INTRODUCTION TO ENGLISH

CONTRACT LAW:

Nadine Tilbury
Bielefeld University 2006
RECAP
 Introduction
 Offer and Acceptance
 Intention
 Consideration
 Capacity
 Privity
 Representations
 Terms
 Exclusion clauses
NEXT
 Misrepresentations
 Mistake
 Duress / undue influence
 Illegal and void contracts
 Discharge
 Remedies
VOID AND VOIDABLE CONTRACTS
– VITIATING FACTORS
VOID AND VOIDABLE CONTRACTS
– VITIATING FACTORS

 Misrepresentation
 Mistake
 Duress
 Undue influence
 Illegality

 Can invalidate otherwise valid contract

 Void – never valid in the first place
 Voidable – can be avoided or continued or can
replace terms with better ones.
MISREPRESENTATION
 “A representation is a statement made by one
party to the other, before or at the time of
making the contract, with regard to some existing
fact or to some past event, which is material to
the contract”

 A misrepresentation is an untrue statement of

fact, made by one party to another party to a
contract, either before or at the time of making
the contract, with the intention that the person to
whom the statement is made shall act upon such
misrepresentation, and he does so act.”
Cheshire and Fifoot: Law of Contract
MISREPRESENTATION cont

 Statement of material fact, which is false

 not opinion Bisset v Wilkinson 1927
 not future intention – although a statement of
future intention can contain a representation of
an existing fact - Edginton v Fitzmaurice 1885
 not trade puffs
 made by one party to another party - not by a
third party (except an agent) Peyman v
Lanjani1985
 before formation, not afterwards Roscaria v
Thomas 1842
 intended to induce a party into the contract (but
not to form part of it) and did induce a party to
enter into the contract
INDUCEMENT

 The representation must

 Be known to the other party

 Not already be known as false by the

other party

 Be believed or relied upon

Misrepresentation (cont)
 Plaintiff must have suffered damage from
the misrepresentation.
 can result from conduct – not just oral or
in writing Spice Girls Ltd v Aprilia World
Service BV 2000
 If intended to be binding, then more likely
to be a breach of warranty or condition
rather than just a misrepresentation
Couchman v Hill 1947

 Important to distinguish between

Representation, Warranty or Condition.
CLASSES OF
MISREPRESENTATION

 Fraudulent
 Negligent
 Innocent

 1967 Misrepresentation Act

 Motive
FRAUDULENT
MISREPRESENTATION

 specific tort of deceit

 False statement made knowingly or
deliberately or without belief in truth – or
recklessly without caring whether it was
true or not. Derry v Peak 1889
 s67 Companies Act 1985
 Defence honest belief
 Recklessness is only evidence of fraud –
not proof, unless it amounts to a flagrant
disregard for the truth and so is also
dishonest Thomas Witter Ltd v TBP
Industries Ltd 1996
REMEDIES FOR FRAUDULENT
MISREPRESENTATION

 Affirm contract or disaffirm and refuse any further

performance and use as defence to breach of contract
 Rescission in equity – with or without claim for damages
 Action in tort for damages for deceit
 Prosecute or notify police
 damages - including consequential loss

 “the defendant is bound to make reparation for all the

damage flowing from the fraudulent inducement” Lord
Denning Doyle v Olby (Ironmongers) Ltd 1969

 Smith New Court Securities Ltd v Scrimgeour Vickers

(Asset Management) Ltd 1996
NEGLIGENT MISREPRESENTATION

Negligent misstatement causing a

financial loss –Hedley Byrne v
Heller & Partners 1964.

 Duty of care includes words

 particular type of knowledge
 Proximity
 Defendant aware claimant relying
on advice
INNOCENT MISREPRESENTATION

 Remedies s2(1) and 2(2) Misrepresentation Act

1967.
 damages or rescission in equity or repudiate and
refuse to perform further or affirm
 Discretionary right to damages.
 Damages is instead of – not as well as –
rescission – so if no right to rescind, then no
right to damages either.
 Measure of damages is uncertain
 Innocent misrepresentation can be incorporated
as a term.
STATUTORY CONTROL

 Misrepresentations Act 1967 s2(1) if, as a

result of a misrepresentation, a person
has suffered loss and if the person
making the misrepresentation would have
been liable for damages had it been made
fraudulently, then, even though it was not
made fraudulently, he is liable for
damages unless s/he can show s/he had
reasonable grounds to believe in the
statement.
Misrepresentation Act 1967

 Burden of proof
 Common law or statute
 Special relationship
 Negligence
 Reasonable grounds for believing
statement was true
Remedies

 Sue in tort for damages under Hedley

Byrne and Heller where = “special
relationship”
 Sue for damages under s2(1)
Misrepresentation Act 1967 Howard
Marine Dredging v Ogden
 Rescission – discretionary
 Common law = tort based on foreseeable
loss (and includes consequential loss.)
 Damages can be reduced for contributory
negligence
Misrepresentation (cont)
 S3 Misrepresentation Act re
exemption clauses
 Trade Descriptions Act 1968 –
criminal offences.
 Property Misdescriptions Act 1991 –
exaggerated descriptions
NON DISCLOSURE

 No basic common law duty to reveal information not

requested Fletcher v Krell 1873
 Silence - Hands v Simpson, Fawcett & Co 1928

 Contracts Uberimmae fides (where the utmost good faith is

required) Locker and Wool v Western Australian Insurance
Co 1936
 Contracts involving fiduciary relationships – solicitor/client,
agent/principal
 Insurance, sale of land contracts and company prospectuses
 Where part truth is falsehood
 True statement becomes false during the negotiation and
the other side is not informed. With v O’Flanagan 1936
EQUITY AND
MISREPRESENTATION

 “no man ought to be able to take advantage of

his own false statements” Redgrave v Hurd 1881

 Right to rescind may be lost if:

 Restitutio in integrum is not possible ( ie parties
cannot be restored to original positions)
 contract is affirmed
 excessive delay
 a third party has gained rights in the property
 under s2(2) the court feels damages is the more
appropriate remedy
RECAP

 Some REPRESENTATIONS become TERMS and are

incorporated into the contract. Others are not. Of these, only
a falsely stated or inaccurate representation is actionable.

 MISREPRESENTATIONS can be FRAUDULENT, NEGLIGENT,

INNOCENT

 A TERM can be EXPRESS, IMPLIED, IMPUTED

 A TERM can amount to a CONDITION, WARRANTY or

INNOMINATE depending on its importance to the contract

 REMEDIES available for breach will depend on the type of

the misrepresentation or term
MISTAKES – COMMON, MUTUAL
AND UNILATERAL
MISTAKES – COMMON, MUTUAL
AND UNILATERAL

 General rule – mistake does not

affect validity of contract.
 Must be a mistake of fact not law.
 If the mistake is “operative” ie it is
why the contract was made or is so
fundamental to the contract, then
the common law applies and the
contract is void ab initio.
 Equity
COMMON MISTAKE

 Same mistake made by both parties

 If operative/crucial then contract void

 Existence of subject matter (res extincta)

 Ownership of subject matter (res sua)

 Quality of bargain(contract) NOT operative so

contract continues but can be set aside in equity.
Bell v Lever Bros 1932 –
MUTUAL MISTAKE

 Both parties making a different mistake.

Parties are at cross purposes – therefore
no consensus ad idem
 Common intention
 Contradictory promises
 Ambiguity
 Mistake is not operative if one party only
mistakes the contract quality and
performance is possible
UNILATERAL MISTAKE

 Only one party is mistaken and other is taking

advantage of it

 Mistake over terms – contract operative and void if

 Party genuinely mistaken over a material detail and
would not have contracted
 Other party should have known
 Mistaken party not at fault

 Mistaken identity – contract operative and void if

 Mistaken party intended to contract with someone else –
must prove that other person exists
 Mistake was material to formation of contract
 Mistake was known to other party
eg Boulton v Jones 1857
Mistaken identity face-to-face
 Party deemed to intend to contract
with person present what ever
identity they have assumed

 Phillips v Brooks 1919

 Cundy v Lindsay & Co 1878

NON EST FACTUM

 written agreements only

 L’Estrange v Graucob 1934

 Foster v Mackinnon 1869
 Saunders v Anglia Building Society
1970
MISTAKE AND EQUITY
 If mistake is operative/crucial then common law applies not
equity

 If mistake is NOT operative/crucial then equity can provide

remedies eg

 Rescission where unconscionable to allow party to take

advantage

 Refusal of specific performance where unfair to expect

performance or other party knew of mistake and took
advantage of it eg Webster v Cecil 1861

 Rectification of a document where complete and certain

agreement reached which remained unchanged to the time
of writing - Mistake common to both parties - innocent
misrepresentation
DURESS and UNDUE
INFLUENCE
 Unfair or improper pressure
 Originally, common law recognised
a narrow principle of duress
 Equity then broadened into undue
influence.
 Effect of duress or undue influence
= contract voidable
DURESS

 intimidation that was sufficiently real and

threatening to vitiate consent Cumming v Ince
1847
 threats of violence Barton v Armstrong 1975
 Welch v Cheeseman 1973 – domestic violence
 Threats to carry out lawful acts are not duress
Williams v Bayley 1886
 Must be both an unlawful act and one amounting
to compulsion vitiating free will
 The Siboen and the Sibotre 1976 – threats to
property rather than to person can amount to
duress
ECONOMIC DURESS
 Pao On v Lau Yiu Long 1980 – “whether
the person alleged to have been coerced
did or did not protest… did or did not
have an alternative course open to him ….
Was independently advised …… took steps
to avoid it”
 Atlas Express Ltd v Kafco (Importers and
Distributors) Ltd 1989. Duress requires
coercion of the will so as to vitiate
consent and “mere commercial pressure”
is not sufficient.
 Doctrine extended to cover submission to
improper pressure by Trade Unions Universe
Tankships Inc of Monrovia v International
Transport Workers Federation (The Universal
Sentinel) 1983
 However difference between unfair pressure and
legitimate pressure = not clear Dimskal Sipping
Co SA v ITWF (The Evia Luck) 1991
 Claim may be possible even if threat is one of
lawful action Alec Lobb (Ganges) Ltd v Total Oil G
B Ltd 1983
 Can prove economic duress yet still be denied a
remedy North Ocean Co Ltd v Hyundai
Construction Ltd (The Atlantic Baron) 1978
UNDUE INFLUENCE

 Unfair pressure not covered by

duress
 Equity – therefore any remedy is
discretionary
 Question of degree therefore no
definition
 Bank of Credit and Commerce International SA v
Aboody 1990 court distinguished between two
classes:
 actual undue influence – traditional class where
parties have no special relationship and party
claiming undue influence must prove it.
 Williams v Bayley 1866.
 presumed undue influence – traditional class
where a special relationship of confidence and
trust exists. Some relationships give automatic
rise to presumption eg fiduciary / children and
parents / doctors and patients / trustees and
beneficiaries / spiritual leaders and followers.
 Husband and wife cases

 Full knowledge of nature and effect and claimant had independent,

impartial advice before entering into contract.

 HL 2001 Royal Bank of Scotland plc v Etridge (No.2) – considered

earlier case (Nat West v Morgan) 1985 and discarded label of
“manifestly disadvantageous” that earlier court had decided was the
key to setting aside a contract.

 Preferred test of whether transaction “called for an explanation” and

used earlier principle (Allcard v Skinner 1887) – is a transaction such
as “not to be reasonably accounted for on the ground of friendship,
relationship, charity or other ordinary motives on which ordinary men
act?”
 Lord Denning (Lloyds Bank v Bundy 1975) suggested single test
based on inequality of bargaining power

 Doctrine may apply where can’t use Non es Factum – Avon Finance v
Bridges 1985
EFFECT OF UNDUE INFLUENCE ON
THIRD PARTIES

 Lack of privity of contract so the actions

of the wrongdoer will have no effect on
the contract.
 Barclays Bank v O’Brien 1993 doctrine of
notice.
 Authoritative guidance regarding undue
influence, misrepresentation or other legal
wrong by a third party.
ILLEGALITY
 Generally –courts will not enforce
contracts whose purpose is illegal
or injurious to society in the widest
sense.

 Contracts declared void by statute

 Contracts void at common law
 Contracts declared illegal by statute
 Contracts illegal at common law
VOID BY STATUTE

 Contacts of wager Gaming Act 1845.

 Consumer Credit Act 1974 extortionate
money lending contracts.
 Restrictive trade practices – increasingly
governed by legislation eg Arts 81, 82 EU
Treaty controlling anti-competitive
practices.
VOID AT COMMON LAW

 Contracts excluding the jurisdiction

of the court
 Contracts undermining the
institution of marriage
 Contracts to relinquish parental
responsibility
 Contracts in restraint of trade
CONSEQUENCES IF CONTRACT
DECLARED VOID

 Difference common law / statute

 Common law – can sever

 blue pencil test

 Statute – depends what statute

says. If says nothing, then common
law rules apply.
ILLEGAL BY STATUTE

 illegally formed
 legally formed but illegally
performed
 Shaw v Groom 1970
 test is whether illegality affects the
core of the contract
ILLEGAL AT COMMON LAW

 injurious to society must be contrary to

public policy

 Contracts to commit criminal offences

Beresford v Royal Insurance Co. Ltd
1937), torts, frauds, benefit from crimes
of another, interfere with justice,
contracts aimed at corruption in public life
Parkinson, promoting sexual immorality
Pearce v Brooks 1866)
CONSEQUENCES IF CONTRACT
DECLARED ILLEGAL

 Difference - illegal when formed or

performed
 Formed – illegal from start
 Ex turpi causa non oritur action - no
right of action arises from a base cause
 Some exceptions
 Illegal as performed – if both at fault then
same as illegally formed. If only one at
fault then other might be able to recover
DISCHARGE OF A CONTRACT

 Discharge – point at which contract

is ended

 Performance
 Agreement
 Frustration
 Breach of contract
DISCHARGE BY PERFORMANCE
 Contract not discharged until all of the obligations have
been performed.
 Generally a failure to perform an obligation allows the
other party to claim a remedy.
 Entire contracts
 Divisible contracts
 Part performance
 “substantially” performed – breach of warranty not
condition Bolton v Mahadeva 1972
 Quantum meruit - “as much as he has earned”
 Time – reasonable time / time of the essence
 Tender - attempted performance of a contract that
depends on the other to collaborate – Startup v
MacDonald 1843 and Sale of Goods Act 1979
DISCHARGE BY AGREEMENT

 Enter a contract by agreement –

exit by agreement

 Waiver – each waives their rights

under the contract

 Accord and Satisfaction replaces

Agreement and Consideration
DISCHARGE BY FRUSTRATION
 Traditional rule – complete performance required
regardless of the reasons for failing to perform.
 Unfair when intervening factor was not in the
control of the party.
 Doctrine of Frustration
 Consequences

 3 types of factors:
 impossibility
 subsequent illegality
 radical change so that contract becomes essentially
different
Krell v Henry 1903 and Herne Bay Steam Boat Co v
Hutton
 Doctrine does not apply where:
 frustration self induced – could have been
avoided – could have been foreseen -
where contract is merely more onerous or
less beneficial
 Consequences – can be held accountable
for obligations up to the point of
frustration.
 “Loss lies where it falls”
 Could be v harsh so…….
LAW REFORM (FRUSTRATED
CONTRACTS) ACT 1943

 Recovery of monies paid in advance – recovery for partial

performance - payment for valuable benefit obtained

 Gamerco SA v ICM Fair Warning (Agency) Ltd 1995 – in

calculating awards under this Act there was “ no indication
in the [Act], the authorities or relevant literature that the
court is obliged to incline towards total retention or equal
division. Its task is to do justice in a situation which the
parties had neither contemplated nor provided for, and to
mitigate the possible harshness of allowing loss to lie where
it falls.”

 Act can be excluded by express provision in contract.

 Act does not apply to certain contracts such as insurance,

carriage of goods by sea and some contracts for the sale of
specific goods which are frustrated by the goods perishing.
DISCHARGE BY BREACH OF
CONTRACT

 Breach occurs where one party fails to fulfil or indicates

that they do not intend to fulfil their obligations under
the contract.

 Breach of a term – condition / warranty

 Anticipatory breach / repudiation

 Repudiation entitles innocent party to sue at once or

treat contract as continuing and wait until time for
performance arrives

 Avery v Bowders 1855

REMEDIES

 Limitation Act 1980 - 6 year time limit from date on which

plaintiff could first have brought an action

 3 years for personal injury arising out of breach of contract

 12 years where contract was a deed

 Most common remedy for breach of contract = damages

where party suffers a loss

 OR can claim Quantum Meruit

 Equitable remedies eg injunctions, specific performance

 Common law - damages automatically awarded

 Equity – remedies discretionary
TYPES OF DAMAGES

 General
 Special
 Nominal
 Contemptuous
 Exemplary (NOT in contract only tort)
 Unliquidated
 Liquidated

 Penalties
DAMAGES
 Contract damages are to “put the victim of the breach,
so far as is possible, and so far as the law allows into
the position he would have been in if the contract had
not been broken” Robinson v Harman 1848

 Measure of damages = value of the performance to the

claimant – not the cost of it to the defendant

 Token damages

 Two tests: one to decide the type of loss based on

causation and remoteness
The other to establish the amount recoverable in
respect of the actual loss.
CAUSATION AND REMOTENESS OF
DAMAGE
 Is there a causal link between defendant’s breach and
the actual damage or loss suffered by the claimant?

 Is the damage of a type that is not too remote a

consequence of the defendant’s breach?

 Question of fact in each case

 Test is one of common sense – whether the breach was

the cause of the loss or simply the occasion

 Loss may arise from more than one cause

REMOTENESS

 Damages should be for losses “such

as may fairly and reasonably be
considered as arising either
naturally ie according to the usual
course of things, … or such as may
be reasonably supposed to have
been in the contemplation of both
parties at the time they made the
contract” Hadley v Baxendale 1854
 2 types of recoverable loss:
 A natural consequence of the
breach – measured objectively
 A loss, which if not a natural
consequence, the parties knew was
possible – measured subjectively.
 Rule modified approx 100 years
later in Victoria Laundry Ltd v
Newman Industries Ltd 1949
 Indemnifying any loss = too harsh
 Recoverable loss should be measured against
foreseeability
 Foresight depends on knowledge of parties when
contracting
 Knowledge: imputed (ie common knowledge) or
actual. Or can be implied from what a reasonable
man might have had in mind.
 Implied knowledge should include what is
POSSIBLE to have foreseen rather than what
must have been foreseen.

 Contrast Kemp v Intasun Holidays 1987

BASES OF ASSESSMENT

 Loss of a bargain – puts parties in position as if the

contract had been properly performed.
 Failure to deliver or failure to accept – difference in
price obtained or expended to acquire or get rid of
stock.
 Loss of profit
 Loss of a chance
 Reliance loss – recovery of expenses necessarily
incurred in advance of the contract being performed.
Anglia Television v Reed 1971.
 Restitution – simple repayment of any price already
paid.
 Damages can be assessed by amount of benefit gained
by wrongdoer – Attorney General v Blake HL 2000
DUTY TO MITIGATE

 Claimant supposed to take all

reasonable steps to mitigate loss

 In anticipatory breach, claimant

need not terminate at once to
mitigate loss, can wait until actual
breach.
MENTAL DISTRESS

 Traditionally, claims for mental distress, injury to reputation

etc = tort.

 However – “stigma compensation” cases (Malik v BCCI

1998)

 “sufficient if a major or important object of the contract is to

give pleasure, relaxation or peace of mind” Farley v Skinner
(No 2) HL 2001

 Holiday cases
 loss of enjoyment and inconvenience caused by double
booking – Cook v Spanish Holidays 1960
 total failure to match description given – Jarvis v Swan
Tours 1973
 “the provision of comfort, pleasure and peace of mind was a
central feature of the contract” Jackson v Horizon Holidays
1975
EQUITABLE REMEDIES

 Specific performance
 Injunctions
 Rescission
 Rectification of a document
SPECIFIC PERFORMANCE

 Usually restricted to cases where

 subject matter of contract is unique and cannot

be replaced (land, art, ships)
 impossible to assess damages
 injured party is left without adequate remedy

 No grant if excessive delay in seeking remedy –

unclean hands –undue hardship to defendant
INJUNCTIONS
 Mandatory and prohibitory

 Reasonable restraint of trade

clauses
 Breach of confidence
 Performance of contracts of
personal service Lumley v Wagner
1852 and Warner Bros v Nelson
1937
RESCISSION - RECTIFICATION
RESCISSION
 Seeks to return the parties to their exact pre-
contract position if possible - Restitutio in
integrum
 Contract must not have been affirmed by party
claiming – ie must not have done anything to put
contract into effect
 No delay in seeking remedy – no third party
adversely affected etc.

RECTIFICATION OF A DOCUMENT
 When the written document contradicts the
actual agreement made by the parties. Webster v
Cecil 1861
 THE END!
 Introduction
 Offer and Acceptance
 Intention
 Consideration
 Capacity
 Privity
 Representations
 Terms
 Exclusion clauses Misrepresentations
 Mistake
 Duress / undue influence
 Illegal and void contracts
 Discharge
 Remedies