Law of Contract(English Variant) -- Mahmood Ahmed Khan

1 Corporate & Business law (ACCA F4)

Law of Contract

LAW OF CONTRACT

By: Sir Mahmood Ahmed Khan

ACCA Paper F4UK Variant


Law of Contract

Topics List

Page No.

‡ Contract 3

‡ Three essential elements of contract 3

‡ Validity factors for contract 3

‡ Offer 4

‡ Acceptance 8

‡ Consideration 10

‡ Intention to create legal relations 13

‡ Privity of contract 14

‡ Contract terms 16

‡ Exclusion clauses 19

‡ The Unfair Contract Terms Act 1977 21

‡ The Unfair Terms in Consumer Contracts Regulations 1999 23

‡ Breach of contract

Contract


Law of Contract

An agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration. A contract is an agreement between two parties which is enforceable by law

OR

A binding agreement between two or more parties for performing, or refraining from performing, some specified act(s) in exchange for lawful consideration.

Three essential elements of contract:There are three elements which are needed for a contract to be made between two parties.

≈ Offer and acceptance

≈ Consideration

≈ Intention to enter into legal relations

Validity factors for contract

1. CapacitySome persons have only restricted capacity to enter into contracts. Like Minors and those who lack mental capacity or are intoxicated.

2. Form Some contracts must be made in a particular form. Such as shares transfer, leases etc.

3. ContentLike terms whether Express or implied, or whether some terms are overridden by statutory rules.

4. Genuine consentA mistake or misrepresentation made by one party may affect the validity of a contract. Parties may be induced to enter into a contract by undue Influence or coercion.

5. LegalityThe courts will not enforce a contract which is deemed to be illegal or contrary to public policy.

A contract which does not satisfy the relevant tests may be either; Void, Voidable or Unenforceable

Void contract


Law of Contract

≈ A void contract is one that cannot be performed or completed at all. A void contract is void ab initio (from the beginning) and the normal remedy is rescission to put the parties back to where they were

≈ A contract is void where one party lacks capacity, where it is based on a mistake or where it would be illegal if completed.

Voidable contract

≈ A valid contract which can be brought to an end by the innocent party (e.g. because of a misrepresentation or improper pressure

≈ A contract may be voidable on the grounds of Fraud, mistake, Misrepresentation, lack of capacity, duress, Undue Influence etc.

Unenforceable contract

≈ An unenforceable contract is a valid contract that cannot be fully enforced due to some technical defect.

≈ A contract may be good, but incapable of proof due to lapse of time, want of written form, or failure to affix a revenue stamp

≈ Courts are usually in the habit of condemning the unenforceable agreement as ‘illegal.’

≈ In certain cases, the conduct that renders the agreement unenforceable is a crime, however this is not usually so

A proposal that is made to a certain individual or legal entity to enter into a contract, that is definite in

its terms, and that indicates the offerer's intent to be bound by an acceptance.

OR

A proposal to enter into certain arrangements, usually accompanied by an expected acceptance. For example, an offer to purchase a house for $50,000

≈ Offer is a definite promise to be bound on specific terms

≈ A definite offer does not have to be made to a particular person

≈ It may be made to a class of persons or to the world at large, and only the person or one of the persons to whom it is made may accept it

o Carlill Vs. Carbolic smoke ball company

Different types of offer:

Offer


Law of Contract

Express offer:

The offer that is made in writing or verbal

Specific offer:

≈ It is the offer that is made to a particular person or a group

≈ It can only be accepted by those to whom the offer was made

≈ For e.g. a health club offering discounts on services to its existing members

≈ In this case only the existing members can accept the offer

General offer:

≈ It is the offer that is made to the public in general or at large

≈ It can be accepted by any member of the public

≈ For e.g. a recreation centre offering discounts on joining the membership

≈ In this case any member of the public can join the membership and avail the discount

Implied offer:

≈ It is the offer that is made by parties by their conduct

≈ For e.g. taking goods to the cash counter is an implied offer to buy the goods

Counter offer:

≈ If in his reply to an offer, the offeree introduces a new term or varies the terms of the offer, then that reply cannot amount to an acceptance. Instead, the reply is treated as a "counter offer", which the original offeror is free to accept or reject. A counter-offer also amounts to a rejection of the original offer which cannot then be subsequently accepted

o Hyde v Wrench (1840)

Cross offer:

≈ A cross offer is one where both parties state to each other the same proposal.E.g. If A tells B - "Will you buy my red car for Rs. 5, 00,000?"But B, unaware of the A's proposition at that time, also goes ahead and says - "Will you sell me your red car for Rs. 5, 00,000?"

≈ In this way, anyone can accept the offer.

Battle of the forms:

≈ If A makes an offer on his standard document and B accepts on on a document containing his conflicting standard terms, a contract will be made on B's terms if A acts upon B's communication, e.g. by delivering goods. This situation is known as the "battle of the forms".An offer must be distinguished from the following;

≈ Supply of information


Law of Contract

≈ Statement of intention

≈ Invitation to treatThese are explained below

Supply of information:

≈ Where one party provides the other information regarding the contract terms, this is considered as supply of information not an offer

o Harvey v Facey 1893Statement of intention:

≈ A statement of intention for a contract is not an offer

≈ For example, advertising that an event such as an auction will take place is not an offer to sell. Potential buyers may not sue the auctioneer if the auction does not take place

Invitation to treat:

This is defined as follows;

An invitation to treat is a mere declaration of willingness to enter into negotiations; it's not an offer, and can't be accepted so regarding form a binding contract

An invitation to treat cannot be accepted to form a binding contract. Examples of invitations to treat include.

≈ Auction sales

≈ Advertisements (for example, price lists or newspaper advertisements)

≈ Exhibition of goods for sale

≈ An invitation for tenders

Auction sales:

≈ In an auction, the auctioneer's call for bids is an invitation to treat, a request for offers. The bids made by persons at the auction are offers, which the auctioneer can accept or reject as he chooses. Similarly, the bidder may retract his bid before it is accepted

o Barry Vs. Davies

Advertisements

≈ Advertisements of goods for sale are normally interpreted as invitations to treat.

≈ However, advertisements may be construed as offers if they are unilateral, i.e. open to the entire world to accept (e.g. offers for rewards).

o Partridge v Crittenden 1968

Exhibition of goods for sale


Law of Contract

≈ The display of goods with a price ticket attached in a shop window or on a supermarket shelf is not an offer to sell but an invitation for customers to make an offer to buy

o Fisher v Bell 1961o Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern)

1952Invitation for tenders

≈ Where goods are advertised for sale by tender, the statement is not an offer, but an invitation to treat; that is, it is a request by the owner of the goods for offers to purchase them

Termination of offer:

Offer can be terminated in the following ways

1. ACCEPTANCE

≈ Once an offer has been accepted, a binding contract is made and the offer ends.

2. REJECTION

If the offeree rejects the offer that is the end of it.

o Hyde v Wrench 18403. Revocation

≈ The offer may be revoked by the offeror at any time until it is accepted. However, the revocation of the offer must be communicated to the offeree(s). Unless and until the revocation is so communicated, it is ineffective. See:

≈ The revocation need not be communicated by the offeror personally, it is sufficient if it is done through a reliable third party.

≈ Where an offer is made to the whole world, it appears that it may be revoked by taking reasonable steps.

≈ Once the offeree has commenced performance of a unilateral offer, the offeror may not revoke the offer.

o Routledge v Grant 1828

4. Counter offer

If in his reply to an offer, the offeree introduces a new term or varies the terms of the offer, then that reply cannot amount to an acceptance. Instead, the reply is treated as a "counter offer", which the original offeror is free to accept or reject. A counter-offer also amounts to a rejection of the original offer which cannot then be subsequently accepted

o Butler Machine Tool Co v Ex-cell-O Corp (England) 19795. Lapse of time

≈ Where an offer is stated to be open for a specific length of time, then the offer automatically terminates when that time limit expires. Where there is no express time limit, an offer is normally open only for a reasonable time

o Ramsgate Victoria Hotel Co v Montefiore 1866


Law of Contract

6. Failure of a condition

≈ An offer may be made subject to conditions. Such a condition may be stated expressly by the offeror or implied by the courts from the circumstances. If the condition is not satisfied the offer is not capable of being accepted

o Financings Ltd v Stimson 1962

7. Death

≈ The offeree cannot accept an offer after notice of the offeror's death. However, if the offeree does not know of the offeror's death, and there is no personal element involved, then he may accept the offer

o Bradbury v Morgan 1862

≈≈ An acceptance is a final and unqualified acceptance of the terms of an offer. To make a binding

contract the acceptance must exactly match the offer. The offeree must accept all the terms of the offer.Acceptance may be by express words, by action or inferred from conduct.

o Brogden v Metropolitan Railway Co 1877

≈ Acceptance “subject to contract” means that the offeree is agreeable to the terms of the offer but proposes that the parties should negotiate a formal contract. Neither party is bound until the formal contract is signed.

o Branca v Cobarro 1947

≈ A letter of intent is a means by which one party gives a strong indication to another that he is likely to place a contract with him. Usually, a letter of intent is worded so as not to create any legal obligation.

o British Steel Corpn v Cleveland Bridge and Engineering Co Ltd 1984

COMMUNICATION OF ACCEPTANCE≈ The general rule is that an acceptance must be communicated to the offeror. Until and unless

the acceptance is so communicated, no contract comes into existence

≈ The acceptance must be communicated by the offeree or someone authorised by the offeree. If someone accepts on behalf of the offeree, without authorisation, this will not be a valid acceptance

≈ The offeror cannot impose a contract on the offeree against his wishes by deeming that his silence should amount to an acceptance

≈ Where an instantaneous method of communication is used, e.g. telex, it will take effect when and where it is received

EXCEPTIONS TO THE COMMUNICATION RULE

≈ In unilateral contracts the normal rule for communication of acceptance to the offeror does not apply. Carrying out the stipulated task is enough to constitute acceptance of the offer.

≈ The offeror may expressly or impliedly waive the need for communication of acceptance by the offeree, e.g. where goods are dispatched in response to an offer to buy.

Acceptance


Law of Contract

≈ The Postal Rule - Where acceptance by post has been requested or where it is an appropriate and reasonable means of communication between the parties, then acceptance is complete as soon as the letter of acceptance is posted, even if the letter is delayed, destroyed or lost in the post so that it never reaches the offeror

o Adams v Lindsell 1818

The postal rule will not apply:

≈ Where the letter of acceptance has not been properly posted, as in Re London and Northern Bank (1900), where the letter of acceptance was handed to a postman only authorised to deliver mail and not to collect it.

≈ Where the letter is not properly addressed. There is no authority on this point.

≈ Where the express terms of the offer exclude the postal rule, i.e. if the offer specifies that the acceptance must reach the offeror. In Holwell Securities v Hughes (1974, below), the postal rule was held not to apply where the offer was to be accepted by "notice in writing". Actual communication was required.

≈ It was said in Holwell Securities that the rule would not be applied where it would produce a "manifest inconvenience or absurdity".

Method of acceptance

≈ The offer may specify that acceptance must reach the offeror in which case actual communication will be required

≈ If a method is prescribed without it being made clear that no other method will suffice then it seems that an equally advantageous method would suffice

Knowledge of the offer

≈ An offeree may perform the act that constitutes acceptance of an offer, with knowledge of that offer, but for a motive other than accepting the offer. The question that then arises is whether his act amounts to a valid acceptance. The position seems to be that:

≈ An acceptance which is wholly motivated by factors other than the existence of the offer has no effect.

≈ Where, however, the existence of the offer plays some part, however small, in inducing a person to do the required act, there is a valid acceptance of the offer

The definition given by Sir Frederick Pollock, approved by Lord Dunedin in Dunlop v Selfridge Ltd [1915] Consideration


Law of Contract

"An act or forebearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable."

Types of consideration

Executed consideration

≈ If one party makes a promise in exchange for an act by the other party, when that act is completed, it is executed consideration, e.g. in a unilateral contract where A offers £50 reward for the return of her lost handbag, if B finds the bag and returns it, B's consideration is executed.

Executory consideration

≈ Consideration is called "executory" where there is an exchange of promises to perform acts in the future, e.g. a bilateral contract for the supply of goods whereby A promises to deliver goods to B at a future date and B promises to pay on delivery. If A does not deliver them, this is a breach of contract and B can sue. If A delivers the goods his consideration then becomes executed.

Conditions of a valid consideration:

1. Consideration must not be past

≈ If one party voluntarily performs an act, and the other party then makes a promise, the consideration for the promise is said to be in the past. The rule is that past consideration is no consideration, so it is not valid and cannot be used to sue on a contract. For example, A gives B a lift home in his car. On arrival B promises to give A £5 towards the petrol. A cannot enforce this promise as his consideration, giving B a lift, is past.

Exceptions to this rule:

(a) Previous request;

≈ If the promisor has previously asked the other party to provide goods or services, then a promise made after they are provided will be treated as binding

(b) Business situations:

≈ If something is done in a business context and it is clearly understood by both sides that it will be paid for, then past consideration will be valid


Law of Contract

(c) The bills of exchange act 1882:

≈ Under s27(1) it is provided that any antecedent debt or liability is valid consideration for a bill of exchange. For example, A mows B's lawn and a week later B gives A a cheque for £10. A's work is valid consideration in exchange for the cheque.

2. Consideration must be sufficient but need not be adequate

≈ Providing consideration has some value, the courts will not investigate its adequacy. Where consideration is recognised by the law as having some value, it is described as "real" or "sufficient" consideration. The courts will not investigate contracts to see if the parties have got equal value.

3. Consideration must move from the promisee

≈ The person who wishes to enforce the contract must show that they provided consideration; it is not enough to show that someone else provided consideration. The promisee must show that consideration "moved from" (ie, was provided by) him. The consideration does not have to move to the promisor. If there are three parties involved, problems may arise. Price v Easton (1833) 4 B & Ad 433

4. Forebearance to sue

≈ If one person has a valid claim against another (in contract or tort) but promises to forbear from enforcing it, that will constitute valid consideration if made in return for a promise by the other to settle the claim. See:

o Alliance Bank v Broom (1864) 2 Dr & Sm 289.

Sufficiency and adequacy of consideration

For a binding contract to be created, consideration must be legally sufficient

Sufficiency of consideration means consisting of either a benefit to the promisor or a detriment to the promisee· Legal Benefit obtaining something to which one had no prior legal right· Legal Detriment doing an act one is not legally obligated to do or not doing an act that one has a legal right to doAdequacy of consideration refers to the fairness of the bargain. In general, a court will not question the adequacy of consideration if the consideration is legally sufficient. Under the doctrine of freedom of contract, parties are normally free to bargain as they wish. If people could sue merely because they had entered into an unwise contract, the courts would be overloaded with frivolous suits. In extreme cases, a court of law may consider the adequacy of consideration in terms of its amount or worth because inadequate consideration may indicate fraud, duress, undue influence, or a lack of bargained-for exchange. It may also reflect a party’s incompetence (for example, an individual might have been too intoxicated or simply too young to make a contract). Suppose Dylan has a house worth $100,000 and he sells it for $50,000. A $50,000 sale could indicate that the buyer unduly pressured Dylan into selling or that Dylan was defrauded into selling the house at far below market value. (It might also indicate that Dylan was in a hurry to sell.)


Law of Contract

5. Existing public duty

≈ If someone is under a public duty to do a particular task, then agreeing to do that task is not sufficient consideration for a contract. See:

o Collins v Godefroy (1831) 1 B & Ad 950.

≈ If someone exceeds their public duty, then this may be valid consideration.

6. Existing contractual duty

≈ If someone promises to do something they are already bound to do under a contract, that is not valid consideration. Contrast:Stilk v Myrick (1809) 2 Camp 317.

7. Existing contractual duty owed to a third party

≈ If a party promises to do something for a second party, but is already bound by a contract to do this for a third party, this is good consideration. See:

o Scotson v Pegg (1861) 6 H & N 295.

8. Part payment of a debt

If one person owes a sum of money to another and agrees to pay part of this in full settlement, the rule at common law (the rule in Pinnel's Case (1602) 5 CoRep 117a) is that part-payment of a debt is not good consideration for a promise to forgo the balance. Thus, if A owes B £50 and B accepts £25 in full satisfaction on the due date, there is nothing to prevent B from claiming the balance at a later date, since there is no consideration proceeding from A to enforce the promise of B to accept part-payment. This is because he is already bound to pay the full amount, an agreement based on the same principle as Stilk v Myrick (1809). It also protects a creditor from the economic duress of his debtor.

Exceptions:

Part-payment of a debt by a third party:

≈ A promise to accept a smaller sum in full satisfaction will be binding on a creditor where the part-payment is made by a third party on condition that the debtor is released from the obligation to pay the full amount.

≈ Hirachand Punamchand v Temple [1911] 2 KB 330 - A father paid a smaller sum to a money lender to pay his son's debts, which the money lender accepted in full settlement. Later the money lender sued for the balance. It was held that the part-payment was valid consideration, and that to allow the moneylender's claim would be a fraud on the father

Composition agreements:

≈ The rule does not apply to composition agreements. This is an agreement between a debtor and a group of creditors, under which the creditors agree to accept a percentage of their debts


Law of Contract

(eg, 50p in the pound) in full settlement. Despite the absence of consideration, the courts will not allow an individual creditor to sue the debtor for the balance: Wood v Robarts (1818)Promissory Estoppel

An exception to the Pinnel’s case;

≈ A legal principle that prevents a person who made a promise from reneging when someone else has reasonably relied on the promise and will suffer a loss if the promise is broken.

≈ An example of promissory estoppel is where A promises B that he would not enforce his legal rights and B acted and relied on it without giving any consideration, equity would not allow A to renege on his promise to B.

o Central London Property Trust v High Trees House 1947

The parties must intend the agreement to be legally binding. But how can the court find out what is in the parties' minds? The nearest the courts can get to discover this intention is to apply an objective test and judge the situation by what was said and done. The law divides agreements into two groups, social & domestic agreements and business agreements.

Social & Domestic agreements:

≈ This group covers agreements between family members, friends and workmates. The law presumes that social agreements are not intended to be legally binding. See, for example:

≈ However, if it can be shown that the transaction had the opposite intention, the court may be prepared to rebut the presumption and to find the necessary intention for a contract. The cases show it is a difficult task to rebut such a presumption.

≈ Agreements between a husband and wife living together as one household are presumed not to be intended to be legally binding, unless the agreement states to the contrary. See:

o Balfour v Balfour [1919] 2 KB 571.o Merritt v Merritt 1970

≈ The presumption against a contractual intention will not apply where the spouses are not living together in amity at the time of the agreement.

≈ If a social agreement will have serious consequences for the parties, this may rebut the presumption.

≈ It seems that agreements of a domestic nature between parent and child are likewise presumed not to be intended to be binding.

≈ Where the parties to the agreement share a household but are not related, the court will examine all the circumstances.

Business/Commercial agreements:

Intention to create legal relations


Law of Contract

≈ In business agreements the presumption is that the parties intend to create legal relations and make a contract. This presumption can be rebutted by the inclusion of an express statement to that effect in the agreement.

o Rose and Frank Co v Crompton Bros Ltd [1925] AC 445.

≈ Similarly, football pools stated to be "binding in honour only" are not legal contracts so that a participant may not recover his winnings.

≈ Contractual intention may be negatived by evidence that "the agreement was a goodwill agreement &ellip; made without any intention of creating legal relations":

≈ If a clause is put in an agreement and the clause is ambiguous then the courts will intervene and interpret it.

≈ Contractual intention may be negatived by the vagueness of a statement or promise.

≈ There are situations where it would appear at first sight that the parties had entered into a commercial agreement, but, nevertheless, a contract is not created:

≈ Mere puffs

≈ Letter of intent

≈ Collective agreements

≈ Free gifts

Transactions binding in honour only

≈ If the parties state that an agreement is “binding in honour only”, this amounts to an express denial of intention to create legal relations.

Under the legal doctrine of privity of contract, only the parties to a contract owe duties to one another and realize any benefits under the contract. The contracting parties also have the ability to sue one another for breach of contract. While the contracting parties have rights and responsibilities, third parties typically do not enjoy any rights or have any obligations because they are not in privity of contract.

For example, John and Jane are parties to a contract, pursuant to which John has agreed to provide Jane, who runs a tuxedo rental company, with 200 tuxedos by a certain date. In turn, Jane has agreed to provide Bob with 50 tuxedos for an upcoming concert. If John fails to provide Jane with the tuxedos, Jane can sue him because they are in privity of contract with one another. Bob could also sue Jane for breach of contract, if Jane fails to deliver the tuxedos, because Bob and Jane are in privity of contract. Bob could not, however, sue John because Bob and John are not in privity of contract with one another, and John does not owe Bob any duties.

o Tweddle v Atkinson 1861o Dunlop v Selfridge 1915

Exceptions

There are number of exceptions to the rule of privity of contract.

Exceptions

Privity of contract


Law of Contract

The third party

can sue in

other capacity

BeswickvBeswick1968The facts: X transferred his business to the defendant, his nephew, in consideration for a pension of £6.1 Os per week and, after his death, a weekly annuity to X's widow. Only one such annuity payment was made. The widow brought an action against the nephew, asking for an order of specific performance. She sued both as administratrix of her husband's estate and in herpersonal capacity as recipient.Decision: As her husband's representative, the widow was successful in enforcing the contract for a third party's (her own) benefit. In her personal capacity she had no right of action.

Collateral

contracts

Shanklin Pier v Detel Products Ltd (1951)The facts: Shanklin Pier contracted with painters to have the pier repainted using products from Detel. Detel had already communicated their paint's suitability to the claimants. The paint was not suitable and Shanklin took action against DetelProducts even though their contract was with the painters.Decision: it was held that a collateral contract (see chapter 4) existed between Shanklin and Detel. Detel had confirmed the paint's suitability in return for Shanklin requiring the painters to use it.

Valid

assignment

Benefit from a contract can be re-assigned from the original beneficiary to a third party if it is in writing, it transfers the same or no more benefits to the new beneficiary and has the consent of the other party.

Foreseeable

loss to the

third party

Linden Garden Trust Ltd V Lenesta Sludge Disposals LtdThe facts: Linden Gardens contracted with the defendants for work to be done on their property. The defendants knew there was the likelihood that the property would be transferred to a third party soon after. After the transfer it became apparent that the workmanship amounted to breach of contract. As the third party had no action against the defendants due to the rules on privity, Linden Gardens took action in their place,Decision: As the transfer was in the contemplation of both parties the original beneficiary could claim full damages on behalf of the third party.

Implied trusts Equity may hold that an implied trust has been createdGregory and Parker v Willimans 1817The facts: P owed money to G and W. He agreed with W to transfer his property to W if W would pay his (P's) debt to G. The property was transferred, but W refused to pay G. G could not sue on the contract between P and W.Decision: P could be regarded as a trustee for G, and G would therefore bring an action jointly with P.

Contracts (Rights of Third Parties) Act

1999


Law of Contract

The Contracts (Rights of Third Parties) Act 1999 reforms the rule of “privity of contract” under which a person can only enforce a contract if he is a party to it. The rule means that, even if a contract is made with the purpose of conferring a benefit on someone who is not a party to it, that person (a “third party”) has no right to sue for breach of contract.

Right of Third Party to Enforce a Contractual Term:

The central purpose of the Act is to give the right to a Third Party to enforce a term of a contract to which that Third Party is not a party.

A Third Party may only enforce a term of a contract if –

(a) the contract expressly provides that the Third Party may do so; or

(b) the term of the contract purports to confer a benefit on that Third Party.

Provision (b) above does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.

The Third Party must be expressly identified in the contract –

(a) by name; or

(b) as a member of a class; or

(c) as answering a particular description

but need not be in existence when the contract was entered into.

The first step in determining the terms of a contract is to establish what the parties said or wrote. Statements made during the course of negotiations may traditionally be classed as representations or terms and if one turns out to be wrong, the plaintiff's remedy will depend on how the statement is classified:

Representation

≈ A representation is a statement of fact made by one party which induces the other to enter into the contract.

Importance of the distinction

≈ A representation is a statement of fact made by one party which induces the other to enter into the contract. If it turns out to be incorrect the innocent party may sue for misrepresentation.Breach of a term of the contract entitles the injured party to claim damages and, if he has been deprived substantially what he bargained for, he will also be able to repudiate the contract.If a statement is not a term of the principal contract, it is possible that it may be enforced as a

Contract terms


Law of Contract

collateral contract (which has developed rapidly in the twentieth century as a significant means by which the difficulties of fixing a statement with contractual force may be circumvented).

≈ How can the courts decide whether a statement is a term or a mere representation? It was established in Heilbut, Symons & Co v Buckleton , that intention is the overall guide as to whether a statement is a term of the contract. In seeking to implement the parties' intentions and decide whether a statement is a term or a mere representation, the courts will consider the following four factors:

What the court considers to identify term or representation?

(A) Timing

≈ The court will consider the lapse of time between the making of the statement and the contract's conclusion: if the interval is short the statement is more likely to be a term. See:

o Routledge v McKay [1954] 1 WLR 615o Schawel v Reade [1913] 2 IR 64.

(B) IMPORTANCE OF THE STATEMENT

≈ The court will consider the importance of the truth of the statement as a pivotal factor in finalising the contract. The statement may be of such importance that if it had not been made the injured party would not have entered into the contract at all. See:

o Bannerman v White (1861) CB(NS) 844

(C) REDUCTION OF TERMS TO WRITINGThe court will consider whether the statement was omitted in a later, formal contract in writing. If the written contract does not incorporate the statement, this would suggest that the parties did not intend the statement to be a contractual term. See:

o Routledge v McKay [1954] 1 WLR 615

(D) SPECIAL KNOWLEDGE/SKILLS

≈ The court will consider whether the maker of the statement had specialist knowledge or was in a better position than the other party to verify the statement's accuracy. See:

o Oscar Chess v Williams [1957] 1 All ER 325o Dick Bentley Productions v Harold Smith Motors [1965] 2 All ER 65.

Express terms and implied terms

Express terms

≈ An express term is a term expressly agreed by the parties to a contract to be a term of that contract. In examining a contract, the courts will look first at the terms expressly agreed by the parties.

o Scammell v Ouston 1941Implied terms


Law of Contract

≈ In most contracts the primary obligations of the parties are contained in express terms. In addition there are various circumstances in which extra terms may be implied into the agreement.

A) TERMS IMPLIED BY CUSTOM

≈ The terms of a contract may have been negotiated against the background of the customs of a particular locality or trade. The parties automatically assume that their contract will be subject to such customs and so do not deal specifically with the matter in their contract. See:

o Hutton v Warren (1836) 1 M&W 466.

B) TERMS IMPLIED BY THE COURT

(i) Intention of the Parties/Terms Implied as Fact

≈ The courts will be prepared to imply a term into a contract in order to give effect to the obvious intentions of the parties. Sometimes the point at issue has been overlooked or the parties have failed to express their intention clearly. In these circumstances, the court will supply a term in the interests of 'business efficacy' so that the contract makes commercial sense. See:

o The Moorcock (1889) 14 PD 64.

(ii) Relationship Between the Parties/Terms Implied by Law

≈ In certain relationships and contracts the law seeks to impose a model or standardised set of terms as a form of regulation. Such terms arising from the relationship between the parties will be implied as of law. See:

o Liverpool City Council v Irwin [1976] 2 All ER 39.

C) TERMS IMPLIED BY STATUTE

These are the terms that are implied by the statute. For e.g. the supply of goods must match the sample provided is a term implied by sales of goods act 1979

Conditions and warrantiesTraditionally terms have been divided into two categories: conditions and warranties.

(A) CONDITIONS

≈ A condition is a major term which is vital to the main purpose of the contract. A breach of condition will entitle the injured party to repudiate the contract and claim damages. The injured party may also choose to go on with the contract, despite the breach, and recover damages instead. See:

o Poussard v Spiers (1876) 1 QBD 410


Law of Contract

(B) WARRANTIES

≈ A warranty is a less important term: it does not go to the root of the contract. A breach of warranty will only give the injured party the right to claim damages; he cannot repudiate the contract. See:

o Bettini v Gye (1876) 1 QBD 183.

(C) INTERMEDIATE TERMS

≈ It may be impossible to classify a term neatly in advance as either a condition or a warranty. Some undertakings may occupy an intermediate position, in that the term can be assessed only in the light of the consequences of a breach. If a breach of the term results in severe loss and damage, the injured party will be entitled to repudiate the contract; where the breach involves minor loss, the injured party's remedies will be restricted to damages. These intermediate terms have also become known as innominate terms. See:

≈ A clause may be inserted into a contract which aims to exclude or limit one party's liability for breach of contract or negligence. However, the party may only rely on such a clause if (a) it has been incorporated into the contract, and if, (b) as a matter of interpretation, it extends to the loss in question. Its validity will then be tested under (c) the Unfair Contract Terms Act 1977 and (d) the Unfair Terms in Consumer Contracts Regulations 1999.

≈ Exclusion clauses must be incorporated into a contract before they have legal effect.Exclusion clauses are interpreted strictly. This may prevent the application of the clause.

Incorporation of exclusion clauses

≈ The person wishing to rely on the exclusion clause must show that it formed part of the contract. An exclusion clause can be incorporated in the contract by signature, by notice, or by a course of dealing.

1. SIGNED DOCUMENTS

≈ If the plaintiff signs a document having contractual effect containing an exclusion clause, it will automatically form part of the contract, and he is bound by its terms. This is so even if he has not read the document and regardless of whether he understands it or not

≈ However, even a signed document can be rendered wholly or partly ineffective if the other party has made a misrepresentation as to its effect

2. UNSIGNED DOCUMENTS

Exclusion clauses


Law of Contract

≈ The exclusion clause may be contained in an unsigned document such as a ticket or a notice. In such a case, reasonable and sufficient notice of the existence of the exclusion clause should be given. For this requirement to be satisfied:

o The clause must be contained in a contractual document, ie one which the reasonable person would assume to contain contractual terms, and not in a document which merely acknowledges payment such as a receipt.

o The existence of the exclusion clause must be brought to the notice of the other party before or at the time the contract is entered into.

o Reasonably sufficient notice of the clause must be given. It should be noted that reasonable, not actual notice is required

3. PREVIOUS DEALINGS

≈ Even where there has been insufficient notice, an exclusion clause may nevertheless be incorporated where there has been a previous consistent course of dealing between the parties on the same terms

≈ As against a private consumer, a considerable number of past transactions may be required

≈ Even if there is no course of dealing, an exclusion clause may still become part of the contract through trade usage or custom

4. THE BATTLE OF THE FORMS

≈ A problem arises if one party sends a form saying that the contract is made on those terms but the second party accepts by sending a form with their own terms on and stating that the contract is on the second party's terms. The "rule of thumb" here is that the contract will be made on the last set of terms sent.

Interpretation of exclusion clauses

≈ Once it is established that an exclusion clause is incorporated, the whole contract will be construed (ie, interpreted) to see whether the clause covers the breach that has occurred. The basic approach is that liability can only be excluded by clear words. The main rules of construction are as follows:

1. CONTRA PROFERENTEM

≈ If there is any ambiguity or uncertainty as to the meaning of an exclusion clause the court will construe it contra proferentem, ie against the party who inserted it in the contract

≈ Very clear words are needed in a contract to exclude liability for negligence

2. THE MAIN PURPOSE RULE

≈ Under this rule, a court can strike out an exemption clause which is inconsistent with or repugnant to the main purpose of the contract.

3. THE DOCTRINE OF FUNDAMENTAL BREACH


Law of Contract

≈ Prior to 1964, the common law considered that a fundamental breach could not be excluded or restricted in any circumstances as this would amount to giving with one hand and taking with the other. This became elevated to a rule of law.

≈ However, the rule of law approach was rejected in UGS Finance v National Mortgage Bank of Greece [1964] 1 Lloyd's Rep 446, on the basis that it conflicted with freedom of contract and the intention of the parties. The question of whether a clause could exclude liability for a fundamental breach was held to be a question of construction.

≈ The UGS case was unanimously approved by the House of Lords in the Suisse Atlantique case [1967] 1 AC 361, and Photo Production Ltd v Securicor Transport [1980] AC 827.

≈ The basic purpose of UCTA 1977 is to restrict the extent to which liability in a contract can be excluded for breach of contract and negligence, largely by reference to a reasonableness requirement, but in some cases by a specific prohibition.

1. THE SCOPE OF UCTA 1977

≈ The Act does not apply to insurance contracts; the sale of land; contracts relating to companies; the sale of shares; and the carriage of goods by sea (Schedule 1); or to international supply contracts (s26).

Business Liability and Dealing as a Consumer

≈ Most of the provisions of the Act apply only to what is termed "business liability". This is defined by s1(3) as liability arising from things done by a person in the course of a business or from the occupation of business premises. The exceptions are ss6 and 7 where the Act also applies to private contracts.

≈ The Act gives the greatest protection to consumers. Under s12(1) a person "deals as a consumer" if he does not contract in the course of a business while the other party does contract in the course of a business; and if it is a contract for the supply of goods, they are of a type ordinarily supplied for private use or consumption.

Main provisions of the Act are;

(a) Any clause that attempts to restrict liability for death or personal injury arising from negligence is void.

(b) Any clause that attempts to restrict liability for other loss or damage arising from negligence is void unless it can be shown to be reasonable.

(c) Any clause that attempts to limit liability for breach of contract, where the contract is based on standard terms or conditions, or where one of the parties is a consumer, is void unless it can be shown to be reasonable.

The unfair contract terms act 1977


Law of Contract

Clauses which are void

A clause is void by statute in the following circumstances.

≈ A clause which purports to exclude or limit liability for death or personal injury resulting from negligence is void.

≈ A guarantee clause which purports to exclude or limit liability for loss or damage caused by a defect of the goods in consumer use is void.

≈ In a contract for the sale or hire purchase of goods, a clause that purports to exclude the condition that the seller has a right to sell the goods is void.

≈ In a contract for the sale of goods, hire purchase, supply of work or materials or exchange with a consumer, a clause that purports to exclude or limit liability for breach of the conditions relating to description, quality, fitness and sample implied by the Sale of Goods Act 1979 is void.

Clauses which are subject to a test of reasonableness

If a clause is not automatically void, it is subject to a test of reasonableness.

The statutory test of reasonableness

Section 11(2) provides that, in determining whether the clause is a reasonable one for the purposes of

ss6 and 7, regard shall be had to the Guidelines set out in Schedule 2 of the Act, which are as follows:

≈ (1) The bargaining strengths of the parties relative to each other and the availability of alternative supplies.

≈ (2) Whether the customer received an inducement to agree to the term. (The supplier may have offered the customer a choice: a lower price but subject to an exemption clause or a higher price without the exemption.)

≈ (3) Whether the customer knew or ought reasonably to have known of the existence and extent of the term.

≈ (4) Where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable.

≈ (5) Whether the goods were manufactured, processed or adapted to the special order of the customer.

Exclusion of liability for negligence

≈ A person acting in the course of a business cannot, by reference to any contract term, restrict his liability for death or personal injury resulting from negligence. The clause containing the term is simply void. In the case of other loss or damage, a person cannot introduce a clause restricting his liability for negligence unless the term is reasonable.

Standard term contracts and consumer contracts


Law of Contract

≈ The person who uses a standard-term contract in dealing with a consumer cannot, unless the term is reasonable, restrict liability for his own breach.

≈ A consumer is defined as a natural person who, in making a contract to which these regulations apply, is acting for purposes which are outside his business.

≈ An unfair term is any term which causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer. In making an assessment of good faith, the courts will have regard to the following:

≈ The strength of the bargaining positions of the parties

≈ Whether the consumer had an inducement to agree to the term

≈ Whether the goods or services were sold or supplied to the special order of the consumer

≈ The extent to which the seller or supplier has dealt fairly and equitably with the consumer

The effect of the regulations is to render certain terms in consumer

contracts unfair.

≈ Excluding or limiting liability of the seller when the consumer dies or is injured, where this results from an act or omission of the seller

≈ Excluding or limiting liability for partial or incomplete performance by the seller

≈ Making a contract binding on the consumer where the seller can still avoid performing the contract

Two forms of redress are available.

≈ A consumer who has concluded a contract containing an unfair term can ask the court to find that the unfair term should not be binding.

≈ A complaint, for example by an individual, a consumer group or a trading standards department can be made to the Director General of Fair Trading.

Contracts can be discharged in four ways:

Unfair terms in consumer contracts regulations 1999

Breach of contract


Law of Contract

Agreement

≈ Where both parties agree to end the agreement and it is supported by consideration.

Frustration

≈ Where performance of an obligation is impossible due to specific circumstances occurring after formation of the contract.

Performance

≈ The most common method of discharge. The contractual obligations are exactly or substantially met (all contract terms are performed).

Breach

≈ Where one party fails to meet its contractual obligations.

Breach of contract

≈ A person sometimes has a lawful excuse not to perform contractual obligations, if:

≈ Performance is impossible, perhaps because of some unforeseeable event.

≈ He has tendered performance but this has been rejected.

≈ The other party has made it impossible for him to perform.

≈ The contract has been discharged through frustration.

≈ The parties have by agreement permitted non-performance.

Repudiation

It can be defined as a breach of contract which entitles the injured party to end the contract if he so

chooses.

A repudiatory breach occurs where a party indicates, either by words or by conduct, that he does not

intend to honour his contractual obligations or commits a breach of condition or commits a breach

which has very serious consequences for the injured party


Law of Contract

≈ It does not automatically discharge the contract - indeed the injured party has a choice.

≈ He can elect to treat the contract as repudiated by the other, recover damages and treat himself as being discharged from his primary obligations under the contract.

≈ He can elect to affirm the contract.

Types of Repudiatory Breach

Repudiatory breach giving rise to a right either to terminate or to affirm arises in the following

circumstances.

Refusal to perform (renunciation).

≈ One party renounces his contractual obligations by showing that he has no intention to perform them.

Failure to perform an entire obligation.

≈ An entire obligation is said to be one where complete and precise performance of it is a precondition of the other party's performance.

Incapacitation

≈ Where a party prevents himself from performing his contractual obligations he is treated as if he refused to perform them. For instance, where A sells a thing to C even though he promised to sell it to B he is in repudiatory breach of his contract with B.

Breach of condition

Breach of an innominate term

≈ Which has the effect of depriving the injured party of substantially the whole benefit of the contract.

Anticipatory breach

Repudiation may be explicit or implicit. A party may break a condition of the contract merely by

declaring in advance that he will not perform it, or by some other action which makes future

performance impossible. The other party may treat this as anticipatory breach

≈ Treat the contract as discharged forthwith

≈ At his option may allow the contract to continue until there is an actual breach.

≈ Where the injured party allows the contract to continue, it may happen that the parties are discharged from their obligations without liability by some other cause which occurs later.

o Hochster v De La Tour 1853o White & Carter (Councils) v McGregor 1961o The Mihalis Angelos 1971


Law of Contract

Termination for repudiatory breach

To terminate for repudiatory breach the innocent party must notify the other of his decision. This may

be by way of refusal to accept defects in performance, refusal to accept further performance or refusal

to perform his own obligations.

≈ He is not bound by his future or continuing contractual obligations, and cannot be sued on them.

≈ He need not accept nor pay for further performance.

≈ He can refuse to pay for partial or defective performance already received, unless the contract is severable.

≈ He can reclaim money paid to a defaulter if he can and does reject defective performance.

≈ He is not discharged from the contractual obligations which were due at the time of terminator

Affirmation after repudiatory breach

If a person is aware of the other party's repudiatory breach and of his own right to terminate the

contract as a result but still decides to treat the contract as being in existence he is said to have

affirmed the contract. The contract remains fully in force.

Damagesare a common law remedy and are primarily intended to restore the party who has suffered loss to the

same position he would have been in if the contract had been performed. The two tests applied to a

claim for damages relate to remoteness of damage and measure of damages.

Types of damages

(1) Compensatory Damages - money to reimburse you for costs to compensate for your loss.

(2) Consequential and Incidental Damages - money for losses caused by the breach that were foreseeable. Foreseeable damages means that each side reasonably knew that, at the time of the contract, there would be potential losses if there was a breach.

(3) Attorney fees and Costs - only recoverable if expressly provided for in the contract.

(4) Liquidated Damages - these are damages specified in the contract that would be payable if there is a fraud.


Law of Contract

(5) Punitive Damages - this is money given to punish a person who acted in an offensive and egregious manner in an effort to deter the person and others from repeated occurrences of the wrongdoing. You generally cannot collect punitive damages in contract cases.

Remoteness of damage

Under the rule in Hadley v Baxendale damages may only be awarded in respect of loss as follows.

≈ The loss must arise naturally from the breach.

≈ The loss must arise in a manner which the parties may reasonably be supposed to have contemplated, in making the contract, as the probable result of the breach of it.

≈ A loss outside the natural course of events will only be compensated if the exceptional circumstances are within the defendant's knowledge when he made the contract.

≈ The defendant is liable only if he knew of the special circumstances from which the abnormal consequence of breach could arise.

o Victoria Laundry (Windsor) v Newman Industries 1949o The Heron II 1969

Measure of damages

As a general rule the amount awarded as damages is what is needed to put the claimant in the

position he would have achieved if the contract had been performed. This is sometimes referred to as

protecting the expectation interest of the claimant.

Market price rule

≈ The measure of damages for breaches of contract for the sale of goods is usually made in relation to the market price of the goods. Where a seller fails to sell the goods, the buyer can go into the market and purchase equivalent goods instead. The seller would have to compensate the buyer for any additional cost the buyer incurred over the contract cost. The situation is reversed when the buyer fails to purchase the goods. The seller can sell the goods on the open market and recover any loss of income he incurred by having to sell the goods at a lower price than that he contracted to.

Non-financial loss

≈ In some recent cases damages have been recovered for mental distress where that is the main result of the breach. It is uncertain how far the courts will develop this concept

o Jarvis v Swan Tours 1973

Cost of cure

≈ Where there has been a breach and the claimant is seeking to be put in the position he would have been in if the contract had been performed, by seeking a sum of money to 'cure' the defect which constituted the breach, he may be denied the cost of cure if it is wholly disproportionate to the breach.

o Ruxley Electronics and Construction Ltd v Forsyth 1995Mitigation of loss

≈ In assessing the amount of damages it is assumed that the claimant will take any reasonable steps to reduce or mitigate his loss. The burden of proof is on the defendant to show that the


Law of Contract

claimant failed to take a reasonable opportunity of mitigation. The injured party is not required to take discreditable or risky measures to reduce his loss since these are not 'reasonable'.

o Payzu Ltd v Saunders 1919o Pilkington v Wood 1953

Liquidated damages and penalty clauses

Liquidated damages can be defined as 'a fixed or ascertainable sum agreed by the parties at the time of contracting, payable in the event of a breach, for example, an amount payable per day for failure to complete a building. If they are a genuine attempt to pre-estimate the likely loss the court will enforce payment.'

o Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd 1915o Ford Motor Co (England) Ltd v Armstrong 1915

A penalty clause can be defined as 'a clause in a contract providing for a specified sum of money to be payable in the event of a subsequent breach. If its purpose is merely to deter a potential difficulty, it will be held void and the court will proceed to assess unliquidated damages.'

o Bridge v Campbell Discount Co 1962Other common law remedies

Action for the price

≈ If the breach of contract arises out of one party's failure to pay the contractually agreed price due under the contract, the creditor should bring a personal action against the debtor to recover that sum. This is a fairly straightforward procedure but is subject to two specific limitations.

≈ The first is that an action for the price under a contract for the sale of goods may only be brought if property has passed to the buyer, unless the price has been agreed to be payable on a specific date.

≈ Secondly, whilst the injured party may recover an agreed sum due at the time of an anticipatory breach, sums which become due after the anticipatory breach may not be recovered unless he affirms the contract.

Quantum meruit

≈ The phrase quantum meruit literally means “how much it is worth”. It is a measure of the value of contractual work which has been performed. The aim of such an award is to restore the claimant to the position he would have been in if the contract had never been made, and is therefore known as a restitutory award.

≈ Quantum meruit is likely to be sought where one party has already performed part of his obligations and the other party then repudiates the contract.

≈ Because it is restitutory, a quantum meruit award is usually for a smaller amount than an award of damages.

o De Barnardy v Harding 1853Specific performance

≈ A court order to a person to fulfil his obligations under a contract. For example, when contracts

have been exchanged for the sale of a house, the court may order a reluctant seller to

complete the sale. The remedy is a discretionary one and is not available in certain cases; for


Law of Contract

example, for the enforcement of a contract of employment or when the payment of damages

would be a sufficient remedy.

Injunction

A remedy in the form of a court order addressed to a particular person that either prohibits him from

doing or continuing to do a certain act (a prohibitory injunction) or orders him to carry out a certain act

(a mandatory injunction). The remedy is discretionary and will be granted only if the court considers it

just and convenient to do so; it will not be granted if damages would be a sufficient remedy.

o Warner Bros Pictures Inc v Nelson 1937

≈ An injunction is limited to enforcement of contract terms which are in substance negative

restraints.

o Metropolitan Electric Supply Co v Ginder 1901

≈ An injunction would not be made merely to restrain the defendant from acts inconsistent with his positive Obligations

o Whitwood Chemical Co v Hardman 1891

Rescission

≈ Rescission is an equitable remedy that wipes out the existing contract and restores the parties to their situation prior to entering into the contract. In general terms, rescission refers to the cancellation of a contract. If money has been paid by one party to another, that money is returned as part of the rescission process.

Rescission can occur as a result of innocent or fraudulent representation, mutual mistake, lack of legal capacity, an impossibility to perform a contract not contemplated by the parties, or duress and undue influence. For example, assume you agreed to sell and the buyer agreed to buy two acres of land that you thought you owned. Later, it turns out that you did not have title to the property. Rescission would be the proper remedy.

Four conditions must be met

≈ It must be possible for each party to be returned to the pre-contract condition (restitutio in integrum).

≈ An innocent third party who has acquired rights in the subject matter of the contract will prevent the original transaction being rescinded.

≈ The right to rescission must be exercised within a reasonable time of it arising.

≈ Where a person affirms a contract expressly or by conduct it may not then be rescinded.

Documents

Law of Contract(English Variant) -- Mahmood Ahmed Khan