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”.