts was likely to contradict the still major principle of freedom of contract.

Moreover, it is not clear how far English judges could go in their construction of contracts supposedly entered into upon the free will of the parties without putting at risk the constitutional principle of the separation of powers. Two preliminary remarks first: the UCTA goes beyond the common law and introduces additional requirement for the exclusion clauses to fulfil in order to be valid; and then recently in 1994 and 1999, the European Directive on unfair terms in consumer contracts came into force. Most often the two sets of statutory provisions overlap, so they are complementary and leave English consumers free to decide whether to take action against certain contract terms which may be void or unreasonable under UCTA or unfair according to the directives. Yet, at the moment, there exist inconsistencies between the UCTA’s concept of reasonableness and the directives’ concept of unfairness, so the law commission is currently reviewing both texts in order to replace them with a single act which will give the statutory provisions applicable to consumer contracts.

The general aim of the UCTA is to regulate those terms that enable one party to offer performance which is substantially different from that expected. So the act takes into consideration the type of liability that the party has tried to exclude, the status of the person trying to avoid the clause and the characteristics of the person trying to rely on it. For instance, the act applies to contracts to which at least one party is a professional businessperson and the other may be either a professional businessperson or a non-business person, i.e. a

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consumer. Therefore the act does not apply to contracts when the two parties are consumers. As a matter of fact, the act is mainly concerned with protecting the interests of consumers when dealing with businesses.

The Act declares six types of clauses inoperative and therefore void. One main category is described in section II of the Act and consists of clauses that purport to exclude business liability for negligence causing death or personal injury. Such clauses are illegal. Additionally, section II requires that a business party cannot in the case of loss or damage over death or personal injury exclude or restrict their liability for negligence except if the term meets the requirement of reasonableness. Several other categories cover manufacturer’s negligence when manufacturing goods aimed at private use by consumers in case loss or damage arises from defects in the goods. And, most importantly, section VI states a number of implied terms in contracts of sales over which businesspersons cannot exclude liability. In the latter category, some terms relating to description, fitness for purpose, sample or quality of statutory implied therefore businesspeople cannot exclude liability over these terms.

Additionally, the Act provides that any clause in the contract, even those that do not fall under the six categories envisaged by the Act, must meet the test of reasonableness. The time of assessing the reasonableness of the clause is the time that the contract was made which in fact means that the test takes into account all the circumstances surrounding the two parties at the time they finalised their contractual relationship. The test of reasonableness aims at establishing the firmness of the term in the context in which it was negotiated. When the contract involves two professional dealers the test of reasonableness aims at establishing whether the parties were in a position to make a rational choice about the limitation or the exclusion of liability. Then the courts take into consideration the relative strength of the bargaining position of the parties. whether the claimant was induced into accepting the exclusion clause as a result of a lower price for the merchandise he is buying. For instance, whether the claimant knew or ought reasonably to have known the existence and the extent of the clause and whether the claimant had any opportunity to enter a similar agreement with other people but without having to accept a similar term and whether the rules were made specifically for the claimant.

Though these guidelines only apply to contracts for the sale of goods, judges use them in a persuasive way to decide cases involving other types of contracts. Case law, which is quite abundant, does give varied examples of the specific facts in various individual cases that allow the courts to decide that the clause was or was not reasonable.

Section III of the Act extents control of exclusion clauses where one party deals as consumer or on the other’s written terms of business. In such cases, the business party, when himself in breach, cannot exclude or restrict his liability in respect of the breach or he cannot claim to be entitled to render a contractual performance different from the one that was reasonably expected from him or to render no performance at all except insofar that the contract term meets the requirement of reasonableness.

Section IX of the Act that on suffering a serious breach, the injured party may choose to terminate or to affirm the contract. No breach, however fundamental, actually operates to terminate the contract automatically.

#57

To conclude this survey of the importance and the construction by the courts of the terms of a contracts shows that over the last few decades legislation has attempted to regulate contracts particularly consumer contracts. Modern legislation tends to impose blanket legislation on certain types of clauses regardless whether the bargaining positions of the parties were impaired. Such a trend probably reflects the influence of continental modern legal methods, it will be interesting to see how the legal commission will manage to combine the UCTA mode of reasoning with that of the European Directive.

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LECTURE 7: ILLEGAL CONTRACTS

#58

In the first part, we will look at contracts from the point of view of illegality, i.e. we will look at contract which have all the legal requirements to be valid but which are unenforceable because they are illegal. In other words, the courts will intervene to prevent the enforcement of some contracts although they have all the characteristics of binding contracts. Such contracts are said to be illegal or contrary to public policy.

Contracts can be illegal at the time of their formation or as a result of the way in which they are performed. The ground of illegality can be either a statute, which the terms of the contract contravene, or a principle of common law. Legal rules governing the issue of illegality generally involve some element of public policy and are rather complex.

As an introduction it may be said that courts interfere with illegal contracts certainly to deter parties from obtaining benefits which could derive from some kind of illegal behaviour or, in the words of the Law Commission, not to allow any person to “benefit from their own wrongdoing” and therefore to punish the wrongdoer. An additional justification for court intervention is to restore respect of the civil justice system or as a famous commentator put it not to jeopardise “the dignity of the courts”.

Contracts therefore may be illegal at the time of their formation i.e. when they are entered into because the performance of the terms agreed upon by the parties will necessarily involve the commission of an illegal act by the parties which may consist of a breach of a criminal law or of a breach of a statutory requirement that the parties fail to fulfil. If, for instance, a contract requires that the parties obtain a licence to exercise a given activity and the parties enter a contract to exercise that activity without actually possessing a licence then the contract will be illegal at the time of its formation. Contracts may also become illegal in the course of their performance if, for example, such performance necessitates conditions statutorily imposed which the parties fail to fulfil.

#59

Let me examine the main category of illegal contract, i.e. contracts that violate a legal rule. Such legal rules may be either of common law or of statutory origin. For instance, a contract to commit a crime as a murder or a theft is obviously illegal. Though it is unlikely that a contract killer might sue his or her client for his fees, if it is then it will be unsuccessful on the ground of illegality as it was decided in 1725 in the very old case involving two men who had agreed to share the proceeds of the spoils of their crime. When one sued the other because the latter tried to evade his promise to share he was unsuccessful.

Another example of a contract to commit a crime which is illegal as a result of a statute, is the selling of an obscene article under the provisions of the Obscene Publications Act of 1959. Some contracts may be illegal because they are forbidden without being, strictly speaking, criminal. Recently in 1999 and 2000, the Court of Appeal had to decide two cases involving solicitors which were alleged to have contravened the solicitors’ Practice Rule of 1990 which is the body of rules that regulate the profession and by which all solicitors should abide. In those two cases, the Court of Appeal decided that the solicitors’ behaviour which amounted to a disciplinary offence rather than strictly speaking to a criminal offence had entered into a contract with their client, which must be made illegal. In one case, a solicitor had agreed to share fees with his client in exchange for introducing more clients to him. In the second case, a solicitor had made an agreement to act for his client on a conditional fee case, also called contingency fees, and though the bill was calculated at the law rates, the Court of Appeal decided in favour of the client who sued the solicitor that the agreement was illegal.

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Similarly, a contract to commit a fraud will be illegal. The significant element here is the intention to commit fraud. Therefore when only one party is fraudulent and the other is innocent, it is unclear whether the contract will be unenforceable or whether the innocent party will be allowed to enforce it.

An interesting issue is that of the commission of the statutory tort of unlawful discrimination on the ground of sex, race or disability in contravention of either the Sex Discrimination Act of 1975 or the Race Relations Act of 1976 or the Disability Discrimination Act of 1995. Let us imagine a contract between an employer and an agency supplying temporary stuff in which the terms provided that the agency will not send applicants of a particular sex or racial group or suffering from a disability. Will such a contract be enforceable or not? There is no case law on such an issue, but it seems inevitable that courts find such a contract unenforceable because of its discriminatory nature.

Additionally, contracts whose performance contravene a statute can also be considered unenforceable. For instance, high purchase agreements whereby consumers acquire goods by paying instalments are regulated by the Consumer Credit Act of 1974 which provides for unless certain formalities are complied with the agreement will be unenforceable against the creditor. The aim of the act is to protect debtors, i.e. consumers and through the provisions of the act, creditors are encouraged to make sure they follow the procedure that parliament has devised to protect consumers. If they do not, the penalty will be the unenforceability of the agreement. So here, the deterrent effect of unenforceability is quite obvious. Other examples of contracts whose performance contravenes a statute are contracts whose performance requires that parties – just one of them or both – have a licence to carry out what they agreed to perform under the contract.

#60

Before going on to explore other categories of illegal unenforceable contracts, let me explain what the effects of illegality are. If a contract is found to be illegal then it is declared void and specific performance will be refused. The reason for it is quite obvious. If a contract is illegal it means that the contract cannot exist and therefore it is logical that the contract cannot order it to be performed. Moreover, in accordance with the Latin maxim in pari delicto potior est conditio defendendis which means that “where there is equal thought the defendant is in the stronger position”, where money or property has been transferred under an illegal contract, which a court eventually declared void then, as a general rule, the claimant will not be allowed to recover that money or that property. There are, however, exceptions to the general rule of non-recovery. For instance, if the contract is still executory, i.e. if the contract has not been carried out yet, the claimant may have an opportunity to change his mind and withdraw from the contract. In such case he may be allowed to recover money or property.

Another example is when one party entered a contact as a result of the other party’s fraudulent misrepresentation, the contract was lawful though, in fact, it was not. Then the innocent party will be granted the remedy of recovery, which is justified as, in such a case, the two parties were not equally informed. It may well happen that not the whole contract is illegal, not all the clauses it contains but only part of it is. In such circumstances, the court may allow the contract to be split into two: the legal clauses will be valid and the illegal clauses will be unenforceable. Therefore, technically speaking, the illegal clauses will be severed i.e. cut out and the rest of the clauses will stand.

#61

A second broad category of illegal or unlawful contracts are those contracts which are described as being contrary to public policy. This category is essentially judgement. There does not exist any general conceptual principle linking the various kinds of contracts within this category. As a matter of fact, this category of contracts against public policy is now closed i.e. judges have made it clear that they do not want to expand the

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concept of public policy to new types of alleged contractual relationship that they would eventually declare illegal and therefore void.

Within the category of contracts contrary to public policy are certain contracts concerning marriage. Traditionally, English courts have regarded as being in the interest of society to preserve the status of marriage. Courts have been ready to declare such contracts, which may threaten the institution of marriage illegal. For instance, a contract between spouses agreeing to separate at some point in the future is invalid if it is made before the marriage or during cohabitation. In a very old case decided in 1917 Brodie v. Brodie, Mr. Brodie only agreed to marry the woman who was carrying his child if a written agreement to separate once the child was born was drawn up. Such an agreement was aimed at denying Ms Brodie her right to take legal action against her husband. The agreement was held to be contrary to public policy and so could not be enforced. Quite interestingly, pre-nuptial agreements are unenforceable in English law whereas they are totally acceptable in the United States. A pre-nuptial agreement is made prior to marriage in order to avoid or minimise disputes about how property should be distributed between the two spouses in case their marriage breaks down. Such agreements are very common in the US particularly when one party is wealthy. We have all heard about these well known personalities which have eventually divorced and one of the spouses requires a huge amount of financial compensation. Such agreements are regarded as contrary to public policy by English courts and therefore unenforceable.

Other contracts related to marriage are unenforceable such as contracts in restraint of marriage which pose liability upon the parties about to marry such as a promise to pay a sum of money to a third party. Similarly, marriage brokage contract are unenforceable. A broker is an intermediary. A marriage brokage consists of a promise by one person, traditionally called a match-maker, to procure a marriage to a person. In case this person does not pay for the services of the match maker, the latter cannot sue him or her. Such contracts have repeatedly been found to be contrary to public policy and therefore illegal. Here again, English law might need to be reconsidered in the light of modern types of contract such as between dating or introduction agencies and their clients whose aim is for the agency to help two persons willing to find a marriage partner to meet. Of course the main difference here is that the service provided by the dating agency is merely helping or making two people meet. Whether or not they eventually get married.

Along the same line of reasoning, contracts promoting sexual immorality will also be considered against public policy on the ground of immorality. So any contract aiming at providing sex outside marriage falls within that category. Such contracts usually involve that one party is a prostitute. Not all contracts involving prostitutes are illegal. For such contracts to be unenforceable two conditions must be met: the other party must have known that he was dealing with a prostitute and he must also have known that was supplied under the contract was to be used for the purpose of prostitution. Concerning immoral contracts, the Court of Appeal gave an interesting decision in 1996 in the case Harram (?) House Ltd v. Chapel. The case involves the publisher of a magazine who sued the defendants to recover payment for advertisements which have been placed by the defendants in the publisher’s magazine. The advertisements related to telephone sex lines offering pre-recorded messages, live conversation and sex dating. The defendant resisted the claim and argued that the contents of the advertisement was immoral and therefore illegal. Yet, the trial judge found for the plaintiff i.e. the publisher. On appeal, the court confirmed the trial judge’s decision stating that “it was undesirable in such a case involving an area regarded as the province of criminal law for individual judges exercising a civil jurisdiction to impose their own moral attitudes”. This decision shows that civil justice judges are quite unwilling to meddle with issues, which will be more efficiently dealt with by criminal court judges. It also shows that unless an activity is clearly criminal as defined by an act voted by parliament, English judges are no longer ready to extend the concept of public policy to cover so-called immoral activities.

Another category of contracts, which are considered as contrary to public policy, are contracts to house the

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jurisdiction of the court. These are contracts, which provide that, in case of dispute, the parties will not resort to a judicial decision given in a court of law, thus such contracts wish to ignore the courts’ capacity to oversee and interpret contracts and to decide about their validity. That is why such contracts are unenforceable because they are deemed to be contrary to public policy whose concept includes the respect of courts and court-decisions. In a 1954 case involving the central council of a professional organisation, it was held that the association’s central council was to be “the sole interpreter of the rules” and that the council’s decision was to be final. The court decided that the council had the power to make final decisions on questions of fact but not on questions of law which had to remain within the exclusive prerogative of the Courts.

It is interesting to note that there is one major exception to the general principle making it illegal to ask the jurisdiction of the court. In commercial contracts, it is quite usual for parties to agree that should a dispute arise concerning the performance of the contract, they are willing to submit such contracts to arbitration on questions of both fact and law at least as a precondition. This very old judge-made rule was confirmed by legislation in the Arbitration Act of 1996. Therefore, under both common law and statute, the arbitrator is allowed the final say on issues of fact. However, regarding issues of law, according to the common law, a party will not agree to house the court’s jurisdiction therefore an agreement to that effect was void. Now, the Act of 1996 gives a more flexible solution. A party may take a dispute to a court even though the contract contained an arbitration clause, but only with the agreement of the other party or the leave, i.e. the permission, of the court itself. As a matter of fact, the Arbitration Act sets out very stringent conditions for the parties to be allowed to take their case to a court. Such conditions aim both at respecting the parties’ original wish to avoid going to court and at giving them the possibility that a court of law examine their dispute if it involves a question of general public importance that is not settled satisfactorily by the arbitrator. So it is clear that the Arbitration Act confirmed the jurisdiction of the court only where it is strictly necessary i.e. in cases when the arbitration procedure resulted in a clearly incorrect application of the law about an issue of “general public importance”.

The main consequence of a contract being void at common law is that it will not be enforceable by either party. Though the remedy of severance that is severing, cutting out the offending clause or clauses of the contract is available, usually it is the whole contract that actually offends against public policy and which is declared void as a whole by the court. Though very scant case law is available it seems that courts will be more ready to allow recovery of money or property transferred in relation to such contracts.

#62

Finally, the third broad category of contracts that are void and unenforceable are wagering contracts. A wagering contract involves an agreement between two people that upon the determination of an uncertain event or fact, one shall receive from the other a sum of money or another stake. The only consideration for the contract is the sum or stake that will therefore be won or lost. The essential characteristic of such wagering contracts is that they are based on the two party bet and in the case one event occurs or not one party wins and the other will lose. So a wagering contract is different from a gaming contract meaning a game of chance such as blackjack or roulette even if such gaming contracts are also illegal unless they take place on premises licensed for that purpose.

Again, it is interesting to note that the common law does not make such contracts illegal so that parties are free to engage in gambling contracts but the courts will not enforce them in case the parties come to a dispute. Another interesting remark to make is to consider why a contract to bet a certain sum of money on a horse outside a licensed shop is anymore against public policy than contracts between an individual person and a stockbroker to invest a huge sum of money in a .com business, which is almost as risky a gamble. Therefore, the common law makes a difference between wagering contracts, void as against public policy, and insurance contracts, which are perfectly legal though, in fact, the outcome of such contracts is that the insured person

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will lose the premium he paid if nothing happens, or the insurance company will lose the insurance money if some unfortunate event happens. The main difference between two very close contracts is that in an insurance contract the insured has an interest in the subject matter of the wager.

Finally, the Financial Services Act of 1986 lists a wide range of investment contracts covering stocks, shares and securities which are deemed not to be wagering contracts though, strictly speaking, they are based on gambles about the future value of securities.

To conclude, wagering contracts are null and void and no suit will be accepted by the courts to recover winnings resulting from such contracts.

#63

More relevant to the needs of our modern society is the case of what are called contracts in restraint of trade. Contracts in restraint of trade are contracts which are actually limits in individual rights to trade freely or to use his or hers skills for payment. For such contracts, two essential principles are in direct conflict. On the one hand, the principle of freedom of contract whereby parties alone determine their obligations without the court’s intervening except in exceptional circumstances and, on the other hand, the principle of free market which means that some kind of competition necessarily exists between the two parties of a contract who negotiate the terms in the best of their respective interest.

So contracts in restraint of trade raise the question of what happens when the principle of freedom of contract is used to restrict competition. So, the old traditional common law gave a limited answer in the case of contracts in restraint of trade, which concern restrictive clauses contained in contracts of employment or in contracts for the sale of a business. Such clauses limiting economic activity, which the employee or the seller of a business could engage in after leaving the employment or selling the business, were treated as being illegal on the grounds of public policy and therefore unenforceable on the grounds of public policy.

Yet, the common law did not have answer in the case of broader anticompetitive practices in particular problems arising from a situation of monopoly or near monopoly in a particular market. Such situations are now regulated by statute, which, in fact, implemented rules established by the European institutions and which are applicable in the whole European Economic Community.

Restraint of trade, as defined by the common law, refers to contracts or contractual provisions, which attempt to restrict the way one of the parties may do business or earn a living. It is a long established rule that such contracts or provisions are presumed to be in restraint of trade and therefore unenforceable. That presumption can, however, be rebutted by proving that the restraint is reasonable both as between the parties and in relation to public interest.

The first category in restraint of trade is contracts in which an employee agrees on leaving his or hers job in a company, they will not accept another job or set up a business of their own in such a way as to compete with their former employer. Such contracts or clauses are widely used when an employer’s personal skills are expected to attract customers. They usually provide that an employee will not take a job with a competitor or set up a competing business within a certain geographic area and over a certain period of time after leaving. Whether such clauses are legal will depend on whether the geographic and time restraints are reasonable and justified.

Another category which is very similar, are contracts for the sale of a business in which the vendor of a business promises not to compete with the purchaser, thus restraining his freedom to set up a business of the same type in the very area of the one he is actually selling. The justification for such a restraint is that the new

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business may attract the vendor’s former customers thus depriving the purchaser from the benefit of buying the vendor’s business.

Such kinds of restraints of trade were established by the common law. They are presumed to be invalid unless they are reasonable. To be reasonable they must satisfy three criteria:

1. There must be a valid interest, which the party imposing the restraint is trying to protect. For instance, an employer will have a legitimate interest in restricting the activities of a departing employee if that employee either knows trade secrets or has gained influence over the employer’s customers in case customers or clients relied on the employee’s skill or expertise or because the employee was the exclusive intermediary between the employer and its customers. In the case of the sale of business, the interest the purchaser is trying to protect is what is called the ‘good will in the business’, i.e. the existing trade which has been built-up by the vendor. In fact, the purchase price paid by the buyer includes the benefit of taking over the so-called good will. The purchaser therefore has a legitimate interest in preventing the seller from setting up a business, which will attract his customers.2. The second criterion that a restraint of trade must fulfil is that it must be reasonable. To assess whether a contract or a clause in restraint of trade is reasonable, the courts will take into consideration the geographical area covered then the duration of the restraint and, thirdly, the scope of the activities concerned. For instance, if a business is sold in one town, a restriction preventing the opening of a similar business anywhere in the country would most probably be found unreasonable and therefore invalid. As regards time, whether the restriction is reasonable or not will depend on the type of contract. In many employment contracts a restraint of one or two years, at most, is likely to be considered reasonable. Yet, longer periods of time may be acceptable depending on the specific circumstances of the contract. 3. Thirdly, the type of activity, which is restrained must also be related to the interest to be protected.

Another category of contracts which are presumed to be in restraint of trade by the common law are contracts on exclusive dealing in which a person agrees to restraint his or hers freedom to trade by, for example, accepting to trade with only one company. For instance, one party agrees to take all supplies of a particular product from one source. Such contacts are called solus agreements. They are the type of agreements that managers of petrol stations enter into with petrol companies, whereby they promise to buy only the goods sold by the petrol company in return for the lease of the petrol station. Solus agreements are also common in relation to the supply of beer in public houses, i.e. to pubs. A very well known case is Esso Petroleum v. Harper’s Garage, which was decided in 1968. The case concerned two solus agreements involving two garages run by the same defendants. In fact, the latter had agreed to take all supplies of petrol from Esso and to keep the garages open at all reasonable hours. One solus agreement was to last five years the other was to last 21 years and was linked to a mortgage over the premises held by Esso. The defendants started to sell cut-priced petrol of other brands. Esso sought an injunction to prevent the defendants from doing this. The defendants argued that the solus agreement was invalid on the ground of restraint of trade. The House of Lords held that solus agreements could be regarded as contracts in restraint of trade and that the five year restraint was reasonable but not the 21 year restraint linked to a mortgage. In a later case, the Court of Appeal held that the reasonableness of a restraint had to be assessed at a time the contract was made and should not be left to be decided in the light of later circumstances and subsequent developments.

Another category of contracts actually raises the issue of restraint of trade and therefore is likely to be scrutinised by judges when the conflict arises between the two parties to the contract. Those are contracts between songwriters or pop-musicians and music publishers or music companies. Such contracts usually include terms by which the artists commit themselves to write songs for one company over a very long period of time though the company does not actually commit itself to promote or even publish the artist’s work. The first case of such exclusive dealing between a songwriter and a music company was decided in 1974. It was

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the case Schroeder Music Publishing Company Ltd v. Macaulay. The case involved an unknown songwriter who entered a standard form agreement with music publishers. The court decided that the contract contained an unreasonable restraint of trade since the plaintiffs, i.e. the artist, was totally committed to the defendant, i.e. the music company, whereas the latter, the music company, had almost no obligation whatsoever under the contract. The decision was followed by other similar decisions in later cases.

#64

In the various categories of contracts that I have just mentioned, it is only one clause or a limited set of clauses that are objectionably in restraint of trade and, therefore, unenforceable. Thus the question is whether the contract can be split into two parts one being valid and the other one being unenforceable. The remedy of severance will then be applied.

Severance basically means cutting out the objectionable parts that must not be included because they are illegal. This, in turn, raises the distinction between severance of consideration and severance of promises.

Let’s imagine that A agrees to pay B £1000 if B will fraudulently obtain a valuable painting and frame it. The part of the contract involving the fraud is clearly illegal whereas the part involving the framing is perfectly legal. So B’s consideration for the promise to pay £1000 consists of both an illegal and a legal act. In other words, can B recover the £1000 simply for framing the picture? Ultimately, can A sue B for not framing the picture? For severance of consideration to be allowed, the lawful part of the consideration must be more important than the unlawful part. For instance, in a contract of employment, the employee’s consideration, in exchange for the employer’s payment of wages, may consist of a performance of a certain work, which is totally legal, and, additionally, not to compete after leaving such employment though this restraint may be considered as abusive and therefore unenforceable. In such a contract, consideration may be severed the required non-competition clause being minor compared with the performance of the work. Therefore the employer is under the main obligation to pay his employee wages for the work perform though a suit on the ground of the non-competition clause may not be accepted.

Promises included in the contract are easier to sever. When it is a matter of editing out, i.e. cancelling a list or part of a list of restrictions which may the restraint too wide. The general principle is to let the contract stand and simply cut out the offending clauses. In such an approach, the courts abide by two principles: the blue pencil test and the requirement that the nature of the contract must be retained.

The blue pencil test simply means that severance must be achieved by cutting out the offending clauses. It must not mean any redrafting of the clauses by judges which constitute too much of a judicial interference with the parties’ essential freedom of contract. The second requirement that the nature of the contract is to be retained makes sense though it is much more difficult to apply and the assessment of the nature of the contract may be subjective and left to judges’ objective appreciation.

#65

The last category of illegal contracts is those anticompetitive contracts past between two professionals in order to regulate prices or the output of a given activity. Such professionals may be quite happy about the outcomes of their contracts in terms of financial benefits yet the performance of such contracts may be quite detrimental to customers who, as third parties, did not traditionally have any ground for legal action as a result of the application of the rule of privity of contracts. Therefore, the only way to outlaw such contracts was and has been through legislation.

Under English law such legislative control started to be voted in the UK parliament in the 1960s and the 1970s

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and they were confirmed and reinforced by European law after the UK joined the EC on 1 January 1973. Thus, the Resale Price Acts of 1964 and 1976, the Various Restrictive Practices Acts of 1956, 1968, 1976 and the Competition Act of 1980 were all voted on the recommendations of the Monopolies and Mergers Commission, the Director of Fair Trading and the Restrictive Practices Court. After 1973, European law started to apply, namely articles 85 and 86 of the Treaty of Rome now renumbered articles 81 and 82 of the TEC. Case law from the ECJ has also been influential. The aim of European legislation has been to implement a single market throughout the European Union and, therefore, to make cross-border anticompetitive practices illegal.

Nowadays, under English law, alleged anticompetitive practices are governed by the Competition Act of 1998 which came into force on 1 March 2000. The Act prohibits a number of anticompetitive practices closely in line with article 85 TEC. The act applies not only to contracts who are intended to have a cross-border effect within the EU but also to contract who are intended to operate within the UK. This act introduced the general principle contained into articles 81 and 82 TEC and required English courts, in interpreting the act, to take the case law produced by the European law into consideration. The act also modified the enforcement procedures by simplifying them. For instance, the powers of the Office of Fair Trading were enhanced, the Restrictive Practices Court was abolished and the Monopolies and Mergers Commission was replaced by the Competition Commission. Appeals from the Office of Fair Trading go to the Competition Commission Appeal Tribunals and from then, on a point of law, to the Court of Appeal and the House of Lords.

The 1998 Act was complemented by the European modernisation regulation, which came into force on 1 May 2004. National authorities, i.e. Office of Fair Trading in the UK, are in charge of enforcing European Commission law when it affects trading between Member States. The Competition Act contained the so-called ‘Chapter I prohibition’ matching article 81 TEC. It provides that “agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade within the UK and which have as their object the prevention, restriction or distortion of competition within the UK are prohibited”. As a result, contracts, which are prohibited under that section of the act, are void. Yet, in case only part of the contract actually contravenes the act, such part will be able to be severed as already mentioned. As I have already briefly remarked, an undertaking includes any entity engaged in an economic activity. It can include individuals but it does not cover employees as regards contracts with their employers.

The contracts, which are prohibited, are those contracts to fix prices or other trading conditions, to control production, markets, technical development, or investment, contracts to share markets or sources and contracts to discriminate in the trading conditions applied to other parties. The restriction on competition must be actual given the circumstances under consideration and not just potential or likely. The extent of the restriction is evaluated according to the de minimis rule as established by European case law. The Chapter I prohibition primarily deals with horizontal agreements, i.e. undertakings at the same level in the markets and almost entirely includes vertical agreements, i.e. agreements in which undertakings are at different levels such as a manufacturer and a distributor. A typical example of a prohibited horizontal agreement is where two suppliers agreed to divide up the country between them and not to encroach into each other’s territory of to fix prices or to restrict outputs.

The Competition Act also includes the so-called Chapter II prohibition, which provides that “any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade in the UK”. The aim of this prohibition is to control market dominance and the abuses which are likely to result from it. Only where an undertaking has a substantial share of a particular market, is the prohibition likely to apply. The ECJ has stated that, in relation to article 82 TEC, which serves as a basis for the Chapter II prohibition of the UK Competition Act of 1998, where an undertaking has more than 50% market share, it may be presumed to be regarded as dominant. In the UK, the Office of Fair Trading (often referred to by its initials OFT) has suggested that, in relation to the Chapter II prohibition, it is “unlikely

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that an undertaking will be individually dominant if its market share is below 40%”. Contracts between the ambit of the Chapter II prohibition are likely to be declared void.

#66

In conclusion, it must be said that the concept of illegality is rather complex, that it lacks certainty and that, therefore, has a potential to give rise to unjust decisions. This has been remarked by judges occasionally and the Law Commission, whose role is to envisage and recommend reforms of the law whenever necessary, issued a document in 2000 pointing out that in the area of illegal contracts “the law has been rendered needlessly complex, technical and difficult to justify”.

A recent case Mohammed v. Alga and Co. [?] decided in 1998 well illustrates the points the courts often fail to take into consideration, the gravity of the illegality and the capability of the parties when determining the effects of illegality. In that case, the plaintiff entered into an oral agreement with a defendant solicitor, under which he, the plaintiff, would refer clients who happen to be Somali refugees to the solicitor and insist the solicitor in preparing the clients’ asylum applications in return of a share of the solicitor’s fees from the legal aid board. Obviously, the agreement breached the rules under the solicitor Act of 1974 though the plaintiff did not know that. After carrying out that work, the plaintiff claimed payment under the contract. Though, the judge found it was highly blameworthy of the defendant solicitor to have entered into such an illegal contract – the solicitor knew that the sharing of fees was engaged the rules – yet, the plaintiff’s claim was refused. We can say that the guilty defendant therefore benefited from the innocent plaintiff’s work without being required to make any payment for it. So far, the recommendations of the Law Commission have not been implemented.

A last practical remark to end lecture 7: erroneously, in the foreword to this series of lectures, I announced that the issue of frustration and frustrated contracts will be examined in lecture 7. In fact, you will find the relevant information and knowledge on this issue in lecture 8.

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LECTURE 8: DISCHARGE OF CONTRACTS

#67

Lecture 8 is about the various ways a contract may be discharged and though remedies may be mentioned, a more complete description of remedies available at English law will be the core subject of lecture 9.

To discharge a contract means that the rights and obligations agreed under the contract come to an end so that the parties no longer have obligations under it. There are basically four ways through which a contract may be discharged: by performance, by agreement, as a result of a breach by one or both parties and out of frustration.

#68

The most obvious way a contract will be discharged is by performance, i.e. when both parties have performed their obligations under it, when both parties have done all they were bound to do under the agreed contract. Discharge means that the parties’ primary obligations come to an end, though they may remain some secondary obligations such as, for instance, in a contract of sale, the obligation to pay compensation if goods turn out to be defective after sale and delivery. The overwhelming majority of contracts are discharged after being performed.

Now, what definition of performance the law gives? In other words, what constitutes satisfactory performance at common law? This point of law is important especially when goods or services are paid only after the goods have been supplied or the services have been completed. Suppose then that some minor defect in what has been supplied is discovered, does this entitle the party to refuse to pay, i.e. to withhold the performance of its obligation under the contract? The general, common law, rule concerning performance is that performance must exactly match the requirements laid down in a contract. In other words, performance must be entire i.e. precise and exact. This principle means that if one party fails to perform, the other party need not pay anything at all even if the shortfall in performance causes no hardship. Yet, it should become clear that the strict application of the rule of entire performance could cause injustice.

Two fairly old cases well illustrate how unjust the rule may turn out. A case decided in 1795 involved a sailor who had contracted to serve on a ship that travelled from Jamaica to Liverpool for which he was to be paid a certain sum of money that was payable when the ship arrived in Liverpool. Unfortunately, the sailor died during the journey. His widow sued for wages up until his death but her claim was rejected on the ground that the contract required entire performance therefore as the sailor had not completed the performance he, and now his widow, were not entitled to any money at all.

Another case also shows how the rule also made it possible for parties to escape from a contract, which may have become unprofitable, by taking advantage of very minor departures from its terms. The case is Re Moore and Co. v. Landauer and Co. which was decided in 1921. In that case, the defendants agreed to buy from the plaintiffs 3000 tins of canned fruit. The fruit was to be packed in cases of 30 tins. When the goods were delivered, a substantial part of the consignment was packed in cases of 24 tins. It was held that this did not constitute satisfactory performance since the delivery sent did not correspond to the description, which is one main requirement of the Sale of Goods Act, the buyers were entitled to reject the whole consignment. It is clear that the decision though totally legal from a strict point of view was unfair. Whether the tins were packed in cases of 20 or 30 made no actual difference since the agreed total number of tins was delivered and whether they were delivered in cases of 20 rather than 30 tins in no way affected the market value of the goods.

The two cases I have just mentioned arouse from a strict interpretation of the old Sale of Goods Act of 1893 which implied an obligation to supply goods which match their contract description, the same provision is

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now contained in the updated Sale of Goods Act of 1979 however, in recent years, the courts have adopted a more flexible approach of that provision and it is now confirmed case law that the business purchaser cannot unreasonably reject goods which are only slightly different from the contract description.

Most contracts for the sale of goods are so-called entire agreements and necessitate this flexible judicial interpretation. Still, the principle of entire performance means that the parties must be very careful when making their agreements and thus allow for flexibility if this is important for the satisfactory performance of their obligations. A recent case decided by the Privy Council, whose authority is the equivalent of that of the judicial committee of the House of Lords only for cases of appeal from Commonwealth countries, recently confirmed that point in the case Union Eagle Ltd v. Golden Achievement Ltd. decided in 1997, which concerned a contract for the sale of a flat. Timely performance had been made of the “essence” which meant that performance had been agreed at a precise time. The parties had agreed that the purchase price was to be tendered at 5 p.m. on a particular day though the meaning of the preposition by meaning no later than. In fact, it was tendered at 5.10 p.m. so the Privy Council confirmed that this entitled the seller to repudiate the agreement and to retain the deposit that had been paid. The main reason why the Privy Council started the rule of the entire performance was that the decision was in the interests of certainty.

In conclusion, unless the parties actually accept to exclude entire performance, judges will stick to the principle that they should strictly enforce what the parties actually agreed and will only accept entire performance.

#69

Since it is clear that the strict application of the rule of entire performance might raise difficulties in certain cases, the courts very early established the doctrine of substantial performance. They did it in a case decided in 1779, which concerned the sale of plantation together with its slaves. Lord Mansfield, a very famous and influential 18th c. judge, suggested that the fact that the seller could not establish ownership of every single slave stated to be included in the contract did not prevent him from recovering payment from the buyer. Thus the doctrine of substantial performance came into existence according to which only a minor variation from the terms of the contracts does not allow the other party to claim to be discharged. He must fulfil his obligations under the contract, which, most of the time, means payment. He can only rely on an action for damages on breach.

This principle was further confirmed by subsequent case law, for instance in the case Dakin v. Lee in 1916. The case concerned a contract for the repair of a house but the work was not done in accordance with the contract on several points. The concrete underpinning was only half the contract depth, the column to support the bay window was of 4 inch solid instead of 5-inch diameter hollow and the joints over the bay window were not installed properly. The owners of the house refused to pay the price agreed and the builders took the case to court. The official referee found that the plaintiffs, i.e. the builders had not performed the contract and therefore could not claim any payment. The court of appeal eventually noted that distinction existed between failing to complete and completing badly. In the case in hand, the work had been completed though it had been poorly performed, which allowed the defendant to pay for the work done less deductions for the fact it did not conform to the contract requirements.

A similar decision was made in Hoenig v. Isaacs in 1952 and more recently in Young v. Thames Property Ltd. in 1999. The latter case involved a contract for the construction of a car park. The builders provided a sub-base of a particular quality of limestone 13mm deep whereas, according to the contract it must have been 100mm deep. Additionally, the wrong rate of tar macadam was used at the top surface. The car park owners refused to pay on the ground of non-performance of their obligations as stated in the contract by the builders. The judge accepted evidence that these defects made little practical difference to the quality of the car park

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and that the cost of remedying theme would have been disproportionate. It held that the plaintiff was entitled to the contract price less the amount that has been saved through the various failures to comply with the specifications. The Court of Appeal confirmed that the doctrine of substantial performance should be applied as in Dakin v. Lee and that, in particular, there was a difference between work that was abandoned and work which was completely and done poorly. A statement made in Dakin v. Lee was used to support the decision: “where a builder has supplied work and labour for the creation or repair of a house under a lump-sum contract but has departed from the terms of the contract, he is entitled to recover for his services unless, first, the work that he has done was of no benefit to the owner, second, the work he had done was entirely different from the work he has contracted to do, third, he has abandoned his work and left it unfinished.” They added that, in the end, “the essence of the doctrine of substantial performance depends on the nature of the contract and all the circumstances that arise in the present case”.

In conclusion, the question of whether a performance is substantial is one of fact and degree and it is up to the trial judge to decide. In the cases I have just mentioned, the building contracts were lump-sum contracts, which required that performance be complete before payment was made. Yet, in many cases the contracts are said to be severable, which means that payment becomes due at several stages of performance. Such contracts are also called divisible contracts because they are divided into sections. The completion of each section gives rise to a right to some or partial payment. Most contracts of employment are agreed on that basis. Employees are paid weekly or monthly not all at once when they leave the company.

If I may come back to the case of the sailor who died half way through the complete performance of his obligations, his widow could have recovered the due wages if the sailor had accepted a severable, divisible contract according to which he would have agreed to a certain rate per week. To finish about that case, the sailor had accepted a lump-sum contract because payment to be made only at the end of the voyage was much higher than the wages paid on a weekly basis.

Apart from employment contracts, major building contracts today operate in a similar way with instalments falling due at various stages of the completion of the construction. In a severable contract, the price of its stage can be claimed when this stage is completed even though the party concerned may be in breach of the contract for not completing subsequent stages. For instance, if a family engages a babysitter for the six-week school holiday, on the basis of weekly-wages, the babysitter would be entitled to the first week pay even if he or she did not turn up for the following five weeks.

A final remark: in case parties do not clearly establish whether a contract is an entire one or a severable one, judges will construe the contract.

#70

If a party accepts partial performance, this may be sufficient in certain circumstances to discharge the other party’s further obligations under the contract on top of allowing that party to sue on a quantum meruit basis for the work that has already been done. This is what is called acceptance of partial performance. A quantum meruit is a Latin expression, which means as much as is deserved. It refers to the possibility for one party to obtain the payment of a reasonable price for whatever expenses he has incurred or for any work that he has done though the contract is eventually declared invalid or is not discharged. The courts will only infer an agreement to accept and pay for part performance where the party making the promise had a genuine choice.

The old case of Sumpter v. Hedges in 1898 clearly illustrates these points. The plaintiff who was a builder had contracted to build two houses and a stable on the defendant’s land for £ 565. However, he abandoned the project after completing £ 335 worth of work. Eventually, the defendant refused to pay any price at all completing the house himself and he did so using the material that the builder had left behind. The builder

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sued the owner on a quantum meruit basis for the work done and for the material supplied. The claim for work was rejected. The owner, defendant, has not chosen to accept part performance, in fact he had no alternative but to complete the building. However, the court accepted the quantum meruit claim for the supply of the materials.

Another case where a quantum meruit can be used in order to cover the cost of some work done is where one party performs partly some of the agreed obligations and is then prevented from completing the rest by some fault of the other party. This was established in a case where the plaintiff, who was a writer, recovered £ 50 towards the work that he had begun but was unable to finish because the defendant, who was the publishing company, decided to cease the series of which the book was meant to form a part. The contract price had been £ 100 but the plaintiff had not completed the book at the time when the defendant brought the contract to an end. In cases such as these, the defendant can ultimately claim damages for consequential damages as a result of a breach of contract.

Similarly, when one party cannot perform his contract obligations without the other party’s cooperation, then rejection of an offer to perform, also called a tender of performance will release the party tendering performance from any further obligation. This was illustrated in case that involved the delivery of oil. The plaintiffs had agreed to sell a certain quantity of oil, which, it was agreed, must be delivered by the end of March of a given year. Eventually, delivery was tendered on the last day of March at 8.30 p.m. but the defendant refused to accept the delivery and later refused to pay the price. The plaintiffs successfully sued for damages as the court established that they had done all they could to comply with the terms of the contract and, therefore, their tender for performance was sufficient basis for their claim. In case of tender for money, if a debtor tenders payment and this is not accepted, this does not cancel the obligation to pay. The debtor is not obliged to attempt to pay again but can wait until the creditor calls for payment.

Another interesting point concerning performance is that of the consequences of the breach of terms concerning time. In other words, what is the legal position when one party performs late yet, in all other respects, as agreed in the contract. The legal question as traditionally put is: “is time of the essence?” The common law said it was unless the parties had expressed a contrary intention but equity took the opposite view stating that it was not unless the parties had specifically stated it was. Most legislation has adopted the equitable approach according to which, until it is clearly stated otherwise, stipulations as to time are not of the essence. So, if time is of the essence, late performance will give rise to a right to terminate the contract. Any failure to perform on time will justify recession even if little or no hardship is caused. On the other hand, when time is not of the essence, late performance will not justify termination unless it amounts to a substantial failure in performance. In any case, it constitutes a breach, which may give rise to damages if the late performance results in a loss. Should delay be so long that it amounts to a frustrating event, then the contract will be terminated according to the rules on frustration.

There are three main ways in which a contract may be classified as one in which time is of the essence.First the parties may explicitly state that in their agreement. Secondly, it may be inferred by the nature of the contract or the circumstances surrounding it. For instance, in a contract to sell goods, which quickly go off or the price of which fluctuates very rapidly, time is, necessarily, of the essence. The third category is that of contracts which originally were not contract in which time was of the essence but become so if one party delays performance and the other then gives notice of a time limit on performance. Where a contract does not specify the time of performance, performance must usually take place within a reasonable time.

The last question that must be envisaged is whether a contract may be discharged, if the contractual obligations of one of the parties are, at the party’s request, performed by someone else. This raises the issue of

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vicarious performance, the word vicarious being a legal term that means that some act is made by someone else. The answer is yes unless that vicarious performance prejudices the other party’s interests. In many cases, vicarious performance is not accepted because the service contracted for is one that relies on the skill of and judgment of one party as in contracts of employment or in a contract to take a picture or to perform in a concert. When vicarious performance is permitted liability for performance remains with the original contracting party.

#71

A contract may be discharged by agreement if parties agree to terminate their contract so that one or both parties are released from their obligations. Such discharge by agreement may be either bilateral – both parties receive a benefit from the discharge – or unilateral, when the change is made to the benefit of one party. In general, an agreement to discharge will be binding if it contains the same elements that make a contract binding when it is formed. Consideration and formality are the two elements that may raise difficulties.

Consideration is generally not a problem when the two parties agree to alter their obligations since each is giving something in return for the change. For example, Gin, a decorator, contracts to decorate Jack’s kitchen and bathroom for £ 400. When the kitchen is finished, Jack decides that he does not want his bathroom done and Jim agrees. In that case, Jack releasing Gin from her obligations to decorate the bathroom is consideration for her releasing Jack from his obligation to pay the other £ 200 and vice versa.

In fact, consideration raises difficulties when only one party’s obligations change. If the party agrees to the change then agreement will only be binding if it is either put in a deed or supported by consideration. When consideration is provided in return of the other party’s agreement to change, the agreement is called accord and the provision is called satisfaction thus the whole arrangement is called “accord and satisfaction”. As a matter of fact such accord and satisfaction agreements are used both to vary, i.e. to alter, a contract and to discharge an existing contract, i.e. to bring to an end by mutual agreement. As long as there are some outstanding obligations on both sides of the contract, i.e. as long as both parties still have obligations to perform, the agreement to terminate will be binding. The foregoing, i.e. the fact of giving out the existing rights under the contract, will constitute good consideration for the promise the other party from his or hers obligations.

The issue of formalities arises in connection with certain types of contracts, mainly those concerning the sale of land, which must be evidenced in writing in order to be binding. The question is to know whether the same requirement concerning formalities applies to an agreement to discharge such a contract. It seems that there are three possibilities. In a case of partial discharge, where the second agreement suggests that parties only want to modify the terms of the previous contract without making substantial changes, the agreed modification must be evidenced in writing. If this is not done, the original contract remains enforceable. In a case of complete discharge, when the parties actually wish to abandon the original contract completely and therefore put an end to their contractual relations it is not necessary that the agreement be made in writing, an oral agreement is sufficient. In case of a new agreement, i.e. when the parties wish to abandon their original contract and replace it with a new one, an oral agreement will be sufficient to rescind the original contract but the new one must be evidenced in writing.

One last remark about discharge by agreement, sometimes contracting parties will agree at the start that if a certain circumstance occurs the contract will come to an end. This is what is called a condition subsequent. A common example is a manufacturer’s guarantee offering to give a refund if a fault in the goods appears within a specified time.

The case Blant v. Sparks in 1999 [?] illustrates another type of condition precedent. Blant had been an

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international swimmer and had been engaged as consultant by the Amateur Swimming Association to promote the association’s award scheme. The consultancy contract allowed the association to terminate the engagement was convicted of any serious criminal effect or was otherwise guilty of bringing the association or himself into disrepute. That was the condition subsequent. The Association discovered that before the contract was made, Blant had received bribes or secret commissions to make commercial recommendations to the Association’s clients. It decided to terminate the contract. When Blant sued the association, the Court of Appeal held that his conduct resulted in bringing the Association into disrepute and that therefore the Association was entitled to terminate the contract as it had been agreed.

#72

A contract is said to be breached when one party performs defectively or differently from what was agreed or not at all, which constitutes what is called an actual breach, or indicates in advance that they will not be performing as agreed referred to as an anticipatory breach.

A breach of contract will have a range of consequences. It may entitle the innocent party to seek an order for performance of the contract which is called an order for specific performance or to claim damages or to terminate the contract or a combination of all these. In this section, I am going to deal excusively with the innocent party’s right to terminate the contract since this termination means that the contract comes to an end and that future obligations are discharged.

By terminating the contract, the innocent party indicates that it does not wish to perform any outstanding obligations under the contract, secondly that it does not expect the defaulting party to perform any of his or her outstanding obligations and that he will therefore reject performance if it is tendered. Finally, through termination, the innocent party also indicates that it may seek financial compensation for losses resulting from the other party’s breach.

A rather traditional common law approach for a long time was that a sufficiently serious breach of a contract, often referred to as a “repudiatory breach”, brought a contract automatically to an end, whether or not the parties to the contract wished it to be so. The current approach is that in case of breach by the other party, the innocent party has the choice of whether to terminate the agreement or allow it to continue. This was confirmed by the House of Lords in the case Photo Productions v. Securicor Ltd. in 1980. In all cases, the innocent party will have the possibility of electing to either treat the contract as repudiated and therefore to terminate it or to confirm it and possibly to claim damages. The case Pilbrow v. Pearless De Rougemont & Co. in 1999 is one example of an actual breach of contract. The appellant had telephoned a firm of solicitor and asked to make an appointment with a solicitor, the appointment was arranged with an employee of the firm who was not a qualified solicitor without the appellant knowing anything about that. Eventually, the latter was dissatisfied with the quality of the legal services he received and refused to pay the fees. The firm sued for their fees. The Court of Appeal accepted that in fact the quality of the legal services had been that of a competent solicitor but it ruled that the terms of the contract included that those legal services be provided by a qualified solicitor and that therefore the firm had breached the terms of the agreement and that they were not entitled to any payment.

In the case of an anticipatory breach, the victim party can sue for breach straight away, he does not have to wait until performance falls due. This was illustrated in an old case of 1872 involving a contract to marry. Note that promises to marry were then considered as valid contracts which is no longer the case. The defendant had promised to marry the plaintiff once his father had died, he later broke off his engagement when his father was still alive and then his ex-fiancée sued him for breach of promise. He argued that she had no claim as the time of performance had not yet arrived. The court rejected the defendant’s argument and recognised the plaintiff’s right to sue as soon as the anticipatory breach occurred. In fact, in cases of

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anticipatory breach, the innocent party may choose to wait until performance falls due, yet they may end up worse off than if they had sued immediately when the anticipatory breach was known.

#73Now, let’s examine exactly what exactly a repudiatory breach may be.

As I have already mentioned repudiation is possible when one party makes it clear that it no longer intends to be bound by the contract, either during its performance or before performance is due. In other words, this party wants to terminate the contract. As I am going to show you, three sets of circumstances may entitle the innocent party to repudiate the contract.

First, the parties may have envisaged possible breaches and whether they want them to be treated as repudiatory breaches or not.Secondly, whether a breach is repudiatory or not may depend on the consequences of that breach on the innocent party andThirdly, legislation may set out special legal rules regarding certain breaches of contract and their consequences.

As a matter of fact, English courts use the three approaches.

Broadly speaking, a contract contains a certain number of terms some of which are essential to the purpose of the contract and go, as it is said, to the core of the contract. Others bring less essential ends and are rather peripheral to the main terms. According to accepted legal terminology, the more essential terms of a contract are called conditions and the others are called warranties.

This classification of contractual terms was confirmed by the Sale of Goods Act voted in 1979, which is the main existing legislation labelling the various terms of a contract of sale. Therefore, according to the Sale of Goods Act, a condition is a stipulation the breach of which may give rise to the right to treat the contract as repudiated whereas the breach of a warranty may give rise to a claim for damages but not to a right to reject the goods. Thus, the Sale of Goods Act uses the terms condition and warranty in order to distinguish between repudiatory and non-repudiatory breaches. Only the use of a term labelled as a condition will possibly result in a repudiation by a non-breaching party.

Yet, not much legislation exists that regulates specific contracts and contracts for the sale of goods are the outstanding exceptions. So the other way courts may know whether the term, which has been breached, is a condition or a warranty is to rely on the parties labelling when making the contract. Yet such labelling will only serve to presume parties intention to treat the term either as a condition or a warranty and will not be conclusive. It will be subject to interpretation, which will be free to construe the terms of the contracts without necessarily sticking to the parties’ qualification of the terms.

Recent case law confirms that this approach is the one that courts have been adopting for several decades now. For instance, in the case Rice v. Great Yarmouth Borough Council decided in 2001, the Court of Appeal confirmed that the trial judges’ holding that the contract clause setting out the circumstances upon which one party may terminate the contract should not be applied literally and that there should be a right to terminate when the breach was serious enough to be treated as repudiatory. The Court of Appeal insisted that the clause must be interpreted in the overall context of the contract and in line with common sense.

Now, a third approach is adopted when no statute actually categorises the clauses of a contract or when parties themselves did not label the terms of their contracts. The approach was used in the case decided in 1962 Hong Kong Fir Shipping Company v. Kawasaki Kisen Kaisha Ltd., which was concerned with a charter party one term of which related to the sea-worthiness of the ship had been breached. By the way, this case is still considered as the leading case in that respect. Such terms therefore are labelled innominate or intermediate

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ones and the courts will eventually have to analyse them in order to know whether they are conditions or warranties. And in the case in hand, when interpreting the clause, which had been breached, the judge had to “look at the events, which had occurred as a result of the breach at the time when the charterers purported to be seeing the charter party and to decide whether the occurrence of those events deprives the charterers of substantially the whole benefit, which was the intention of the party as expressed in the charter party that the charterers should obtain from the further performance of their own contractual undertakings.” So, the focus is not on the party’s intentions at the time of the making of the contract but on the effect of the actual breach that had occurred. So, if the consequences of the breach are so serious that they fundamentally annihilate the purpose of the contract, then the breach will be treated as repudiatory whether or not the term was labelled as a condition. Similarly, if the consequences are less serious, the breach will give rise only to the remedy of damages as if the term breached was a warranty.

The concluding remark is that English courts have a rather flexible approach when analysing the terms of a contract and having to decide whether a breach is repudiatory or not. Such flexibility, focusing on the consequences of the breach, rather than on the party’s intentions when making the contract is hard to reconcile with the need for certainty, which commercial transactions require. Therefore, it is of lesser importance that parties label the terms of their contracts or set out the consequences of the breach of the terms of their contracts, since courts will be able to superimpose their own interpretation.

#74

Now, I come to the last way a contract may be discharged: discharge by frustration. The basic principle is that, after a contract was made, something happened through no fault of the parties, to make its performance impossible, then the contract is said to be frustrated and the obligations are going to come to an end. As I am going to explain only a limited number of circumstances will excuse non-performance.

The first case in English case law, which hinted at impossibility to perform as a mode of discharge was Taylor v. Caldwell in 1863. The case involved an agreement to use the surrey gardens and music halls for a series of “grand concerts and day and night fetes”. Six days before the planned date for the first concert, the building burnt down rendering it impossible for the concert to take place. The organisers of the concert were sued for breach of contract, yet the action failed because the court held that performance was impossible.

It will take too long to give a list of all the situations in which a contract will be considered as frustrated. Yet, these frustrating circumstances fall into three broad categories. First, events that make performance impossible. Second, those that make performance illegal and third those that make it pointless.

Among events that make performance impossible, let’s mention the destruction or unavailability of something essential for the performance of the contract as was the case in Taylor v. Caldwell or the death or unavailability as result of ill health of either the party in contracts which require personal performance. In certain circumstances, the method of performance may become impossible, which frustrates the contract. Impossibility of performance does not mean simply that performance has become more onerous or more expensive than expected. A number of cases have consistently stressed what a law Lord explained in the case Davis Contractors Ltd, v. Fareham UDC in 1956: “It is not hardship or inconvenience or material loss itself which cause the principle of frustration into play. There must be as well a change in the principle that the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.”

Supervening illegality occurs if, after a contract was formed a change in the law makes the performance illegal. This is the case when a war breaks out between two countries making commercial exchanges illegal. Such an event will obviously frustrate the contract.

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Lastly, a contract may be frustrated where a supervening event makes performance pointless, i.e. meaningless. This is illustrated by the well-known case Krell v. Henry in 1903 associated with a coronation of Edward VII in 1901. The coronation had been planned for a certain date but was postponed because the King fell ill. Since the postponement was made at the last moment, many preparations had been made and events organised. So, in Krell v. Henry, the defendants had agreed to rent from the plaintiff a suite of rooms in Pall Mall for the day on which the coronation was to take place. The rooms offered a view of the coronation procession and the defendant had intended to sell tickets to people wanting to watch it from its windows. As the coronation did not take place, the defendant no longer wanted the rooms and refused to pay so the plaintiff sued for the pay. The Court of Appeal ruled that, though the contract was still capable of being performed, it was frustrated because, though the contract did not actually mention it in so many words, the coronation procession was “the foundation of the contract”. The Court stated that frustration could apply in cases where the event which renders the contract incapable of performance is the cessation or non-existence of an express condition or state of things going to the root of the contract and essential performance.

On the contrary, in another of the so-called coronation cases, in which the defendant had hired a steamboat in order to take passengers to watch the national review by the King, the Court of Appeal held that the ability to watch the review was not fundamental to the contract as the defendant could still carry out pleasant trips on the boat.

Though the difference between those two coronation cases may seem quite flat, at any rate, case law has made it clear that frustration cannot be invoked simply because one party has made what turns out to be a bad deal. In a recent case, the fact that redevelopment of the building block became difficult or impossible did not mean that there was no purpose at all in the contract. The contract in fact only did not turn out to be as lucrative as expected.

A few conditions are required for frustration to exist. The event in question must occur after the contract was made then, if the event was foreseen or foreseeable or if it resulted from some fault of one of the parties, frustration shall be excluded. For instance, some contract makes specific provisions for the type of events which might frustrate a contract. Such clauses are called frustration clauses. They give a list, which tends to be exhaustive, of all events which might interfere with performance in which case the failing party will be excused for his non-performance.

Once a contract is considered to be frustrated, it is automatically terminated at the time when the frustrating event occurred. The contract is thus described as being discharged. Obligations which would have arisen from that point no longer exist but the contract is not treated as though it never existed. So, acts done before the frustrating event will have legal consequences. According to the Law Reform Frustrated Contracts Act of 1943, money paid under a contract before it was frustrated must be recovered. The Act also removes every obligation to pay any money which existed prior to the frustrating event. In case a party obtained a benefit other than money, because of something done by the other in performance of the contract, the party receiving the benefit can be ordered to pay a just sum in return for it.

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LECTURE 9: REMEDIES

#75

From a vocabulary point of view, at common law, remedies are rewarded for breach of contract rather than for non-performance or for defective performance. True enough, a breach of contract does mean that one party failed to fulfil one or several obligations it had agreed to when it entered the contract with the other party. Yet, the expression focuses more on the claimants right to be indemnified for non-performance than on his right of performance by the other party.

As we are going to see, the remedy of specific performance is most exceptional and some judges have established that “the duty to keep a contract at common law means a prediction that the breaching party must pay damages if it is not kept”. So, under the English law of contract, the party’s primary obligation is to perform. The courts are reluctant to order a party to perform so that the party in breach can, in most cases, pay damages rather than perform its obligations. In one old case, which I will mention more in depth later, Photo Production Ltd. v. Securicor Ltd. decided in 1980, Lord Diplock stated that “breaches of primary obligations give rise to secondary obligations on the part of the party in default”. Therefore, every failure to perform a primary obligation is a breach of contract and the secondary obligation on the part of the breaching party to which it gives rise is to pay monetary compensation to the party for the loss sustained by him resulting from the breach. Yet, strictly speaking, the primary obligations of the two parties so far as they have not been fully performed remain unchanged.

So it is clear that, at English law, a breach of contract is the failure by one party to perform a primary obligation and the common law is not really concerned with distinguishing whether such failure to perform actually is non-performance, defective or partial performance or delay in performance. The breach automatically gives rise to a secondary obligation, which consists of an obligation to pay damages for the loss caused.

Historically, the common law envisaged only one kind of remedies, i.e. damages which is a sum of money aimed at compensating the innocent party for the prejudice caused to him as a result of the other party’s breach of his contractual obligations. As this kind of remedy proved not to be satisfactory in all cases, the courts of equity started to develop different kinds of remedies, essentially injunctions in order to oblige the defaulting party to do something, to do some act or to stop doing something. After the two systems, of common law and equity, merged, the new courts were able to grant both types of remedies. Note that the two kinds of remedies are not exclusive in other words, common law or equitable remedies may be granted simply or in combination. On top of those two broad categories of remedies there is a third category, which are those that the parties agree to when they enter the contract.

A last vocabulary remark must be repeated now. Do not forget to make the difference between damage (always in the singular), which is a synonym of prejudice, of loss and damages (always in the plural), which refers to the sum of money that may be awarded by courts in case of prejudice.

#76

So let me first explain the scope of damages which are the only common law remedies. Such common law remedies are available as of right if a contract has been breached. So courts award damages as the usual remedy when they are convinced that the contract has been breached so that the innocent party may receive financial compensation for the losses he suffered as a result of not receiving the benefit he expected from the contract. Such losses include physical harm to the claimants or his or hers property and any other injury to their economic position. Injury to feelings are rarely a ground for a reward of damages though this may be the

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case in very specific circumstances.

The general rule governing damages is that innocent parties are entitled to such damages as will put them in the position they would have been in if the contract had been performed, thus fulfilling the expectations of that party as to the benefits that would have flown from the successful completion of the contract. So, generally speaking, where the innocent party was expected to make a profit as a result of a contract that will generally be recoverable along with other consequential losses flowing from the breach. In all cases, the reward of damages is subject to the rules of causation, remoteness and mitigation.

Except in very exceptional circumstances, contract damages are not intended a means to punishing the party in breach. Thus, with only very few exceptions, when calculating damages, the courts do not take into account any gain the party in breach has made by breaking the contract, only the loss caused to the innocent party. Very exceptionally, the courts may decide to award what are called punitive or exemplary damages.

#77

The concept of causation means that the party will only be liable for the losses caused by their breach of contract. The breach may not be the only cause for the loss incurred by the innocent party then the courts will have to establish whether any intervening event broke the chain of causation.

The case Country Ltd v. Jerusem Private Securities in 1996 illustrates that the breach of contract may not be the only cause for the loss. In that case, the plaintiff’s bank agreed to underwrite, i.e. to guarantee, the issue of 26m shares in a privately quoted company. The defendants were stockbrokers engaged by the plaintiffs to approach potential investors in the shares. The stockbrokers breached the terms of their contract and the plaintiffs found themselves with some 4.5m shares in their hands which, as a result of a fall in prices, represented a loss in value of nearly £ 7m. They sued the stockbrokers and the main issue was whether the plaintiff’s loss was caused by the defendants’ breach of contract. The Court of Appeal decided that although a certain number of events have contributed to the plaintiff’s loss, the defendants’ breach was the effective cause of the plaintiffs’ loss and were therefore liable for damages.

Remoteness is another concept applied to assess the extent of the compensation that the innocent party may obtain. Remoteness has to do with the extent to which the defendant is liable for the consequences for his wrongful act or omission. In a contractual relationship, the defendant is liable to compensate for damage only if it was within his reasonable contemplation, which means is presumed to have contemplated and therefore is liable for the breach according to the usual cause of events. There may be losses which clearly result from a defendants breach of contract but which are too remote from the breach for them to be fair for the defendant to compensate the claimant for them. The scope of remoteness was established in a 19th c. case in which the court stated that the defendant should be liable for such loss as would arise naturally, “according to the usual course of things”, from their breach or such loss “as may reasonably have been in the contemplation of the parties at the time when they made the contract”.

20th c. case law confirmed the principle in various types of contracts. The most interesting cases concern what is abnormal losses which did not occur “in the normal course of things” as the two following cases exemplify. In Victoria Laundry Windsor Ltd v. Newman Industries Ltd, in 1949, the plaintiffs were launderers and dyers who needed to buy a large boiler to extend their business so that they might take on very well paid government contracts. Therefore, they contracted to buy a second hand boiler from the defendants and made it clear that they needed it for immediate use. While the boiler was getting prepared for delivery, it eventually got damaged so that delivery was made much later than what was agreed in the contract. The launderers then sued the defendants under two heads: £ 16 per week for the loss of normal profits which they would have made if they had been able to take on extraordinary work thanks to the new boiler and £ 262 per week for the

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loss of the lucrative dying contract with the government. The Court of Appeal rejected the plaintiff’s claim of loss of profits under the government contract on the ground that the defendants had no way to know about the plaintiff’s government contract and even less about the fact that it was so much more lucrative than the laundry’s ordinary work. The Court held that the defendants could be liable only for such losses as were “reasonably foreseeable” as arising from the breach.

In another case decided in 1969, the Heron II, the plaintiff chartered the ship whose name was the Heron II to carry sugar to Basra where the cargo was to be sold. The journey was to take 20 days but the ship owners changed routes and the ship journey eventually took 9 more days. During the period between the agreed delivery date and the actual delivery, the market price of sugar at Basra had felt significantly. The late delivery put the ship-owner in breach of contract and the plaintiff claimed the difference between the price he would have got for the sugar that was carried had the delivery been on time and the going price when the delivery actually took place. The ship-owner did not know that the plaintiff intended to sell the sugar as soon as he reached Basra yet he knew that there was a market for sugar in that town. So the court considered that “if he, the defendant, had thought about the matter he must have realised that at least it was not unlikely that the sugar would be sold in the market at the market price on arrival”. So the House of Lords held that the plaintiff’s intention to sell the sugar at Basra when the ship arrived was so probable that it should be regarded as arising in the normal course of events and therefore had been in the contemplation of the parties at the time they made their contract. In the case the Heron II, the House of Lords discussed the level of probability required for an event to be regarded within the contemplation of the parties. They disapproved of the phrase “reasonably foreseeable” as used in the Victoria Laundry case, they stated that in order for a defendant to be held responsible for a loss that loss must be such that both parties would, at the time the contract was made, have regarded it as being liable to result from the breach. The fact that they knew that there was a remote chance that the loss might occur would not be enough.

To conclude concerning remoteness, where a loss only results from a breach because of special circumstances, the defendant will only be liable for that loss if they knew about the special circumstances at the time the contract was made and contracted on the basis that such circumstances existed.

Mitigation is the third limit on the scope of damages. The concept of mitigation rests upon the notion that a non-defaulting party is expected to do what it can to reduce the loss suffered as a result from the defendant’s breach. The claimant is thus expected to take steps to find a replacement solution or an alternative procedure to avoid unnecessary losses. Claimants need only make reasonable efforts not enormous efforts and it is up to the defendant to prove that the loss could have been mitigated or better mitigated. The leading 19th c. case of Brace v. Calder in 1895 well illustrates the purpose of mitigation and the extent to which it may limit the amount of damages awarded in case of a breach of contract. In that case, the defendants were a partnership of 4 members. They had agreed to employ the plaintiff two years as a manager of a branch of their business. Five months later, two of the members retired and the partnership was dissolved and the business was transferred to the remaining two. Legally, the dissolution of the partnership constituted wrongful dismissal of the plaintiff but the two remaining partners agreed to reemploy him on the same terms as before. The claimant rejected the offer and brought an action for breach of contract seeking to recover the salary he would have received had he served the two full years. His claim was refused and he was awarded only nominal damages. As a matter of fact, accepting the two remaining members offer of employment would have been the best way to mitigate the loss suffered as a result of the breach of his former contract of employment resulting from the dissolution of the original partnership.

#78

Now, let me go into more details on how loss is calculated. Once the courts have decided that the defendant is liable, the next issue is to determine the amount of damages that will compensate the claimant for the loss. It

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has long been established that there are two main ways in which the losses of a claimant in a contract action may be calculated. First there is loss of expectation and then reliance loss.

Loss of expectation is the usual way in which damages are calculated and it aims at putting the claimant in the position they would have been in if the contract had been performed. For instance, the claimant who bought goods in the intention to sell them can claim the profit he would have made on that sale. Similarly, a claimant who’s forced to sell goods at a lower price when the original buyer pulls out can claim the difference between the contract price and the price at which the goods were eventually sold. The case Anglia Television v. Reed in 1972 established that reliance loss compensation can include money spent before the contract was made. In that case, the television company had planned to make a film and had signed Reed, an actor, to star in it. At a fairly early stage, Reed pulled out and, as a result, the film was not made. Clearly the potential profits of a film are extremely difficult to predict. Consequently, Anglia sought to claim back the money it has spent on making preparation for the film. There was no doubt that the amount they had spent after contracting Reed was recoverable, as it was spent in reliance of him performing as agreed. But the film company also wished to claim money that had been spent in the preparatory stages, before Reed was signed. The court accepted the claim stating that they saw no reason why such expenditure should not be recovered so long as it satisfies the rule of remoteness. If Reed could be expected to realise that such losses were likely to result from his breach then he was liable for them. As Lord Denning pointed out that money had been spent on the film before he signed up and that that money would be wasted if the film was not made. Therefore, Anglia were allowed to recover all they had spent on the film before and after the contract was made with Reed.

As a rule, a claimant can choose whether to base a claim on loss of expectation or on reliance loss. But if the defendant can show that the contract made would have turned out so badly for the claimant that they would have made a loss, the claimant cannot transfer his loss to the defendant by choosing damages based on reliance loss. So, if, in the case above-mentioned, Reed could have proved that Anglia would not have made any money from the film anyway, the television company could not have claimed back the money they had spent. The same applies where, despite the defendant’s breach, the claimant actually suffers no loss. The fact that the claimant looses no profit prevents him from claiming damages as this would effectively put him in a better position than he would have been in if the contract had been performed properly and this is clearly not the aim of the contract damages. In some cases, the courts would allow the claimants to combine claims for expectation loss and reliance loss yet not in such a way as to recover twice for the same loss.

#79

The question now is how to calculate the expectation loss. Where the goods that were supplied are of a lesser value than agreed in the contract or where the claimant has had to pay for substitute goods or performance, damages are for such loss are assessed by reference either to actual or to market value of the goods in question. Where there is a market for the goods in question, which means that they can be readily bought or sold at a price fixed by supply and demand, the basic calculation of loss will be based on the market price. Yet, other factors may also be taken into account. Where there is no market, the loss has to be quantified in some way.

As concerns contracts for the sale of goods, the Sale of Goods Act (1979) lays down for calculating the compensation to be paid for certain types of breach of contract though their application is subject to the principle that such provisions should not apply if their application may cause injustice. For instance, section 51 of the Act provides that where a seller fails to deliver the goods for which there is a market, the measure of damages should be the difference between the contract price and the current market price at the time the goods ought to have been delivered or at the time of the refusal to deliver if no time for delivery was fixed. If there is no available market, the market value must be established in some way for instance by reference to a resale price.

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Two distinct situations may cause difficulties for the calculation of the expectation loss. First, when the profit resulting from the contract was not certain and secondly, when the cost of fulfilling the claimant’s full expectation is disproportionate to the eventual benefit. Case law provides various examples of uncertain lost profit as a result of breaches of contract such as the loss of opportunity for a hairdresser to earn tips or the loss of opportunity for a writer to enhance his reputation as a result of the publishing company breaching the publishing contract or the loss of sales for a trader as a result of the supplier’s failure to deliver some specimens for a trade fair. Such damages may be qualified as speculative since, in such cases, the innocent party claims damages for loss of a chance to gain some benefit even if it is not absolutely certain that such a benefit would in fact have been obtained if the contract had been performed as agreed.

A recent case, in 1996, exemplifies the difficulties in finding the appropriate reward to meet the claimant’s expectation. Such difficulties often arise from building or construction contracts. The difficulty arises from the disproportion between the cost of providing the claimant with exactly what was bargained for and the benefit which would thus be obtained. The title of the case is Ruxley Electronics and Construction Ltd v. Forsyth. The contract was agreed for the construction of a swimming pool and of a building to enclose it at a cost of £ 70000. The depth of the pool, at one end, was to be 7ft 6 inches, then, eventually, when the pool was completed, the depth of the pool was 6ft 9 inches. The defendants refused to pay the cost of the work and the builders sued them to recover payment for the installation of the pool. Then, the defendants counter-claimed that the completed pool did not meet the specifications agreed in the contract and sought compensation for that. It was obvious that the pool could not be adapted and that the only way to produce a pool that met the specifications agreed upon in the contract would have been by total reconstruction which would have cost over £ 20000. According to well-established case law in such situations, courts would normally allow the recovery of what was called the cost of cure, i.e. the amount of damages that permitted to put the building into the condition it should have been in if the breach had not occurred. The only limit on that case law approach was that if the cost of cure was significantly greater than the reduction in value of the property concerned, then the court may refuse to allow it on the ground of disproportion.

In Ruxley Electronics and Construction Ltd v. Forsyth, the trial judge followed the principles long-established by case law: the swimming pool was entirely suitable for the purpose for which the defendant wished to use it and, given the very high cost of reconstruction, held that the measure of damages should be the difference in value between the pool as supplied and the pool which met the contract specifications. He assessed the difference as nill but ordered the defendants £ 2500 for loss of amenity (loss of amenity refers to the loss or reduction of a person’s mental of physical capacity to do the things he used to do or expected to do). Here the defendant’s capacity to enjoy the new 7ft 9 inches deep swimming pool. On appeal by the defendants, the Court of Appeal reversed the trial judges decision. Eventually, on appeal by the plaintiffs to the House of Lords, the latter restored the trial judges decision thereby confirming that, in building contracts, there are two principle measures for damages. On the one hand, the difference in value and, on the other hand, the cost of reinstatement, where it would be unreasonable to award the cost of reinstatement, because the expense would be totally out of proportion with the benefit to be obtained, then the court should award the difference in value. As one of the Law Lords stated “damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party.” Aggrieved means the one which has suffered a loss.

If the decision of the Law Lords in the case I have just mentioned appears quite sensible on the facts, the legal principle which it confirms may raise difficult issues. It seems that an unscrupulous contractor may very well ignore contract specifications provided that the final product is fit for the purpose for which the other party wants to use it. If it is so fit, the cost of reconstruction to meet the specifications is likely to be considered unreasonable and, in the end, there may be little or no difference in the market value of the building, which means that the innocent party has no remedy against such dishonest practices.

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#80

Though contract damages usually aim at compensating financial or pecuniary loss, a limited number of cases involved injury to feelings, generally referred to as moral distress. Traditionally, compensation for such moral distress was granted in case of breaches of contracts for recreation, where the whole purpose of the contract was to provide trouble-free enjoyment. The leading case is Jarvis v. Swans Tours Ltd in 1973. Mr. Jarvis booked a two-week winter sports holiday, which was described as a “house party” and was promised, among other things, a welcome party, afternoon tea and a yodelling evening. In the event, there was no welcoming party, the afternoon tea consisted largely of crisps and the yodeller turned out to be a local man who turned up in his working clothes sang a couple of songs and left. The so-called house party also left something to be desired consisting of 13 holidaymakers the first week and only Mr. Jarvis in the second week. The holiday company was clearly in breach of contract and the trial judge awarded Mr. Jarvis half the contract price at first instance on the basis that Mr. Jarvis received some benefit in the shape of transport and accommodation and the sum awarded was the difference in value between the holiday that he expected and the one he actually got. On appeal by Mr. Jarvis, the Court of Appeal raised the amount of damages rewarded in order to take into account Mr. Jarvis’ disappointment and distress. As Lord Denning stated “it is true that he was conveyed to Switzerland and back and had meals and bed in the hotel but that was not what he went for, he went to enjoy himself with all those facilities that the defendants said he would have, he is entitled for compensation for the loss of these facilities and for the loss of enjoyment”.

More recently, as I have already mentioned in the case Ruxley Electronics v. Forsyth, English courts have established a new ground for the award of damages: loss of amenity. What is the exact nature of this fairly new concept? Case law seems to indicate that loss of amenity is the ground on which the courts are prepared to award damages “for distress and inconvenience” arising as a consequence of breach of contract. The case Farley v. Skinner in 2001 confirmed the concept of loss of amenity. The case concerned a contract for the survey of a house where the surveyor had been specifically instructed by the prospective buyer to check on aircraft noise. The surveyor failed to perform his obligations properly and the purchaser, having moved in, sought compensation for the fact that his enjoyment of the property was reduced, though, in fact, there was no reduction in the market value of the property. In that case, the House of Lords approved a reward of £ 10000 for loss of a benefit which had been contracted for, as distinct from “consequential damages for discomfort”. This seems to mean that the award for loss of amenity is a separate element in the expectation interest and would be awarded in addition to any other elements. At any rate, the calculation of the value of a loss of amenity, since it is by nature a non-pecuniary loss, is left entirely to the discretion of the trial judge.

#81

To complete this presentation of common law remedies in case of breach of contract, let me just mention three procedures aimed at recovering money unduly paid. As a matter of fact, in certain circumstances, damages are not necessarily sought by the innocent party. Yet, he simply wants his money back so to speak.

For instance, when a contract specifies a price to be paid for performance and the party due to pay fails to do so, the party who has performed can claim the price owed by means of an action for the agreed sum. In such a situation, the claimant is not seeking compensation but simply enforcement of the defendant’s promise to pay. An action for the agreed sum can only be brought once the duty to pay has arisen. Of course, if the claimant has suffered additional loss, he may also claim damages.

Secondly, a quantum meruit, Latin for as much as is deserved, is also different from damages as it aims to pay for one past performance in case a price has not been specified but work has been done or goods have been supplied. A quantum meruit may be used when the whole agreement is inferred from conduct or when, simply, the price is the only thing not specified in the contract.

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Thirdly, the remedy of restitution is available when money has been paid under a contract and performance has not been received in return or has not been adequate. In such a case, the claimant may want to claim his money back rather than claim damages, particularly when no additional loss has resulted from the failure to perform. The remedy of restitution is available only when there has been a total failure of consideration so that restitution will prevent unjust enrichment. This means that the party who seeks to recover his money has not received any for what was paid for. The so-called Fibrosa case in 1943 established the principle. The case involved a contract to manufacture machinery between an English company and a Polish one in July 1931 and part of the money was paid in advance by the Polish company. The machinery was never delivered because of the ban on trading with enemy countries as a result of the outbreak of World War II. The contract was frustrated. Fibrosa claimed the money paid in advance back which the Court of Appeal accepted because Fibrosa, the Polish company, had received nothing at all in return for it.

#82

As I have already mentioned, common law remedies, that is to say damages, are not always adequate and the innocent party may seek other remedies apart from or on top of financial compensation. That is why, very early, back in the Middle Ages, the body of equity, which is a body of legal rules distinct from that of the common law, was created. Equity created new legal concepts such as the trust for instance, but it also created new remedies better adapted to the parties’ situation than the traditional single common law remedy of damages. This range of equitable remedies has evolved and are still available today subject to the limits that they are not available as of right but are granted at the sole discretion of the judge. In other words, equitable remedies are not automatic as a result of the defendant being in breach, when deciding the case, the judges take into account the behaviour of both parties and the overall justice or fairness of the case.

The range of equitable remedies includes specific performance and injunctions.

As I have explained, the common law will not force a party in breach to perform his contract obligations except when performance is simply paying money. Now, the equitable remedy of specific performance aims to compel, i.e. to oblige, the party in breach to perform. In practice, specific performance only rarely applies as its application is subject to restrictions.

The first restriction placed on the availability of specific performance is that specific performance may be granted when damages alone will be inadequate, it is not applied when the claimant can easily purchase replacement goods or performance. Thus, specific performance is mainly applied in contracts to sale land including land with buildings, since its piece of land is thought to be unique and impossible to replace exactly. Where damages would only be nominal, specific performance may be ordered to avoid one party being unjustly enriched.

The second restriction is that the court will not apply specific performance to cases where it could cause the claimant great hardship or unfairness. In Patel v. Ali in 1984, the plaintiff has requested specific performance on a contract for the sale of a house. Yet, the claim had been delayed for four years through no fault of either party and, by that time, the seller’s husband had gone bankrupt and she had become disabled. As a result, the sale of the house would have mean moving houses, which, given the circumstances, would have caused her hardship, consequently the court refused specific performance and ordered damages instead.

The third restriction is that specific performance will be refused where the contract has been obtained by unfair means even if that unfairness does not amount to a vitiating factor which would invalidate the contract.

Additionally, some types of contracts, by their nature, are unlikely to be the subject of an order for specific

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performance. For instance, contracts involving personal services such as employment services and contracts which involve continuous duties, are likely to be outside the scope of specific performance.

In Co-operative Insurance Society Ltd v. Argyll Stores Holdings Ltd in 1997, the plaintiffs were developers of a shopping centre, they had granted the defendants a 35 years lease to operate a supermarket in the largest shop unit. This store was central to the success of the centre as it would attract customers generating business for the small shops. The lease contained a promise to keep the store open, as a supermarket, during ordinary business hours and only allowed closure for a maximum of four months during the whole lease. In 1995, the supermarket was losing money and the defendants informed the plaintiffs that they intended to close it down despite the fact that 20 years remained on the lease. The plaintiffs, in turn, proposed that the defendants keep the supermarket open at a reduced rate until they found a suitable tenant to replace them. Without replying, the defendants closed the supermarket which constituted a serious breach of contract. The plaintiffs sought an order for specific performance to compel the supermarket to come back and carry on the tenancy for the rest of the lease. Their claim was eventually refused by the House of Lords.

The House considered that there was no sufficient justification for an order for specific performance. Lord Hoffmann in delivering the principle judgement was clear that “the established practice may justify a refusal of specific performance even when damages are not an adequate remedy”. It was settled practice not to make such orders if this would compel someone to carry on a business as this would require constant supervision by the courts. The result of ordering someone to run a business which was uneconomic might well be to cause them loss which was completely out of proportion to that caused to the other party by the original breach of contract. The Court of Appeal has clearly been influenced by what they considered to be blatantly dishonest conduct by the defendants, the House of Lords followed the traditional path of refusing to treat the nature of the defendants’ conduct as relevant.

Finally, Lord Hoffmann distinguished between contracts requiring someone to carry on an activity over a period of time and contracts for results. In the latter case, supervision by the courts was less problematic as the court could often simply view the end result. This distinction was used to explain the fact that specific enforcement had been ordered in the past in relation to building contracts.

Specific performance will not be applied to a contract, which is vague, as to the performance required, nor to a promise which is only supported by nominal consideration or contained in a deed. That is not used when the contract allows the party concerned to terminate it since its specific performance were ordered, the party concerned could simply exercise the right to terminate. An order for specific performance is also subject to the principle of neutrality which means that it will not usually be ordered against the defendant if it could not have been ordered against the claimant had he been the one in breach. So, for example, specific performance is never ordered when the claimant is a minor because it cannot be ordered against a minor.

The second category of equitable remedies are injunctions. An injunction normally orders the defendant not to do a particular thing. For example, Ken, a horse owner, rents a field from July and it is a term of their agreement that no buildings should be put upon their land. If July discovers that Ken is about the build a stable, she can apply to the court for an injunction to prevent Ken from doing so. This is called a prohibitory injunction.

When the action had already taken place, for example if Ken has already built a stable for instance, the court may make a mandatory injunction which orders the defendant to take action to restore the situation to that which existed before the defendant’s breach. So Ken would have to demolish the stable. When considering the application for a mandatory injunction, the court applies a balance of convenience test and may refuse the remedy if the defendant could lose a lot more by restoring the original position than the claimant could gain. However, in deciding the issue, they will also take into account the nature of the breach and the circumstances

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and a mandatory injunction may be applied even if the defendant’s loss, in the event of restoration, outweighs the claimant’s gain. If, for example, the breach was committed knowingly and damages would not be an adequate remedy.

As a conclusion, there are cases where an injunction potentially brings about the same effects as specific performance. Most recent cases raising the issues suggest that courts are careful not to use injunction as a means of achieving specific performance.

#83

Now, let’s pass on the last topic of this lecture which is liquidated damages and penalty clauses. Many contracts, particularly commercial ones, specify the kinds of breach which would justify termination and/or the amount of damages to be paid by each party in the event of breach. So, it is perfectly acceptable to the parties of a contract to include a provision, a clause in it, concerning the compensation to be paid by the breaching party in the event of a breach. Such clauses are known as liquidated damages clauses. They mean that the parties decided, between themselves, not only where the risk should lie but the extents of such risks.

The aim of such liquidated damages clause is efficiently to reduce the transaction cost which might otherwise follow a breach of contract. In case of breach of contract, the parties will not have to negotiate the compensation and certainly will not have to take legal action since they agreed, in their contract, what amount of financial compensation, the breaching party will pay. They are most common in building which often contain a provision for liquidated or specified damages to be paid in the event that the building is not completed in time. Similarly, holiday contracts often contain a provision stating that the touring company will be allowed to keep a percentage of the price paid if the customer cancels his tour at a late stage. Such provisions allow both sides to know in advance what their liability will amount to.

Liquidated damages clauses are distinct from penalty clauses. A penalty clause is a clause in a contract whereby such high damages are agreed to be paid in the case of breach, that this acts as a threat, thus compelling, obliging the other party to perform. Though parties remain free to agree on such liquidated damages, English law imposes one limitation. The sum that is specified in a contract must be a genuine pre-estimate of the plaintiff’s loss and not a penalty. The distinction was stressed by the Law Lord in the case they had to decide in 1915 Dunlop Pneumatic Tyre Company Ltd v. New Garage and Motor Company Ltd. In the contract, the parties had agreed that a certain sum of money was payable “by way of liquidated damages and not as a penalty”. The House of Lord held that, despite the parties’ own statement, a sum payable could constitute a penalty not only if it was excessive in comparison to the loss but also if it was payable on the occurrence of a range of events which was likely to produce a range of different losses. According to one Law Lord, “the question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of at the time of the contract and not at the time of the breach”. This argument and the reasoning were confirmed by later 20th c. case law.

A recent case brought up the issue again. In Duffin v. Frablespar [?] in 2000, the Court of Appeal considered the term in an agency contract which provided that, on termination by the agent, the principle should immediately pay the agent £ 100000. The contract stated the clause to be a liquidated damages clause with the sum being agreed by the parties to be a reasonable pre-estimate of the loss and damage which the agent will suffer on termination of the agreement. The court held that it was a penalty clause and that therefore it was unenforceable. The court held that it was not a genuine attempt to estimate the loss which the agent would suffer following breach by the principle nor was it graduated in relation to the unexpired term of the agent’s contract. Enforcing it would give the agent a substantial windfall which would be both “extravagant and unconscionable”.

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LECTURE 10: CONSUMER CONTRACTS

#84

To finish this series of 10 lectures about the English law of contracts, I thought it would be interesting to have a closer look at consumer contracts. Consumer contracts are interesting to study because the rules that apply to them well show the combination of traditional common law rules based on case law and of more recent legislative rules at the initiative of the UK parliament. In other words, the rules governing consumer contracts both comply with the traditional common law principles governing all English contracts and offer interesting exceptions to those traditional rules. Thus, consumer contracts well illustrate a recent development in English law, i.e. the intervention of Parliament in certain types of contracts so as to give more certainty to the parties concerning the ways such contracts can be made and the terms they must or, at least, they should include.

Consumer contracts are not the only category of contracts that Parliament has recently, I mean over the last quarter of the 20th c., considered needed clarification. In the lectures, I mentioned contracts for the sale of goods in relation to which the UK parliament enacted an Act as early as 1893 which required, for example, that, in such contracts, the goods must be fit for that purpose. Contracts for the sale of land were also subject to early legislative intervention. More recently, other categories of contracts such as those involving tenant and landlord and those involving employees and employers have also been matter for legislative intervention. Obviously, the reason for such legislative intervention is to provide exceptions to the sacrosanct principle of freedom of contract. In such contracts, the parties are, on the one hand, ordinary consumers and, on the other hand, professional businessmen. In such contracts, the consumers are clearly at a disadvantage both economically and legally since they usually sign with what are called pre-printed standard form contracts whose terms they are in no position to negotiate and that they must take as they are or leave if they are unhappy about their terms. The consumers are in a weaker position so that they may be induced to enter into a disadvantageous deal or an unfair one. That is why regulations have been issued by parliament to avoid such imbalance as the downfall of such contracts.

When the first Sale of Goods Act was voted in 1893, it merely harmonised the existing case law so as to avoid any discrepancy that case law might contain. Later in 20th c., parliament found it necessary to vote more drastic legislation imposing restraints on big companies which took advantage of consumers’ ignorance of the law and weaker position to draw standard form contracts that favoured their interests. Not only companies individually took advantage of their superior position but they supported themselves collectively so that the consumers, virtually, had no choice at all. In case they did not accept the terms of one company and contacted another competitor they found that the terms were equivalent so it was not at all a matter of taking it or leaving it. All the companies in the same line of business offered the same terms. So, in case of litigation, courts started to construe contracts in a way less favourable to the companies but it became obvious that more positive action was needed in order to protect consumers. The trend started in the 1960s and went on throughout the second half of the 20th c. and gave rise to such protective Acts as the Consumer Protection Act of 1961, the Trades Description Act (1968), the Fair Trading Act (1973), the Consumer Credit Act (1974), the Unfair Contract Terms Act (1977), the Consumer Safety Act of 1978 and the Consumer Safety Amendment Act of 1986, the Sale of Goods Act (1979), the Supply of Goods and Services Act of 1992 and the Sale Supply of Goods Act of 1994.

The aim of this legislation has been to balance the two parties rights and obligations so that both obtained some gain or advantage out of the contract in proportion with the detriment that they incur.

#85

Let me review the various contracts in which one party may be a consumer and examine how legislation

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contributed to protect them.

The first category are contracts for the sale of goods. Such contracts are largely governed by the Sale of Goods Act of 1979 which was later amended that is to say modified by the Sale and Supply of Goods Act of 1994. Section II paragraph 1 of the Sale of Goods Act gives a definition of a sale of goods contract as being a contract “by which the seller transfers or agrees to transfer the property of goods to the buyer for a money consideration called the price”. So, it is clear that the act applies only to goods sold for money and does not cover transactions such as the swapping or exchanging of goods. Yet, the act does not define the word goods so that is to be construed according to ordinary meaning. Thus it is clear that it does cover services which are covered by distinct legislation.

The fact that various provisions of the act apply only when goods are sold “in the course of a business” has a raised a certain amount of difficulty as to the exact meaning of that expression. Some situations leave no doubt as to the fact that a given transaction was carried out in the course of a business, as it is obviously the case when the sale of food takes place in a supermarket or a sale of clothes in a clothes shop. On the other hand, in a private sale by a member of the public, as, for instance, when an ordinary person sales his private car through an advertisement in the local newspaper, it is obvious that the transaction was not carried out “in the course of a business”.

Yet, there are certain situations where the construction of the criteria is tricky. For instance, when a business carries out a sales transaction which does not fall within the normal activity of the business. For instance, a solicitor’s firm decides to sell the old computer that it does no longer use. Is the sale within the course of a business or not? The prevailing case was established by the decision in the case Stevenson v. Rogers in 1999. The case involved Rodgers who had a business as a fisherman who then decided to sell his only fishing boat to the claimant and to replace it with a new one. Eventually, the claimant was dissatisfied with the boat and brought an action against Mr. Rogers claiming that he was in breach of the implied term included in the Sale of Goods Act of 1979, according to which the boat should be of “merchantable quality”. As this implied applied only to goods sold “in the course of a business”, it was of the outmost importance for the court to decide if the sale had taken place in the course of Mr. Rogers’ business as a fisherman. The answer of the court is quite interesting. The Court of Appeal extended the meaning of the expression so as to impose as few little limitations as possible on the remedies available to a person buying goods as a consumer. The court took into consideration the legislative history of the Sale of Goods Act including the Law Commission report that paved the way for this legislation and the parliamentary statements and debates when the bill was discussed in parliament. Eventually, the court decided that the expression “in the course of a business” must be given a wider meaning than the one it had originally and that it was meant to cover all sorts of sales of goods made by a business whether or not the sale of goods in question fell within the regular trade of a business. In effect, it meant that the expression in section IV of the Sale of Goods of Act did not require any regularity of the dealing nor, indeed, any previous dealing at all. The court emphasised that the aim of the whole act was to protect consumers and that a narrow construction of the expression would in fact restrict the seller’s liability to the detriment of the consumer’s satisfaction and his right to be protected against abusive practices.

As I have already mentioned, the main novelty that the act brought about was that a certain number of terms would be implied in all contracts for the sale of goods, though parties had never thought of including them or had failed to include them. For instance, under section XII paragraph 1 of the act, the seller must have a right to sell a good and be able to pass good title to the buyer. If that were not the case, the contract would be deemed not to exist for lack of consideration and the buyer would be able to claim back the price of the goods. Another implied term is the one provided by section XIII paragraph 1 which states that “where there is a contract for the sale of goods by description, there is an implied condition that the goods will correspond with the description”. Sale by description covers a vast number of transactions; the court established that this transaction applies to goods sold by self-election, as in the supermarkets. Because the goods are labelled in

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some way their content must match the description on the label. The fact that a discrepancy between the description of the goods and their actual contents cause no specific hardship to the buyer is irrelevant and such a discrepancy will be treated as a breach of a condition and will allow the buyer to invalidate the contract.

Section V of the act is concerned with the correspondence between the bulk of the goods with the sample. The buyer must give some reasonable opportunity of comparing the bulk with the sample. The goods must be free of any defect rendering them unmerchantable which would be apparent on reasonable examination of the sample. Section XIV paragraph 1 originally required that goods must be of merchantable quality but because this criterion rose a lot of difficulties, the Sale of Supply of Goods Act of 1994 amended this provision and replaced it with the requirement that goods be of satisfactory quality which means that they should meet the standard that a reasonable person would regard as satisfactory taking into account their price, description and other relevant circumstances. Such satisfactory quality includes the fitness of the goods for their usual purposes, their appearance and finish, the absence of minor defects and such aspects as safety and durability. So, for instance, defects may be accepted with a very cheap coat though the same defects may be totally unacceptable with an expensive one. Similarly, goods which are sold second hand are not required to be the same standard as new one. A limit of the scope of the criteria of satisfactory criteria is whether any defect was brought to the attention of the buyer before the contract was made or whether the buyer ought to have spotted some defect on examining the goods before buying them. In such cases, defects are not covered by the implied condition of satisfactory quality.

Additionally, section XIV paragraph 3 provides that “where the seller sells goods in the course of a business and the buyer expressly or by implication makes known to him any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied under the contract are reasonably fit for that purpose whether or not that is a purpose for which such goods are commonly supplied, except when the circumstances show that the buyer does not rely or that it is unreasonable for him to rely on the skill and judgment of the seller”. That means that if a buyer tells the seller the goods are required for a particular purpose and the seller goes ahead and sells them, they must be fit for the purpose even if it is an unusual one. For section XIV paragraph 3 to apply the buyer must make known the special purposes he wants to use the goods for. Clearly, the two conditions of fitness for purpose and satisfactory quality quite frequently overlap.

Remedies for breach of any of the implied terms I have just mentioned are now governed by the Sale and Supply of Goods Act of 1994. A breach of the conditions, which originally entitled the buyer to terminate the contract, may, in certain circumstances, be considered as merely a breach of warranty. That is the case if the buyer does not deal as a consumer and if the breach is so slight that it would be unreasonable to reject the goods. Therefore, the buyer is only allowed to claim damages.

Another difficulty raised by the application of the Sale of Goods Act of 1979 was to ascertain when acceptance took place. Therefore the Sale and Supply of Goods Act of 1994 tried to modify the rules governing acceptance thus reinforcing consumer protection against any defect that the goods might have. Acceptance is still deemed to have taken place within a reasonable time, yet this length of time is required to be long enough to give the buyer a reasonable opportunity to examine the goods which means that goods used infrequently will be allowed a longer period of acceptance to ensure that they conform to the contract. Additionally, asking for or accepting a repair in case of defective goods does not amount to acceptance and therefore does not cancel the buyer’s right to reject the goods.

Additional protection is granted by section XI of the Sale of Goods Act which states that the restrictions on terminating a contract for breach of an implied term do not apply where there is an express or implied term to the contrary in the contract for sale. So for instance, if a shop claimed that faulty goods could be returned for a refund at any time it would not matter that in terms of legislation the buyer might be deemed to have accepted them. The Unfair Contract Terms Act of 1977 also lays down rules concerning the exclusion of terms implied

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by the Sale of Goods Act. Moreover, the Unfair Contract Terms Act provisions are strengthened by the Consumer Transaction Restriction on Statement of Orders of 1976. This order made under the authority of the Fair Trading Act of 1973 makes it a criminal offence to purport to introduce into a consumer transaction a term which is void by virtue of the Unfair Contract Terms Act. Such a provision aims at preventing unscrupulous dishonest traders from misleading consumers about their rights by, for instance, stating that no refunds will be given.

#86

Consumers also receive protection when they are parties to contracts for the supply of services which are governed by the Supply of Goods and Services Act of 1982. The act covers the supply of services such as hairdressing or plumbing or window cleaning and all sorts of services but it also covers contracts in which a service is performed and goods are supplied at the same time, which are referred to as work and materials services. An example of such a works and materials service contract is one for the decoration of a house in which the decorator will supply materials such as wallpaper or carpet or paint and in which the decorator will also supply his own work. Another example is a contract to repair a car which will include the supply of the used spare parts and the work by the garage man.

Under the Supply of Goods and Services Act some terms are automatically implied those are the terms which are related to care and skill, time, price and property.

Section XIII of the act provides that “where the supplier is acting in the course of a business, there is an implied term that the supplier will carry out the service with a reasonable care and skill”. It does not mean that the job must be carried out successfully but the supplier must make his best efforts to supply the service he has promised to supply in the most satisfactory manner. If, for instance, you employ someone to cure the damp in your house and he fails to do so, there will be a breach of the implied term only if the damp could have been cured using reasonable care and skills. If reasonable care and skills would not have cured the dump, there is no breach of contract though there may be a breach of an express term if the supplier actually promised, as a term of the contract, that they would be able to eradicate the damp.

Section XIV paragraph 1 provides that, in a business transaction, where the parties do not specify the time by which the job must be finished “there is an implied term that the supplier will carry out the service within a reasonable time”. What a reasonable time is, is a question of fact and will depend on the type of work done.

Section XV-1 states that when the parties did not specify a fixed price “there is an implied term that the party contracting the supplier will pay a reasonable price”. Again, the reasonable price is a question of fact and will depend on the nature of the service.

When a service contract also involves the transfer of property to the customer as when the decorator installs wallpaper or carpets or the mechanic repairs the car using spare parts. The Supply of Goods and Services Act implies terms as to title, description, satisfactory quality, fitness for the purpose and sample similar to the terms implied by the Sale of Goods Act. The implied terms in the Supply of Goods and Services Act are considered as innominate terms and the consequences of a breach will depend on the seriousness of that breach.

#87

The Supply of Goods and Services Act also covers contracts where goods are hired. Such hired contracts are defined as contracts under which one party gives possession of goods to another to be used for the purposes agreed upon by the two parties in return for consideration. The act does not include hire purchase agreements.

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Such hire contracts are covered by implied conditions concerning satisfactory quality, fitness for purspose and correspondance with the description or the sample similar to those implied in other service contracts. An additional implied condition requires that the party hiring out the goods has a right to transfer possession of the goods by will of hire or will have such right by the time of the hiring.

#88

Since most of the goods that consumers buy are actually produced by manufacturers, it is necessary now to envisage in what sort of circumstances manufacturers may be liable directly to the consumer. Note that since consumers buy goods from retailers, consumers may raise claims against the retailers with whom the contract was made. Yet, as I am going to show you, manufacturers may also be liable directly on three grounds:

1. Under a manufacturer’s guarantee2. As a result of the manufacturer’s negligence 3. Under the provisions of the Consumer Protection Act of 1987

So, first, manufacturers’ guarantees: many manufacturers provide a guarantee with their product. Yet, is such a guarantee legally enforceable? As a matter of fact, guarantees raised difficulties under English law. In fact, they are not considered as contracts because they are not supported by consideration the goods being bought before the guarantee is given. So manufacturers provide guarantees and honour them out of common commercial practice. Yet, from a strictly legal point of view, they are not obliged to do so. It seems possible for consumers to claim that they have a collateral contract with the manufacturer since the goods were bought on the basis of the promise made in the guarantee. It means that consumers must be aware, before buying the goods that such guarantees are provided. Sometimes, in the past, manufacturers used guarantees as a way to deprive consumers of their common law or statutory rights so that the consumer would sign a waiver’s right in order to benefit from the guarantee which was likely to give them fewer rights than what they already possessed at law. The Unfair Contract Terms Act made this practice totally illegal by making an exclusion of rights ineffective. Additionally, a European directive provides that consumers have the right to return goods and receive a replacement, a refund, free repairs or a price reduction in case of defective goods. It also created the presumption that defects appearing within six months are presumed to have existed at the time of the delivery. On the other hand, a buyer has an obligation to notify the defects within one month of detecting them.

If goods actually harm the consumers, then the manufacturer will be liable on the ground of negligence. This major principle was established in the case Donaghue v. Stevenson in 1932, in which a beer manufacturer was found liable for negligence as a result of a consumer finding a decomposed snail in the bottle of beer he bought in a café. The case established that a manufacturer of goods is under a duty of care not to put on the market goods that could harm the ultimate consumer. This case law is now backed up by statute. This principle is of outmost significance since it means that the consumer does not need to have a contractual relation with the manufacturer in order to have rights against him and file a claim on the basis of the manufacturer’s negligence. Manufacturers can, of course, defend themselves against the claim for negligence by showing that the goods were manufactured using reasonable care and skill. The burden of proving the manufacturer was negligent lies with the consumer which may prove to be quite difficult as a result of more and more complex manufacturing procedures.

The difficulty of proving negligence with regard to products is illustrated by an old case, decided in 1938, Daniels v. R. White & Sons Ltd. Mr. Daniels bought a bottle of R. White lemonade and a chock of beer from his local pub. Took that home and mixed the lemonade and beer for his wife and himself. On drinking the beverage, both felt burning sensation in their mouths and it was later shown that the lemonade had been contaminated with carbonic acid. It had been proved that carbonic acid had been used in the manufacturer’s

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bottle cleaning plant but the plaintiff could not show where, in the manufacturing process, the negligence had occurred therefore his claim failed. Mr. Daniels also filed a claim in contract against the pub licensee Mrs. Tubbort which was successful simply because liability in contracts is strict and Mrs Tubbort was in breach of the implied condition of the merchantable quality. Though she had no way to check that the various beverages supplied by the manufacturer were of merchantable quality. In fact, they were supplied to her in sealed containers. So the decision is quite harsh on the pub licensee as well. Moreover, though Mr. and Mrs Daniels were injured, only Mr. Daniels could recover damages as a result of the strict application of the doctrine of the privity of contract. So that the decision in that case Daniels v. R. White & Sons Ltd was totally unsatisfactory on several grounds. The courts, nowadays, tend to impose a less rigorous burden of proof in negligence cases and have also imposed stricter liability of manufacturers such as a duty to carry research to discover whether a product was dangerous.

At any rate, liability for negligence with regard to products only covers damage to the person or property. It does not cover economic loss or loss of profits. This was established in 1986 in a case New Head v. Industrial Tanks Besheltis Ltd [?]. The case involved a fish merchant who installed a fist tank to keep lobsters alive out of season. The motor, which powered the tank, failed and caused all the lobsters to die which, in turn, caused substantial loss of profit for the fish merchant. The supplier of the tank had gone into liquidation so the fish merchant sued the manufacturer but the court held that the relationship was not sufficiently proximate to allow recovery of pure economic loss.

#89

Now, I would like to examine the protection granted to consumers under the Consumer Protection Act of 1987. The act was passed in order to implement the EC directive of 1985 in British national law. The purpose of the directive was to harmonise the national law of the various Member States on the issue liability for defective products. The Consumer Protection Act of 1987 establishes strict liability for defective products which means that a claimant does not have to establish that a manufacturer was negligent. In case of defective products, the manufacturer will be held responsible for the damage caused by the defective good unless he is covered by one of the defences provided by the act.

Section II of the act lays down the basic liability for damage caused by a defective product. It gives the fairly wide definition of a product as any goods or electricity so as to include all the usual consumer goods only unprocessed goods and agricultural products are outside the scope of the act. Liability under the act cannot be limited by any term or notice, the statute obliges the supplier of defective products which may be a distributor or a retailer to identify the producer when the victim of a defective product requests it from him. Supplier which may not give the name of the manufacturer who is primarily liable or the name of the supplier who supplied the products to them, will face liability for the damages themselves.

According to Section III paragraph 1 of the act, the criteria for establishing that a product is defective is whether “the safety of a product is not such as persons generally is entitled to expect”. Section V paragraph 1 defines damage as death, personal injury or loss or damage to property. It does not include damage to the product itself or damage worth less than £ 275.

As I have alluded to a moment ago, manufacturers will be able to defend themselves against a claim in the four following circumstances:

1. In case of contributory negligence: the manufacturer will have a defence where the consumer has done something which contributes to the damage he claims to have suffered. That is the case if the consumer has interfered with the workings of the product.

2. In case of compliance with legislation: the manufacturer will have a defence if the defect is the result of the manufacturer’s compliance with the provision of an act of parliament or of an obligation

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resulting from EU legislation.3. The manufacturer will also have what is called the development risks defects. This is a defence on the

basis that when the product was produced that the state of scientific and technical knowledge was insufficiently advanced for the producer to be expected to discover the defects. So the manufacturer will have a defence if he can prove that, at the time the product was made, scientific knowledge was such that he could not be expected to discover any defect or side effects. This means that, in that case, the victims are left without any compensation. This defence is very controversial since it weakens the act’s requirement of strict liability. Yet, the burden of proof lies with the producer. This defence was found to conform the EU directive of defective products in a case that was decided in 1997.

4. The fourth defence is a time limit: the time of action, under the act, is extinguished ten years after the date when the product was put in circulation.

#90

So far, I have examined consumer protection as guaranteed by claims in the civil courts. Now I am going to examine what sort of protection consumers are granted by the criminal law. Criminal law offers wider consumer protection than contract or tort which requires consumers to know their rights more precisely and to be prepared to spend time and money, usually hiring the services of a lawyer, to assert them in court. Criminal law, on the other hand, enables trading standards officers, officers in charge of ensuring trading standards, i.e. of minimum quality requirements to be complied with by professional businessmen, to take action against unscrupulous traders. The criminal approach has another positive aspect in that it aims at preventing harm or loss before it occurs by obliging traders to comply with certain specific rules rather than awarding compensation for harm or loss after it was suffered.

So, the Consumer Protection Act of 1987 contains a general requirement that goods sold must be safe. Section X creates an offence of supplying goods, defined as goods for ordinary private use or consumption, which fail to comply with this general safety requirement by not being reasonably safe in all circumstances. Again, there is a possible defence against such a charge that of due diligence if the manufacturer can prove that it took all the reasonable steps to ensure that the product is safe, i.e. that he exercised due diligence to avoid committing the offence. The 1987 act also empowers the Secretary of state, i.e. the cabinet minister in the British government in charge of product safety, to make safety regulations that may concern the composition, design or labelling of goods. Thus, what is called a prohibition notice may be issued to prevent the supply of a particular type of goods and where dangerous goods have already been sold, a notice to warn can order a trader to warn consumers of the danger. Additionally, the Fair Trading Act of 1973 set up a mechanism whereby certain types of trading practices may be kept under constant review. Thus, the office of fair trading was set up headed by the director general of fair trading whose role includes acting against businesses whose trading practices are persistently unfair to consumers.

Another act, the Trade Description Act of 1968, also contributes to protection of consumers. The act makes it an offence, when in the course of a business, to apply a false description to any goods or to supply or offer goods with a false description. Since it was enacted, this legislation has been extremely successful. As a matter of fact, over 30000 prosecutions are started every year under this provision of the act. An example of an offence under the act is what is called cloaking which is well-known practice consisting in turning back the milometer of a car to suggest that the car has driven fewer miles than what it actually has. Under the act, the mileage of a car amounts to description that the car has gone this mileage. If the clock has been turned back, the description is false and, therefore, the professional seller is criminally liable.

To be thorough on the subject of manufacturers’ criminal liability, it must be added that the trade description act of 1968 also aimed at preventing traders from supplying misleading information on price such as half price labels when the product has never been sold at a higher price. Yet, the act does not clearly prohibits such

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malpractice, it merely states that the fact for a trader, acting in the course of a business to give consumers any misleading information concerning the price of goods, services or accommodation will constitute an offence.

#91

Now, I would like to deal with another issue which may be a source of unfairness to consumers: the issue of unsolicited goods. Some, probably unscrupulous, companies send goods to customers who never ordered them and then demand payment for these goods usually stating that, unless the goods are returned by a specific date, the company will assume that the customer would have accepted the goods. Under common law, such a practice places no obligation on the so-called customer since, for a contract to exist, acceptance must be communicated and silence does not amount to acceptance. Yet, people have no knowledge of the rules governing English contracts and are not actually aware that they have no obligation whatsoever to pay for the goods and some companies find it easy to give people the impression that they are obliged either to pay the goods or return them at their own expense. In some cases, customers assume that, since they have not ordered the goods, they did not have to pay for them nor to return them and simply kept them and used them which was risky from a legal point of view because, at common law, the fact of using goods may be considered as acceptance of the goods in which case, in the end, the customers had to pay for the goods they have started to use.

So, it is clear that the situation was totally confusing and that is why the British parliament eventually voted the Unsolicited Goods Act in 1971. The act defines unsolicited goods as goods sent without the recipient’s request and with a view that the recipient will be in a position to accept them. According to the provisions of the act, anyone receiving such unsolicited goods is under no obligation to pay for them or to send them back. They have two options: (1) to keep the goods safe for six months and, if they are not reclaimed by that time, to do whatever they like to them without any obligation to pay and (2) to write to the sender stating that the goods were unsolicited and giving an address at which the goods may be collected. If the sender does not collect the goods within 30 days of notice, they will belong to the recipient. In either case, if the goods are accidentally lost or damaged before the statutory period expires, the recipient will not generally be liable.

Section II of the act makes it a criminal offence for traders to demand payment for unsolicited goods where they have no reasonable cause to believe that there is a right to payment or to threaten legal proceedings to enforce such a payment.

#92

Consumer credit is another area where consumers need protection. Credit is now used on a regular basis not just for only for major purchases such as cars of furniture, the increasingly easily available credit cards means that all kind of purchases are made with them. Since the traders who provide such credit are largely powerful business organisations whereas the users are inexperienced ordinary consumers who may not be aware of the legal issues attached to this kind of contracts, it was necessary that parliament voted legislation to avoid that such inequality of bargaining power might lead to transactions manifestly to the credit suppliers and detrimental to consumers.

Thus, the Consumer Credit Act was passed on 1974 to regulate credit transactions. Contracts organising the sale of goods on credit are called hire purchase agreements. The buyer chooses a purchase, i.e. he chooses the goods he wants to buy, to purchase then he fills in a form, the seller passes to a finance company which then checks the customer’s credit worthiness, i.e. if the customer’s financial situation is clean. If that is the case, the finance company accepts the deal. The goods are then sold to finance company not to the buyer. The buyer takes possession of the goods which remain the property of the finance company until the final payment is made. Legally speaking, what happens is that the finance company hires the goods to the customer with an

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option to buy them when it has completed the payment of all instalments. The contract of sale is therefore between the seller and the finance company and not between the seller and the company. The 1974 act covers hire purchase when the credit is no more than £ 15000.

A number of provisions apply to protect the consumer. For instance, the act imposes strict rules on the formalities of the agreement. The agreement must be in writing, the print and the paper are regulated by the act and the consumer must receive his own copy. As with any contract, the consumer can cancel at any time before the offer is accepted. But the act provides an additional means of escape known as the cooling off period. The cooling off period is a period of five days from receiving a copy of the agreement that is signed. During that time, a customer can cancel his acceptance in writing, which takes effect in posting, he may return the goods and get back any money paid. The transaction is then treated as if it has never been made.

So, as a final conclusion, I just want to recall that the majority of consumer protection provisions have been developed not like most contract law by the common law but by legislation essentially because the idea of protecting one party against the other in a contractual relationship is totally contrary to the common law concept of freedom of contract. But maybe we can point out additional reasons why statutory intervention was necessary. First, since certain practices result in the trader’s criminal liability, nowadays only parliament can create criminal offences. Secondly, only the highest courts are really involved in developing the common law and consumer cases rarely reach these courts so the opportunity to create precedents is limited. Finally, consumer protection has often been the result of pressure exercised by consumers associations. Such pressure groups cannot directly influence judges but they can bring about change by publicising issues and pressing for legislation through major campaigns.

So, a last word to conclude this series of 10 lectures: I am sure by now that you have learned a lot about some fundamental principles of English contract law and I am also sure you improved you English both were aimed of the course.

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