Tuesday 27 February 2007

This week we looked at THE VITIATING ELEMENTS OF A CONTRACT. Vitiate means spoil, deprive of efficacy, invalidate. Those elements which may spoil a contract and make it invalid include:

A lack of formality – some contracts need to be made in a particular way
Various kinds of mistakes
Misrepresentation
Duress and undue influence
Illegality and vagueness

LACK OF FORMALITY

Most contracts are valid and enforceable regardless of whether they are in writing or oral. Formality is sometimes required, however:

Land conveyances and leases longer than three years need deeds.
Consumer credit agreements need to be in writing - though there is no need for a deed.
Contracts for the “sale or other disposition of land” need written evidence of their existence before they can be enforced by court process - s40 (1) LAW OF PROPERTY ACT 1925. Richarfd will cover this with you in Property Law.


MISTAKES

A contract may be void at common law due to a mistake made by the contracting parties. Even where it is valid at law, it may nevertheless be voidable in equity on the grounds of mistake.

There is no underlying general ‘doctrine of mistake’, the areas are quite separate:

signed documents
identity
subject matter

A mistake which makes a contract void is described as an ‘operative’ mistake.

SIGNED DOCUMENTS

As a general rule, a person is bound by their signature to a document, whether or not he has read or understood the document. It will be voidable where the inducement to sign came about through fraud or misrepresentation, as we shall see later.

Gallie v Lee [1971] – a 78 year old Mrs Gallie had lost her reading glasses, and signed a document which had been prepared by a crook named Lee. He was the partner of her nephew, a Wally Parkin. The document had the effect of transferring the house to Lee and she was held to be bound by her signature on the document.

To escape the consequences of your signature you would need to prove:

The document signed was radically different to the one that you believed you were signing
That you had not been careless in signing the document
That had the true contents of the document have been known you would not have signed it

Mrs Gallie could show the last point, but not the others. The courts are not sympathetic to a claimant as Justice Byles said (in essence) in:

Foster v MacKinnon [1869] – to escape liability you need to be blind, illiterate and without a friend in the world!

MISTAKE AS TO IDENTITY OF THE OTHER PARTY

An examiner’s favourite. If you advertise your car for sale, and someone calling herself Jean Bloggs buys it, but you later find out it is the transvestite Bill Bloggs who has bought it, should it be of any consequence to you? If he/she then sells on to a third party, should you be able to get the goods from them? The answer on both counts is apparently ‘No’. Just because you don’t like transvestites is not going to allow you to void the contract.

Unless you can prove that the identity of the other party was crucial in that you would not have sold to anyone else, then it doesn’t matter even if the sale was induced by fraud.

If you can trace the person prior to him selling on then you could recover the goods because of misrepresentation, but not because of the mistake alone. If you advertise goods for sale, should you care a jot who buys them?

Lewis v Averay [1972] – the claimant advertised a car for sale, and a rogue claiming to be the actor Richard Greene offered to buy it. The rogue signed a cheque, but the claimant only allowed him to take the car away after being shown a (forged) studio admission pass. The cheque was dud and the rogue sold the car to the defendant, an innocent purchaser. Who owns the car? The Court of Appeal said that the contract, though voidable, was not void. The view of the Court is that where the parties are face to face there is a presumption that a person intends to deal with him, as identified by sight and hearing. There was no evidence that the claimant would have sold only to Robin Hood!

There are cases where the courts have recognised that the identity of the other party is fundamental to the contract. It is all very well, but if you were the innocent purchaser how would you feel about this?

Cundy v Lindsay [1878] – a rogue named Blenkarn, trading as Blenkiron and Co, placed a large order for linen handkerchiefs through the post. Both Blenkarn and the real Blenkiron and Co had premises in Wood Street. The claimant thought that he was dealing with the reputable firm, Blenkarn contributed to this in the way he signed the order. The goods were supplied and sold on to an innocent third party. It was held that there was no contract between the claimant and Blenkarn. Lord Cairns pointed out that the claimant never intended to deal with Blenkarn, and had never thought of him. There was no consensus of mind which could lead to an agreement, therefore there was no contract.

Had Blenkarn had paid, of course, this case wouldn’t have arisen. This clearly was not a face to face contract as in Lewis v Averay, but it did mean that an innocent third party was required to return goods for which he had paid and then spend more money in trying to trace and then sue Blenkarn.

Shogun Finance v Hudson [2003]. A rogue bought a car on hire purchase from a dealer, producing a driving licence (probably stolen) that showed a false name. The finance company carried out the normal credit checks against the name on the licence, and subsequently approved the loan. The rogue sold the car to an innocent purchaser and subsequently defaulted on the loan. (Note: the HIRE PURCHASE ACT 1964 provides that a person who buys in good faith from a “hire purchaser”, believing him to be an outright owner, acquires a good title). The Court of Appeal decided that the claimants were entitled to repossess the car: they clearly intended to hire the car only to the person named on the licence, and the rogue had not acquired any title that could be transmitted to the innocent purchaser.

It looks like a face to face agreement, but it isn’t. The hire purchase company buys from the dealer, and the purchaser contracts with the hire purchase company, so it isn’t a surprise that the House of Lords agreed with the Court of Appeal.

In essence, the law presumed that you intend to deal with the person in front of you, but most companies never see one another.

MISTAKES ABOUT THE SUBJECT MATTER

It would be easy to say that A contracted with B to buy a dog, but B thought that the contract with A was for the supply of a squirrel. If that is what this meant then the court would simply find that there had been no agreement, and therefore no contract.

Mistakes as to the identity of the subject matter have been allowed:

Raffles v Wichelhaus [1864] – the alleged contract was for the purchase of a cargo of cotton due to arrive in England on the ship Peerless, from Bombay. There were two ships of this name, both carrying cotton from Bombay, one of which had left in October, the other in December. In the absence of an agreement between the parties as to which ship was meant, and since there was no objective evidence which could determine the issue, the contract could not stand. The parties were never truly in agreement.

Scriven Brothers v Hindley [1913] – there was confusion as to the nature of two lots in an auction. One was ‘hemp’, the other was a less valuable commodity called ‘tow’. The defendant had bid an unusually high price for the tow in the mistaken belief that it was hemp and was allowed to void the contract.

Strickland v Turner [1852] is a good example of a mistake about the existence of the subject matter. An annuity was taken out on the life of a man who was already dead at the time. Not surprisingly, the court found that no contract had been made at all.

MISREPRESENTATION

For there to be a remedy for a pre-contractual misrepresentation, the statement:

must have been made by one of the contracting parties to the other
must be one of fact, not opinion
must have induced the other party to enter into the contract

Bisset v Wilkinson [1927] – a statement as to the number of sheep that a field would support is opinion, not representation.

Redgrave v Hurt [1881] – false statements were made by the claimant about the income of his practice as a solicitor, on the strength of which the defendant entered into a contract to but the practice and a house. He had been given the option to examine documents which would have revealed the true position, but had declined. This did not alter the fact that the statements made were statements of fact that had induced the contract and so it could be avoided.

The break up of the Spice Girls when Gerri Halliwell left to pursue a solo career was the subject of Spice Girls Ltd v Aprilia World Service BV [2000]. The Chancery Division held that the participation of a pop group in making a film advertising certain goods constituted a representation by conduct of an intention of the group that it would not break up during the term of the advertising contract. It was a continuing representation which the group had a duty to correct when it was untrue.

The court said that although there was no representation in the agreement which was falsified by the failure to disclose the stated intention of Ms Geri Halliwell to leave the group, the court could infer that indirectly Aprilia was induced to enter the contract by the representations made when the group made the shoot.

Spice Girls Ltd participated in the commercial shoot and provided logos and images of five Spice Girls in order that Aprilia should sign the agreement. The court was satisfied that the representations by conduct were such as to be likely to induce a person to enter the agreement.

Spice Girls Ltd failed to discharge its onus under s2(1) MISREPRESENTATION ACT 1967 that it had reasonable ground to believe and did believe at the time of the agreement that the representation was true.

The action was estimated to have cost the group £1, 450,000 in damages and costs.

The Spice Girls appealed, and the case came before the Court of Appeal in 2002. It was held that the group were liable under s2(1) and had to pay damages to AWS for the full extent of its losses.

Can you misrepresent something by remaining quiet? Insurance law describes such contracts as ‘uberrimae fidei’ (of the utmost good faith), and so there is a duty to disclose all relevant facts to a contract. When you omit to give details about any serious health problems you are misrepresenting the facts and the insurance company will be able to avoid the contract when they discover the truth.

If a court allows your plea of mistake the contract will be void – it was never made as there had never been an agreement. Where misrepresentation is the issue, the contract is still valid but voidable at the behest of the party misled. This is called rescission, the contract is undone and the parties are returned to their pre-contractual positions. the innocent party may, if he so chooses, continue with the deal.

Innocent = Damages only
Negligent = Rescission & Damages
Fraudulent = Rescission & Heavier Damages

Rescission is the principal remedy, and arises from equity and is, therefore, discretionary only. It will be lost by:

AFFIRMATION - the innocent party affirms the contract.

LAPSE OF TIME - after a long delay in applying for it it appears that the innocent party has decided to carry on even though he was misled. In Leaf v International Galleries [1950] the claimant bought a picture he was told was by Constable, but discovered five years later that this was not the case. This was found to be a common mistake, and although voidable for innocent misrepresentation the court held that the lapse of time defeated the claim. Consider the insurance company who find out that you have angina and you have not disclosed it. They keep it to themselves, and when you expire forty years later they try rescind the contract.

IMPOSSIBILITY OF RESTITUTION, e.g. the goods have been destroyed - clearly it is impossible to get the goods back if they have been consumed or destroyed.

INVOLVEMENT OF THIRD PARTY RIGHTS - goods obtained on the basis of (probably fraudulent) misrepresentation have been sold on to an innocent third party. Remember that equity is all about fairness, why should the third party lose out? They are called “bona fide purchasers for value and in good faith” and even “equity’s darlings”.

DURESS AND UNDUE INFLUENCE
Here the contract appears to be valid, but it is alleged that there has been improper pressure of some kind:

physical coercion/threats
economic pressure
psychological influence.

All make the contract voidable.

DURESS TO THE PERSON – violence/threat of violence to an individual or his family.

Barton v Armstrong [1975] – the managing director of a company was threatened with death if he did not arrange for his company to buy shares from the defendant. Not surprisingly, the contract was held to be void for duress.

DURESS TO GOODS –

The Siboen and The Sibotre [1976] – the case actually concerns the re-negotiation of charters of two vessels, but an obiter statement said that a threat to slash a valuable painting belonging to another party would be duress, but this case fits more neatly within the next category.

ECONOMIC DURESS – one party uses his superior power in an illegitimate way in order to coerce the other contracting party to agree to a particular set of terms.

Universe Tankships of Monrovia v International Transport Workers Federation [1983] – the defendant trade union blacked the claimant’s ship in port and refused to release it unless certain monies were paid, including a payment to the union’s welfare fund. This latter payment was recoverable because the will of the ship owners had been coerced, the pressure applied to make the payment to the fund was illegitimate.

UNDUE INFLUENCE makes a contract voidable, and this is an equitable remedy only. Where parties to a contract have a ‘special relationship’ (e.g. doctor/patient, solicitor/client, bank/customer), then any contract between them will be assumed to have been the result of undue influence, and therefore voidable at the behest of the weaker party, unless the stronger party can rebut the presumption. We covered this in land law and tort.

Lloyds Bank v Bundy [1975] – Mr Bundy was an elderly farmer and was freed of mortgages held by his bank on his house, his only asset. He has acted on the advice of his bank manager and eventually the mortgages outweighed the value of the house. Here is a special relationship, and therefore a presumption of undue influence which was not rebutted by the defendant. The contract was therefore voidable at the behest of the claimant. Lord Denning said that the common thread was the inequality of bargaining power, and the law would protect one who, without independent advice, enters into a contract on terms which are very unfair or transfer property for a grossly inadequate consideration.

This is another are where Richard will speak at length in property law.

ILLEGALITY

Again, the contract appears to be perfectly valid, but the courts will intervene to prevent its enforcement.

Some contracts are illegal by statute, others at common law. It is public policy that declares them to be illegal, it does not necessarily mean that they are criminal in nature. Unacceptable restraints on trade (e.g. where a person may work) is one example, and we shall look at some others.

How about actual illegal acts? A contracts with B to kill C is never going to be enforced by a court, quite clearly, but consider:

Pearce v Brooks [1866] – the claimant supplied the defendant with a brougham, to be paid for by instalments. After one instalment it was returned in a damaged condition. The claimant sued for £15 compensation, payable under the agreement if the brougham was returned. The defendant was a prostitute, and there was evidence that the brougham was to be used to attract customers. At least one partner in the claimant’s firm was aware of this. On this basis the court held that this was an illegal contract, so the claimant was unable to recover either under the contract or for the damages.

Tony Blair knows all about this one:

Parkinson v College of Ambulance Ltd [1925] – Colonel Parkinson was approached by a third party who told him that if he made a contribution to the College (a charity) it would obtain a knighthood for him. He paid £3,000, nothing happened, so he sued for its return. On the face of it the donation was a gift, and could only be explained otherwise by revealing that the consideration was a knighthood. This was prejudicial to honesty in public life and illegal at common law. A statute was to follow as a result of this case, but once again you may be forgiven for wondering on its effectiveness.

Other contracts may not be illegal, but void of legal effect. The courts will not enforce them.

Section 18 GAMING ACT 1845 declares that all gambling contracts, written or otherwise, are null and void. So gambling debts are not enforceable.

Void contracts at common law, which Judges have declared void on the grounds of public policy include the following:

An agreement to oust the jurisdiction of the courts. A contracts with B and a term of the contract includes a term that neither party may take the matter to court. Can’t be done. An agreement as to arbitration first is quite common, but an agreement trying to keep the courts out of a dispute at all is void.

Agreements prejudicial to the sanctity of marriage. A contract between spouses agreeing to separate at some point in the future is void - Brodie v Brodie [1917]. Similarly, a promise by A to pay make a payment to B if he marries someone other than C is also void.

Contracts contrary to public policy. In Carnduff v Chief Constable West Midlands Police [2001] the claimant was a police informer. He claimed that a contract existed with the police to provide information in return for payment. The amount depended upon the seriousness of the crime, the money made by the criminals and so on. The defendants argued that the claim should be dismissed on the grounds of public policy because the defendants would have to reveal information damaging to the public interest. The Court of Appeal said that the public interest in keeping the information secret outweighed the public interest in having the claim tried, and that, therefore, it should fail.

Contracts in restraint of trade. They unfairly restrict competition, or unreasonably restrict people’s ability to work. They are considered contrary to public policy and will be prima facie void. It simply means that they will be unenforceable unless there is proof that the restrictions are justifiable as being reasonable from the point of view of the parties and the community as a whole.

There are three groups of contracts to consider in this area, and we shall look at them again when we consider employment law:

1) Where A leaves the employment of B and agrees not to set up in competition against B or enter the employment of any of B’s rivals.
2) A sells his business to B and contracts with him that he will not carry on a similar business in competition to B.
3) Solus agreements. An agreement between two businesses whereby owner A agrees to restrict himself to taking and selling only the supplies of owner B for some financial benefit.

The first two are the most important for our purpose. They are void as it is contrary to public policy to allow such agreements as they could damage the economy of the community as a whole. They restrict competition by encouraging monopolies and at the same time increase unemployment.

Because such clauses are not allowed there has to be a balance somewhere, and it is provided by the purchaser of a business paying for the goodwill of the business. If the seller then opens a business nearby the purchaser would gain nothing from the goodwill. On the other hand, employers spend a great deal of time and money in building a database of clients, perfecting secret processes and the like and they should be protected from former employees and rival traders simply copying them.

Restraint of trade clauses are not absolutely void, and can be valid if the following three requirements are fulfilled:

A valid interest to protect
The restraint is no more extensive than is reasonable to protect that interest
The restraint must not be contrary to the public interest

The modern position has been developed from:

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co. [1894] – N manufactured guns and armaments and sold his business to a company for £287,500 and entered into a restrain of trade contract. Two years later that company was amalgamated with another which agreed to employ N as Managing Director at a sum of £2,000 p.a. This contract amplified the previous clause, he now agreed that he would “not for twenty-five years, if the company so long continued, engage except on behalf of the company, either directly or indirectly in the trade of guns and armaments manufacture, or in any business competing or liable to compete in any way with that for the time being carried out by the company.”

This was a world-wide restraint since it was an international business. The House of Lords held that this was mostly valid. Held:

Restraint of trade clauses are only prima facie void, and could be validated if in the interest of the parties and the public.
Here it was reasonable between the parties as the business had been sold for a large sum of money. It was in the public interest, since it secured for the UK the business and inventions of a foreigner and increased UK trade. The restriction to any business was severed from the contract as it went beyond that necessary to protect the proprietary interest that the company had bought.
Restraint of trade clauses are severable from contracts, leaving the remainder of the contract enforceable.

Further amendments have been developed, particularly that such a clause was severable.

Mason v Provident Clothing and Supply Co. [1913] – a canvasser who had been employed to sell clothes in Islington was restrained from entering a similar business within twenty-five miles of London. This was considered to be too wide. The case confirmed that all restraint of trade clauses are prima facie void and subject to a test of reasonableness. A sharp distinction was made between restraints of trade:

imposed on the sale of a business
those governing employer-employee relationships

The former are more readily supportable, because in the second the law recognises the unequal bargaining power of the parties, the employer always having the upper hand and the important point that the employee’s further employment chances are limited. As a matter of public policy no employer is entitled to bar an employee from using his labour, skill or talent.

Forster and Sons v Suggett [1918] – the employer had developed a secret glass making process and the defendant works engineer concerned with the process had covenanted not to work for a competitor anywhere in the UK for five years after leaving employment with the claimant. This was held to be reasonable and enforceable.

The same can apply to the protection of trade connections, the list of clients that a business possess as his customer base.

Fitch v Dewes [1921] – a life-long restraint was held to be reasonable against a solicitor’s managing clerk working for another firm of solicitors within a seven mile radius of Tamworth. The modest area allowed him to work quite openly outside the seven mile limit, and was therefore valid. (How long did it take to travel seven miles in those days?)

If the arrangements offer more protection than is adequate, a fifty mile radius of Tamworth perhaps, then they will be invalid. The courts pay special attention to time factors and the geographical area.

Panayiotou and Others v Sony Music Entertainment Ltd [1994] – he had entered into a money spinning contract with Sony, and now wanted to escape from it. He was having a sulk and claimed that the company were restraining his wishes to change the direction of his music and his image. He failed, mainly because he had suffered no financial damage as a result of the association. In fact, the opposite had occurred. He had increased income as the company had successfully promoted him into a super-star in the USA, and the negotiations on his contract had been undertaken by professional negotiators.

It is probably fair to say that, in spite of the above decision, the courts are aware of the need to protect the employee against excessive restraints. That is okay, but George Michael had been happy enough to be made a multi millionaire and Sony were just protecting their investment.

A decision in the ECJ means that professional footballers are no longer tied to their teams at the end of their contract and can move freely to a club of their choice – Union Des Associations Europeenes De Football v Jean-Marc Bosman [1995].

As we saw in Nordenfelt, the courts are more willing to support restraints against the vendor of a business.

Severance involves removing something from a contract whilst allowing the remainder of the contract to be valid.

Goldsoll v Goldman [1915] – the defendant had sold imitation jewellery throughout the UK. He sold the business to the claimant and agreed that for two years he would not deal in imitation or real jewellery anywhere in the UK, France, USA, Russia, Spain, or within twenty-five miles of Berlin or Vienna. The contract was severed so that the restriction applied only to the UK, and to imitation jewellery.

Our final group, the solus agreements. An agreement between two businesses where the owner of one agrees to restrict himself to taking the supplies solely of the other for some financial advantage. Quite common in pubs, and very common indeed in the garage business. An agreement to buy only one brand of petrol means you can expect a discount on the bulk purchase of it. The agreement, however, must still be reasonable.

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] – H owned two garages. At garage (A) he agreed to sell Esso exclusively for four years and five months in return for a reduction in costs, and at garage (B) he agreed to sell Esso exclusively, but this was contained in the terms of a mortgage of £7,000 for twenty-one years which could not be redeemed earlier. The House of Lords held that Esso had an interest in the petrol market worthy of protection and should be allowed to enter into such agreements to protect this. Whilst the agreement at garage (A) was fine, the one at garage (B) would be void because the period was too long, i.e. it was unreasonable.

Only VAGUENESS to look at next week, before we turn to discharge of a contract.

Tuesday 20 February 2007

Having looked at the answers to the short questions given before half term, we turned to the final of the five contractual elements, that of CAPACITY. The law protects those who are mentally disordered, either temporarily through drink or drugs or permanently through illness. They can avoid contracts whilst they are unaware of the events if it can be shown that the other party knew of the incapacity.

An examiners’ favourite relates to MINORS. It applies to those under the age of eighteen years, and the contracts to which they apply can be divided into three headings:

VALID, BINDING CONTRACTS - made for “necessaries”, e.g. food, clothing, shelter and education, or “beneficial contracts of service”. These are contracts providing education and/or training that the court regards as satisfactory. The problem is just what the courts allow to be ‘necessaries’ where it is apparent that the vendor is an honest man and the minor is taking advantage of the situation. In modern times such situations are unlikely to arise.

For a minor to be bound in a contract for necessaries it must be proved that:

• The goods/services could (as a matter of law) have been necessaries, and


• that they were (as a matter of fact) actually necessary.

Nash v Inman [1908] – the minor ordered a number of waistcoats from a tailor and didn’t pay. He was an undergraduate at Cambridge. There is no argument that waistcoats are clothing and, therefore, necessary. The problem is that he already owned a large number of them, so these particular ones were not necessary!

Had the court found otherwise the price payable would have been a reasonable price only, which is not necessarily the contract price.

Doyle v White City Stadium [1935] – a licence to box according to the rules of the British Boxing Board of Control was held to be binding as a “beneficial contract of service”.

VALID, BUT VOIDABLE CONTRACTS - a minor can avoid a contract in four situations, but until he does avoid it the contract will remain valid. This means that when he does repudiate it it will not affect obligations which have already fallen due and have been performed. The four are:

1. Contracts concerning land (particularly buying or renting)


2. Subscribing for or buying company shares


3. Partnership contracts


4. Marriage settlements

All are of a permanent kind involving continuing obligations.

ABSOLUTELY VOID – contracts made by a minor which are not valid are governed by the MINORS CONTRACT ACT 1987. It enables a minor, upon reaching the age of eighteen years, to ratify a contract for a loan made during infancy; guarantees made by adults to secure the debts of minors are now binding on the adult and goods other than necessaries can now, with a court order, be recovered in all cases. Previously they could only be recovered where the minor had obtained them by fraudulent means.

Contracts made by a minor which are absolutely void:

• do not bind the minor, but


• are binding on the other party.

If the minor has received a benefit under such a contract or has not ratified a voidable contract the court can order the return of any benefits received under it. The goods or money must be in possession of the minor, or if they have been exchanged the new goods (or money) can be recovered. If the goods have been consumed no compensation is payable.

If the minor obtains the goods by fraud the equitable doctrine of restitution can be used. It is narrower in scope than the MINORS CONTRACT ACT 1987, because if the original goods have been sold/exchanged the other party must identify the actual monies. Not easy!, as demonstrated by:

THE CONTENTS OF A CONTRACT is concerned with:

• Terms – express and implied


• Conditions


• Warranties


• Attempted Exclusion Clauses

The Terms
The contract used in buying a newspaper was completed in a matter of moments, whilst purchasing A Bentley Continental takes a whole lot longer. No matter, both had to meet the five element conditions of a contract.

During the early stages there were bound to have been negotiations by both sides – known as “pre-contractual statements”. Not all of these statements will be included in the final contract, in fact as a result of the negotiations a contract may never be made at all.

Some pre-contractual statements are simply “trade puffs”, and have no legal effect: “Eight out of ten cat owners who expressed a preference …” or any one of the shampoo adverts.

Pre-contractual statements which induce the deal, but do not form a part of the contract, are called REPRESENTATIONS. If found to be false or inaccurate the innocent party might begin an action for MISREPRESENTATION. If it is written down it is simple to see which are representations and which have become terms of the contract, but with an oral contract it is clearly much more difficult to establish whether or not a particular pre-contractual statement formed part of the contract. Any which did form part of the contract, oral or written, are, therefore, CONTRACTUAL TERMS.

Conditions and Warranties
Contractual terms are further divided into two, and a claimant is entitled to damages for a breach of either.

Major Term = Condition
Minor Term = Warranty

The big difference is that a breach of a condition means that the claimant is also entitled to cancel the contract and be free of it and his own obligations under the deal.

A breach of a warranty allows for damages to the claimant, to put him in the situation he would have been in but for the breach, but the contract then lives on. He must perform his obligations.

Poussard v Spiers and Pond [1876] – Madame Poussard, an opera singer, had agreed to perform in an opera commencing in November, but did not arrive until early December. The defendants had hired a substitute, and the only way that they could arrange it was to offer this substitute the whole of the engagement. Thus, when Madame Poussard finally arrived her services were refused. She sued for a breach of contract. The court held that her failure to perform the contract was a breach of a condition, and the defendants were within their rights to consider the contract discharged.

compare

Bettini v Gye [1876] – Bettini was also an opera singer and was contracted to attend rehearsals six days before the first performance. He attended for only two days before the opening night and the defendants would not then accept his services and treated the contract as discharged. He sued. The rehearsal clause was subsidiary to the main contract, and its breach was a breach of a warranty only. The defendant had no right to treat the contract as discharged, but was entitled to recover damages he suffered as a result of the claimant’s late arrival.

It isn’t always easy to spot the difference, although sometimes the parties will state them at the outset in the contract. On other occasions the matter is defined by statute. The SALE OF GOODS ACT 1979 is a big example which sets out what terms are conditions and which are warranties in contracts for the sale of goods.

Union Eagle Ltd v Golden Achievement Ltd [1997] – in contract time is not normally of the essence, unless expressly made a condition. Here the purchaser entered into a contract on 1st August 1991 to buy a flat in Hong Kong for $4.2 million. A 10% deposit was paid, completion was due at 5 p.m. on 30th September 1991. Time was made of the essence, and if the purchaser failed to comply the deposit was forfeit. The purchaser was 10 minutes late completing his part of the bargain, and the vendor invoked the clause. The purchaser sough specific performance, but as time was of the essence this was dismissed.

Terms which are not so clearly defined are known as INTERMEDIATE or INNOMINATE terms of the contract. A court will then have to make the decision. If the breach means that the innocent party is liable to suffer substantial loss the courts will treat it as a condition, declaring the contract to be at an end. If not so important it will be considered as a warranty and only damages will be allowed. In fact, courts are loath to destroy a contract, so are reluctant to declare a breach as a breach of a condition.

Hong Kong Shipping C Ltd v Kawasaki Kisen Kaisha Ltd [1962] – the claimant owned a ship which they chartered to the defendants for twenty-four months from the date of delivery “she being fitted in every way for cargo service”. Upon delivery it sailed from Liverpool to the USA, where it took on cargo bound for Japan. The engine room staff were inefficient and the engines were very old. As a result the ship was delayed for five weeks on the way to Japan. It was then discovered that work lasting a further fifteen weeks was required to make her seaworthy. The charter still had twenty months to run. The charterer repudiated the contract and the owners sued. The Court of Appeal held that this was not a breach of a condition. The term “she being fitted in every way for cargo service” was to be treated as an innominate or intermediate term. The effect was that the ship was still available for nineteen out of the twenty-four months of the contract, so the defendants could not consider it discharged, but they could recover damages.

This decision has been followed ever since.

EXPRESS AND IMPLIED TERMS
The express terms are simple:

• “The car has done 50,000 miles”


• “I want some boots suitable to climb Ben Nevis”


• “The coat must keep me warm and dry on my forthcoming holiday in Iceland”

All of these are express terms to a contract and will, of course, be a CONDITION of it. A pair of Nike trainers is not going to get you up Ben Nevis and you would want to be free of such a contract.

In some contracts all of the terms will be in writing, and there will then be a strong presumption that no evidence supporting a different oral agreement will be permitted to vary these terms. This is known as the PAROL EVIDENCE RULE. It must exist because otherwise a written contract could be easily contradicted and made worthless:

There may well be other terms in the contract, implied by statute and also by the courts. The SALE OF GOODS ACT 1979 implies terms about the title of the seller of the goods, their quality, the fact that they must correspond with the description and so on. The terms aren’t in the contract in fact, but by implication of the statute.

Terms may also be implied by custom: Hutton v Warren [1836] – a customary usage permitted a farm tenant to claim an allowance for seed and labour on quitting his tenancy.

The courts aren’t so keen to imply terms into contracts as the parties could have done better in negotiations. Most of the terms implied by courts in the past later went on to become part of statute law, and this is where they are commonly to be found. A court will only imply a term where:

• The parties are in the same trade and the term required is commonly accepted in the trade as usual; or


• The contract would not make business sense without it

The Moorcock [1889] – the case concerns the Thames river bed. A mooring had been hired for the steamship Moorcock in the tidal part of the Thames. When the tide ebbed the ship was grounded and damaged. The jetty owners claimed no responsibility for the river bed or its condition. They pointed out that it was under the control of the Thames Conservators. The contract had made no mention of the river bed, but both parties realised that the tide would go out. The question to be answered by the court was whether the court should imply a term into the contract about the condition of the river bed. LJ Bowen held:

“I think if they let our their jetty for use they imply that they have taken reasonable care to see whether the berth, which is the essential part of the use of the jetty, is safe, and if it is not safe, and if they have not taken such reasonable acre, it is their duty to warn persons with whom they have dealings that they have not done so. So the court implied the term, and the ship owner could sue for a breach of it.”

EXCLUSION CLAUSES. Contracts are littered with these, attempting to exclude or limit liability. The one party one all of the benefits of the contract, whilst avoiding the burden:

Take your holidays photographs into Boots and you will find that the company tries to limit its liability only to the cost of film lost or damaged during processing. If it’s a picture of you, lobster red, sitting on a donkey in Blackpool, it may not matter if they lose it. But what if they are photographs of your once in a life-time World Cruise? Pictures of Halley’s Comet which visits Earth only once every seventy-six years? Photographs of the Titan Arum plant in Kew Gardens which flowers every sixty-odd years? Sorry, here is a free film seems a little inadequate somehow.

If the exclusion or limitation clause is found to be part of a contract and effectual, it enables one party to avoid or limit a liability he would otherwise carry. Ask to see Virgin Railways conditions of carriage. Their conditions are manifest and mostly unfair, but what can you do as a traveller? Try to negotiate better terms? No chance, big brother company will always win against the man in the street. Fortunately, statutes give some help.

The legislation we shall be look at includes the UNFAIR CONTRACTS TERMS ACT 1977 (UCTA) and the UNFAIR TERMS IN CONSUMER CONTRACT REGULATIONS 1999 (UTCCR). Common law provides additional safeguards.

Because of statute law some exclusion clauses, even if they are present in the contract, have no effect. For a party to rely on exclusion causes he must show:

• The clause is incorporated into the contract, AND


• It covered the damage complained of, AND


• It isn’t affected by statute or common law rules of invalidity

The cases we are now going to look at are common enough events. An exclusion clause is incorporated into a contract by signature or notice:

L’Estrange v Graucob [1934] – when a document containing contractual terms is signed, in the absence of fraud the party signing it is bound, it is immaterial whether he read the document or not.

Who wants to read the small print? Just sign here, and you do. You are bound, whether or not you have read it, and if you did read it you are bound whether or not you understood it.

The document containing the clause must be a contractual document, and even if it is if a person wouldn’t expect to find such a clause there it will not be valid.

Chapelton v Barry UDC [1940] – the exclusion clause was on the back of a ticket used for deck-chair hire.

You often see notices, signs or posters, all trying to limit or exclude liability. TIMING is all important, it must be brought to the attention of the other party before the contract is made, so the other party can decide whether or not to accept it.

Thornton v Shoe Lane Parking [1971] – In 1964 Mr Thornton, a freelance trumpeter, had an engagement with the BBC at Farrington Hall. He went to park his car in the Park Lane multi-storey car park, outside of which there was a notice which gave the hourly tariff and stated that all cars were parked at the owners risk. Entrance to the car park was effected by driving his car up to a red traffic light that turned green when the car was in the appropriate position. At this point a ticket was issued from a machine and he drove his car into the garage whereupon it was taken by mechanical means to the floor above. After his appointment, Mr Thornton returned to the garage, paid the appropriate charge and was injured in an accident.

The trial judge, Mocatta J, found that Shoe Lane Parking Ltd and Mr Thornton were equally at fault for the injury and awarded damages on this basis. Shoe Lane Parking Ltd did not appeal against the finding of fault but said that in contract law they had exempted themselves from liability for personal injury. They claimed that the ‘ticket’ issued by the machine was a contractual document and that it incorporated into the contract between themselves and Mr Thornton a condition exempting them from liability. They contended this because on the face of the ticket, just below the time on entry into the garage, there was some small print stating that the ticket was issued subject to the conditions of issue as displayed on the premises.

These conditions were long-winded but included statements to the effect that the customer was deemed to have fully insured himself against damage to his car or injury to himself. Was this condition to be incorporated into their contract as a term of the contract?

The Court of Appeal held that it was not incorporated into the contract. Lord Denning MR noted that counsel had made reference to previous ‘ticket’ cases concerning railways, steamships and cloakrooms in which ‘real people’ issued the tickets. The tickets were taken away by the customer without reading. Nevertheless, the conditions that were referred to on the tickets were capable of being incorporated into the contracts. This was because in these cases it was held that the issue of the ticket by the clerk was an ‘offer’ by the company which was ‘accepted’ by the customer. His Lordship stated that the ‘fiction’ underpinning these cases was that the customer could in theory refuse to accept the ticket and hand it back and ask for his money to be returned to him. As his lordship pointed out, hardly any customer would actually read the conditions.

Lord Denning distinguished these cases from the present one because of the fact that the ticket was issued not by a human being but by a machine. As such the driver of the car did not have a chance to refuse the ticket and ask for the return of his money. He said that the ‘offer’ was made by the car park owner, having the machine ready to receive money. The ‘acceptance’ was made when the driver put his money into the slot. As such the driver would only be subject to any terms printed on clearly visible notices placed by the machine. He would not be bound by terms on the ticket because he received the ticket after the contract had been made.

Lord Denning MR then went on to say that even if the ticket machine was to be regarded as a ‘booking clerk in disguise’, such that the old ticket cases applied, the defendants could still not escape liability under the condition. This was because the condition was so destructive of the rights of the individual that the courts would not hold someone bound by it unless it was drawn to their attention in the most explicit way: to draw the condition to a person’s attention it would need to be printed in red ink with a red hand pointing to it or something equally startling.

Olley v Marlborough Court Hotel [1949] – a couple at a hotel booked for a week and paid in advance. A sign in the room stated that ‘the proprietors will not hold themselves responsible for articles lost or stolen unless handed to the manageress for safe custody”. Her furs were stolen. The clause was communicated effectively enough, but after the contract had been made at the desk.

Having established the clause as a term of the contract, it MUST BE SHOWN TO COVER THE DAMAGE COMPLAINED OF. This is strictly enforced by the courts.

Middleton v Wiggins [1995] – the claimant owned a landfill site, gas escaped and severely damaged a house. The insurer sought to rely on an exclusion clause excluding liability arising from the disposal of waste materials unless the accident resulted from “accident in the method of disposal”. The court held that the loss suffered was not covered by the clause.

If there is any ambiguity or room for doubt as to the meaning of an exclusion clause it will be interpreted in a way unfavourable to the person who wants to rely on it – the CONTRA PROFERENTEM RULE.

If the parties are of equal bargaining power the courts will not be so generous, as the parties could do better.

Photo Production v Securicor [1980] – Securicor were allowed to rely upon an exclusion clause protecting them from liability when their employee burnt down the premises that the company was hired to protect!

The final point was that the clause could not be invalidated by statute or common law rules. Road Traffic Acts forbid a driver trying to exclude liability to his passengers and compels the purchase of third party insurance. A group of statutes forbid buses and railways from excluding or limiting liability for death or injury of passengers, but can limit liability for luggage, but only as far as is allowed by a very important piece of legislation, UNFAIR CONTRACT TERMS ACT 1977. It includes the following important provisions (paraphrased):

s2(1): any attempt to exclude/restrict liability for death or personal injury is void.

s2(2): any attempt to exclude/restrict liability in the case of other loss or damage must satisfy a test of reasonableness.

s3(1): this applies where one of the parties deals as A CONSUMER or on the OTHER’S WRITTEN STANDARD TERMS OF BUSINESS.

s3(2): the other cannot by reference to any contract term –

• when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or


• claim to be entitled -

• to render a contractual performance substantially different from that which was reasonably expected of him, or


• in respect of the whole or any part of his contractual obligation to render no performance at all, except in so far (in any cases mentioned above in this subsection) the contract term satisfied the requirement of reasonableness.

s6: the terms implied into contracts for the sale of goods by SALE OF GOODS ACT 1979 cannot be excluded at all in a consumer sale, and only so far as would be reasonable to any other sale.

s6(1) & (2) deals with consumer contracts.

s6(3) otherwise than as a consumer, the term complained of must satisfy a test of reasonableness.

In determining reasonableness the Act includes guide-lines.

Here are some cases to show the courts attitude:

Waldron-Kelly v British Railways Board [1981] – British Rail lost a suitcase valued at £320. The Board relied on a clause limiting liability to £27. The court held that this was unreasonable.

Warren v Truprint [1986] – another free film offered, court awarded £50 compensation. Truprint appeal fails, Judge said that he would have awarded three times as much.

The UNFAIR TERMS IN CONSUMER CONTRACTS REGULATIONS 1999 replaced the previous statute of 1994. The legislation covers only consumer contracts.

The aim of the Regulations is to control the inclusion of unfair terms into CONSUMER CONTRACTS WHERE THOSE TERMS HAVE NOT BEEN INDIVIDUALLY NEGOTIATED.

Employment contracts, and agreements in relation to succession rights, rights under family law and those dealing with the incorporation and organisation of partnerships are expressly excluded (Schedule 1).

Outside these limitations the Regulations will apply to any form of consumer contract, including those in standard form and will specifically relate to any term which has been drafted in advance and where the consumer has not been able to influence the substance of the term. Nevertheless, if the term stated is in plain, intelligible language then it will be assessed as fair as long as it defines the main subject matter of the contract or concerns the adequacy of the price or remuneration, as against the goods or services sold or supplied. Any ambiguity is to be resolved in favour of the consumer.

Individually negotiated terms must also be in plain, intelligible language.

This simply means that providing the term is in understandable English and clearly describes the subject matter of the contract and the price to be paid, the consumer will not be able to challenge it.

Outside of this limitation, an unfair term is defined as:

“If contrary to the requirements of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.”

We’ll begin next week by looking at things that spoil a contract – known as the “Vitiating Elements”.

Tuesday 6 February 2007

We began this week by looking at the second element of a contract, that of the ACCEPTANCE. This is defined as “An unconditional assent of the offeree to all the terms of the offer.” A conditional acceptance is of no use, they can be considered as counter-offers: Hyde v Wrench [1840], that we discussed last week.

The phrase ‘acceptance subject to contract’ is typically used in house purchases and sales. The parties do what is necessary with surveyor’s, building societies etc., and in the meantime the contract is prepared and routine enquiries before contract are made.

Winn v Bull [1877] – acceptance ‘subject to contract’ means what it says. It is subject to and dependent upon a formal contract being prepared.

Where an offeree decides to accept an offer he must generally communicate the decision by informing the offeror that he is now a party to an agreement. There are various ways of communicating the acceptance, and there are exceptions to the general rule.

Felthouse v Bindley [1863] – a horse was to be sold by auction. The vendor’s uncle offered to buy it. He said, “If I hear no more about him, I consider the horse mine at £30/15/- (£30.75p).” So does the nephew accept by saying nothing? The trial Judge pointed out what could have occurred, e.g. the nephew could bind his uncle by writing to him, or the uncle revoking the offer before acceptance. When the farming stock was to be sold the nephew told the auctioneer, the defendant, that the horse had already been sold. Therefore, in his own mind, the nephew had sold the horse to the uncle, but hadn’t communicated this to him. Nothing was done to vest the horse in the claimant down to 25/2 when the defendant auctioneer sold it.

It was the uncle that had brought the action against the auctioneer alleging that he had bought it from the nephew, and therefore the defendant had no right to sell it. To win he had to show that there had been a contract between himself and the nephew under which ownership had passed. He failed as there had been no acceptance communicated to the offeror. So, SILENCE DOES NOT CONSTITUTE ACCEPTANCE.

The DISTANCE SELLING REGULATIONS 2000 implemented the Distance Selling Regulations. Unsolicited goods become the recipient’s immediately, and are treated as an unconditional gift. It is also a criminal offence to demand money for goods that were not ordered.


A REWARD or UNILATERAL CONTRACTS: the offeror of a reward does not need or expect to be told, he does not need to be told in order to be bound. As discussed in Carlill v Carbolic Smokeball Co. [1893], a further argument of the defendant was that the claimant had not told them that she had bought and was using the ball, and so the acceptance had not been communicated. There is no need as this was a reward case. LJ Bowen said (paraphrased), “If I advertise to the world that my dog is lost and offering payment for its return I do not expect potential seekers to write an offer of acceptance first. They look for the dog and perform the condition, and there should be no need to notify acceptance to make a binding contract.”

THE POSTAL RULE: Where the post is an appropriate means of communication between the parties, then the following rules apply unless the parties agree otherwise:

1. The letter containing the offer is effective when received. You can hardly accept an offer that you don’t know about!


2. A letter of revocation is effective when it is received - the revocation must be communicated to the offeror before acceptance. This seems straightforward, but:

Byrne v Van Tienhoven [1880]

1 Oct: The defendant in Cardiff posts an offer to the claimant, who is in New York
8 Oct: The defendant changes his mind and posts a letter of revocation
11 Oct: The claimant sends a telegram of acceptance
20 Oct: The claimant sends a letter in confirmation of the telegram
25 Oct: The letter of revocation arrives

So one is convinced that the offer is revoked, the other that he has accepted the offer. As you will see from the next rule, the court held that the letter of acceptance was valid when posted and so the revocation was too late. The contract had probably been formed on 11 Oct and in any event had been formed on 20 Oct, and both dates were prior to the arrival of the letter of revocation.

1. A letter of acceptance is valid as soon as it is posted, or as soon as it is put into the hands of a Post Office employee for posting (e.g. recorded delivery).

What happens if the letter gets lost and the offeror isn’t told that he is bound by the contract?

Household Fire Insurance v Grant [1879] – Grant applies for shares in the claimant’s company and a letter of allotment was posted to him. It was never received. When the company went into liquidation Grant was asked for his contribution of the amount outstanding on his shares, to place into the company assets. The court held that Grant was a shareholder, the contract was made when the allotment letter was posted.

It really has to be that way, otherwise he could have avoided payment even if he had received the letter by claiming that he had not.

The postal rule can be avoided by the parties making an agreement contrary to it and this is the case in much contract law. Two people are free to make their own terms and conditions in any contract, with the law intervening only where one of the parties is in a less favourable position.

Holwell Securities v Hughes [1974] – the offeror said that he required notice ‘in writing’ of the acceptance. Thus the letter had to reach him before the contract could be formed.

As the law has evolved the postal rule has been extended to telegrams and telemessages. Acceptance is at the time of dictating the message over the telephone. If a private courier service is used then the acceptance is treated as valid upon delivery of the message to the courier. There is no authority for these assertions, the intention of the parties will ultimately be looked at by the court to ascertain just what was meant.

Telex machines were superseded by fax and e-mail. When do the offers and acceptances become effective? There is no clear authority for most of this, and when the situations do arise the courts will need to refer to the basic principles to interpret them.

An offer: must be communicated to the offeree. So whatever device is used the offer will not become effective until the person to whom it is addressed reads it.

An acceptance: the first attempt (involving a telex):

Entores v Miles Far East Corporation [1955] – the Judge decided that the telexed acceptance became effective when it was received, but as telexes are simply talking devices in print it is almost instantaneous and so the general rule applies – there is no binding contract until the acceptance is communicated to the offeror.

The decision in Entores has been followed ever since, but should it apply to faxes and e-mail? If you send me a fax to my home it will be received practically instantaneously and I shall have a hard copy of it. If you send me an e-mail it can be held in the system for hours, and I might not receive it from my mail box until many hours later.

The Entores decision, however, was concerned with the PLACE of communication, not the TIME of it, and so provides no direct authority on the issue of the time when a telex acceptance takes effect.

Brinkibon v Stahag Stahl [1983] – the House of Lords were dealing with a situation almost identical to that in Entores. It approved that approach, but refused to say whether the same approach should be used in all circumstances, e.g. the message is sent out of office hours or at night, the recipient’s machine is faulty etc. Lord Wilberforce specifically stated that no universal rule can cover all such cases, it must be resolved by reference to the intention of the parties, by sound business practice and in some cases by a judgement where the risks should lie.

The ELECTRONIC COMMERCE (EC DIRECTIVE) REGULATIONS 2002 have been introduced to deal with contracts via the Internet. All e-tailers must provide a minimum amount of information on the web site. The important bits of information to be provided are:

1. The different steps to be taken to conclude the contract


2. Whether or not the contract will be concluded by the service provider


3. How to identify and correct input errors in placing an order


4. The terms and conditions of the contract

After the order has been placed the company must acknowledge receipt electronically without delay and make available a means of correcting an input error.

Acknowledgement of the order will be deemed to have been received when the recipient can access it, and it is at this point that the contract is concluded. A failure of the supplier to acknowledge will mean that the order is not enforceable against the consumer.
The Telephone is considered in law to be ‘face to face’. But what happens if the acceptance is left on an answering machine? The person leaving the message knows it has not been heard at the time that it was left – but this may not be true. He does not know whether it will ever be listened to.

Again, no case law. Some suggest that the caller should check again later, but that defeats the whole point of an answering machine.

The third element of a contract is the CONSIDERATION, the contribution made by each of the parties to the bargain.

A definition of consideration can be found in : Dunlop Pneumatic Tyre Co v Selfridge [1915] – consideration is an act or forbearance of one party or the promise thereof and is the price for which the promise of the other is bought and the promise thus given for value is enforceable. I know it is long-winded, and I don’t really expect you to remember it!

The whole purpose of a contract is this consideration, what each of the parties want to gain from it. If one of the parties does not receive their consideration it will usually be a breach. A number of so-called ‘rules’ have been developed by cases, meaning a piece-meal approach:

A promise for nothing is not binding, except if it is contained in a deed. The only reason that the law will enforce it is because of the extraordinary lengths that the promisor went to in order to make it. The signature is important.

There are three types of consideration:

EXECUTORY - A promise to do something which will bring about the act of the contract at a later date. Go and order a new bed from Beds R Us and agree to pay cash on delivery for it, then the later delivery and later payment are promises to the future that will support a contract.

EXECUTED - One or both of the parties have already performed their part of the contract. If you had paid for the bed in the shop, with delivery to follow one week later, then you have executed your part of the contract.

PAST - The promise to pay is made after the act has been completed. As a general rule, past consideration in no consideration at all. The examiner’s favourite.

As long as the consideration has a value, then in the absence of fraud, it is enough. If you offer to sell me your house for my briefcase as consideration the law will enforce it.

Thomas v Thomas [1842] - £1 each year for ground rent of a house was enough to bind a promise to allow a woman to live in her late husband’s house. It was not the market value, but it did have value. His love and affection for her was not enough, but £1 would do!

White v Bluett [1853] – father promised his son that he need not repay money owed, if he would stop boring him! There was no consideration as there was no economic value.

Can there possibly be any value in something which is simply thrown away?

Chappell and Co v Nestle Co Ltd [1960] – three chocolate wrappers, later to be thrown away by a record company, could be of value as consideration, as this was part of a deal whereby the wrappers and 1/6d formed the price of a copy of a record called “Rockin’ Shoes”.

The argument that the wrappers were thrown away is not relevant, it was a part of the consideration and the offeree is not concerned with what the offeror might do with the consideration. The wrappers formed a part of the consideration.

Consideration cannot exist where you are already bound by an existing contractual duty with the other party, although if you did more than what is contracted you could expect more pay.

Stilk v Myrick [1809] – a sailor couldn’t recover extra pay he was promised (the promise wasn’t binding) for working upon a voyage to cover for two deserters from a crew of eleven.

Hartley v Ponsonby [1857] – the circumstances are similar to the above, but the desertion was nineteen out of a crew of thirty-six, leaving only four or five able seamen. He had done more than his existing contractual duty and had ‘bought’ the promise of extra pay.

Consideration cannot exist in doing what the law already requires - an existing legal as opposed to contractual duty.

Glasbrook Bros v Glamorgan C. C. [1925] - there were industrial problems at a quarry and the police were called to protect the owner’s property. The police made a charge, but the bill was not paid. The argument was that the police were already under a legal duty to protect property, thus there was no consideration on the part of the police to bind the promise to pay. However, the police had attended in greater numbers than that needed to discharge their usual legal duty, and had done so at the request of the owner and in reliance of the promise of payment. Consideration had been given to bind the promise and they should be paid.

A more up-to-date version can be found in Harris v Sheffield United F. C. [1988] - the circumstances are the same, except that the police attended on a regular basis. There was the same argument as in the colliery case, with the same greater numbers reply. The court held it to have been a ‘special’ police service. A number of other clubs had helped finance the action in the hope of a different result.

It is hardly extra value to be paid less than what you are owed, but what if you can find a LITTLE EXTRA?, something that a person was not contractually bound to do?

Pinnel’s Case [1602] – Cole owed Pinnel £8/10/- to be paid by 11/11. At Pinnel’s request Cole paid £5/11/- on 1/10 in full settlement of the debt. As the debt had been paid early there was valuable consideration.

D and C Builders v Rees [1966] – the builders promise to accept £300 in full settlement of a debt of £482 was not binding, and so they could sue for the balance. A part payment of a debt has no value, and consideration must be valuable.

This would not be the case if it were not a ‘straight’ part payment. If there is any little extra then valuable consideration has been given. So:

1. Part payment made early
2. Payment was in bricks to the value of £300
3. Part payment + a wheelbarrow
4. Part payment through a third party – A owes B, B accepts cash from C with agreement of creditor

All contain this little something extra. If this little extra is missing then a part-payment has no value; and consideration must be valuable:

Re Selectmove Ltd [1995] – a case concerning the payment of income tax arrears by instalments. The Inland Revenue agreed to accept the instalments, but later changed their mind and threatened to wind up the company unless the sum was not paid in full. The company appealed against the decision, but a promise to pay a sum which a debtor is already bound to pay, is not good consideration.

In other cases the courts seem to have been willing to accept that consideration can exist in a variety of contracts by the parties. It is an idea based upon economic duress. It is usual to include penalty clauses in building and highway contracts:

Williams v Roffey Bros and Nichols [1990] – an agreement by a sub-contractor to perform existing duties under a contract was held to amount to good consideration for a promised increased payment. The gain to the main contractor was avoiding penalty clauses for late performance, and that was valuable consideration.

Past consideration is no consideration at all.

Roscorla v Thomas [1842] – A sells a horse to B. A price is agreed, A gets the cash and B gets the horse. Then B asks about the horse’s temperament and A says that it is ‘sound and free from vice’. In fact it is the opposite. B cannot sue A for a breach of contract as it was not part of the deal – when B made the enquiry the deal was already over and the consideration (the money for the horse) was already in the past.

Re McArdle [1951] – A dies, leaving the house to his widow for life, then to the children. Improvements were made at the house, with the children subsequently promising to make a contribution, but the promise came after the work was done and was not, therefore, binding.

If A promises B £50 to find his lost dog B can only enforce the promise once he has found the dog, when he has executed the consideration, but the consideration is clearly given in return for the promise since it is performed after the promise. Hence whilst it is past (executed) in relation to the time of enforcement, it is not past in relation to the giving of the promise and is good consideration.

Conversely if B knows that A has lost his dog and searches for it, finds it and returns it to A, than A being grateful promises B £50, the promise is not enforceable since finding the dog could not have been done in return for the promise as it was done before the promise was made. It was past in relation to the promise.

Having told you all of this, the rule is not complied with strictly as the courts have to be sympathetic to commercial reality. It is a well established exception that professional people don’t respond to requests for their services except on the basis that they are to be paid for them. Call out the emergency plumber after you have hammered a nail through a pipe and he will come to fix it. A promise is then made to pay for the work (past consideration) and it is legally enforceable. This is known as the DOCTRINE OF IMPLIED ASSUMPSIT.

Re Caseys Patents [1892] – Casey agreed to promote certain patents held by S. Two years later S wrote to Casey promising him a one third share in the patents for his efforts in promoting the products. The court held that Casey could enforce the payment as the original agreement created an implication of payment and all that was left to be determined was how much, and this was set out in S’s letter.

Consideration Must Move From The Promisee. This is all about ‘privity of contract’; i.e. the claimant must show that he provided consideration. If A and B enter into a contract and B does not fulfil his part, neither X, Y or Z can sue B as they have no privity. Only A and B have rights, and only they have obligations.

This may seem fair enough, but as we shall see, it does present problems. The common law rules still exist, but we will first look at how statute law assists.

CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
This supplements the common law.

Section 1 – someone who is not a party to a contract may still enforce a term of it if:

• the contract says that he may, or


• the contract purports to confer a benefit on him

the third party must be named in the contract or identified as a member of a class answering a particular contract description. They need not exist at the time the contract is entered into (unborn child, future spouse?).

Section 2 – the original parties cannot later cancel or vary the right of the third party to sue.

Section 3 – the defendant has the same defences available as he would have against a contracting party.

Section 4 – the rights of the original contracting parties to sue is not affected.

Section 5 – the party in breach cannot be forced to pay twice for the breach.

Section 6 – certain contracts are excluded – not important here.

Section 7 – third party cannot contest validity of a term under UCTA 1977.

Section 7(4) – the third party is not a ‘party to the contract’ for the purposes of other legislation, e.g. UCTA 1977.

The common law rules are explained in:

Tweddle v Atkinson [1861] – a couple got engaged, and each set of parents promised to pay a sum of money to the couple upon marriage. One paid, the other didn’t. In fact, the father died before he could pay. The couple sued the estate for the cash and failed. The only possible claimant could have been the other set of parents, the couple had provided no consideration to the contract and could not, therefore, sue under it.

Dunlop Pneumatic Tyre Co v Selfridge [1915] – this is the case we used for our definition of consideration. Dunlop sold tyres to Dew and Co, subject to two conditions:

1. The firm would not resell the tyres below a certain price
2. If any tyres were sold to a trade customer, they would be required to agree to point one.

Dew sold to Selfridges under a contract that provided for the price restriction, with a clause awarding £5 per tyre payable to Dunlop for each breach. Selfridge sold to customers below the price and Dunlop sued to obtain the requisite number of fivers, and sought an injunction to prevent further breaches. The defendants were not liable to Dunlop as Dunlop had provided no consideration for the defendant’s promise. No privity of contract existed between Dunlop and Selfridge.

Because of decisions such as these the courts had to find ways around the harsh privity rule, and came up with the following exceptions:

COLLATERAL CONTRACTS. The favoured approach. Find a collateral contract to exist between the third party and one of the parties, the third party will then be able to sue to enforce it.

A contracts with B, X is the third party. The court finds a collateral contract between A and X where, because of X’s statement, A is induced to enter into the contract with B. The consideration for X’s promise is A entering into the contract with B (to the detriment of A).

Shanklin Pier Ltd v Detel Products Ltd [1951] – the claimant employed contractors to repair their pier, specifying the type of paint to be used, that of the defendants. The stipulation was made after the defendant had told the claimant that the paint would last for seven years. In fact it lasted only three months, and £4,000 was spent remedying the defects. The defendant argued that as there was no contract they couldn’t be held liable. However, a collateral contract existed between the claimant and the defendant and the latter was liable to pay damages for its breach. They had provided consideration for the promise of the defendant by entering into an agreement with the contractor which resulted in the purchase of the defendants’ paint.

THE EQUITABLE POSITION. A contracts with B for the benefit of C. C cannot enforce under the contract, even though both A and B both know that C is the object of the contract. Equity has been prepared to regard the contract as creating a trust in favour of C, enabling C to sue as a beneficiary under a trust. This is similar to the statute above, but remember that equitable remedies are discretionary.

The law of agency is particularly important in insurance law, and needs only a few words here. If A contracts with B to supply goods to C, A is judged to have acted as C’s agent, so C can sue B under the contract. The normal rules of agency provide that “he who does an act through another does it himself.”

Equitable Estoppel. One of Lord Denning’s most famous cases:

Central London Property Trust Ltd v High Trees House Ltd [1947] –concerns the argument of consideration.

In 1940 a landlord gratuitously promised to halve the rent that he could have demanded from a company who rented the whole block. It was World. In 1945 the landlord wanted to return to his former position of War II and difficult times for the company to let flats and pay the full rent full rent, the company thought otherwise. The landlord was entitled to recover the rent arrears from the end of the war. There was no right to sue for the ‘arrears’ from 1940 - 1945 as the 1940 agreement would defeat the claim. Equity requires the claimant to honour his gratuitous promise made in the 1940 agreement.

This is known as equitable estoppel and simply means that a person who promises that he will not insist on his strict legal rights and that subsequently the promise is acted upon, the principle requires the promise to be honoured even if there is no consideration. It is applied only subject to the following points:

• It is a DEFENCE ONLY, not a cause of action - Combe v Combe [1951]


• The individual to whom the promise is made must be able to show that he RELIED on the promise.


• Those seeking help must show that they acted with FAIRNESS (clean hands).


• Equitable estoppel SUSPENDS rights, it does not EXTINGUISH them. Thus in High Trees it was suspended in time of war and then re-instated.

Our fourth element is AN INTENTION TO BE LEGALLY BOUND. In law there are rebuttable and irrebuttable presumptions, and there are two rebuttable presumptions here:

SOCIAL AND DOMESTIC AGREEMENT: No intention to be legally bound

COMMERCIAL AGREEMENT: Intention to be legally bound

Social and Domestic

Balfour v Balfour [1919] – the defendant was a civil servant in Ceylon (Sri Lanka). The defendant and his wife came to England on leave. When it was time to return the wife remained in England for health reasons. They agreed that he would pay her £30 per month whilst they were apart. The wife later divorced him and so he stopped paying. She sued and lost. Couples make such arrangements all the while, and whilst they are agreements they are not contracts because the parties did not intend that they should be legally bound.

compare

Simpkins v Pays [1955] – an old lady, her grand-daughter and the lodger jointly entered a competition. The old lady’s name appeared on the form. The grand-daughter won £750 and the lodger had to sue for his share. Despite the social agreement this was held to be a contract.

Commercial Agreements

Edwards v Skyways [1964] – a promise of ex gratia payments to surplus pilots was held to be binding as it was a commercial agreement.

compare

Rose and Frank v Crompton [1925] – an agreement for the sale of paper tissues contained a clause - “This arrangement is not entered into, nor is this memorandum written, as a formal or legal agreement and shall not be subject to legal jurisdiction in the courts.” The parties were not bound by the agreement, that is what they wanted.

We will begin with capacity in two weeks’ time. Next week is half-term.

Tuesday 30 January 2007

A new subject for you. I intend to teach you the law of contract, followed by consumer protection. When we have done that we shall turn to wills & probate.

People enter into contracts every day, and there is no difference between buying a bottle of pop and a Rolls Royce. Both require five elements to exist if the contract is to be valid.

We’ll start by looking at what a contract is, and fill out the framework over the coming weeks.

Definition of a contract: “an agreement that the law will enforce”. This is essential, but there are five elements which must exist before a party can enforce a contract.

Whilst all contracts are agreements, all agreements are not contracts. Learning the law is more difficult than learning to ride a bicycle? If you agree we have an agreement, but we do not have a contract.

The best way of analysing a problem question in an examination on what purports to be a contract in real life, is to ensure that the five basic elements are present. Without them there can be no contract. Having found all five to be present, only then do you need to dig deeper into the law itself.

1. Offer


2. Acceptance – these are the basic building blocks that must lead to an agreement


3. Consideration – what both parties contribute of value to the bargain. A gratuitous promise is not binding unless in a deed (later)


4. Intention to be legally bound – is it that sort of transaction which the parties intended should be enforceable against each other, or was it merely a social arrangement? If the former there is a presumption of being bound, but not in the latter.


5. Capacity - the law will protect those that cannot protect themselves, so the mentally disordered (permanently or not), the drunk and those under the influence of drugs and the young do not have the capacity to enter into contracts.

None of this needs to be written down, although the law does require some contracts to be in the form of a deed, and some must be evidenced in writing. If disputes arise it is for the courts to ascertain the rights and wrongs, the same as other areas of the law.

So there is our basic simple contract:

Offer “Daily Telegraph, please”
Acceptance “Sixty pence, please sir”
Consideration The newspaper and the money
Intention to be Commercial transaction, so
legally bound intention is presumed
Capacity Both 18 years or older and sane

Write this out on a card and learn it quickly.
OFFER
A statement of the terms by which the offeror is prepared to be bound.

If the offer is accepted then there is an agreement. If the other three elements exist, there is a contract.

• Party making the offer = offeror


• Parting to whom offer is made = offeree


• Unilateral Offer - A one sided offer, the offeror has no idea whether anyone will accept the offer, e.g. Carlill; reward cases


• Bilateral Offer – more common, one person makes an offer to another

The majority of the law of contract is based upon common law, developed over the years by the Judiciary by reference to previous decisions and the rules of precedent. Because of this it is important to cite cases when covering a point of law, or at least having a knowledge of the details of the case from which the point arises.
THE INVITATION TO TREAT
Some statements look like offers, but are, in fact, something else. No offer means no contract.

Pharmaceutical Society v Boots [1953] – Boots ran a supermarket type layout in their stores, and the question to be decided is whether the sale is made at the shelves or at the cash desk. It was important because the PHARMACY AND POISONS ACT 1933 stated that certain merchandise could be sold only under the supervision of a pharmacist. The pharmacist was near the cash desk, not the shelves, and Boots were being prosecuted for this heinous offence.

When is the contract made? At the cash desk said LJ Somerville, and so Boots were not guilty as they had a pharmacist there. Prior to that moment of sale the display of goods was an “invitation to treat” as opposed to an offer.

It is important that you understand the term, and are able to differentiate between it and an offer. You should be able to work out the decision in:

Fisher v Bell [1960] – flick knives were displayed in a shop window being ‘offered for sale’. If that was true then the owner was guilty of an offence under the RESTRICTION OF OFFENSIVE WEAPONS ACT 1959, but it isn’t true. The display of an article with a price on it in a shop window is merely an invitation to treat. In no sense is it an offer for sale, the acceptance of which would constitute a contract.

Classified ads are the same, an invitation to readers to make offers, not offers in themselves. It must be so by illustration:

“Rolex watch for sale. Brand new, unwanted gift. £500.”

The advert gets twenty replies and the sale is made. It would be ludicrous for the disappointed nineteen to be able to bring an action for a breach of contract and, of course, they can’t. The ad was simply an invitation to treat, the replies are the offers which the advertiser can accept or reject as he wishes.

Partridge v Crittenden [1968] – a man was acquitted of offering to sell a Bramble Finch, a protected bird, on the basis that the ad in Cage and Aviary Birds was an invitation to treat, not an offer.

At an auction the bidder makes the offer to buy, acceptance is made at the fall of the hammer. In Barry v Heathcote Ball Ltd [2001] the Court of Appeal held that the auctioneer who rejected the highest bid because he considered it too low was in breach of contract, as there was a collateral contract that the goods would be sold to the highest bidder.

A statement as to the price may be an invitation to treat as opposed to an offer, as happens during negotiations.

Harvey v Facey [1893] – the claimants telegraphed the defendant in relation to a piece of land:

C: “Will you sell us Bumper Hall Pen? Telegraph lowest price”
D: “Lowest cash price for Bumper Hall, £900”
P: “We agree to buy Bumper Hall for £900 asked by you”

The Privy Council stated that the original message was not an offer. The second one was, but there was no acceptance.
REWARDS
Is a reward an offer? If it is, does it need to be accepted to form the basis of a contract?

“The Sun has offered a reward of £10,000 to any person who can provide information leading to the arrest and subsequent conviction of the killer of WPc Blue”

B provides the information, and X is later convicted. Must The Sun pay? B did not communicate his acceptance of the offer to The Sun, so are they bound? Yes. In practice there is no problem with this, as long as you spot that there is a reward. It is a unilateral offer - you do this and I will pay.

Possibly second only to Donoghue v Stevenson in fame is the case of:

Carlill v Carbolic Smoke Ball Company [1893] – a good example of quack medicine, although not to take off in the same way as Coca-Cola. Full page ads were taken in papers and magazines:

• Coughs cured in 1 week


• Snoring cured in 1 week


• Whooping Cough relieved at first application


• Hay Fever cured in every case

and so it went on, eighteen claims in all. At the time of the ads there was an epidemic of influenza, and this must have seemed to be a marvel come to save everyone. All you had to do was set fire to the ball and inhale the fumes. A truly miracle cure. I have given you a copy of the ad.

To bolster their claims the ad stated that £1,000 had been lodged at a bank with £100 rewards available for everyone who had bought the ball and subsequently caught flu. Mrs Carlill bought the ball, used it, and caught flu. She claimed £100 from the company and was refused. She sued for breach of contract. The case was to raise a number of important issues, which are still valid today. From what you know so far, there seems to be an:

(image placeholder) Offer - Buy the ball
(image placeholder) Acceptance - The cash
(image placeholder) Consideration - The ball and the cash
(image placeholder) Presumption of legally bound - Commercial transaction
(image placeholder) Capacity - No problem here

so why didn’t the company pay up?

Held:

(image placeholder) Firstly it was argued that the document was too vague to be enforceable. Yet it isn’t a contract at all, it is only an offer to the public.

• The defendant then contends that it is an offer which is too vague to be treated as a definite offer; there is no time limit on catching the flu and it cannot be supposed that they seriously intended to pay money to everyone who caught flu after inhaling the smoke ball.


• It is further argued as being too vague as its terms were wide enough to cover all those who had used the ball prior to the ad, and in any event it was an offer to the whole world in general. It was unreasonable to suppose it to be a definite offer because no-one would contract themselves out of the opportunity of checking the experiment which was going to be made at their own expense.


• It was also contended that this was a mere trade puff or proclamation, rather than an offer intended to mature into a contract when accepted.

The main point, rejected by the Judge, was that the vagueness of the document showed that no contract was intended. The intention was to increase the use of the smoke ball.

Was the intention that the £100 should be paid if the conditions were met in full? It was intended to be so understood by the public as an offer to be acted upon, but the defendant argued that there is no check by them. That is their problem, an extravagant promise is no reason as to why he shouldn’t be bound by them.

Is this a contract made with all the world? No. It is an offer made to all the world which can be accepted by anyone who comes forward and performs the conditions:

• buy the ball


• use the ball


• catch the flu


• claim the cash

TERMINATION OF AN OFFER
An offer which is accepted becomes an agreement, and may become a contract. An offer will not last forever if it remains unaccepted; it can end by:
Rejection
An offer is rejected when the person to whom it is made turns the offer down. This is not as silly as it seems, as we shall see.
Revocation
The offeror withdraws the offer. Provided it is effectively communicated to the offeree by either the offeror or a reliable third party, and provided it is done before acceptance, it is revoked and no longer exists to be accepted.

Dickinson v Dodds [1876] – on Wednesday 10/6/1874 the defendant delivers a letter to the claimant containing a signed offer to sell a house for £800, including the words “this offer to be left over until Friday 12/6/1874 at 9 a.m.”. On 11/6 the claimant hears from someone else, a Mr Berry, that the defendant had been negotiating with another prospective purchaser. He went straight round to the defendant’s house and left a formal written acceptance. This never reached the defendant. On the following morning, Friday 12th, the defendant was handed another copy of the acceptance by the same Mr Berry. The defendant said he sold the house the day before. The claimant brought an action for specific performance, i.e. asked the court to order the defendant to do as he had agreed, the defendant argued that there was no agreement and so there was no contract to breach, his offer having been revoked as a consequence of the events.

It was held that to constitute a contract it must appear that two minds are as one at the same moment of time, i.e. an offer continuing up to the time of acceptance. If there was no continuing offer the acceptance comes to nothing. It may well be that the one man is bound in some way or other to let the other man know that his mind has been changed with regard to the offer, but here the claimant knew that the defendant was no longer minded to sell as plainly as if he had told him in so many words “I withdraw the offer”. So the communication by Mr Berry (a third party) was enough to withdraw the offer.
Counter Offers
An offer answered with another offer destroys the first offer. This counter offer can be converted into a contract by acceptance. Note: a request for further information which leaves the original offer untouched is not a counter offer.

Hyde v Wrench [1840]
A farm is offered for sale at £1,000.
Offeree offers £950 (counter offer destroying first offer)
Offeror refuses
Offeree then suggests £1,000, an acceptance of the first offer

The counter offer destroyed the original offer, so when he then purports to accept it there was nothing for him to accept.

Businesses check that both sides are in agreement at the end of negotiations, and many use standard forms. What happens when these ‘standard’ forms are different? It is known as “the battle of the forms”.

Butler Machine Tool Co v Ex-Cell-O Corporation [1979] – a contract was made for a machine tool, and a dispute arose over the price. The buyer had enquired and on 23/5/69 the seller quoted a price of £75,535 with a delivery date some ten months later. The machine was offered subject to terms “which shall prevail over any terms and conditions in the buyer’s order”. The vital term that caused the dispute concerned variation. This meant that the price for the goods was that prevailing at the time of delivery, which was ten months after the enquiry. The order was made on the prospective buyer’s order form, which differed in several respects from the seller’s standard form. The buyer’s form, not surprisingly, contained no price variation clause. At the bottom was a tear off slip which read “We accept your order on the terms and conditions stated thereon”. This order was placed on 27/5. The slip was completed and returned on 5/6, but was accompanied by a letter stating that the order was accepted in accordance with the quote of 23/5.

Upon delivery the price had risen by £2,892 and the action was brought on whether this was payable. Which of the two ‘standard’ forms applied?

The Court of Appeal decided that the buyer’s order of 27/5 was a counter-offer which destroyed the sellers offer of 23/5. The return of the acknowledgement slip amounted to an acceptance of the counter-offer and, therefore, the contract was made on the buyers terms and the increase was not payable. The letter with the slip was irrelevant and did not operate to incorporate the seller’s terms back into the contract.

What seems to have been overlooked is the simple question: were the parties ever in agreement?

This kind of trading goes on every day, with hundreds of thousands of pounds worth of business done on these non-existent contracts. Professor Atiyah suggests distinguishing between executed and executory contracts. Once executed it would be ridiculous to say that there never was a contract, and so the court will find a way of preferring one set of terms to the other. Where it is executory, i.e. to be performed in the future, the court may well decide that there is no agreement and refuse to enforce it.
Delays
The problem here is:

• The making of the offer


• Goods get damaged


• Delay


• Offer accepted

Financings v Stimson [1962] – the offeror was awaiting a response from a finance company to his offer to buy a car and vehicle. In the interim the vehicle was wrecked by thieves. The offer is deemed to have lapsed at that moment, the offer having been based upon the condition the vehicle was in when it was inspected.

Just how long is too long will depend upon the goods.
Death
The general rule can be found in Reynolds v Atherton [1912] –upon the death of either party negotiations are brought to an end.

However, if the subject of the contract is not dependent upon the deceased’s personal activity, his executors could carry out the deal and if the offeree has not heard of the death when he accepted then a contract could be made. Don’t worry too much over this.

We will begin with an acceptance next week.