Lecturer: Rowin Gurusami Sunday 1 st July 2012. No formal definition of a contract Contract law developed around a form of action Sir Guenter Treitel

CONTRACT LAW

Lecturer: Rowin Gurusami

Sunday 1st July 2012

Contract LawNo formal definition of a contractContract law developed around a form of actionSir Guenter Treitel (The Law of Contract, 2nd ed.):“A contract is an agreement giving rise to obligations which are enforced or recognised by law.”

The fundamental part of a contract law is based on the agreement between the contracting parties.”

Key Requirements1. Agreement2. Consideration3. Intention to create legal relations

Also relevant is incapacity

Void/Voidable Contracts1. Lack of Capacity – Voidable2. Absence of Free Will – Voidable3. Illegality – Void4. Mistake – Void/Voidable5. Misrepresentation – Voidable

Void – The contract never existed; thus the parties have no rights or obligations under it. Can recover from third party

Voidable – One party may decide to set it aside. Cannot recover from third party.

Types of ContractOral ContractDeed (leases, transfer of land...)Writing

Certain contracts have to be in writing (transfer of shares, sale of land, bill of exchange, cheques, contract of guarantee)

Leading CaseCarlill v Smoke Ball Company [1893] 1 QB 256

Leading CaseCarlill v Smoke Ball Company [1893]

o Medical firm advertised new drug, claiming to cure flu

o If not, buyers would receive £100o Mrs Carlill used smoke ball regularly, fell ill

and claimed the £100o Company claimed ad was not a serious,

legally binding offero Court held otherwise.

OfferIndication by one person (the offeror) to

another (the offeree) of the offeror’s willingness to enter into a contract on certain terms without further negotiation

The court in Carlill held that an offer can be made to an individual, a class of persons or to the world at large.

OfferUnilateral Contract (Carlill v.s. Smoke Ball Co.)

An invitation to treat is not an offer. It is an indication of a person's willingness to negotiate a contract

Fisher v. Bell (1960) – shop window display not an offer

Pharmaceutical Society of Great Britain v Boots Cash Chemists (1953) – customer making offer, not seller

Harvey v. Facey –supply of information not an offer

OfferHarris v. Nickerson (1873) – Auction ad is

not an offer. The bid is the offer, which auctioneer is free to accept or reject

Partridge v Crittenden (1968) – advertisement offering for sale not an offer

Tenders

Advertisement only an offer when the other party (the offeree) satisfies the conditions

Termination of OfferOffer can only be accepted while still open.Offer closes when:- Rejection- Counter-offer- Lapse of time- Revocation by offeror- Failure of a condition- Death of one of parties

Rejection & Counter-OfferOutright or by counter-offer

Hyde v. Wrench (1840) – Once original offer rejected, it does not exist anymore

Any change in original terms is a counter-offer: Butler Machine Tool Co. v. Ex-cell-O Corp (England) (1979)

Stevenson v. McLean (1880) – Inquiry not a counter-offer

RevocationCan revoke an offer at any time before

acceptance (Payne v. Cave [1789])Even in cases with time limit (Routledge v.

Grant [1828])Revocation not valid until communicated to

offeror (time slots important – e.g. Byrne v. Van Tienhoven [1880] involving letters)

Can be communicated by third party (Dickinson v. Dodds [1876])

Exceptions: payment, conditions partly satisfied in unilateral contract

AcceptanceTreitel: “final and unqualified expression of

assent to the terms of an offer”Contract comes to effect from moment

offeree accepts termsOnce accepted, neither party can withdrawOral, written or by conduct

Rules of Acceptance

Acceptance must be communicated (exceptions)

Offer can only be accepted by the offereeIf means of acceptance stated, offer have to

be accepted using a means which is no less effective

Silence is not acceptance (Felthouse v. Bindley [1862])

Communication of Acceptance

Postal rule – Acceptance complete as soon as letter posted

Even if letter delayed (Adams v. Lindsell [1818]) or lost (Household Fire and Carriage Accident Insurance Co. v. Grant [1879])

Exception: Holwell Securities v. Hughes (1974) – Acceptance had to be by notice in writing


Intention to Create Legal Relation Presumption for commercial agreements that parties intend to be legally bound

Presumption not to be legally bound for arrangements made in social, domestic and family setting

Balfour v. Balfour (1919) – agreement between husband and wife not deemed enforceable

Merritt v. Merritt (1970) – parties were already estranged at the time contract was made


Intention to Create Legal Relation Commercial agreements – presumed intention unless it is expressly disclaimed or circumstances indicate otherwise

RTS Flexible Systems Ltd v Mokerei Alois Muller GmbH (2010) – Court held that unrealistic to consider major works done without a valid contract between parties

Jones v. Vernon’s Pools Ltd (1938) – clause stating contract shall not give rise to any legal relationship


Consideration A promisee cannot enforce a promise unless he has given something in exchange for the promise or unless promisor has obtained something in return

Either some detriment to the promisee or some benefit to the promisor

The detriment and benefit usually the same (e.g payment and delivery)

ConsiderationA promised action, or omission of action, that the

promisee did not already have a pre-existing duty to abide by

“Valuable consideration may consist either in some right, interest, profit or benefit accruing to one party and some forbearance, detriment, loss or responsibility given by the other”– Currie v. Misa [1875]

Both parties to a contract must pass consideration to the another party for there to be a valid contract.

Executed or Executory

ConsiderationConsideration needs to be sufficient, not

adequate

Adequate Consideration – Thomas v. Thomas (1842)

Sufficient Consideration – Chappell & Co v. Nestle Co (1960)

Courts need to be able to put a value on consideration

ConsiderationPast Consideration – Something which has

already been done at the time promise is made. No legal Value

Re McArdle (1951) – Previous improvements on house is past consideration

ConsiderationPerformance of an existing obligation

imposed by statute is no consideration Collins v. Godefroy (1831) – appearing in

Court enforceable by lawConsideration valid if existing duty is

exceeded – in Glasbrook Bros v. Glamorgan CC [1925], police performed extra duty

ConsiderationIf additional reward is promised for

performing existing duties, consideration is not valid - Stilk v Myrick [1809]

Recent exception if one party benefits – Williams v. Roffrey Bros (1990)

Performing more than existing contractual duty is consideration – Hartley v Ponsonby [1857]

ConsiderationWaiver of existing right needs to be

supported by consideration – Foakes v Beer (1884)

Exceptions:1. Part payment by third party2. Alternative consideration3. Bargain between creditors4. Promissory Estoppel


Contractual Terms Any provision forming part of a contract

Express Term – Clearly defined in contract by one or both parties

Implied Term – Term deemed to form part of contract even though not expressly included in contract.


Express Terms Terms must be substantially complete

Terms can be determined at a later day; but parties must provide for it expressly (Scammell v Ouston 1941)

Statements made before the contract is valid can become terms. Courts will consider:-If person making statement had special knowledge of the subject; and-Why was the term omitted from the contract


Implied Terms Terms can be implied:

- By statute- By the courts- By customs


Privity of Contract Contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it

Example: - Contract between A and B that A will (for consideration provided by B) confer a benefit to C- C cannot enforce A’s promise- C provided no consideration


Privity of Contract Contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it

Example: - Contract between A and B that A will (for consideration provided by B) confer a benefit to C- C cannot enforce A’s promise- C provided no consideration

Tweddle v. Atkinson (1861)

Contracts (Rights to Third Parties) Act 1999

Sets out circumstances in which third party has right to enforce contract term

Test:- Whether contract expressly so provides- Where term confers benefit to third party,

unless it appears parties did not want to confer rights to third party

- NOTE FOR LATER: Common law exception to rule of Privity of Contract – Agency Law



Performance Brings the contract to an end

Substantial performance can be enough to discharge contract but the injured party can seek damages

Partial performance makes a contract severable; i.e. some obligations performed so far while others are not.

If one party prevents performance, the offer of performance from other party is enough to discharge of obligations and sue for damages for breach of contract (Planche v Colburn 1831)


Frustration In cases where impossibility arises after contract made

Usually catered for in escape clauses or force majeure clauses

Contract is discharged by frustration if there is NO other way to perform the obligations under the contract

-Destruction of subject matter-Person incapacity-Government intervention-Non-occurrence of an event


The Law Reform (Frustrated Contracts) Act 1943 In the event of a frustrated contract:

- Money paid before frustrating event is to be repaid

- Sums due for payment cease to be payable

- Expenses incurred may be retained/recovered if incurred in the performance of the contract and before frustrating event

- If a party has obtained a valuable benefit (other than monetary), it can be ordered to pay to the other party all or part of the value of the benefit - BP Exploration Co (Libya) Ltd v Hunt (No 2) 1982


Breach of Contract Legal concept in which a binding agreement is not honoured by one or more of the parties to the contract by non-performance or interference with the other party's performance

Minor breachMaterial breachFundamental breachAnticipatory breach – express or implied (injured party can sue as from date of anticipatory breach)


Anticipatory Breach Actual breach – where breach occurs on the due date of performanceAnticipatory breach – implied or express

Claimant can start action as from day of anticipatory breach, no need to wait for actual breach

Claimant can discharge contract and sue for damages without waiting date of performance, orTreat contract as valid, perform his side and sue for payment from other side – White & Carter (Councils) v McGregor (1961)


Damages Common Law remedy for breach – intends to restore party who suffered loss to position he would have been in if contract was performed

Can be inserted as a clause in contract (liquidated damages, penalty clause) or determined by court of law

Test:-Remoteness of damage-Measure of damages


Remoteness of Damage Defendant not always responsible for all losses suffered by claimantRemoteness is designed as a further limit on a cause of action to ensure that the liability to pay damages is fairly placed on the defendant

Traditional approach – defendant liable for all consequent damages (Re Polemis [1921])Nowadays, if defendant could not reasonably have foreseen that someone might be hurt by his actions, then there may be no liability


Remoteness of DamageHadley v Baxendale (1854) sets out rules:-Loss must arise naturally from breach, or-Loss must arise in a manner which parties may reasonably be supposed to have contemplated

-Loss outside natural course of events only compensated if exceptional circumstances are within defendant’s knowledge when contract made – Victoria Laundry v. Newman Industries (1949)

Measure of Damages How much to compensate for the loss incurred? Awarded for financial and non-financial lossGeneral Principle is to compensate for actual financial loss

Expectation interest: Position party would be in if the contract had been performed Reliance interest: Position party would be in had he not relied on the contract Anglia Television Ltd v. Reed (1972): Speculative contract

Damages not intended that injured party profit from claim



Measure of Damages Market Price Rule – one party can claim amount required to purchase equivalent goods

Non-Financial Loss – Discretion of Court- Jarvis v. Swan Tours (1973): damages for distress of holidays- Alexander v. Rolls Royce Motor Cars Ltd (1995): Damages for distress, inconvenience and loss of enjoyment not granted


Measure of Damage Mitigation of Loss: Claimant need to have taken any reasonable steps to reduce loss – Payzu Ltd v Saunders 1919

-Burden of Proof on Defendant to show that Claimant did not mitigate loss

- Not required to take risky measures, only reasonable ones


Equitable Remedies Money cannot solve all problems

Specific Performance: Order of the court directing party in breach to perform his part of contract- usually used to complete a previously established transaction-Not applicable if required performance over period of time (e.g. contracts of employment, building contracts, personal service)


Equitable Remedies Injunction: Court Order whereby party in breach is required to do or refrained from doing certain acts (e.g. restraining orders, freezing injunctions)

- Mandatory Injunction : directs defendant to take positive steps- Prohibitory Injunction: directs defendant to observe a negative promise

- Claimant has to prove likelihood of irreparable harm in the absence of a injunction before such an injunction may be granted


Equitable Principles He who comes to equity must come with clean hands

Delay defeats equity

Equity will not assist a volunteer

Equitable remedies not granted where damages are sufficient


Exclusion Clauses Term in a contract that seeks to restrict the rights of the parties, mainly in cases of breach or negligence

Courts are hostile to exclusion clauses and thus common law will always try to limit their effects

Requirements:-Must be incorporated in contract-Wording interpreted strictly against person who relies on the exclusion


Exclusion Clauses - Incorporation By signature – L’Estrange v Graucob (1934) : if the clause is written on a document which has been signed by all parties, then it is part of the contract

By notice - an exclusion clause will have been incorporated into the contract if the person relying on it took reasonable steps to draw it to the other parties' attention

By previous dealings


Unfair Contract Terms Act(UCTA) 1977 After satisfying common law test, now Statutory Rules

Regulates contracts by restricting the operation and legality of some contract terms, mainly exclusion clauses

Clause exempting liability for death or personal injury due to negligence is voidClause exempting liability for other loss due to negligence is void unless reasonable

Documents

Lecturer: Rowin Gurusami Sunday 1 st July 2012. No formal definition of a contract Contract law developed around a form of action Sir Guenter Treitel