Business Law Reader 2012

Business Law

Lecture notes

Course outline

Adrienne Komanovics

2012

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Komanovics Adrienne, 2012

BA I Business law

Classes Thursday 14.00-15.15 B017 Thursday 15.30-16.45 B017 Schedule I. Introduction (definitions, legal norms,

classification, etc.) II. Tort of negligence

Duty of care Breach of duty of care Damage caused by the breach of the duty of care

(causation) Remoteness of damage Defences Remedies Vicarious liability

III. Contract law Formation of a contract: Offer and acceptance Formation of a contract: Consideration Intention to create legal relations Misrepresentation Contractual terms Exclusion clauses Remedies

Literature • Catherine Elliott and Frances Quinn: Tort Law, 2004 • Catherine Elliott and Frances Quinn: Contract Law, 2003 Assessment scheme Date if relevant Description Percentage

Class activity Continuous Participation Class work Q & A sessions

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Midterm exam (to be specified later) Case study (tort of negligence) 15

Home assignment (to be specified later) Case study (contract law) 10

Final exam To be decided later Open book exam (case studies) 60

Total 100

Lecturer dr. Adrienne Komanovics Office: Room 118 (Dohány u.) Tel.: 501-599 Extension 23297 E-mail: [email protected] Office hours: Monday 10.00-12.00

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Lecture notes based on:

• Catherine Elliott and Frances Quinn: Tort Law (Pearson, 2004)

• Catherine Elliott and Frances Quinn: Contract Law (Pearson, 2004)

• David Oughton, John Marston and Barbara Harvey: Law of Torts. Questions and Answers (OUP,

2009)

• Adrian Chandler and Ian Brown: Law of Contract: Questions and Answers (OUP, 2009)

I. Introduction

The nature of law Why do we have laws and legal systems? Custom, morality and law

Law is a body of rules. Law is for the guidance of human conduct. Law is imposed. Enforcement. Content of law. Justice and law.

The classification of law Municipal law ↔ Public international law Public international law ↔ Private international law Public law ↔ Private law Criminal law ↔ Civil law Substantive law ↔ Procedural law

Civil and criminal law compared Issue Civil law Criminal law Area of concern Rights and duties between

individuals Offences against society as a whole

Wrongful act Harm to a person Violation of a statute that prohibits some type of activity

Party who brings suit Person who suffered harm The state Standard of proof Balance of probabilities Beyond reasonable doubt Remedy Damages to compensate for the

harm, or a decree to achieve an equitable result

Punishment (fine, removal from public office, imprisonment, death)

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Differences between criminal and civil law Criminal law Civil law

Concerns offences against the state disputes between private individuals

Purpose of the

action

to preserve order in the community by

punishing offenders

to remedy the wrong which has been

suffered

The parties a prosecutor prosecutes a defendant a plaintiff sues a defendant

The action is heard

in

the criminal courts (magistrates’ court

or Crown court)

the civil courts (county court or High

Court)

Standard and

burden of proof

the prosecutor must prove his case

beyond reasonable doubt (presumption

of innocence)

the plaintiff must establish his case on

the balance of probabilities (more likely

than not)

Decision a defendant may be convicted if he is

guilty, or acquitted if he is innocent

a defendant may be found liable or not

liable

Sanctions imprisonment, fine, probation,

community service

damages, injunction, specific

performance, rescission

Examples

murder, theft, driving with excess

alcohol, applying false trade description

to goods

contract, tort, trusts, property law

Legal systems Three major types of legal system Types Main characteristics

(1) Civil law (as a legal system) Roman law foundations

Extended codification

Legislation is seen as the primary source of law

(2) Common law Common law was law developed by custom

Remains largely uncodified

Cases are the primary source of law

(3) Religious law The word of God is law

E.g. Jewish Halakha, Islamic Sharia, Christian canon law

Common law Judge-made law. The law is created and/or refined by judges: a decision in the case currently pending depends on decisions in previous cases and affects the law to be applied in future cases. When there is no authoritative statement of the law, common law judges have the authority and duty to “make” law by creating precedent Precedent. If a similar dispute has been resolved in the past, the court is bound to follow the reasoning used in the prior decision (this principle is known as stare decisis). If, however, the court finds that the current dispute is fundamentally distinct from all previous cases, it will decide as a “matter of first impression.” Thereafter, the new decision becomes precedent, and will bind future courts under the principle of stare decisis. Where? E.g. England and Wales, Northern Ireland, the Republic of Ireland, federal law in the United States and the states’ laws (except Louisiana), federal law in Canada and the provinces’ laws (except Quebec civil law), Australia (both federal and individual states),

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New Zealand, South Africa, India, Malaysia, Brunei, Pakistan, Singapore, Hong Kong, and many other generally English-speaking countries or Commonwealth countries (except Malta and Scotland).

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II. Tort of negligence

Tort law – contract law – criminal law: Comparison

Tort Crime Contract

The rights and duties are the

result of the application of civil

law made up of statute law and

common law.

The rights and duties are the

result of the criminal law.

The rights and duties depend on

the obligations undertaken under

the contract.

A civil action is normally

commenced by one individual

against another. A typical tort

case would be cited as Smith v.

Brown (1980).

The action is brought by the

Crown Prosecution Service as

agents of the state against the

offending person. A typical

criminal case would be cited

thus: R. v. Brown (1980).

The action is brought by the

party alleging breach of the

contract against the other party

to the contract. A contract case

would have a similar citation to a

tort case.

The successful party is awarded

damages or other remedies

where applicable, such as

injunction.

The guilty party is punished by

way of imprisonment, or by fine

or other non-custodial sentence.

Apart from damages, other

remedies like specific

performance, injunction,

payment on quantum meruit and

rescission may be available.

A duty is owed towards persons

generally.

Criminal conduct is prescribed

by the criminal law and a duty is

owed to the general public.

A duty is owed to a specific

person(s) who is a party to a

contract.

Source: Business Law by Kadar et al., p.351

Tort law Contract law

Duty fixed by law Duty which the party has voluntarily agreed to

assume

Duty owed to people in general Duty owed to the other contracting party

Aim: to compensate for harm suffered Aim: to enforce promises


LIABILITY

ACT commission or omission

+

PROTECTED INTEREST

+

FAULT

+

CAUSATION

+

DAMAGE

Examples • Negligence (non-

contractual liability) • Liability of occupiers of

premises • Trespass to property • Nuisance. E.g. the

emission of fumes, smoke, dirt, noise, smell.

• Defamation (Interest protected: reputation)

• Conspiracy • Deceit or fraud (see

misrepresentation) • Injurious falsehood about

the plaintiff’s business interests

1. Personal security Examples: • assault • nervous shock • defamation • negligence 2. Interest in property Examples: • nuisance • trespass to land • trespass to goods 3. Economic interests Economic loss – not always!!

Mental element in tort. A particular state of mind of the defendant. (a) Fault based test • Malice • Intention • Negligence (b) Strict liability (Liability without fault) Examples: • Industrial safety • Abnormally dangerous

activities • Vicarious liability

The defendant’s breach of duty actually caused the damage suffered by the plaintiff. 1. ‘But for’ test. The so-called ‘but for’ test is applied. Test whether the damage would not have occurred but for the breach of duty. 2. Remoteness of damage. The damage caused is not too remote from the breach.

Types • Personal injury • Damage to property • Pure economic loss • Psychiatric damage

(nervous shock) Exception (iniuria sine damno): No harm is required. The tort is actionable per se, i.e. without proof of damage (e.g. trespass, libel).


Tort of negligence Elements:

• Duty of care • Breach of duty • Damage caused by the breach

1. Duty of care 1.1. Definition

Lord Atkin in Donoghue v. Stevenson. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who then is my neighbour? Persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question. I.e. it is reasonably foreseeable that these persons (your ‘neighbours’) will be affected by your acts.

1.2. Recognised duties in law

Highway users (motorists) Employers’ liability Professional persons. Doctors, surgeons, dentists, solicitors and similar professional persons (accountants, architects) Carriers. Bus companies, railway companies, other transport authorities. Schools Manufacturers Etc. ‘The categories of negligence are never closed.’ (Donoghue v. Stevenson, 1932)

1.3. Development of the notion “duty of care”

The original neighbour principle established in Donoghue v. Stevenson. The ‘old law’. Two-stage test set down in Anns v. Merton London Borough (1978). This greatly widened the potential for liability in negligence. 1) Did the parties satisfy the requirement of the neighbour test? If yes: 2) A duty would exist unless the court found that policy dictated there should be no duty. The ‘new law’. Murphy v. Brentwood District Council (1990). Requirements for the existence of a duty of care: 1) Was the damage to the claimant reasonably foreseeable? 2) Was the relationship between the claimant and the defendant sufficiently proximate? 3) Whether it is just and reasonable to impose a duty.

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1.4. Special duty problems: economic loss Definition: losses which are ‘purely’ economic, meaning those where a claimant has suffered financial damage, but has incurred no personal injury or damage to property. Approach: English law does not allow economic loss claims in negligence. Traditional reluctance to compensate pure economic loss. (a) Economic loss caused by negligent acts Spartan Steel and Alloys Ltd v. Martin & Co Ltd (1973) - direct physical loss → recoverable - consequential economic loss → recoverable - pure economic loss → NOT recoverable (b) Economic loss caused by defective products General rule: - claims may be made for any personal injury caused as a result of the defect, - or any damage to other property, - but not for the defect itself, which is considered economic, since the loss arises from the

reduced value of the object. But see Junior Books Ltd. v. Veitchi Co Ltd (1982) which has often been doubted and never followed but has not been expressly overruled. (c) Economic loss caused by negligent information or advice Hedley Byrne & Co Ltd v. Heller & Partners. Requirements: 1. Special relationship between the parties.

E.g. surveyors and valuers, accountants, auditors. Business context:

- More limited approach: the Hedley Byrne principle should be restricted to cases involving people whose profession centres around the giving of advice, such as accountants, solicitors and surveyors. - Broader approach: it is sufficient that the advice was sought from a business person, in the course of business. → On the whole it is this broader approach which was followed

2. A voluntary assumption of responsibility by the party giving the advice. Disclaimers. 3. Reliance by the other party on that advice or information. Causation. 4. Such reliance must be reasonable. The advice must be given in circumstances in which

the reasonable person in the defendant’s position would appreciate that his advice would be likely to be relied on. – The purpose for which his advice is required is also important.

1.5. Special duty problems: nervous shock Definition: Nervous shock must manifest itself in some recognisable psychiatric illness. Mere grief or emotional upset is not actionable. The plaintiff must establish harm over and above

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ordinary grief, sorrow or distress. Psychiatric damage: the individual fails to deal adequately with a traumatic event; reactive depression, anxiety, neurosis, post-traumatic stress disorder, etc. Categories of claimants

1. Claimants who are physically injured. Those who are physically injured in the event which the defendant has caused, as well as psychiatrically injured as a result of it. – The ordinary rules of negligence apply. 2. Primary victims. Those who were put in danger of physical harm, but actually suffer only psychiatric injury. E.g. McFarlane v. EE Caledonia (1994). The fear must be reasonable, given the nature of the risk and the claimant’s situation. 3. Secondary victims. Those who are not put in danger of physical injury to themselves, but suffer psychiatric harm as a result of witnessing such injury to others. – A duty of care to secondary victims will arise only if they can satisfy very restrictive requirements. Unlike other types of claimant, secondary victims have to satisfy a series of other requirements (apart from reasonable foresight), concerning (a) their relationship to the primary victims of the shocking incident and (b) their position with regard to that incident. E.g. McLoughlin v. O’Brian (1983); The Hillsborough litigation [Alcock v. Chief Constable of South Yorkshire Police (1992)].

2. Breach of the duty of care 2.1. Standard of care Reasonable man. How a reasonable man would have acted in the defendant’s position. An objective test. The standard of care of an ordinary, prudent and reasonable man. The reasonable man is a fictitious character who is considered neither over-confident nor unduly apprehensive. As the test is objective, the particular defendant’s own characteristics, individual disabilities or peculiarities are usually ignored. Reasonable professional. What is reasonable in the circumstances of the case, having regard to his particular profession or occupation? Where a person sets himself up as possessing a particular skill, e.g. a surgeon, industrial chemist or accountant, he must exhibit in following his calling that skill which is usually found in such a person. The standard of care required from a person possessing special skill or knowledge is that which is reasonable having regard to the particular profession or occupation that person is engaged in. – A ‘learner professional’ does not exist. – However, if a person acted in an emergency then he would be judged by the standards of a reasonable person, not a specialist.

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2.2. Factors determining negligence

(a) Knowledge available at the time of the event. E.g. Roe v. Minister of Health (1954). (b) Magnitude of risk of harm to the plaintiff. The degree of probability that damage will be done. E.g. Bolton v. Stone (1951). (c) Seriousness of the injury that is risked. E.g. Paris v. Stepney Borough Council (1951) – The plaintiff may have some characteristics or incapacity which increases the risk of harm. (d) Social benefit of the defendant’s conduct. The benefits that might be gained from taking the risk. E.g. Watt v. Hertfordshire County Council (1954) (e) Cost of precautions. How far it was practicable to prevent the risk. E.g. Latimer v. AEC Ltd (1953).

2.3. Proof of negligence As in all civil cases the plaintiff has the burden of proof, and he must show to the court that ‘on the balance of probabilities’ the defendant’s conduct was negligent. See however res ipsa loquitur. Res ipsa loquitur is a rule of evidence under which negligence is presumed and hence a plaintiff is entitled to have his case put to the jury. The burden of proof shifts from the plaintiff to the defendant, who must now prove that he was not negligent, but that the events that occurred were caused by some force outside his control. To rely on this principle the plaintiff must show: • The thing which caused the injury was under the management and control of the defendant. • The accident was such as would not occur if those in control used proper care. • There must be no explanation for the accident. See e.g. Scott v. London & St. Katherine Docks Co (1865)

3. Damage caused by the breach of the duty of care Causation

Connection must be shown between the defendant’s breach of duty and the damage suffered by the plaintiff. 3.1. Did the breach of duty cause the damage? Wilsher v. Essex Area Health Authority (1987) 3.2. Would the loss have occurred anyway? Barnett v. Chelsea and Kensington Hospital (1969)

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3.3. Intervening causes (Novus actus interveniens) Some other factual cause, intervening after the breach, breaks the chain of causation between the defendant and the plaintiff.

(a) Natural event. The courts will generally be reluctant to find that a natural event breaks the chain of causation as the plaintiff has no one else to sue if the defendant is exonerated. (b) Act of the plaintiff. Where the plaintiff has been found to have been contributorily negligent, his damages will be reduced by the proportion that he is found to be to blame for his damage. McKew v. Holland and Hannan and Cubitts (1969) (c) Act of a third party. Where the defendant’s breach of duty is followed by a third party act which is also a cause of the plaintiff’s damage, the court has to determine the extent of the defendant’s liability. If the act of the third party is held to be a novus actus interveniens then the defendant is not liable for any damage occurring after the act. Thompson v. Blake-James (1998), Wright v. Lodge, Kerek and Lodge (1993)

4. Remoteness of damage 4.1. The test

Old law: the direct consequence test. This test imposed liability for all direct physical consequences of a defendant’s negligence. New law: reasonable foreseeability test. The defendant is liable for the consequences of his negligent act or omission only if he could have reasonably foreseen that his tortious conduct would result in those consequences. The Wagon Mound (No. 1) case.

4.2. The nature and manner of occurrence of the damage

If the kind of damage suffered is reasonably foreseeable, it does not matter that the damage came about in an unforeseeable way. It is not necessary to foresee the exact type of injury or damage that has occurred, as long as it is a likely consequence of the breach of duty. See the contrasting decisions in Hughes v. Lord Advocate (1963) and Doughty v. Turner Manufacturing Co. Ltd. (1964).

4.3. The extent of the damage

Provided that the kind of damage is reasonably foreseeable, it does not matter that it is more extensive that could have been foreseen. See the “eggshell-skull” rule: the defendant must take the victim as he finds him as regards his physical characteristics. Smith v. Leech Braine & Co. Ltd. (1962)

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5. Defences 5.1. Consent / Volenti non fit iniuria

Meaning: no injury can be done to a willing person. Definition: A person cannot sue if he consents to the risk of damage. In law no wrong is done to a person who voluntarily consents to undergo it. Complete defence. The test of consent is objective: the question is not so much whether the plaintiff actually consented, but whether his behaviour was such that it was reasonable for the defendant to think that there was consent. Conditions:

(a) Knowledge of the risk. In order for the volenti to operate, the plaintiff must have knowledge of the existence of the risk and its nature and extent. The test for knowledge is subjective. (b) Agreement or consent to run the risk (express or implied) (c) The consent is voluntarily given. Genuine freedom of choice. E.g. employment relationships (Smith v. Baker, 1891); or the so-called rescue cases (Haynes v. Harwood, 1935 ↔ Cutler v. United Dairies, 1933).

5.2. Contributory negligence Definition. Law Reform (Contributory Negligence) Act of 1945. Section 1(1):

Where any person suffers damage as a result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage.

This defence will apply where the damage which the plaintiff has suffered was caused partly by his own fault and partly by the fault of the defendant. The plaintiff will have his damages reduced by the court in proportion to his fault.

Elements.

(a) The plaintiff’s conduct. The standard of care which the plaintiff must show for their own safety in order to avoid being found contributorily negligent is essentially the same as that of a reasonable person involved in the relevant activity. Exception: when the plaintiff has fallen below the standard of care as a result of an error of judgment.

(b) Causation. The plaintiff’s fault must be a legal and factual cause of the harm suffered (e.g. seat belt cases).

(c) Apportionment. According to the claimant’s share in the responsibility for the damage. The exact calculations are at the discretion of the court

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5.3. Illegality / Ex turpi causa From a bad cause no action arises. The court will deny an action to a plaintiff who suffered damage while participating in a criminal action.

5.4. Exclusion clauses and notices

Disclaimers or exclusion clauses may be capable of restricting the defendant’s liability. But such clauses are now subject to the provisions of the Unfair Contract Terms Act 1977.

5.5. Statutory authority

A public authority or body may be expressly authorised by statute to do what would normally be a tort

5.6. Time limits

Actions in tort must normally be brought within six years of the date on which the cause of action came into existence; or within three years in case of personal injury.

6. Remedies (torts in general) 6.1. Damages: definition; objective

Monetary compensation awarded to the party that has suffered a wrong. The underlying principle is one of restitutio in integrum – i.e. to restore a plaintiff as far as possible to the position he would have been if no wrong had been committed against him.

6.2. Damages: classification

(a) Non-compensatory. • Nominal damages. E.g. £2 where a legal right has been violated but the plaintiff has

suffered no actual loss, e.g. in the case of trespass. • Contemptuous damages. Only in defamation actions. • Exemplary or punitive damages. In addition to compensatory damages. This is a bit

ambiguous, it should rather be left for criminal law.

(b) Compensatory damages for personal injuries. Objective: to put the plaintiff in the position he would have been if he had not sustained the injuries. Awarded in a lump sum. The personal injuries may be: physical harm to the person; disease; illness (psychiatric, etc.). • Pecuniary. The damage / injuries can be estimated in monetary terms. E.g. loss of

earnings; medical expenses; other expenses reasonably incurred. • Non-pecuniary. Loss of physical amenity, pain, shock, suffering. Inconvenience.

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6.3. Other remedies Injunction Restitution Damages in lieu of injunction Restitution of property

7. Vicarious liability 7.1. Definition This term refers to a situation where a person who has not himself committed a tort is held responsible for the commission of a tort by another. 7.2. Conditions (1) There must be a particular relationship (e.g. the employer and the employee as opposed to an independent contractor).

Who is an employee? • Control test. The employer is in control of the behaviour of his employee; the

employer has control over the work, is in a position to lay down how and when tasks should be done.

• Business integration test. A person would be an employee if his work was an integral part of the business. An independent contractor would work for the business but as an accessory rather than an integral part of it.

• Modern approach. The modern approach is entirely pragmatic: the employer’s greater ability to pay any damages. The courts do not search one single factor but look at all the circumstances of the particular case.

(2) The tort must be committed in the course of employment.

An employer will not be responsible for acts committed by employees which have nothing to do with their employment, even though those acts may be committed in the workplace during working hours, or even using the employer’s equipment.

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III. Contract law

1. Introduction 1.1. Contract: definition, essential elements An agreement enforceable by law. Any legally binding agreement, written or unwritten. • Agreement – offer and acceptance • Consent – genuineness of the consent; free will; “meeting of the mind” • Intention – to create legal relations, to have legal consequences • Consideration – bargain; each side must promise to give or do something for the other.

Some kind of exchange between the parties; mutuality. Rights and obligations on both sides.

• Formalities – in some cases • Capacity to contract – legal capability of entering into a contract • Legality – the contract must not be contrary to public policy (+ possibility of

performance) (contravening statutory or common law rules) 1.2. Conceptual background Freedom of contract (procedural fairness). Since parties are the best judges of their own interests, they should be free to make contracts on any terms they choose – on the assumption that nobody would choose unfavourable terms. Parties should be left alone to make their bargains. Contract and fairness (substantive fairness). Substantive fairness aims to redress the balance of power between unequal parties, giving protection to the weaker one. Examples: employment contracts, consumer contracts. 1.3. Approach Formation of a contract Contents / Terms of a contract Discharge of a contract

2. Formation of a contract – offer and acceptance 2.1. Distinction between bilateral and unilateral contracts Bilateral contract. Each party takes on an obligation, usually by promising the other something. Example: Ann promises to sell something – Ben promises to buy it.

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Unilateral contract. Only one party assumes an obligation under the contract. E.g. reward cases. 2.2. Offer How? Orally; in writing or by conduct (a customer in a supermarket chooses goods and hands them to the cashier, who then accepts the customer’s offer to buy). A statement of price is not necessarily an offer. An alleged offer can be a mere price indication – Harvey v. Facey (1893) Offeree. An offer can be made: • To a definite person or group of persons. – Only that person or these persons may accept. • To the whole world generally. – Anyone may accept by complying with the requirements.

See Carlill v. Carbolic Smoke Ball Co. (1893). The offer must be communicated to the offeree. Offer must be distinguished from an invitation to treat. 2.3. Invitation to treat Some kinds of transaction involve a preliminary stage in which one party invites the other to make an offer. This stage is called an invitation to treat. This is merely one step in the negotiations for a contract. Examples: • Display of goods in shops → invitation to treat. Pharmaceutical Society of GB v Boots

(1953) • Advertisements for unilateral contracts → usually treated as offers! • Advertisements for bilateral contracts → invitation to treat. See Partridge v. Crittenden

(1968). 2.4. Acceptance How? Orally, in writing, or by conduct (Brogden v. Metropolitan Railway Co., 1877). The acceptance must be absolute and unconditional; and unqualified. The acceptance must correspond exactly with the offer and must not constitute a counter-offer. Distinguish between: • Counter-offer: a rejection of the original offer, and in some cases has the effect of

cancelling it. Jones v. Daniel (1894); Hyde v. Wrench (1840) • Request for further information → does not cancel the offer.

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2.5. Communication of acceptance Acceptance must be communicated. Silence does not constitute acceptance. Felthouse v Bindley (1862). Merely remaining silent cannot amount to an acceptance, unless it is absolutely clear that acceptance was intended. See also the statutory rules: Unsolicited Goods and Services Acts (1971). Use of post and telemessages in offer and acceptance (postal rule) • Offer is valid when it reaches the offeree (when it is communicated to him). • Acceptance is valid when posted (not when it arrives). • Revocation of the offer is valid when it reaches the other party (not when posted). See e.g. Adams v. Lindsell (1818), Household Fire Insurance Co v. Grant (1879) The postal rule is automatically set aside where a term in the offer stipulates the method of communicating acceptance. Holwell Securities Ltd. v. Hughes (1974) Instant methods of communication (telex, fax, e-mail) Where communication is instantaneous (where parties are face to face or speaking on the telephone), acceptance must be received by the offeror. Entores Ltd. v. Miles Far East Corporation (1955), Brinkibon (1982). Telex messages, fax messages and e-mails sent during office hours → instantaneous communications (same principles apply as in the case of oral acceptance); they take effect when printed on the offeror’s telex (fax) machine. This rule does not apply where communication is not instantaneous – e.g. telex message is sent out of office hours (e.g. parties contracting from different places in the world). In this case the time of acceptance depends on the parties’ intentions and sound business practice, and in some cases on a judgment as to where the risk should lie. 2.6. How long does an offer last? Termination of offer 1. Specified time.

If a time for acceptance has been stipulated, then the offer lapses when the time has expired.

2. Reasonable length of time.

If no time is stipulated, then the acceptance must be within a reasonable time. What constitutes a reasonable time? Exactly how long this is will depend upon whether the means of communicating the offer were fast or slow, and on its subject matter. Ramsgate Victoria Hotel Co Ltd v. Montefiore (1866)

3. Failure of a precondition.

Some offers are made subject to certain conditions, and if such conditions are not in place, the offer may lapse.

4. Rejection.

The offeree communicates his rejection to the offeror.

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5. Counter offer. Counter-offer constitutes a refusal of the original offer, thus producing a new offer. See Jones v. Daniel (1894); Hyde v. Wrench (1840)

6. Requests for information → not a counter-offer.

Counter offers must be distinguished from request for further information. If the offeree asks if the offeror would be willing to amend some of the terms of the offer, that does not amount to counter-offer. The original offer remains open. Stevenson v. McLean (1880)

7. Death of the offeror. 8. Death of the offeree.

Effect of death: varies according to the type of contract in question; whether the offeror or the offeree died; whether the death takes place before or after acceptance or whether or not the contract is for personal services.

9. Withdrawal of offer. Revocation.

An offer may be revoked (= withdrawn) at any time before it is accepted, but the revocation must be communicated to the offeree (= the revocation must have come to the knowledge of the offeree).

Revocation of an offer does not have to be communicated by the offeror; the communication can be made by some other reliable source. Dickinson v. Dodds (1876)

Posted revocation takes effect on communication. Byrne v Van Tienhoven (1880)

Revocation of unilateral contracts: the same publicity should be given to the revocation as was given to the offer. Once an offeree started to perform on a unilateral contract, it is too late for the offeror to revoke the offer. Errington v. Errington (1952)

3. Formation of a contract – Consideration 3.1. Definition The benefit given to the promisor at the expense of the promise. It is the act, forbearance or promise of one contracting party that constitutes the price he or she pays for the promise of the other. It embodies the concept of mutuality, the benefit to the promisor and the detriment of the promisee that results in a bargain. In modern terms, consideration usually takes the form of the price paid or value given for the promise. Consideration: some benefit enjoyed by one party or some detriment suffered by the other. In most cases the benefit and the detriment are the same thing, if one looks at the situation from different points of view. Types. • Executed consideration → usually unilateral contracts. Consideration which is wholly

performed on one side immediately the contract is entered into. • Executory consideration → usually bilateral contracts. A promise to confer a benefit or

suffer some detriment at some future time.

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Rules of consideration • The consideration must be real or genuine. • Consideration need not be adequate. • It must be legal. • It must move from the promisee. • Consideration must be possible. • Consideration must not be past. • Consideration which does not contribute to the bargain 3.2. Real or genuine consideration / Gratuitous promises An agreement, even if the parties intend legal relations, is not a contract unless it is supported by consideration or made by deed. 3.3. Adequacy of consideration Consideration must be sufficient, must be of economic value but need not be adequate. (Idea behind: freedom of contract). De La Bere v. Person Ltd. (1908), Chappel v. Nestlé (1960) 3.4. Consideration must be legal 3.5. Consideration must move from the promisee Since the parties to the contract must provide consideration, it follows that as a general rule a person who receives a benefit under a contract may not, unless he has supplied consideration, enforce rights under the contract. No stranger to the consideration may sue on a contract. Tweedle v. Atkinson (1861). 3.6. Consideration must be possible 3.7. Consideration must not be past Consideration must be given in return for the promise or act of the other party. Something done, given or promised beforehand (for another reason) will not count as consideration. Roscorla v. Thomas (1842) Re McArdle (1951) Exception: Where it is proved that services have been rendered at the express or implied request of the promisor, this is sufficient consideration to support a subsequent promise to pay. Re Casey’s Patents, Stewart v. Casey (1892)

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3.8. Consideration which does not contribute to the bargain

a) Forbearance to sue = a promise not to sue If one party has a possible civil claim against the other, a promise not to enforce that claim is good consideration for a promise given in return. b) Performance of an existing duty – duty imposed by law (public duty) Where a person is merely carrying out duties they are legally obliged to perform – such as a police officer protecting citizens, or a juror listening to evidence – doing that alone will not be consideration. However, where a promisee is under a public duty, but does something which goes beyond what they are bound to do under that duty, that extra act can amount to consideration. Glasbrook Bros v. Glamorgan County Council (1925), Harris v. Sheffield United Football Club (1988) c) Performance of an existing duty – contractual duty owed to the promisor The performance of a contractual duty already owed to the defendant is not a consideration. However, where the contractual duty is not precisely coincident with the public duty but is in excess of it – it may be sufficient consideration and an action may be brought to claim payment for it. Stilk v. Myrick (1809), Hartley v. Ponsonby (1857) In the light of the decision in Williams v. Roffey, a distinction has to be drawn between (1) contractual duties to supply goods or services, and (2) contractual duties to pay debts. Ad (1) Williams v. Roffey Bros and Nicholls (Contractors) Ltd. (1990) To perform an existing obligation could amount to good consideration provided there are practical benefits to the promisee. Ad (2) Re Selectmove Ltd (1995). Special rules apply to contractual duties regarding debts. Where someone owes another person 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 for the debt. Even if such an agreement is made, it is only binding if the debtor offers some consideration for it by adding some extra element.

d) Performance of an existing duty – contractual duty owed to a third party Shadwell v. Shadwell (1860)

3.9. Agreement to accept less than is due Rule. Agreed variation in contractual obligations are generally unenforceable without consideration. Foakes v. Beer (1884) Exceptions. 1. Change of time – earlier payment. Payment of a lesser sum before the due date at the

creditor’s request is valid consideration. 2. Change of place. Payment of a lesser sum at a different place, at the creditor’s request is

valid consideration. 3. Where something is added, addition of something of value. Payment of a lesser sum

together with a chattel (an article), at the creditor’s request is valid consideration. 4. Composition agreements. Creditors agree to accept partial payment of their debts. An

individual creditor cannot later seek to recover the unpaid amount of the debt. 5. Payment of a lesser sum by a third party. Welby v. Drake (1825)

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4. Intention to create legal relations Contracts can be divided into (1) domestic and social agreements on the one hand and (2) commercial transactions on the other. 4.1. Domestic and social agreements Where one agreement falls onto the domestic and social category, there is rebuttable presumption that the parties do not intend to create legal relations. Simpkins v. Pays (1955) • Where husband and wife were living together in amity when the agreement was made,

then the agreement is not enforceable as a contract because legal proceedings are an inappropriate method of settling purely domestic disputes. Balfour v. Balfour (1919)

• Where husband and wife were living together but not in amity or were separated altogether when the agreement was made, the court may enforce it. Merrit v. Merrit (1969)

• If the words used by the parties are uncertain, then the agreement will not be enforced, the uncertainty leading to the conclusion that there was no intention to create legal relations.

4.2. Commercial transactions The reverse applies in commercial agreements, where it is presumed that the parties do intend such agreements to be legally binding. Again, this principle can be rebutted if there is evidence that the parties did not intend their agreement to be legally enforceable.

5. Terms (express and implied) 5.1. Terms and representations distinguished Definition. • Representation. Pre-contractual statements (inducement). A representation is a statement

made by one party to the other, before or at the time of the contract, with regard to some existing fact or some past event, which is material to the contract. Representations are those statements which are made for the purpose of inducing persons to make contracts.

• Terms. Contractual statements. Guidelines Whether a statement is a representation or a term is largely a question of the parties’ intentions. If the parties have indicated that a particular statement is a term of their contract, the court will carry out that intention. In other cases, the following guidelines may be used. • Importance of the statement. Bannerman v. White (1861)

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• Special knowledge and skill. Oscar Chess Ltd. v. Williams (1957), Dick Bentley Productions Ltd. v. Harold Smith (Motors) Ltd. (1965)

• Timing of the statement • Agreements in writing 5.2. Terms implied by court (a) Terms implied in fact

Two overlapping tests: the officious bystander test and the business efficacy test. The Moorcock (1889)

(b) Terms implied in law

These are terms which the law dictates must be present in certain types of contract. Liverpool City Council v. Irwin (1976) – implied terms in a tenancy agreement Implied terms in contracts of employment

5.3. Terms implied by statute Sale of Goods Act 1979, as amended by the Sale and Supply of Goods Act 1994 Definitions

• Sale of goods. Transfer of property for a money consideration. • Goods. Broad interpretation; includes packaging, labelling, instructions, etc. • Consumer. • In the course of a business. R&B Customs Brokers Co. Ltd. v. UDT Ltd. (1988),

Stevenson v. Rogers (1999) Implied terms in contracts for the sale of goods

• Implied condition as to title (Sect. 12). There is an implied condition on the part of the seller that in the case of a sale he has the right to sell the goods and is able to pass good title to the buyer.

• Sale by description (Sect. 13). Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description.

• Satisfactory quality and fitness for purpose (Sect. 14). Goods should meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all other relevant circumstances.

• Sale by sample (Sect. 15). Godley v. Perry (1960) Application of the requirement of satisfactory quality

• This rule applies only to sales made in the course of a business. • The test of satisfactory quality → value for money. (Previous test: merchantable

quality) • Factors to be taken into account: description of the goods, the price, safety, durability,

and fitness for all usual purposes. • Examination of the goods. • Fitness. Where the buyer expressly or by implication makes known to the seller any

particular purpose for which the goods are being bought, there is an implied condition

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that the goods supplied under the contract are reasonably fit for that purpose, unless the circumstances are such that the buyer did not rely – or that it was unreasonable for him to rely – on the seller’s skill or judgment. – There is no need to reveal a usual purpose, but a special purpose must be disclosed. Priest v. Last (1903), Griffiths v. Peter Conway Ltd. (1939).

Remedies

The buyer can reject the goods for a cash refund and/or claim damages for loss of bargain and expenses incurred. The right to reject is lost where the buyer has accepted the goods or part of them. Thus once the buyer had “accepted” goods or part of them, any breach of the implied terms would only be treated as a breach of warranty, so that the buyer could not get back the money paid and could only sue for damages for any loss The buyer should have reasonable opportunity of examining the goods.

5.4. Conditions and warranties Distinction between representations, conditions and warranties. • Representations are those statements which are made for the purpose of inducing persons

to make contracts. • Conditions are terms of the contract which are vital, which go to the root of the contract.

These are so essential that if they are broken the innocent party can treat the contract as discharged. He will not therefore be bound to do anything further under that contract. But he may choose to go on with the contract.

• A warranty is a term in an agreement which is subsidiary or collateral to the main purpose of the contract. In other words, a warranty is not so vital to the performance of the contract to be set aside for breach. A breach of warranty only entitles the innocent party to an action for damages; he cannot treat the contract as discharged.

6. Exclusion clauses 6.1. Exclusion clauses, limitation clauses Very often exclusion clauses are incorporated into contracts in order to reduce or exclude liability. The use of such clauses is subject to the control by the courts and by statute. Both the courts and Parliament have been reluctant to allow exclusion clauses to operate successfully where they have been imposed on a weaker party (an ordinary customer) by a stronger party (e.g. a person or corporation in business to supply goods or services).

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6.2. Common law control 6.2.1. Incorporation. Was the clause part of the contract? (a) Incorporation by signature

Where the terms are signed, the parties are bound as a general rule. L’Estrange Ltd. v. Graucob (1934) Where the party seeking to rely on an exemption clause misrepresents the extent of the clause, it will not be binding. Curtis v. Chemical Cleaning and Dyeing Co. (1951)

(b) Incorporation by reasonable notice

If separate written terms are presented at the time a contract is made – by handing over a ticket, or listing them on a sign, for example – those terms only become part of the contract if it can be said that the recipient had reasonable notice of them. • Time of the notice. The conditions must be brought to the notice of the offeree either

before or contemporaneously with the making of the contract. Olley v. Marlborough Court Ltd. (1949). – The offeror must do all that is reasonably necessary to bring the conditions to the notice of the offeree. Thornton v. Shoe Lane Parking (1971)

• Form of the notice. In general, notice of an exemption clause will only be considered reasonable if it is given in a document which a reasonable person would expect to contain contractual terms. Chapelton v. Barry Urban District Council (1940)

• Effect of the clause. The more unusual or onerous a particular term is, the greater the degree of notice required to incorporate it.

(c) Incorporation by previous course of dealings

If two parties have previously made a series of contracts between them, and those contracts contained an exemption clause, that clause may also apply to a subsequent transaction, even if the usual steps to incorporate the clause have not been taken. Commercial contracts – Spurling v. Bradshaw (1956) Consumer contracts – Hollier v. Rambler Motors (1972)

6.2.2. Interpretation of exclusion clauses The clause is interpreted narrowly against the party seeking to rely on it (contra proferentem). If there is any ambiguity or room for doubt as to the meaning of an exclusion clause, the courts will construe it in a way unfavourable to the person who put it into the contract. George Mitchell v. Finney Lock Seeds (1983) 6.3. Statutory control Unfair Contract Terms Act 1977 6.3.1. Scope Dealing as a consumer. The strongest position is given by the Act to persons who deal as consumers; though those dealing otherwise than as consumers (where the goods are bought for use in a business) are covered. To be a consumer one must be dealing as a private buyer with a person in business.

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Certain contracts are not covered (e.g. insurance contracts, contracts concerning land). 6.3.2. Impact • Some clauses are void (ineffective). • Some clauses are subject to the reasonableness test. 6.3.3. Exclusion of liability for negligence (Sect. 2) • Liability for death or personal injury resulting from negligence cannot be excluded or

limited. Clauses purporting to do so will simply be ineffective. This includes liability for negligence in tort as well as contract. Sect. 2(1)

• Any other loss or damage. Responsibility for negligence which causes some harm short of death or personal injury can only be limited or excluded where it is reasonable to do so. Sect. 2(2)

6.3.4. Exclusion of liability arising from contractual obligation (Sect. 3) In a consumer contract, or when dealing on one party’s standard business terms, a contract term cannot exclude or restrict liability • for non-performance or • for performance which is substantially different from what was agreed, unless it is reasonable to do so. 6.3.5. Breach of implied terms under the Sale of Goods Act 1979 The seller’s implied

undertaking as to

Title Cannot be excluded

Conformity with description

Quality or fitness

Conformity with sample

Against a person who deals as a

consumer liability cannot be

excluded

Deals as a consumer:

- he does not make the contract in

the course of business;

- and the other party does, and not

an auction sale; and

- the goods are of a type ordinarily

supplied for private use or

consumption.

Conformity with description

Quality or fitness

Conformity with sample

Against a person who deals

otherwise than as a

consumer, liability can be

excluded if the exclusion clause

is reasonable, Sect. 6(3)

According to Sect. 11(2) regard shall

be had in particular to the five

guidelines found in Schedule 2 for

the application of the test

6.3.6. Statutory test of reasonableness (Sect. 11) The term must be fair and reasonable having regard to all the circumstances which were or which ought to have been known to the parties when the contract was made. The burden of proving reasonableness lies on the person seeking to rely on the clause.

Documents

Business Law Reader 2012