Professional Documents
Culture Documents
CONTRACT
Unit 1: DEFINITION
CLASSIFICATION
Contracts may be divided into two broad classes:
1. Contracts by deed
A deed is a formal legal document signed, witnessed and delivered to affect
a conveyance or transfer of property or to create a legal obligation or
contract.
Deed-document: a signed document that outlines the terms of an agreement, especially one that
details a change in ownership of property
2. Simple contracts
Contracts which are not deeds are known as simple contracts. They are
informal contracts and may be made in any way
in writing,
orally or
they may be implied from conduct.
Another way of classifying contracts is according to whether they are
"bilateral" or "unilateral".
1. Bilateral contracts
A bilateral contract is one where a promise by one party is exchanged for a
promise by the other. The exchange of promises is enough to render them
both enforceable. Thus in a contract for the sale of goods, the buyer
promises to pay the price and the seller promises to deliver the goods.
2. Unilateral contracts
A unilateral contract is one where one party promises to do something in
return for an act of the other party, as opposed to a promise, e.g., where X
promises a reward to anyone who will find his lost wallet. The essence of the
unilateral contract is that only one party, X, is bound to do anything. No one
is bound to search for the lost wallet, but if Y, having seen the offer, recovers
the wallet and returns it, he/she is entitled to the reward.
ELEMENTS
The essential elements of a contract are:
1. Agreement
An agreement is formed when one party accepts the offer of another and
involves a "meeting of the minds".
2. Consideration
Both parties must have provided consideration, i.e., each side must promise
to give or do something for the other.
3. Intention to create legal relations
The parties must have intended their agreement to have legal
consequences. The law will not concern itself with purely domestic or social
agreements.
4. Form
In some cases, certain formalities (that is, writing) must be observed.
5. Capacity
The parties must be legally capable of entering into a contract.
6. Consent
The agreement must have been entered into freely. Consent may be vitiated
by duress or undue influence.
7. Legality
The purpose of the agreement must not be illegal or contrary to public policy.
ENFORCEABILITY
i. Valid
A valid contract is one which is binding in all material aspects. All the parties
are required to perform in accordance with the contract. Any deviation from
the terms of the contract amounts to breach of that contract.
ii. Void (not legally valid) contracts
A "void contract" is one where the whole transaction is regarded as a nullity
(legal invalidity). It means that at no time has there been a contract
between the parties. Any goods or money obtained under the agreement
must be returned. Where items have been resold to a third party, they may
be recovered by the original owner.
iii. Void able contracts
A contract which is voidable operates in every respect as a valid contract
unless and until one of the parties takes steps to avoid it. Anything obtained
under the contract must be returned, insofar as this is possible. If goods
have been resold before the contract was avoided, the original owner will not
be able to reclaim them.
iv. Unenforceable contractsAn unenforceable contract is a valid
contract but it cannot be enforced in the courts if one of the parties
refuses to carry out its terms. Items received under the contract
cannot generally be reclaimed.
1 AGREEMENT
(A) OFFER
Invitation to Treat
1. AUCTIONS ( sale by bidding: a sale of goods or property at which intending buyers bid against one
another for individual items, each of which is sold to the bidder offering the highest price )
(Bid -offer money at auction: to offer an amount of money for something at an auction)
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 (withdraw) his bid before it is accepted. See:
Payne v Cave (1789) 3 Term Rep 148
The plaintiff wanted to bid in an auction, but before he could bid the
defendant withdrew the bid. It was held that this was an invitation to treat
and not an offer.
2. DISPLAY OF GOODS
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. See:
Fisher v Bell [1960] 3 All ER 731
P.S.G.B. v Boots Chemists [1953] 1 All ER 482.
3. ADVERTISEMENTS
Advertisements of goods for sale are normally interpreted as invitations to
treat. See:
Partridge v Crittenden [1968] 2 All ER 421.
In
Partridge v Crittenden 31
The appellate had inserted a notice in a periodical entitled Cage and Aviary
Birds which read Bramble finch cocks and hens, 25s each. It appeared
under the general heading of Classified Advertisements and the words offer
for sale were not used. He was charged with unlawfully offering for sale a
wild live bird contrary to the provisions of the Protection of Birds Act 1954
and was convicted. The divisional court quashed ( declare null and void) the
conviction. There had been no offer for sale. Lord Parker said:32
I think that when one is dealing with advertisements and circulars, unless
they indeed come from manufacturers, there is business sense in their being
construed as invitations to treat and not offers for sale.
(B) ACCEPTANCE
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.
However, in certain cases it is possible to have a binding contract without a
matching offer and acceptance. See:
Brogden v Metropolitan Railway Co. (1877) 2 App Cas 666
Brogden v. Metropolitan Railway Co. (1877)
Mr Brogden had supplied coal to the company without any formal agreement. It was then
suggested that the parties should have a written contract. So, the companys agent drew up a
draft which he sent to Mr Brogden with a request to fill in certain blanks. Mr Brogden duly did
this, and signed and returned the draft but after having made certain alterations. The agent
put the agreement in a drawer, and forgot about it. Coal was supplied on the stated terms
then a dispute arose.
HELD: The return of the draft as altered was a counter-offer. The acceptance of this counteroffer
was never communicated to Mr Brogden so prima facie, no contract was formed.
However, acceptance could, on the facts, be inferred, as the subsequent supply of coal on the
terms of the document amounted to acceptance by conduct.
1. COUNTER OFFERS
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. See:
Hyde v Wrench (1840) 3 Beav 334.
There are yet other cases where the battle depends on the shots fired on
both sides. There is a concluded contract but the forms vary. The terms
and conditions of both parties are to be construed together. If they can be
reconciled so as to give a harmonious result, all well and good. If the
differences are irreconcilable, so that they are mutually contradictory, then
the conflicting terms may have to be scrapped and replaced by a reasonable
implication.... But I think the documents have to be considered as a whole.
And, as a matter of construction, I think the acknowledgement of the 5th
June 1969 is the decisive document. It makes it clear that the contract was
on the buyers terms and not the sellers terms.
(The acknowledgement referred to by Lord Denning was a tear-off acknowledgement of
order slip attached to the buyers standard order form.)
8. CROSS-OFFERS
A writes to B offering to sell certain property at a stated price. B writes to A
offering to buy the same property at the same price. The letters cross in the
post. Is there (a) an offer and acceptance, (b) a contract? This problem was
discussed, obiter, by the Court in Tinn v Hoffman (1873) 29 LT 271. Five
judges said that cross-offers do not make a binding contract. One judge said
they do.
2. CONDITIONAL ACCEPTANCE
If the offeree puts a condition in the acceptance, then it will not be binding.
3. TENDERS
A tender is an offer, the acceptance of which leads to the formation of a
contract. However, difficulties arise where tenders are invited for the
periodical supply of goods:
(a) Where X advertises for offers to supply a specified quantity of goods, to
be supplied during a specified time, and Y offers to supply, acceptance of Y's
tender creates a contract, under which Y is bound to supply the goods and
the buyer X is bound to accept them and pay for them.
(b) Where X advertises for offers to supply goods up to a stated maximum,
during a certain period, the goods to be supplied as and when demanded,
acceptance by X of a tender received from Y does not create a contract.
Instead, X's acceptance converts Y's tender into a standing offer to supply
the goods up to the stated maximum at the stated price as and when
requested to do so by X. The standing offer is accepted each time X places
an order, so that there are a series of separate contracts for the supply of
goods. See:
Great Northern Railway Co. v Witham (1873) LR 9 CP 1
4. COMMUNICATION OF ACCEPTANCE
The offeror cannot impose a contract on the offeree against his wishes by
deeming that his silence should amount to an acceptance:
Felthouse v Bindley (1862) 11 CBNS 869.
Can an offeree withdraw his acceptance, after it has been posted, by a later
communication, which reaches the offeror before the acceptance? There is
no clear authority in English law. The Scottish case of Dunmore v Alexander
(1830) appears to permit such a revocation but it is an unclear decision. A
strict application of the postal rule would not permit such withdrawal. This
view is supported by decisions in: New Zealand in Wenkheim v Arndt (1873)
and South Africa in A-Z Bazaars v Ministry of Agriculture (1974). However,
such an approach is regarded as inflexible.
6. METHOD OF ACCEPTANCE
The offer may specify that acceptance must reach the offeror in which case
actual communication will be required. See:
Holwell Securities v Hughes [1974] 1 All ER 161.
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. See:
Tinn v Hoffman (1873) 29 LT 271
Yates Building Co. v Pulleyn Ltd (1975) 119 SJ 370.
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.
3. 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:
Byrne v Van Tienhoven (1880) 5 CPD 344.
The revocation need not be communicated by the offeror personally, it is
sufficient if it is done through a reliable third party. See:
Dickinson v Dodds (1876) 2 ChD 463.
The defendant on 10 June gave the claimant a written offer to sell the house
for E800 to be left over until 9:00 am 12 June. On 11 June the defendant
sold the house to the third party and the defendants brother in law told the
claimant of the sale. Before 9:00am hrs the next day the claimant accepted
the offer.
Held: as the claimant knew that the defendant was no longer in the position
to sell the house to him, the defendant had vividly withdrawn his
offer.
Where an offer is made to the whole world, it appears that it may be revoked
by taking reasonable steps. See:
Shuey v United States [1875] 92 US 73.
Once the offeree has commenced performance of a unilateral offer, the
offeror may not revoke the offer. See:
Errington v Errington [1952] 1 All ER 149
Daulia v Four Millbank Nominees [1978] 2 All ER 557.
4. Counter Offer
See above for Hyde v Wrench (1840).
5. 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.
See:
Ramsgate Victoria Hotel v Montefiore (1866) LR 1 Ex 109.
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. See:
Financings Ltd v Stimson [1962] 3 All ER 386.
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. See:
Bradbury v Morgan (1862) 1 H&C 249.
The case of Bradbury v Morgan,176 however, suggests that, in principle at
least, this
opinion does not represent the law:
X had written to the plaintiffs, requesting them to give credit to Y and
guaranteeing
payment up to 100. The plaintiffs gave credit to Y. X then died, and the
plaintiffs,
in ignorance of this fact, continued the credit to Y. The plaintiffs now sued Xs
executors on the guarantee.
It was held that the defendants were liable. In the words of Pollock CB:
This is a contract, and the question is whether it is put an end to by death of
the guarantor.
There is no direct authority to that effect; and I think that all reason and
authority, such as
there is, are against that proposition.
2 CONSIDERATION
INTRODUCTION
The mere fact of agreement alone does not make a contract. Both parties to
the contract must provide consideration if they wish to sue on the contract.
This means that each side must promise to give or do something for the
other. (Note: if a contract is made by deed, then consideration is not
needed.)
For example, if one party, A (the promisor) promises to mow the lawn of
another, B (the promisee), A's promise will only be enforceable by B as a
contract if B has provided consideration. The consideration from B might
normally take the form of a payment of money but could consist of some
other service to which A might agree. Further, the promise of a money
payment or service in the future is just as sufficient a consideration as
payment itself or the actual rendering of the service. Thus the promisee has
to give something in return for the promise of the promisor in order to
convert a bare promise made in his favour into a binding contract.
DEFINITION
Lush J. in Currie v Misa (1875) LR 10 Exch 153 referred to consideration as
consisting of a detriment to the promisee or a benefit to the promisor:
" some right, interest, profit or benefit accruing to one party, or some
forbearance, detriment, loss or responsibility given, suffered or undertaken
by the other."
The definition given by Sir Frederick Pollock, approved by Lord Dunedin in
Dunlop v Selfridge Ltd [1915] AC 847, is as follows:
"An act or forbearance 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
1. 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.
( standing offer djb) [executory means coming into effect later.]
2. 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.
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:
Alliance Bank v Broom (1864) 2 Dr & Sm 289.
4 CAPACITY TO CONTRACT
INCAPACITY
The general rule of English law is that any person is competent to bind
himself to any contract he chooses to make, provided that it is not illegal
or void for reasons of public policy. (See below, Chapter 19.) At common law
there are exceptions to this rule in the case of corporations, minors,
and married women, mentally incompetent and intoxicated persons.
The exceptions are now greatly reduced in scope. A series of statutes from
1870 to 1949 abolished the married woman's disabilities and she now enjoys
full contractual capacity. The present state of the other exceptions requires a
little further explanation.
(a) CORPORATIONS
A corporation created by Royal Charter has always had the same contractual
capacity as an ordinary person but a company incorporated under the
Companies Act could, until recently, only make such contracts as were within
the scope of the objects set out in its memorandum of association. Anything
beyond that was ultra vires and void. [Ultra vires- Beyond legal capacity:
beyond the legal capacity of a person, company, or other legal entity]
In the leading case of Ashbury Railway Carriage and Iron Co. Ltd v. Riche
(1875) L.R. 7 H.L. 653 the objects set out in the company's memorandum
were:
"to make and sell,
or lend on hire, railway carriages and wagons,
and all kinds of railway plant, fittings,
machinery and rolling stock;
to carry on the business of mechanical
engineers and general contractors;
to purchase, lease, work and sell mines,
minerals, land and buildings;
to purchase and sell as merchants, timber,
coal, metals, or other materials, and
to buy any such materials on commission or as
agents."
The directors purchased a concession for making a railway in Belgium and
purported (intended) to contract with Riche that he should have the
construction of the line. Riche's action for breach of the alleged contract
failed since the House of Lords held that the construction of a railway, as
distinct from rolling stock, was ultra vires the company and that therefore
the contract was void. Even if every shareholder of the company had
expressed his approval of the act, it would have made no difference, for it
was an act which the company had no power, in law, to do. Important
changes were made by section 108 of the Companies Act 1989,
substituting a new section 35 of the Companies Act 1985. Under that new
section it remains the duty of the directors to observe any limitations on
their powers flowing from the company's memorandum (section 35(3))
and a member of a company may bring proceedings to restrain the doing
of an act in excess of those powers .
"The validity of an act done by a company shall not be called into question
on the ground of lack of capacity by reason of anything in the company's
memorandum."
So, by applying the modern law to the Ashbury case, the directors committed
a breach of duty by making the contract and might have been restrained by
action by a member; but once the contract was made its validity could not
be questioned provided that the making of the contract was "an act done by
the company." It might be objected that it was not such an act because the
directors had no power to make the contract. This objection is met by section
35A(1):
"In favour of a person dealing with a company in good faith, the power of the
board of directors to bind the company, or authorise others to do so, shall be
deemed to be free of any limitation under the company's constitution."
A person is presumed to have acted in good faith unless the contrary is
proved and is not to be regarded as acting in bad faith merely because he
knows the act is beyond the directors' powers. An ultra vires act by the
directors may now be ratified, but only by special resolution which does not
affect any liability incurred by the directors or any other person-any such
relief must be agreed to separately by special resolution.
Formerly a corporation's contracts were invalid unless made under the
corporate seal but, since the Corporate Bodies' Contracts Act 1960, a
corporation may make contracts in the same manner as a natural person-
that is the contract may be made orally unless a special rule requires a
written contract-as in contracts for the sale or disposition of an interest in
land-or evidence in writing-as in the case of a guarantee within section 4 of
the Statute of Frauds 1677.
(b) MINORS
At common law persons under the age of 21 were designated "infants" and
had only a limited capacity to contract. From January 1, 1970, the Family Law
Reform Act 1969 reduced the age of majority to 18 and authorised the term
"minor" as an alternative to "infant." "Minor" is now the preferred term. The
capacity of a minor to contract is still regulated by the common law, modified
by the Minors' Contracts Act 1987 which repealed a troublesome statute, the
Infants Relief Act 1874.
The general principle is that a contract made by a minor with an
adult is binding on the adult but not on the minor. If, after attaining his
majority, he ratifies it by an act confirming the promise he made when a
minor, he is bound. There need be no consideration for the act of ratification.
A contract by a minor is not void and any money or property transferred by
him under the contract can be recovered only if there has been a total failure
of consideration.
The nature of the minor's liability for necessary goods is uncertain. The fact
that the Sale of Goods Act makes him liable only for goods "sold and
delivered" and to pay, not any agreed price, but a reasonable price, suggests
quasi-contractual liability-he must pay, not because he has contracted to do
so, but because the law requires him to recompense the seller for a benefit
conferred and accepted. Some dicta support this view but others treat the
minor's liability as contractual.
In Roberts v Gray [1913] KB 520, CA,
a minor was held liable for his failure to perform a contract for a tour with
the plaintiff, a noted billiards player (game of hitting balls with cue). It was a
contract for the instruction of the minor. The contract was wholly
executory and but it was held that the contract was binding on him from its
formation.
It may be thought that there is a distinction between necessary goods and
necessary services but this is difficult to justify logically or historically.
Perhaps the contract in Roberts v. Gray belongs more properly to the
category of beneficial contracts of service, below.
A contract is not binding on a minor merely because it is proved to be for the
minor's benefit; but a contract which would otherwise be binding as a
contract for necessaries is not so if it contains harsh and onerous terms.
B) 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 (e.g., 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).
The reason usually advanced for this rule is that to allow an individual
creditor to claim the balance would amount to a fraud on the other creditors
who had all agreed to the percentage.
C) PROMISSORY ESTOPPEL
This is the name that has been given to the equitable doctrine which has as
its principal source the obiter dicta of Denning J in High Trees House Ltd
[1947] (see below)
PROMISSORY ESTOPPEL
A further exception to the rule in Pinnel's Case is to be found in the equitable
doctrine of promissory estoppel. The doctrine provides a means of making a
promise binding, in certain circumstances, in the absence of consideration.
The principle is that if someone (the promisor) makes a promise, which
another person acts on, the promisor is stopped (or estopped) from going
back on the promise, even though the other person did not provide
consideration (in so far as is it is inequitable to do so).
DEVELOPMENT
The modern doctrine is largely based on dicta of Denning J in Central London
Property Trust Ltd v High Trees House Ltd [1947] 1 KB 130 and on the
decision of the House of Lords in Tool Metal Manufacturing Co Ltd v Tungsten
Electric Co Ltd [1955] 1 WLR 761 and can be traced to Hughes v
Metropolitan Railway (1877) 2 App Cas 439.
(a) Hughes Case (1877) - In October a landlord gave his tenant six months
notice to repair and in the event of a failure to repair, the lease would be
forfeited. In November the landlord opened negotiations for the sale of the
premises, but these ended in December without agreement. Meanwhile the
tenant had not done the repairs and when the six months period was up, the
landlord sought possession.
The House of Lords held that the landlord could not do so. The landlord had,
by his conduct, led the tenant to suppose that as long as negotiations went
on, the landlord would not enforce the notice. He could not subsequently
take advantage of the tenant relying on this. Therefore, the notice did not
run during the period of negotiations. However, the six month period would
begin to run again from the date of the breakdown of negotiations.
(b) High Trees (1947) - In 1937 the Ps granted a 99 year lease on a block of
flats in London to the Ds at an annual rent of 2500. Because of the outbreak
of war in 1939, the Ds could not get enough tenants and in 1940 the Ps
agreed in writing to reduce the rent to 1250. After the war in 1945 all the
flats were occupied and the Ps sued to recover the arrears of rent as fixed by
the 1937 agreement for the last two quarters of 1945.
Denning J held that they were entitled to recover this money as their promise
to accept only half was intended to apply during war conditions. This is the
ratio decidendi of the case. He stated obiter, that if the Ps sued for the
arrears from 1940-45, the 1940 agreement would have defeated their claim.
Even though the Ds did not provide consideration for the Ps' promise to
accept half rent, this promise was intended to be binding and was acted on
by the Ds. Therefore the Plaintiffs were estopped from going back on their
promise and could not claim the full rent for 1940-45.
(c) Tool Metal Case (1955) - see below.
Thus it seems that if a person promises that he will not insist on his strict
legal rights, and the promise is acted upon, then the law will require the
promise to be honoured even though it is not supported by consideration.
REQUIREMENTS
The exact scope of the doctrine of promissory estoppel is a matter of debate
but it is clear that certain requirements must be satisfied before the doctrine
can come into play:
(A) CONTRACTUAL/LEGAL RELATIONSHIP
All the cases relied on by Denning J in High Trees House were cases of
contract. However, in Durham Fancy Goods v Michael Jackson (Fancy Goods)
[1968] 2 QB 839, Donaldson J said that an existing contractual relationship
was not necessary providing there was "a pre-existing legal relationship
which could, in certain circumstances, give rise to liabilities and penalties".
(B) PROMISE
There must be a clear and unambiguous statement by the promisor that his
strict legal rights will not be enforced, i.e. one party must make a promise
which is intended to be binding: The Scaptrade [1983] QB 529. However, it
can be implied or made by conduct as in the Hughes Case (1877).
(C) RELIANCE
The promisee must have acted in reliance on the promise. There is some
uncertainty as to whether the promisee (i) should have relied on the promise
by changing his position to their detriment (i.e., so that he is put in a worse
position if the promise is revoked): Ajayi v Briscoe [1964] 1 WLR 1326, or (ii)
whether they should have merely altered their position in some way, not
necessarily for the worse.
In Alan Co Ltd v El Nasr Export & Import Co [1972] 2 QB 189, Lord Denning
disclaimed detriment as an element of promissory estoppel, saying it was
sufficient if the debtor acted on the promise by paying the lower sum. He
said that "he must have been led to act differently from what he otherwise
would have done".
(D) INEQUITABLE TO REVERT
It must be inequitable for the promisor to go back on his promise and revert
to his strict legal rights. If the promisor's promise has been extracted by
improper pressure it will not be inequitable for the promisor to go back on his
promise. See:
D & C Builders v Rees [1965] 2 QB 617 - The Ps, a small building company,
had completed some work for Mr. Rees for which he owed the company
482. For months the company, which was in severe financial difficulties,
pressed for payment. Eventually, Mrs. Rees, who had become aware of the
company's problems, contacted the company and offered 300 in full
settlement. She added that if the company refused this offer they would get
nothing. The company reluctantly accepted a cheque for 300 "in completion
of the account" and later sued for the balance. The Court of Appeal held that
the company was entitled to succeed. Lord Denning was of the view that it
was not inequitable for the creditors to go back on their word and claim the
balance as the debtor had acted inequitably by exerting improper pressure.
(E) A SHIELD OR A SWORD?
At one point it was said in Coombe v Coombe [1951] 2 KB 215 that the
doctrine may only be raised as a defense: "as a shield and not a sword". It
was held that the doctrine cannot be raised as a cause of action. This means
that the doctrine only operates as a defense to a claim and cannot be used
as the basis for a case. However, this was doubted in Re Wyven
Developments [1974] 1 WLR 1097 by Templeman J, who appeared to think
that this was no longer the case and that it could create rights. Lord Denning
in Evenden v Guildford City AFC [1975] QB 917 also adopted this approach.
(F) EXTINCTIVE OR SUSPENSIVE OF RIGHTS?
Another question raised by this doctrine is whether it extinguishes rights or
merely suspends them. The prevalent authorities are in favour of it merely
suspending rights, which can be revived by giving reasonable notice or by
conditions changing.
(a) Where the debtor's contractual obligation is to make periodic payments,
the creditor's right to receive payments during the period of suspension may
be permanently extinguished, but the creditor may revert to their strict
contractual rights either upon giving reasonable notice, or where the
circumstances which gave rise to the promise have changed as in High Trees.
See:
Tool Metal Case (1955) - Patent owners promised to suspend periodic
payments of compensation due to them from manufacturers from the
outbreak of war. It was held by the House of Lords that the promise was
binding during the period of suspension, but the owners could, on giving
reasonable notice to the other party, revert to their legal entitlement to
receive the compensation payments.
(b) It is not settled law that there can be no such resumption of payments in
relation to a promise to forgo a single sum. In D & C Builders, which
concerned liability for a single lump sum, Lord Denning expressed obiter that
the court would not permit the promisor to revert to his strict legal right and
that the estoppel would be final and permanent if the promise was intended
and understood to be permanent in effect.
The preferred approach is to look at the nature of the promise: if as in High
Trees and Tool Metal, it is intended to be temporary in application and to
reserve to the promisor the right subsequently to reassert his strict legal
rights, the effect will be suspensive only; and if on the other hand, it is
intended to be permanent (as envisaged in D & C Builders), then there is no
reason why in principle or authority the promise should not be given its full
effect so as to extinguish the promisor's right.
Example:
Here A and B are parties to the contract privy to the contract and can sue
each other if there is a breach by the other. C is not a party to the contract
and cannot sue A is A fails to pay C the sum of $ 100.
See also Coulls v Bagots Executor & Trustee Co Ltd (1967) 119 CLR 460, at
478, per Barwick CJ.
This raises the question of whether there is a distinction between the privity
and consideration rules. This question has generated considerable discussion
in academic circles and there is a division of opinion between those who say
the rules are in fact one rule differently expressed and those who argue that
the two rules are distinct.
In the cases, the relatively scant references to the question tend to support
the two separate rules approach.
See Coulls v Bagots Executor, at 478, Barwick CJ and, at 494, per Windeyer
J; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR
107, at 115-116, Mason CJ, Wilson J and at 164, per Toohey J.
Because C is a third party and not privy to the contract, C has no right of
action against A.
However, B as the promisee under the contract and a party to the contract
can sue A. Two possible remedies arise, namely, damages at common law
and specific performance in equity.
Because the remedy of common law damages for breach of contract will
always be granted to a plaintiff, B will always succeed. However, the critical
issue is the measure of damages that will be recovered.
The fact that B cannot sue to recover as damages the measure of Cs loss
from As breach of contract was recently confirmed by four members of the
House of Lords in Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1
AC 518, at 522, 563, 575 and 580. The fifth Law Lord, Lord Goff was, at 538-
539, 544, more skeptical, suggesting that it was an extraordinary defect in
the law that B should have no remedy for common law damages against A.
(b) Specific Performance in Equity
The facts
The issue that had to be determined by the House of Lords
The decision and reasoning of the House of Lords as to why damages were
an inadequate remedy on the facts of the case?
The most significant High Court decision on privity has been Trident General
Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. From this case
set out:
The facts
The different views on the status of the doctrine of privity set out by the
judges of the High Court.
What reasons did Mason CJ & Wilson J give for their radical approach to
privity and how did they compare and contrast with those of the other
radical approach given by Toohey J?
What was the approach of the conservative judges, Brennan, Deane &
Dawson JJ to the status of privity?
To which of the above two approaches does the judgment of Gaudron J
belong?
In Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR
363, Gummow J, after a long analysis of Trident, concluded, at 368, with the
following observation:
At best ... there is support by three only of their Honours for the
proposition ... that the old rules do not apply in their full vigour.
His Honour was, of course, referring to Mason CJ, Wilson, Toohey JJ.
Unit 5:
5. General Law Exceptions to the Doctrine of Privity
There are a number of general law principles which enable a third party, such
as C in our example, to overcome the doctrine of privity. Because they rely
upon establishing the elements of other established legal doctrines and
institutions, they are not true exceptions. Rather they constitute means of
circumventing the doctrine of privity because these other legal principles
apply on the facts of the given case. Some of the key exceptions are
discussed below.
(a) Agency
The rule here is that if one of the contracting parties contracts as an agent,
then either the agent or the principal, but not both, can sue to enforce the
contract. In our example, if B is Cs agent then either B or C can enforce the
contract against A. In these cases it is immaterial as to whether A knew that
B was Cs agent.
A particular situation where agency principles arise is with contracts for the
carriage of goods. Typically the situation will be where a carrier includes in
the contract an exclusion clause and the exclusion clause is expressed to be
for the benefit of not only the carrier but third parties that might be engaged
by the carrier for the purpose of transporting the goods. A common example
in the cases is in shipping contracts, where the third party is the stevedore
who unloads the goods at the port of destination.
In such cases, can the stevedore rely on the benefit of the exclusion clause
when the stevedore causes damage to the goods? See elements that have to
be satisfied in Midland Silicones Ltd v Scruttons [1962] AC 446, at 474, per
Lord Reid.
Originally these principles were only applied to contracts for carriage of
goods by sea. However, they have been applied to road carriage cases: Life
Savers (Australasia) Pty Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431.
Presumably they would also apply to contracts for carriage of goods by rail or
air.
It may even be the case that these principles could apply to exclusion
clauses in any context where it is intended to extend their protection to third
parties.
An illustration of the application of the principles is in New Zealand Shipping
Co v A M Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154. From this
case set out:
The facts
The issue that had to be determined by the Privy Council
The decision and reasoning of the Privy Council as to how the elements of
Midland Silicones were satisfied in this case.
In The Eurymedon, the close relationship between the carrier and the third
party was crucial to establishing the third element in Midland Silicones. It
now appears that if the third party simply pleads the exclusion emption when
sued for damages that will be enough: Life Savers v Frigmobile.
If all the elements in Midland Silicones are met a contract arises between the
owner of the goods and the third party. There is, thus, no privity issue. The
third party becomes a contracting party in a later contract that was
anticipated by the principal contract between the cargo owner and the
carrier. In this respect in Homburg Houtimport BV v Agrosin Private Ltd (The
Starsin) [2003] 2 All ER 785, at 851-852, Lord Millett said:
It is well established by the authorities that the Himalaya clause has the
effect of bringing into being a separate or collateral contract between the
cargo owner and a third party, usually an independent contractor such as a
stevedore, under which the third party enjoys exemption from liability to the
cargo owner. They also establish that the contract is a unilateral or 'if'
contract by which the third party undertakes no obligation to the cargo
owner of any kind, but the cargo owner promises that if the third party does
anything in the course of its employment which damages the cargo it will
have the benefit of the protective provisions of the clause. ... Such a contract
is a promise for an act, not a promise for a promise. If in the course of its
employment the third party performs an act in relation to the goods, which it
is under no obligation to the cargo owner to perform, it will at the one and
same time bring the contract with the cargo owner into existence and supply
the consideration for the cargo owner's promise of exemption from liability.
In relation to the contract between the owner of the goods and the third
party Lord Millet went on to say, at 853:
Such a contract cannot properly be characterised as a contract of carriage. It
is rather a contract of exemption which is ancillary or collateral to other
contractual arrangements (the time charter and the bill of lading) which were
necessary to achieve the carriage of the goods on the chosen vessel.
(b) Trusts
The law of trusts can enable a third party beneficiary to initiate action that
will enforce the promisors obligation. Using the above example, if B had
contracted with A in the capacity of trustee for C, C as beneficiary under the
trust has enforceable rights. These rights arise because the law of trusts
gives a beneficiary certain rights against a trustee.
(c) Estoppel
Following the decision in Waltons Stores (Interstate) Ltd v Maher (1988) 164
CLR 387, a third party may be able to seek relief against a promisor on the
basis of promissory estoppel principles. To succeed the third party would
need to establish the elements of promissory estoppel. See Trident, at 145,
per Deane J.
In Trident, Mason CJ, Wilson J, at 123-124, were of the view that it was likely
that estoppel could be established on the facts of the case, but it was not
necessary for them to determine the issue on the basis that they had
decided the case on other grounds.
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 plaintiffs remedy will depend on how the statement is
classified:
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 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
[1913] AC 30, 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.
(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:
Routledge v McKay [1954] 1 WLR 615 Schawel v Reade [1913] 2 IR 6
Traditionally 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( reject as
invalid) 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:
(Note: The word 'condition' also has another meaning. It may mean a
stipulation that a contract should not be enforceable except on the
happening of a given event, or should be brought to an end on the
happening of a given event. The condition is then properly called a 'condition
precedent', or a 'condition subsequent1 respectively
(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.
(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:
Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962] 1 All ER 474
The Mihalis Angelos [1971] 1 QB 164
The Hansa Nord [1976] QB 44
Reardon Smith Line v Hansen-Tangen [1976] 3 All ER 570
Bunge Corporation v Tradax Export [1981] 2 All ER 513.
NOTE
If the term is described in the contract as a 'condition that will not be
conclusive. See:
Schuler v Wickman Machine Tools [1974] AC 235.
3. IMPLIED TERMS
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.
INTRODUCTION
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.
A. INCORPORATION
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. See:
L'Estrange v Graucob [1934] 2 KB 394.
However, even a signed document can be rendered wholly or partly
ineffective if the other party has made a misrepresentation as to its effect.
See:
Curtis v Chemical Cleaning Co [1951] 1 KB 805.
2. UNSIGNED DOCUMENTS
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:
(i) The clause must be contained in a contractual document, i.e. one which
the reasonable person would assume to contain contractual terms, and not in
a document which merely acknowledges payment such as a receipt. See:
Parker v SE Railway Co (1877) 2 CPD 416
Chappleton v Barry UDC [1940].
(ii) 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. See:
Olley v Marlborough Court [1949] 1 KB 532.
(iii) Reasonably sufficient notice of the clause must be given. It should be
noted that reasonable, not actual notice is required. See:
Thompson v LMS Railway [1930] 1 KB 41.
What is reasonable is a question of fact depending on all the circumstances
and the situation of the parties. The courts have repeatedly held that
attention should be drawn to the existence of exclusion clauses by clear
words on the front of any document delivered to the plaintiff, e.g. "For
conditions, see back". It seems that the degree of notice required may
increase according to the gravity or unusualness of the clause in question.
See:
Thornton v Shoe Lane Parking [1971] 1 All ER 686
Interfoto v Stiletto Ltd [1988] 1 All ER 348.
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. Contrast:
Spurling v Bradshaw [1956] 2 All ER 121
McCutcheon v MacBrayne [1964] 1 WLR 125.
As against a private consumer, a considerable number of past transactions
may be required. See:
Hollier v Rambler Motors [1972] 2 AB 71.
Even if there is no course of dealing, an exclusion clause may still become
part of the contract through trade usage or custom. See:
British Crane Hire v Ipswich Plant Hire [1974] QB 303.
4. PRIVITY OF CONTRACT
As a result of the doctrine of privity of contract, the courts held that a person
who is not a party to the contract (a third party) was not protected by an
exclusion clause in that contract, even if the clause purported to extend to
him. Employees are regarded in this context as third parties. See:
Adler v Dickinson [1954] 3 All ER 396
Scruttons v Midland Silicones [1962] AC 446.
Now see the provisions in the Contracts (Rights of Third Parties) Act 1999
(Handout on Privity of Contract).
5. COLLATERAL CONTRACTS
Even where an exclusion clause has been incorporated into a contract, it
may not have been incorporated in a collateral contract. See:
Andrews v Hopkinson [1957] 1 QB 229.
B. INTERPRETATION
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, i.e. against the party
who inserted it in the contract. See:
Baldry v Marshall [1925] 1 KB 260
Houghton v Trafalgar Insurance Co (1954).
Very clear words are needed in a contract to exclude liability for negligence.
See:
White v John Warwick [1953] 1 WLR 1285.
(A) MISTAKE
The general rule is that mistake does not affect the validity of a contract. For
example, if a man is mistaken as to the nature or value of what he buys, this
is simply the misfortune. The law will not help him unless he has been
misled by the other party (see Misrepresentation, page 135).
In leaf v. International Galleries (1950), a picture was sold which both seller
and buyer believed to be Constable. In fact it was not. The contract was not
affected by this mistake, because each side intended to deal with the
physical thing sold; they were simply mistaken as to its quality and value.
A further preliminary point is that mistake of law will never affect the validity
of a contract. Ignorance of the law is no defense! In certain circumstances,
mistake of fact may affect the contract and, if sufficiently serious, render the
contract void.
Mistakes of fact that render a contract void
(B) MISREPRESENTATION
At common law, duress arose when a party was induced to enter a contract
by force. His consent was not freely given. Today, economic coercion can
also be duress
In Universe Tankships Inc. v. ITWF (1982), a trade dispute arose
involving a ship, The Universe Sentinel. The union stopped it from leaving
port, and eventually only allowed it to do so on condition that the owners
paid money into a welfare fund. This agreement was held void able for
duress, and the owners recovered the money.
However, the economic pressure must be such that the courts regard it as
improper. There can be a narrow line between economic duress and
legitimate commercial pressure.
In D & C Builders Ltd v. Rees (1966) (Unit 11), it was suggested, obiter,
that even if there had been a valid contract, it would have been void able for
duress. Mr. and Mrs. Rees almost held the builders to ransom; the builders
needed the money quickly, and the Rees family (who owed 482) said in
effect, either agree to accept to accept only 300 or we delay still further.
In Atlas Express Ltd v. Kafco Ltd (1989), K, a small manufacturer,
received a good order from are tail chain, Woolworths. K contracted with
Atlas, a road carrier, to deliver the goods at an agreed fee. After the firs
load, Atlas realized that it had miscalculated the delivery costs, and therefore
told K that it would not make any further deliveries unless K almost doubled
the agreed fee. K, desperate to fulfill its Woolworths order and unable to
find another carrier in time, had to agree but later refused to pay the extra.
It was held that k was not liable for the extra charge, which had been
extorted from it by duress. (Moreover, there was no consideration for its
promise to increase the fee; contrast Williams v. Roffey, Unit 11).
On the other hand, in Pao On v. Lau Yiu Long (1979) (Unit 11), the
defendant was the major shareholder in Fu Chip Ltd. He was persuaded to
give a guarantee to Pao. On by the latters threat to break his contract with
Fu Chip Ltd. This could have harmed the defendant. Nevertheless the
guarantee was held valid. The full facts were complex, and Pao Ons threat
was ultimately regarded as legitimate commercial pressure.
Equity has long recognized less direct pressures, particularly where
confidential or professional relationships are abused. Generally, improper
pressure has to be proved.
In Williams v. Bayley (1866), a father was induced to give security for
his sons debts to the bank by the banks threats to prosecute the son. On
proof of this, the father was held not to be bound.
In some instances equity goes further and presumes undue influence unless
the contrary is proved. This will occur where the relationship between the
parties was doctor and patient, solicitor and client, religious adviser and
disciple, parent and child (but not husband and wife). The presumption of
undue influence can only be rebutted in these cases by proof that the weaker
party had had independent advice or used his own free will. There are also
situations where, although the relationship does not necessarily suggest
undue influence, the circumstances do. It depends upon the facts.
In Lloyds Bank Ltd v. Bundy (1975), a son was in financial difficulty.
The bank manager visited the father and persuaded him to give the bank a
guarantee of the sons debts and a mortgage of the fathers house as
security. The father was old and was given no warning or opportunity to seek
independent advice (which might have been against the contracts). Undue
influence by the bank was presumed from the circumstances, and the
contracts were set aside when the bank could not rebut the presumption.
In National Westminster bank p l c v. Morgan (1985), a couple in
financial difficulty mortgaged their home to the bank. The house was jointly
owned, and the bank manager had to visit the wife to persuade her to sign.
She did not realize that the mortgage could also cover her husbands
business debts. Nevertheless it was binding on her. She herself wanted the
loan and, in spite of the misunderstanding, she knew basically what she was
doing. The court did not presume undue influence just because the lender
was a bank.
In OSullivan v. MAM Ltd (1985), a young singer and composer (Gilbert
OSullivan) made several contracts with a management company at a time
when he had no business experience. Many of the contracts were unduly
harsh, and they were later set aside as being obtained by undue influence.
Where undue influence is deemed to exist, either by proof or presumption,
the contract is void able, but the right to rescind must be exercised within a
reasonable time of the influence being withdrawn.
In Allcard v. Skinner (1887), Miss Allcard joined a religious order and, in
accordance with its rule of poverty, gave about 7000 to the head of the
order during the eight years that she was a member. After leaving the order
she waited six years and then sued to recover the money. It was held that,
while the money had been obtained from her by undue religious influence,
her action failed because she had waited too long before suing.
Unit 10: ILLEGALITY OF CONTRACT AND CONTRACTS IN RESTRAINT
OF TRADE
The case law is vast and the answers are far from simple. The distinction is
sometimes made between illegal and void contracts. However, the
distinction is apt to confuse since their consequences are not clearly
distinguishable and courts sometimes use the terms interchangeably. Thus,
illegality is used to refer to the whole range of cases where contract law
denies a contract its ordinary legal consequences because of some
prohibition, breach of duty, or contravention of public policy. We will see that
the consequences of illegality vary according to factors such as:
the nature and seriousness of the illegality,
how far the contract was carried through,
the parties states of mind, and
the intricacies of certain rules of property and trust law.
Types of illegality.
Statutory illegality
A contracts may be illegal because its formation, purpose, or performance
contravenes
some statute or the common law. It is difficult to generalize about the wide
range of
statutory prohibitions although they are often designed to secure fair trading
conditions, safeguard property and personal safety, and prevent competitive
markets from being undermined. Some examples are the prohibition on the
marketing or sale of certain knives (Restriction of Offensive Weapons Act
1959; Offensive Weapons Act 1996; Knives Act 1997) and the sale of body
parts (Human Organ Transplants Act 1989).
Many of the common law illegalities have become the subject of statutory
control or prohibitions. The relevant statute may:
expressly prohibit the making of the contract (courts are reluctant to imply
a prohibition) barring enforcement by or restitution to either
only bar enforcement by one of the parties (e.g. Consumer Credit Act 1974,
s 40,
Sex Discrimination Act 1975, s 77, Race Relations Act 1976, s 72, Financial
Services
and Markets Act 2000, ss 26, 27);
permit enforcement by either party because the statutory intent is only to
impose a penalty and not to deny contractual enforcement (St John Shipping
Corporation v. Joseph Rank Ltd (1957)); or
render the contract void and unenforceable but not bar restitution.
Where statutes are silent (as they often are) on the effect of the illegality on
the contract
while setting out the administrative and penal sanctions, courts must decide
the consequences on the same general principles as are applicable to
common law illegality. One area of statutory invalidity is gaming, wagering,
and related contracts.
The law bars enforcement of such contracts and denies recovery of property
transferred under them (Gaming Act 1845, s 18). The aim here is not to
discourage betting; an enormous betting industry thrives without the ability
to sue for unpaid bets. The law here expresses the attitude that courts have
more important matters to attend to, than to compel parties to perform
betting contracts.
Common law illegality
With statutory illegality, courts discern and apply the conception of public
policy contained therein. However, where courts refuse to recognize a
contract as contravening public policy at common law, they are vulnerable to
the usual charges of:
usurping the function of Parliament;
giving effect to their subjective opinions on matters of morality and the
public good; and,
undermining the freedom, sanctity, and stability of contracts.
Burroughs J saw public policy as a very unruly horse, and when once you get
astride it
you never know where it will carry you (Richardson v. Mellish (1824) at 252).
Lord Dennings predictable response is that with a good man in the saddle,
the unruly horse can be kept in control. It can jump over obstacles. It can
leap the fences put up by fictions and come down on the side of justice
(Enderby Town Football Club Ltd v. The Football Association Ltd (1970) at
1026).
The categories of public policy are often said to be closed. Characteristically,
the picture presented is of general respect for the sanctity of contract,
subject to a series of exceptions established by precedents. While it is still
not open to courts to reject a contract unless it falls within one of the well-
established heads of illegality, courts have been willing to extend existing
categories to reflect changing social and moral values. As Dankwerts LJ said
in Nagle v. Feilden (1966 at 650): [T]he law relating to public policy cannot
remain immutable. It must change with the passage of time. The wind of
change blows upon it. Chitty concludes (at Para 16-004) that the difference
between extending an existing principle as opposed to creating a new one
will often be wafer thin. In a system of law which evolves (albeit gradually),
like the common law, the content of the public policy (which reinforces the
law) cannot remain immutable, but must change with the evolution of public
opinion, morality, and legislative policies.
Writers disagree on how to categorize the heads of public policy, but the
differences are largely in exposition and not substance. A detailed account of
each category is not proposed here (see further Treitel, 43080; Beatson,
34895); the law of restraint of Pause for reflection
The law fails if it does not reflect a societys changing values changes over
time. For example, the older cases reflect a preoccupation with gambling,
marriage brokerage, and unmarried cohabitation. Today we may be more
concerned with the commercialization of babies, child labor, body parts,
reproductive services, sex, weapons, and addictive drugs. Other
contemporary examples of objectionable or unworthy contracts are
mentioned above (see 12.9). We will see that unmarried cohabitation
presented no obstacle in Tinsley v. Milligan (1993) involving lesbian
cohabitees and that the scope of impermissible restraint of trade has been
modified in response to changing economic conditions, trade, for example,
fills whole books. What follows is a brief overview of the kinds of contracts
held at common law to contravene public policy.
The same tests of reasonableness and consistency with the public interest
are applied to
restraints in contracts for the sale of businesses, although wider latitude is
permitted here since inequality of bargaining positions is less obvious. A
purchaser of a business and its goodwill are entitled to protect the value of
the purchase by an appropriate restraint clause; sellers would command
lower prices if such restraints were unenforceable. The wider the restraint,
the larger the legitimate interest required to justify it. In one extreme case, a
buyer of an armament business for a vast sum was permitted to restrain the
seller from competing with this business anywhere in the world for 25 years,
in view of the world-wide operation of the business sold and the fact that its
main customers were governments (Nordenfelt Ltd v. Maxim Nordenfelt Guns
and Ammunition Co Ltd (1894)).
In Esso v. Harper the owner of two garages entered into a solus agreements
to buy all its petrol from Esso, to keep the garages open at all reasonable
hours, and not to sell them
without securing the purchasers agreement to enter similar arrangements
with Esso. In exchange, Esso gave a discount on the petrol and provided a
loan. The House of Lords held that the contract lasting 4 years was onerous
but reasonably necessary to protect Essos interests, but not the contract
lasting 21 years, which was invalid as an unreasonable restraint of trade.
However, the Court of Appeal upheld a 21-year solus agreement in Alec
Lobb Garages v. Total Oil (GB) Ltd (1985) where the restrained party
had received a substantial sum from the restraining party. The court applied
the dicta in Nordenfelt that the quantum of consideration may enter into the
question of the reasonableness of the contract.
Schroeder Music Publishing Co Ltd v. Macaulay (1974) shows how
substantive imbalance in the contract can invalidate a restraint of trade
clause. There a young unknown song-writer entered an exclusive services
agreement by which he agreed to assign the full copyright to all his present
and future works to the publisher for 5 years, renewable at the latters option
for another 5 years, in return for royalties. The publisher had no obligation to
publish the works, could terminate the contract on a months notice, and was
free to assign its rights. The song-writer was a great success and obtained a
declaration that the agreement was void as an unreasonable restraint of
trade. As Trebilcock observes, the contract was produced within a
competitive market so there could be no market failure justification for
upsetting the terms of the contract, nor any alternative set of terms to be
discovered by the technique of market transference.
Nevertheless, the House of Lords was clearly influenced by the one-
sidedness of the agreement (the publisher giving minimal commitment in
exchange for the song-writers total commitment) in setting aside the
restraint on the writer. As Lord Reid said: Normally the doctrine of restraint
of trade has no application to such restrictions. . . . But if contractual
restrictions appear to be unnecessary or to be reasonably capable of
enforcement in an oppressive manner, then they must be justified before
they can be enforced.
[W]hat your Lordships have in fact been doing has been to assess the
relative bargaining
power of [the parties] . . . to decide whether the publisher had used his
superior bargaining power to extract from the song writer promises that were
unfairly onerous to him. . . . Under the influence of Bentham and of laissez-
faire the courts in the 19th century abandoned the practice of applying the
public policy against unconscionable bargains to contracts generally, as they
had formerly done . . . but the policy survived in its application to penalty
clauses and to relief against forfeiture and also to . . . restraint[s] of trade. If
one looks at the reasoning of 19th century judges in cases about contracts in
restraint of trade one finds lip service paid to the current economic theories,
but if one looks at what they said in the light of what they did, one finds that
they struck down a bargain if they thought it was unconscionable as between
the parties to it and upheld it if they thought that it was not. So I would hold
that the question to be answered . . . is: was the bargain fair?
We have seen that substantively unfair contracts can also be invalidated by
other doctrines such as undue influence (see 9.2); incapacity;
unconscionable bargains and the special rules applicable to exemption
penalty, and forfeiture clauses. As Treitel observes, these and others can be
seen as disguised extensions or applications of the doctrine of public policy.
In this context the doctrine on non-commercial guarantees can be
understood as a recently created head of public policy. Our discussions of
these doctrines and rules reveal the extent of their concern with procedural
and substantive unfairness. Collins locates the real objection to the contract
in Schroeder v. Macaulay in terms of power, fairness, and co-operation. He
explains:
The general rule and starting point is that courts will not help parties enforce
illegal contracts or obtain restitution of benefits conferred under them.
However, this is subject to complex and uncertain exceptions which, to some
extent, reflect the conflicting policies in this area. The policies against
assisting parties to illegal contracts are that:
(i) courts should not help parties who deliberately enter illegal contracts;
(ii) justice would be tainted and the dignity of the court offended; and
(iii) people should be deterred from entering illegal contracts.
On the other hand, these policies are not offended and some judicial
assistance is justifiable, whether by way of enforcement or restitution,
where:
(i) parties are ignorant of the illegality involved or have been wrongfully
induced
to contract;
(ii) the relevant illegality does not involve gross moral turpitude, such as
robbery or
terrorism, but merely the infringement of technical regulations;
(iii) a party has withdrawn from the illegality; or
(iv) a party would be unjustly enriched at the expense of the other.
These policies are reflected in the law, albeit imperfectly. The public
conscience test used in evaluating the impact of illegality in tort claims
permits an open balancing of these policies. Such a test has been rejected in
the contractual context by the House of Lords in Tinsley v. Milligan. However,
its substance is preserved in the Law Commissions proposal based on a
structured discretion. As Chitty observes:
Much difficulty would be avoided, if whenever a plea of illegality or public
policy were raised as a defense to a contractual claim, the test were applied:
does public policy require that this claimant, in the circumstances which
have occurred, should be refused relief to which he would otherwise have
been entitled with respect to all or part of his claim? In addition, once the
court finds that the contract is illegal and unenforceable, a second question
should be posed which would also lead to greater clarity: do the facts justify
the granting of some consequential relief. . .to either of the parties to the
contract.
Illegality per se
The law adopts the strictest attitude to contracts which are illegal per se.
Contract which are expressly or impliedly forbidden by statute or by public
policy are void and unenforceable even if both parties are ignorant of the
facts constituting the illegality and had no intention of breaking the law. Re
Mahmoud and Ispahani (1921) provides an example of statutory prohibition.
When the parties bought and sold linseed oil without the required licenses
the seller could not recover damages for the buyers non-acceptance
although the buyer had misrepresented that he had a license. Scrutton LJ left
open the question of whether the seller would have a remedy for deceit.
In Quereshi v. Circle Properties and others (2004) Q was denied an order to
freeze Cs assets to enforce a commission agreement because, at the time
the agreement was made,
was an undischarged bankrupt and could not engage in estate agency work.
Section 23 of the Estate Agents Act 1979 Act rendered any commission
agreement with the claimant invalid or unenforceable. An example of
common law prohibition is a contract which involves trading with alien
enemies in wartime.
It may be very difficult to decide whether a statute or head of public policy
renders the contract unlawful per se and bars enforcement by either party,
or merely bars enforcement by a guilty party (i.e. one who knows of the
illegality). The question is whether, having regard to the mischief against
which the illegality is directed and the circumstances in which the contract
was made and is to be performed, it would be contrary to public policy to
enforce it (Shaw v. Groom (1970)). In view of the potential harshness of
unenforceability, the modern tendency is to prefer the latter unless the
former is very clearly demanded by the statute or public policy. The
harshness is clear enough where both parties are ignorant of the illegality for
it may afford one party with an unmeritorious and technical defense to an
action for breach. The potential unfairness is all the more glaring where the
contract breaker either knows of the illegality or wrongly induces an innocent
party into the illegal contract. In such cases, a court may assist the innocent
party by:
Breach of contract can occur in several ways. For example, one party may
expressly repudiate his liabilities and refuse to perform his side of the
bargain. This can happen either at or before the time when performance was
due. If a party renounces his obligations in advance, this is known as an
anticipatory breach. A person can impliedly renounce his obligations by
rendering himself incapable of performing them; for example, if he had
contracted to sell a specific painting, he would renounce the contract by
selling the painting elsewhere. Alternatively, one party may simply fail to
perform the contract. He may fail altogether to perform his bargain or he
may merely fail to perform one, or some, of his many obligations under the
agreement. If the obligation broken was a major part of the contract, there
will be breach of condition', if only a minor part, there will be breach of
warranty.
Sometimes the courts have classified a breach according to whether or not it
is 'fundamental', but this classification has been used mainly in relation to
exemption clauses.
Effects of breach
L Every breach of contract will give the injured party the right to recover
damages (see below).
2. If the breach is sufficiently serious, it also gives the injured party a right to
avoid the contract and bring it to an end. This right arises if the contract has
been repudiated, or if there is breach of condition. It will not arise for breach
of warranty.
The consequences of breach can be so serious that the injured party has no
choice. He may have to treat the contract as ended if, for example, the
property is destroyed. Subject to this, however, he need not end the contract
unless he wants to. He can either avoid the agreement and no longer
perform his side; or he can go on with it and either be content with defective
performance from the other (but recover damages) or, sometimes, continue
to press for performance. If he does wish to end the contract, he must do so
reasonably promptly and, as with rescission for misrepresentation (Unit 13),
the right is lost if he 'affirms' the agreement.
If a term is so wide that it is not possible to classify it in advance as a
condition or a mere warranty, then the right to avoid the contract will depend
upon the seriousness of the breach; see Hong Kong Fir Shipping Co. Ltd v.
Kawasaki Kisen Kaisha Ltd. Often, however, commercial requirements
demand that terms should be classified in advance, so that the parties will
be sure of what their rights are in the event of breach.
In Bunge Corporation v. Tradax Export SA (1981), the seller contracted to
deliver goods to the buyer's ship provided that the buyer gave at least 15
days' notice that the ship was ready. This notice requirement was held to be
a condition, which the buyer then broke by giving shorter notice. The seller
could, therefore, refuse delivery.
Terms implied by statute are almost invariably classified in advance. For
example the terms implied by sections 13 to 15 of the Sale of Goods Act are
all conditions, and breach entitles the buyer to withdraw from the contract.
On the other hand, late payment does not entitle the seller to avoid, unless
the parties had specifically agreed otherwise. A time set for delivery of the
goods is almost invariably a condition, and lateness entitles the buyer to
reject the goods and end the contract. The buyer can, alternatively, waive
failure to deliver on time, but impose a new deadline, breach of which will
again entitle him to set the contract aside.
In Charles Rickards Ltd. v. Oppenheim (1950), the buyer ordered a new car
body, to be ready in seven months' time. It was not, but the buyer agreed to
wait a further three months. When it was still not completed, he indicated
that he would cancel the order unless it was ready within a further four
weeks. He was held entitled to do so, and to refuse the car body when it was
finally tendered months later.
3. If one party renounces his obligations and commits an anticipatory breach,
the injured party may have two possible course of action. He may treat the
contract as at an end and opt either for damages for breach or for
reasonable remuneration for the work which he has performed.
In Holster v. De La Tour (1853), the defendant agreed in April to employ the
plaintiff as a courier on a European tour as from 1 June. In May, the
defendant repudiated this agreement, and the plaintiff was held entitled to
commence proceedings immediately, before waiting for 1 June.
The plaintiff may, in fact, be forced to adopt this course if the defendant has
made it impossible to go on with the contract, perhaps by destroying the
subject-matter. In any event, when the contract ends, the plaintiff must try to
mitigate his loss immediately, for example by seeking another job.
Alternatively, since renunciation does not generally discharge a contract
automatically, the injured party can often continue to press for performance
until the due date arrives. If this is done, the contract continues to exist, for
the benefit and at the risk of both parties, until the final date for
performance. If, before that date, performance becomes impossible, this will
discharge the contract without the party who renounced it having to pay
damages.
In Avery v. Bowden (1855), a ship arrived at Odessa for a cargo of wheat and
was met by a refusal to load. This renunciation was not accepted and, before
the last date for performance arrived, war broke out between England and
Russia. This discharged the contract, and the ship-owner was unable to
recover damages.
A. Discharge by Agreement
There are three main ways in which a contract can be discharged by
agreement. 1. The parties may have made provision for discharge in their
original contract. For example, the parties may have agreed at the outset
that the contract should end automatically on some determining event or on
the expiration of a fixed time. Thus goods may be hired, premises may be
leased, or a person employed for a fixed term. On the expiration of the term,
the contract will cease.
Alternatively, the contract may contain a provision entitling one or both
parties to terminate it if they so wish. Thus a contract of employment can
normally be brought to an end by either party on reasonable notice to the
other (subject only to statutory minimum periods of notice laid down by the
Employment Protection (Consolidation) Act 1978). Hire-purchase contracts
usually give the hirer a contractual right to end the agreement and return
the goods at any time; where the Consumer Credit Act 1974 applies, there is
also a statutory right to do this. Discharge in these ways does arise out of
the terms of the original agreement.
Discharge can also arise, not out of the original agreement, but by reason of
a new, extraneous contract. In order that the new agreement should
discharge the -old one, however, the new contract must be valid; for
example, there must be consideration. Where neither side of the original
contract has yet been performed, there will be no difficulty; each side still
owes duties, and the consideration for one party waiving his rights is the
waiver of rights by the other. Thus the buyer and seller may agree to cancel
an order; the seller need no longer supply the goods, and the buyer no
longer has to pay.
The position is more complicated where one party has completely performed
his original obligations. The agreement for discharge will only be binding if, in
return for the release, the other party does or promises something which he
is not already bound to do, such as paying earlier than he was bound to do or
in a different manner.
In Re Charge Card Services Ltd (1986), a garage agreed to accept payment
for petrol by a charge card instead of cash. This was held to discharge the
customer s obligation to pay cash so that, when the card company became
insolvent, the customer did not have to pay again.
In the absence of such new consideration, the agreement for release will not
be binding, and the original contract will stand; D & C Builders Ltd v. Rees
(1966) (Unit 11). For this reason discharge by new agreement is sometimes
called discharge by accord (agreement) and satisfaction (consideration). 3.
Finally, one party can release the other unilaterally, without consideration,
but only if he does so by deed.
B. Discharge by Frustration
Until the last century, the obligation to perform a contractual duty was
absolute. If it became physically impossible for a party to perform his
bargain, he nevertheless had to pay damages for breach, and if extraneous
events took away the whole purpose of the contract without the fault of
either party, the parties still had to continue with the agreement.
In Paradine v. Jane (1647), a lessee was evicted during the Civil War. It was
held that he still had to pay the rent; the fact that he could not enjoy the
property because of events beyond his control was of no concern to the
lessor, and was no excuse.
Starting with the case of Taylor v. Caldwell in 1863 (see below), the courts
have developed the doctrine of frustration as an exception to this absolute
rule. If some outside event occurs, for which neither party is responsible and
which makes total nonsense of the original agreement, then the contract will
be discharged by frustration. A radical change in circumstances can
sometimes, therefore, he pleaded by a party as a valid excuse for not
performing his side of the bargain. This doctrine must be approached with
caution, however, because the courts have understandably been reluctant to
accept anything but the most fundamental changes as frustrating events.
The following are the main examples.
Subsequent illegality.
This will occur where, after the contract was made, a change in the law or in
the circumstances renders it illegal to perform the agreement.
In Avery v. Bow den (1855), the contract to load a cargo at Odessa was
eventually discharged by the outbreak of the Crimean War, which made it
thenceforth an illegal contract of trading with the enemy.
Limitation of actions
Contractual obligations are not enforceable for ever. Apart from other
considerations, evidence becomes less reliable with the passage of time, and
therefore, after a certain period, the law bars any remedy. The Limitation Act
1980 lays down the general periods within which an action must be brought.
These are as follows:
1. Actions based on a simple contract will be barred after six years from the
date when the cause of action accrued.
2. Where the contract is made by deed, actions can be brought up to 12
years from the date when the cause of action accrued.
3. Actions to recover land can be brought up to 12 years from the date when
the cause of action accrued.
A right of action 'accrues' when breach occurs. Thus, if a loan is made for a
fixed time, the right will accrue when this time expires. If no time is agreed it
will be when a written demand for payment is made.
If, when the cause of action accrues, the plaintiff is under a disability by
reason of infancy or unsoundness of mind, the period will not run until the
disability has ended or until his death, whichever comes first. Once the
period has started to run, subsequent insanity will have no effect.
If the plaintiff is the victim of fraud or acts under a mistake or if the
defendant deliberately conceals relevant facts, the limitation period will not
begin until the true state of affairs is discovered or should reasonably have
been discovered.
In Lynn v. Bamber (1930), some plum trees were sold in 1921 with an
undertaking by the seller that they were of a particular type. Not until they
matured in 1928 was it discovered that they were of inferior quality. It was
held that an action for damages could still be brought, since the fraudulent
misrepresentations by the seller had postponed the operation of the period
of limitation.
Provided that the limitation period has not already expired, the period may
be extended where the party in breach either acknowledges his liability in
writing, signed by him or his agent, or makes part payment in respect of the
debt or claim. Time will then begin to run afresh from the date of
acknowledgement or part payment. Property obtained by theft may be
recovered at any time unless it has passed to a bona fide purchaser who is
protected after six years.
Equitable remedies such as rescission, specific performance or an injunction,
are not covered by the ordinary limitation periods, but will almost invariably
be barred much earlier under general equitable principles. An equitable
remedy must be sought reasonably promptly, because 'equity aids the
vigilant, not the indolent'. A short delay, of weeks or even days, may bar the
remedy; see Bernstein v. Pamson Motors Ltd.
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