Tuesday 27 March 2007

We began our study of wills and probate. We shall cover the following points:

1. Making a will, its contents and revocation.
2. The different types of gifts which may be made by will, and their effect where the beneficiary dies before the testator.
3. The types of formal papers which must be applied for by the personal representatives who sort out the deceased’s estate.
4. Things called “death–bed” gifts, more properly called “donationes mortis causa”, and the requirements for such gifts to be effective.
5. When, and by whom, a claim can be made against the estate by someone not mentioned in the will or provided for by the terms of intestacy.
6. A brief introduction to inheritance tax.

Only about one–third of persons capable of making a will do so. They may have valid reasons for not doing so, but there are lots of reasons for making a will now. You ensure that your estate passes to person(s) of your choice. If there is no will then statute – the Administrative of Estates Act 1925 – specifies who will inherit upon your death.

The law of succession deals with the ways by which property, accumulated during a lifetime, can be transferred on death. The responsibility for carrying out the transfer lies with individuals called PERSONAL REPRESENTATIVES appointed by the deceased in a will, or by statute under the terms of the ADMINISTRATION OF ESTATES ACT 1925. The law allows, with some exceptions, substantial freedom for a person to decide where his property will go after death by expressing those wishes in a will. Where an individual has not made a will the assets will be distributed to family members in accordance with certain statutory rules which we shall look at later.

A will is a document drawn up, in accordance with statute, in which a person expresses his wishes on how his assets should be distributed when he dies; this person is called the testator. The will may also include:

details of what funeral arrangements the testator requires to be made
the testator’s wishes on the donation of his organs for use in transplant surgery or general medical research
for the parents of young children it is an opportunity to express their wishes as to whom they would like to be the guardians of their children if they should die
it is also possible to make gifts of specific items like family heirlooms
for the testator to express gratitude and thanks to particular people for acts of kindness during the testator’s lifetime.

Not all of the wishes expressed in the will are binding on the personal representative, e.g. funeral arrangements, but it is a useful way of recording those views and wishes. THE WILL HAS NO LEGAL EFFECT AND IS NOT OPERATIONAL UNTIL THE DEATH OF THE PERSON MAKING IT. Any person named in a will as a beneficiary has no claim or right to the property until the testator’s death. Until that time the property can be disposed of freely by the testator.

There are many reasons why it is important to make a will; a person who dies without having made a valid will is said to die intestate, and any property he owned will be distributed according to statutory rules set out in the ADMINISTRATION OF ESTATES ACT 1925. These rules may produce effects which are contrary to the way the person would have wished the property to be distributed:

partners in a long term relationship but not married to each other could not inherit from each other unless there was a will containing the appropriate gifts made by one partner to the other. The death of one partner could therefore create serious financial problems for the other. In these circumstances unmarried couples with children need to make wills in order to protect the children and their own respective positions. A claim could be made under the INHERITANCE (PROVISION FOR FAMILY AND DEPENDANTS) ACT 1975, but this may be less financially advantageous.
an unmarried mother automatically has sole parental responsibility; if she dies the father has no automatic rights with respect to the child, unless this issue has been determined before death. If the mother leaves no valid will, the children will inherit on her intestacy but this money will be kept in trust for the children until they are eighteen. The restriction on the type of investments which can be made can prevent the property being dealt with as flexibly and advantageously for the children’s benefit as would be possible under a will.
the planning and organising of a person’s affairs in a will can reduce the amount of tax due on death. Where personal circumstances change, a will can be used to reflect the new situation, i.e. provision for a new partner following the ending of a long term relationship.
Since the case of WHITE v JONES [1995] a beneficiary may bring an action against a solicitor if the solicitor is negligent in drawing up the will.

A will can be altered by executing a document called a CODICIL; this must be done with formalities similar to those surrounding the execution of a will. This is a testamentary document made subsequent to a valid will. It must state that it is made subsequent to the will and any previous codicils. It will deal with either dispositions (gifts) or formalities (appointment of executors).

Definition of a will: “it is a declaration, in a prescribed form, of intentions of the testator which are to take effect on the testator’s death”. Until the time of death the will can be revoked.

A will has the following characteristics:

extends to the disposition of property and other testamentary arrangements;
is a declaration of intent;
must be in a prescribed form, with some exceptions;
can always be revoked;
takes effect on death;
can dispose of assets acquired after execution.

The will is divided into three distinct sections:

1. the appointment of executors and guardians – executors are the people responsible for dealing with all your affairs after your death;
2. usually most important, deals with the distribution of the assets in accordance with the terms of the will;
3. establishes administrative provisions for the executors in order that they can carry out their duties.

See the HANDOUT of the will of the late Donald Campbell, which contains examples of the various types of gifts, along with other points which we shall cover during the lectures.

A will only operates as a declaration of intention. Whether the document is a will is usually clear from the nature of the document. Where the testator has produced a document which describes itself as a will or a codicil, and complies with all the statutory rules, this is strong evidence that the document is a will.

NICHOLAS v NICHOLAS [1814] – probate was refused on a will when evidence was adduced to show that the testator made ‘the will’ as a joke, and it was only a specimen.

Who can make a will?

Aged 18 years or over
of sound mind
acting voluntarily

provided the details of the will and its execution comply with the terms of the WILLS ACT 1837 and the ADMINISTRATION OF JUSTICE ACT 1982. There is no legal requirement to have a will drawn up by a solicitor, although it is usual to do so to ensure that the statutory requirements are complied with and hence that the will is valid.

Persons from the age of fourteen years can make a will provided they are in ACTUAL MILITARY SERVICE, s11 WILLS ACT 1837; these are called PRIVILEGED WILLS. See the handout I gave you relating to Private Harry Roberts, killed during the Great War.

When people are involved in military emergencies of war, there may be few opportunities to seek advice on the making of a will to ensure that the statutory requirements for a valid will are complied with. Sailors on a sinking ship may experience difficulty in finding two independent people to witness their signature, and soldiers could experience difficulty in obtaining the services of a solicitor; therefore the strict rules for making wills are relaxed for:

soldiers and airmen on actual military service
seamen at sea and
any members of Her Majesty’s naval or marine forces in actual military service.

Privileged wills REMAIN VALID EVEN AFTER THE EMERGENCY OR HOSTILITIES HAVE ENDED.

RE BOOTH [1926] – a privileged will made by the testator while on actual military service in 1882 was held to be valid after the testator’s death in 1924 – a gap of forty-two years!

ACTUAL MILITARY SERVICE (s11 WILLS ACT 1837) has given rise to much litigation:

Re Jones [1981] – Jones was a soldier stationed in Northern Ireland. He was shot, and on his way to hospital said, in the presence of two colleagues, “If I do not make it make sure Anne gets all my stuff”; he died a day later. He had previously made a formal will in favour of his mother. The court determined that he was on actual military service even though he was not at war, and that the will was privileged. It was a valid will and revoked an earlier will made in favour of his mother.

REQUIREMENTS FOR A VALID WILL

The prescribed formalities must be complied with for the will to be valid per s9 WILLS ACT 1837 as substituted by the ADMINISTRATION OF JUSTICE ACT 1982. A valid will must have the following characteristics:

IN WRITING – except for certain privileged wills – RE JONES [1981].

IN THE GOODS OF ADAMS [1972] – insertions in a different medium to the original, e.g. pencil alterations on a typed will, will be ignored unless there is proof that it is what the testator wishes.

SIGNED BY THE TESTATOR – or by some other person at the testator’s direction and in his presence. If the testator cannot write, it is sufficient for the testator to make a mark, e.g. a cross, a thumb print, or initials, identified as the testator’s. The will is usually signed at the end and this was a requirement of both the WILLS ACT 1837 and the WILLS ACT (AMENDMENT) ACT 1852. The ADMINISTRATION OF JUSTICE ACT 1982 amended this: “as long as the testator intends his signature to give effect to the will, then it will be valid no matter where it is signed”.

WOOD AND ANOTHER V SMITH AND ANOTHER [1991] – the testator made a hand-written will, two days before he died, which commenced “My will by Peter Winterborne”. It was witnessed, but the testator did not add his signature at the end. The Chancery Division Judge held that the writing of the name was a signature, but that the will was invalid as no dispositions existed at the time the signature was made, the signature being at the head of a blank piece of paper. On appeal the Court of Appeal held that, provided the signing and the writing of the subsequent disposition all formed part of the one operation, as in this case, then it would be a valid will.

Where the testator is blind or illiterate or not fluent in English, it must be clear that the will has been explained carefully and accurately to him and that he fully understands the nature and effect of the will.

TESTATOR’S SIGNATURE MUST BE WITNESSED OR ACKNOWLEDGED BY AT LEAST TWO INDEPENDENT WITNESSES – under the ADMINISTRATION OF JUSTICE ACT 1982, if only one witness is present when the testator signs, both the testator and the witness may acknowledge their signatures when the second witness adds his signature: COUSER v COUSER [1996]. If this is the case the usual attestation clause would need to be amended to reflect the actual details of the attestation.

Witnesses need not be aware of the contents of the document, but to be a competent witness the individual must appreciate that they are witnessing the testator’s signature. A competent witness could be under seventeen-years or could be an illiterate, provided it could be shown that there was understanding of the signature. A blind person however could not be a competent witness because he could not observe the signature being made.

There must be at least two independent witnesses, i.e. witnesses who are not gaining a benefit under the will.

RE BRAVDA [1968] – if the witness is a beneficiary of the will, the will is not invalid but the gift to the witness would be void

FORFEITURE RULE

Public policy determines that no one who unlawfully kills another should be able to benefit from the will or intestacy of the deceased: RE SIGSWORTH [1935].

As a matter of public policy the common law does not allow a criminal to benefit from his criminal activity , so a person who unlawfully kills another is stopped from benefiting from that person’s death either under the rules of intestacy or under the victim’s will. The rule affects not only the person convicted, but also anyone claiming through him, therefore his issue will also be unable to take unless they are entitled in their own right.

RE GILES [1972] –a wife who killed her husband was found guilty of manslaughter on the grounds of diminished responsibility.

The effect of the FORFEITURE ACT 1982 is to allow certain people found guilty of unlawful killing to obtain relief from forfeiture.

A person wishing to make a claim must do so within three months of the date of the conviction. The court will only make an order where the interests of justice require it, e.g. where the killing was a mercy killing by a carer.

Application under the Act for benefit must also be made within three months from the date of the conviction.

TESTAMENTARY GIFTS FOR CHILDREN

CONTINGENT – a pre-condition, e.g. “on attaining the age of eighteen years”. Should the child die at sixteen the gift will fail and fall into the residue.

VESTED – there is no condition, but the gift is held in trust until eighteen years of age. Should the child die at sixteen the gift is valid and forms a part of the estate.

TESTAMENTARY GIFTS GENERALLY

A will is only effective when the testator dies; until that time the beneficiaries have no interest in the property, so if the beneficiary dies before the testator, that beneficiary will gain no benefit under the will. In these circumstances the gift is said to LAPSE. The gift can be saved where the beneficiary named in the will has children living at the date of the testator’s death, as the children can be competent to take the gift; if there is more than one child, then they take the gift in equal shares: s33 WILLS ACT 1837. This applies unless there is a contrary intention expressed in the will.

The assets which are subject to disposition in the will are those assets belonging to the testator at the date of death. These assets can include assets acquired after the date the will was executed, e.g. “a gift of all my paintings to David” in the will made in 1989 would include paintings acquired in 1991.

A gift in the will of freehold land is called a “devise” ; a gift of personal property (leaseholds, cars, jewellery etc.) is called a “bequest” or a “legacy”. There are different types of legacy and it is important to be able to distinguish between them:

GENERAL LEGACY: a gift of property which is not distinguished from other property of the same type, e.g. £1,000, or “A horse for James”. If at the date of the testator’s death there is no horse for James the personal representatives will have to buy one.

SPECIFIC LEGACY: a gift of a particular thing which is identified, e.g. MY Constable painting, MY diamond ring. If the legacy does not exist at the date of the testator’s death the beneficiary receives nothing. The gift is said to ADEEM.

DEMONSTRATIVE LEGACY: a gift of a general type payable out of a particular fund, e.g. £1,000 from my Co–operative Bank account, or one hundred of my holding of ICI shares. Should there be less than the legacy at the date of the testator’s death the beneficiary will receive what there is, the remainder may be paid from the general assets if there is sufficient.

PECUNIARY LEGACY: a form of general legacy which is a gift of money out of the general estate, e.g. £1,000 to Bert.

RESIDUARY LEGACY: that part of the estate which is left, once all the debts have been paid and all other gifts have been distributed.

These distinctions between the different types of gift are important because the classification of the gift determines what happens to legacies when the estate has insufficient assets in it to pay all the testator’s debts and fulfil all the gifts made in the will. This process is called ABATEMENT. Where the estate is insufficient to meet the demands of all the creditors and beneficiaries, the creditors take priority and must be paid in full before the beneficiaries receive anything. Creditors are paid in accordance with strict statutory rules in order to prevent competition between them. If the creditors cannot be paid in full there will be nothing to distribute to the beneficiaries:

Funeral and testamentary expenses are paid first from the estate,
followed by secured debts;
assets are then applied to pay preferential debts, e.g. money owed to the Inland Revenue, arrears of National Insurance contributions;
any remaining assets go to pay ordinary debts, e.g. utilities bills.

Under the ADMINISTRATION OF ESTATES ACT 1925, gifts under a will where the estate is insolvent cease to have effect, i.e. abate, in the following order:

1. any property not disposed of by the will (subject to keeping back a pecuniary fund to meet general or demonstrative legacies);
2. property not specifically devised or bequeathed but included in the residuary estate (subject to keeping back a fund to meet pecuniary legacies);
3. property specifically set aside for the payment of debts; (the will does not state what happens to the surplus)
4. property charged with the payment of debts; (the will states what happens to the surplus)
5. pecuniary legacy fund ;
6. specific property;

You should be able to see from this that liabilities are first met from the residue. Beneficiaries higher on the list are more likely to lose their ‘gifts’ than those lower down on the list. No distinction is drawn between real or personal property.

REVOCATION OF A WILL

The testator always has the ability to revoke a will before his death, provided he is of sound mind. It is usual for a will to start with a declaration that this will revokes all previous wills made by the testator – the revocation clause. It is for the person who alleges that the will is revoked to prove it.

Wills can be revoked by:

a declaration in a later will or codicil;
marriage or re–marriage and divorce of the testator;
destruction;
a properly executed declaration by the testator.

MARRIAGE: under s18 WILLS ACT 1837, amended by the LAW OF PROPERTY ACT 1925, the general rule is that a will is revoked by a later marriage, unless it can be shown that the will was made in contemplation of [that] marriage: s177 LAW OF PROPERTY ACT 1925. The marriage must be a valid marriage to have the effect of revoking the will. A general intention expressed in the will would be insufficient to save the will.

SALLIS v JONES [1936] – the testator stated that “this will is made in contemplation of marriage”. This was insufficient to save the will from revocation by a later marriage.

contrast

PILOT v GAINFORT [1931] – a testator who was, at the time he made the will, living with the woman later to be his wife, made a will in which he gave to “Diane Featherstone Pilot my wife all my worldly goods”. The will was valid because it was made expressly in contemplation of the testator’s subsequent marriage.

Previously, the position was that when the testator’s marriage ended in divorce or nullity, gifts in the will to the former spouse would ‘lapse’. The will also took effect as if the appointment of the former spouse as an executor and trustee of the will were omitted. This provision was made in s18A (1) of the WILLS ACT 1837 which was an addition provided for by the ADMINISTRATION OF JUSTICE ACT 1982.

Section 18A (1) also provided that these effects would not take place if a contrary intention expressly appeared in the will. However, problems arose in relation to the use of the word ‘lapse’ when applied to gifts made to the former spouse. This meant that the gift failed and fell into the residue. If the will provided for a GIFT OVER in the event of the spouse failing to survive the testator, the gift over would not take effect.

RE SINCLAIR [1985] – the will left property to the testator’s wife with a proviso that if she failed to survive him by one month, it was to pass to the Imperial Cancer Research Fund. It was held that on the death of the testator following his divorce, the gift to the Imperial Cancer Research Fund failed and the property passed as on his intestacy.

This is now radically altered by s3 of the LAW REFORM (SUCCESSION) ACT 1995 which amends s18A (1) so that in relation to a will made by a person DYING on or after 1st January 1996, any property, or an interest in property, which is devised or bequeathed to the former spouse will pass as if the former spouse had died on the date on which the marriage was dissolved or annulled. This means that only the former spouse, and not any other beneficiary, will be deprived of the benefit. There is a similar provision regarding the appointment of a spouse as an executor or trustee.

JUDICIAL SEPARATION

WILL: a decree of judicial separation has no effect on a will and the spouse can take any benefit from it.

INTESTACY: when a decree of judicial separation is in force, the surviving spouse is treated as if he/she were already dead and will take no beneficial interest from the intestacy: s18(2) MATRIMONIAL CAUSES ACT 1973. The testator can (if he or she so wishes) make a gift to a former spouse in a new will, once the relationship has ended.


DESTRUCTION: the testator destroys the will or directs someone else to destroy the will; the testator must intend that the will is destroyed.

Destruction is defined in the s19 WILLS ACT 1837:

“... burning, tearing or otherwise destroying” the will.

CHEESE v LOVEJOY [1777] – the testator made his will and executed several codicils to it and then, several years later, drew a line across each page and wrote on the back ‘revoked’. He called in his maid and told her that he had revoked his will; he then threw the crumpled papers into a wastepaper basket. The maid retrieved the papers. The court held that the testator’s acts were not sufficient to revoke his will!

Destruction of the will must be by the testator or by someone who has the testator’s authority to act, but the DESTRUCTION MUST BE IN THE TESTATOR’S PRESENCE:

RE KREMER [1965] – a telephone call to a solicitor instructed the solicitor to destroy the will and gave instructions for a new will. The will was not revoked because the destruction was not in the testator’s presence

ANOTHER WILL: a will drawn up by a solicitor will generally always include an express revocation clause. The clause can revoke the whole of a previous will, or only part of a previous will:

WRITTEN DECLARATION: a will may also be revoked by executing a written declaration to that effect: s20 WILLS ACT 1837.

RE SPRAKLANS [1938] – the testator wrote a letter to her bank manager, who had her will in his possession, requiring him to “destroy the will already made out”.

COMPARE

RE KREMER [1965] – mentioned earlier, the instruction to destroy the will was verbal only.
ADMINISTRATION OF THE DECEASED’S PROPERTY

The deceased’s estate is administered in accordance with the rules contained in the ADMINISTRATION OF ESTATES ACT 1925. Individuals who have the responsibility for administering the estate are called PERSONAL REPRESENTATIVES. Their duties are:

collection of the deceased’s assets
payment of creditors in full
distribution of testamentary gifts in accordance with the will, or,
if there is no will, in accordance with the rules of intestacy.

Personal representatives are in a position similar to that of trustees, in that they control the deceased’s assets and must act in accordance with any valid instructions left by the deceased and with statutory rules. They do not have the title to the assets in their names. They incur no personal liability when administering the estate, so long as they act in accordance with their statutory powers.

WILL = executor
INTESTACY = administrators

APPLYING FOR THE GRANT

Whether for probate or letters of administration, it will be necessary for him to submit an OATH, contained in an affidavit sworn/affirmed by him. It includes the following information:

DEATH OF THE DECEASED. Swears to the death of the deceased, stating the date of death if known.

DOMICILE AT DEATH. The oath states where the deceased died domiciled and this is noted in the grant.

WILL OR INTESTACY. Swears that “the paper writing now produced to and marked by me to contain the true and original last will and testament” of the deceased (on an application for probate or administration with the will annexed ), or that the deceased died intestate (on an application for simple administration).

TITLE OF APPLICANT FOR GRANT. The applicant shows his title to the grant for which he is applying, e.g. that he is the sole executor of the will (on an application for probate), the residuary legatee and devisee named in the will (on an application for administration with the will annexed ), or the surviving spouse or eldest child and one of the persons entitled to share in the estate (on an application for simple administration). On any application for administration, the oath must state in what manner all persons having a prior right to the grant have been ‘cleared off’.

SETTLED LAND. Whether, to the best of the applicant’s knowledge, information and belief, there was land vested in the deceased which was vested previous to his death and not by his will and which remained settled land notwithstanding his death.

DUTIES OF THE PERSONAL REPRESENTATIVES. A statement as to the duties of the personal representative, which are to collect in and administer the estate according to law and to provide a full inventory of the estate and render an account of the administration of the estate to the court. The applicant swears that he will carry out these duties as set out in the oath.

VALUE OF THE ESTATE. The gross value and net value of the estate passing under the grant to the best of his knowledge, information and belief.

Normally on an application for probate or administration with will annexed, the applicant lodges the original will in the registry, where a photocopy of it is made and annexed to the grant. If the original will is not available a duly authorised copy of the will may be admitted to proof. However, even if there is a will the registrar may require further proof as to its authenticity or validity. He may require either evidence of due execution or evidence as to its plight and condition which matters are contained in Rules 12 to 15 of the NON–CONTENTIOUS PROBATE RULES 1987 (NON–CONTENTIOUS PROBATE RULES).

DUE EXECUTION. A properly drawn up attestation clause raises a presumption that the will was duly executed. If the will contains no attestation clause or the clause is insufficient, or if it appears to the registrar that there is some doubt about the due execution of the will, he must, under Rule 12 require an affidavit as to its due execution before admitting the will to probate in common form. For instance:

the signature of the testator appears after the signatures of the witnesses, or
the signatures of the witnesses seem to have been added at different times,

the registrar may consider that there is some doubt about the execution of the will despite the presence of an attestation clause. The affidavit of due execution must then be sought from one or more of the attesting witnesses, or if not available, from someone else present when the will was executed. If none of those persons can be traced, or they are dead, the registrar may then accept evidence on affidavit from other persons to show that the signature on the will is that of the deceased, or any other matter which may raise a presumption in favour of due execution.

If a will appears to have been signed by a blind or illiterate testator, or by another person at the testator’s direction, or for any other reason gives rise to doubt as to the testator having had knowledge of the contents of the will at the time of its execution, then the registrar must satisfy himself that the testator had such knowledge before admitting the will to proof and may, under Rule 13 require affidavit evidence for this purpose.

PLIGHT AND CONDITION. By Rule 14 where there is any “obliteration, interlineation or other alteration” which has not been validated by the testator and the witnesses by proper attestation, then the registrar will require evidence to sh 7 7465ow that the amendments were present at the time the will was executed. There is a rebuttable presumption that an unattested alteration was made after the execution of the will.

If there are any marks on the will, e.g. pin or staple holes, then the reasons for these marks must be explained to the registrar: for example, is there a missing document and if so what is it and where is it?

Under Rule 15 any appearance of attempted revocation of a will by burning, tearing or otherwise must be accounted for to the registrar’s satisfaction. For example, was the will torn up by mistake or was it singed in an accidental fire?

Such affidavits of plight and condition will usually be required from the person finding the will or having knowledge of the reason for the state of the will.

Tuesday 20 March 2007

Tody we finished our look at consumer law by looking at consumer credit. The problem with consumer credit is:

Being persuaded by a man you don’t know
To sign an agreement you haven’t read
To buy something that you don’t want
With money that you haven’t got!

There are many ways to obtain credit, e.g. overdraft, loan, in-store credit cards, bank credit cards or one of the following:

HIRE PURCHASE - a contract of hire which gives the hirer an option to buy the goods at the end of the hire period. This is one way of buying a car, but not all deals involving car are HP.

Whilst the ‘hire period’ is in force the repayments plus interest are made. The hirer cannot sell the goods by right until all of the instalments have been paid. So a third party will not receive good title unless it is sold to an innocent private purchaser (not a trade buyer).

CREDIT SALE - A contract for the sale of goods which simply means that in return for the price the seller promises to transfer to the buyer the property in the goods. The buyer will be entitled to take delivery immediately. The ownership will usually transfer to the buyer at or before the time that he takes the delivery. So if the buyer sells the goods he has good title to pass to the seller.

CONDITIONAL SALE - A contract for sale of goods where the buyer takes possession immediately, but property in those goods does not pass until a condition has been fulfilled. The condition is usually that the buyer pays all of the instalments. So, ownership remains with the seller whilst the buyer has possession. A good title cannot be obtained if the goods are sold prior to this date, except under the rule of the HP Act concerning motor vehicle sales to private individuals.

THE CONSUMER CREDIT ACT 1974

Most consumer credit agreements now come within this Act, designed to provide reasonable protection for consumers. This is achieved in several ways:

§ Regulating the formation, terms and enforcement of credit agreements
§ Anyone engaged in the consumer credit business must be licensed
§ An advertisement for credit must show its true cost
§ Restrictions on door-to-door selling on credit, i.e. salesmen selling double glazing must be licensed in respect of the credit offered
§ Creates criminal offences, e.g. trading without a licence
§ It makes it impossible to contract out of the provisions of the Act

The Act applies to ‘consumer credit agreements’, defined by s8 as:

“credit agreements made between an individual[1] (the ‘debtor’) and any other person (the ‘creditor’) by which the creditor provides the debtor with credit not exceeding £25,000.” During the next two years the higher figure will be abolished.

Credit agreements include:

§ Hire Purchase agreements
§ Conditional Sale agreements
§ Credit Sale agreements
§ Credit Card agreements
§ Loan agreements
§ Bank Overdraft agreements

They are all called ‘regulated agreements’ and must comply with the provisions of the Act and regulations made under it. Not included are hire agreements where the hirer never becomes the owner (TV rental).

The Formation of a Regulated Agreement

It must be IN WRITING, often using a standard form provided by the creditor.

There are pre-contractual disclosure requirements that must be complied with to ensure that the borrower is aware of the nature and full cost of the transaction, he being provided with a copy of the final written agreement. These include information on:

§ Total charge for credit
§ The APR
§ Cash sale price

A full detailed written agreement covering all the terms of the agreement.

Signature of the agreement by the debtor and creditor should only take place when the agreement has been fully completed.

Debtor must receive a copy of the agreement.

A failure to comply means that the creditor cannot enforce the agreement without an enforcement order from the court - usually the County Court.

Extortionate Terms

Barcabe v Edwards [1983] – a loan with an APR of 319% was prima facie extortionate. The court re-opened the agreement and substituted a flat interest rate of 40% - an equivalent APR of 92%!

A Ketley Ltd v Scott [1981] – a bridging loan with an PAR of 57.35% was not extortionate, taking into account the high degree of risk taken by the lender.
Cancellation

High pressure sales patter convinces you to sign something which you know that you shouldn’t. So a door-to-door double glazing salesman at your home, or an agreement that you signed in the Gracechurch Centre following ‘oral representations’ is covered by this. To exercise a right to cancel the debtor must send a written notice to this effect to the creditor within five days of receiving his copy of the agreement completed by the creditor.

The effect is that the transaction is without effect and the debtor is entitled to a return of any deposit or goods traded in part-exchange. In return the debtor must return the goods or make them available for collection. It is applicable to sums over £35.

The consumer protection is roughly the same, with a seven-day cooling-off period. It was enacted following a EU Directive on doorstep selling. Further, the TIMESHARE ACT 1992 provides for a fourteen day cooling-off period for those who sign agreement to purchase timeshares, where one of the parties to the contract is located in the United Kingdom.

Liability of the Creditor

In an HP agreement it is the creditor (usually a finance house) and not the dealer (e.g. car dealership) who will be liable if there is a breach of any of the conditions and warranties implied by the SUPPLY OF GOODS (IMPLIED TERMS) ACT 1973. Attempts to exclude liability for such breaches are void.

Joint Liability in Consumer Credit

In credit sales and conditional sales, liability for breach of contract and misrepresentation is shared between the finance house and the dealer, provided that they have a business link (e.g. A shop accepting Visa cards). The liability applies only to amounts between £100 and £30,000.

Termination of Regulated Consumer Credit Agreements

If a debtor is in breach of the agreement (e.g. fails to pay instalments), then the creditor may wish to terminate the agreement. To do this, under s87 of the 1974 Act, he must first serve a default notice setting out:

§ Amount required to bring payments up to date
§ Time by which payments must be made (minimum 7 days, shortly to become 14 days)
§ The consequence of failure to comply with the notice
§ The provision of the agreement under which the agreement can be terminated
§ The fact that if the breach is remedied the agreement will not be terminated

If the notice is not complied with the creditor can exercise his right to terminate the agreement, with the following consequences:

The creditor may be able to recover possession of the goods, unless it is an HP agreement and the debtor has already paid one third of the total price of the goods. They then become ‘protected’ and a court order is needed. Failure to comply by the creditor is severe:

Recovery of Goods By the Creditor

If an agreement is terminated the creditor is entitled to recover possession of the goods. However:

The creditor cannot, without the permission of the debtor, or an order from the court, enter premises to repossess the property.

If the goods are ‘protected’ then, unless the debtor is prepared to hand them over, a court order is again necessary to repossess them. They are protected when one third of the payments due has been made.

The court can always, when considering a possession order, make a ‘time order’ giving the debtor more time to pay by extending the life of the agreement

The Powers of the Court

The court may make the following orders:

§ TIME ORDER - giving debtor extra time to pay
§ RETURN ORDER - orders debtor to return the goods to the creditor
§ TRANSFER ORDER - allows debtor to return part of the goods and allowing him to keep the other part.

Debtor’s Right of Termination

Section 99 gives a debtor under a regulated hire purchase or conditional sale agreement a statutory right of termination. He should give notice, in writing, of his intention to terminate, usually to the creditor. When he exercises the right he has to return the goods which are not protected. He must also pay:

§ Any loss caused by his failure to take reasonable care of the goods; plus
§ All arrears due; plus
§ A sum sufficient to bring payments up to half the total price.

You should be able to see that this is not a good deal for a debtor. He would be better off agreeing to reschedule his payments.

I later handed out a copy of the will of the late Donald Campbell, which she shall use whilst studying wills and probate. This will begin next week.

Tuesday 13 March 2007

Due to dwindling numbers last week, I began again with CONSUMER PROTECTION LAW.

The law reflects the balance between competing interests, and consumer protection law is no different:

Freedom of contract v right of tradesmen to get the best deal that they can with consumers.
Protection of the ill-informed public v unscrupulous traders.

Certain transactions are entered into by consumers every day – at the newsagents, the supermarket, the restaurant. All enter into contracts for the sale and supply of goods or services, with the basis of the contract being the exchange of cash for the goods/service.

We have all been there, we want the goods but don’t have the cash! Hire purchase and other forms of credit have evolved to meet the need and are an important feature of many consumer transactions. Cars, furniture, carpets etc., are often financed by other than the consumer.

You should probably have heard the phrase “caveat emptor” - let the buyer beware - but nowadays it is less true than ever. Several statutes have been passed over the years to regulate transactions. This is so not only by implying terms into consumer contracts, but also protecting consumers in a more general way, mainly in criminal penalties, e.g. TRADE DESCRIPTIONS ACT 1968, WEIGHTS and MEASURES ACT 1985, FOOD SAFETY ACT 1990 and so on. THE CONSUMER PROTECTION ACT 1987 was introduced as a result of a European Directive.

CONTRACTS FOR THE SALE OF GOODS. Every contract for the sale of goods , be it a packet of crisps or a Rolls Royce, is governed by the SALE OF GOODS ACT 1979.

Section 2(1) defines a contract for the sale of goods as:

“.... a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.”

CONDITIONS are important contractual terms and a breach may well allow the injured party to treat the contract as ended. The goods are returned to the seller, the buyer gets his money back. A buys two tons of Group 1 coal from B, but coke is delivered. This will be a breach of an express term concerning the description of the fuel, and an implied term of the 1979 Act – the goods will fit their description.

WARRANTIES are less important contractual terms which lead to damages but not discharge from the contract.

A retailer may attempt in the contract to exclude liability for breach of conditions and warranties, express or implied. This would cause hardship to a consumer who may have no choice but to accept such an exclusion if he wants to buy the goods. Protection at common law and statute steps in to help him by preventing a seller from including unfair consumer clauses in a contract.

In addition to this, and other restrictions upon exclusion provided by the courts, the statutory blanket from exclusion is provided by the UNFAIR CONTRACT TERMS ACT 1977:

s6: where the buyer is dealing as a consumer the seller cannot simply exclude liability for breach of most of the terms implied into contracts by statutes such as the SALE OF GOODS ACT 1979.

The UNFAIR TERMS IN CONSUMER CONTRACT REGULATIONS 1999 control the inclusion of unfair terms into consumer contracts where those terms are not individually negotiated – limitation clauses in standard form contracts usually.

THE SALE OF GOODS ACT 1979

The 1979 Act implies a number of terms into contracts for the sale of goods, dealing mainly with rules governing the parties’ obligations to each other and the transfer of ownership of the goods. Such contracts are usually made without any formal requirement, remember the Daily Telegraph?

We have already considered the definition of a contract of sale from s2, but note:

• A sale - where ownership of the goods passes immediately to the buyer when he tenders the price (which must be money, not barter), as in transactions in shops;
• An agreement to sell - the parties agree that ownership is to pass at some time in the future.

In the main parties to a contract are free to make whatever sort of contract they wish, the obligations are a matter for the parties. Where there are no such express agreements the 1979 Act will imply them, and these terms form the cornerstone of consumer protection law.

Section 12 - The Right To Sell Goods

I cannot sell something which I don’t own, as I cannot pass to you the title to those goods. The parties make a deal whereby the seller will get the buyer’s money, and in return the receives the ownership of (“the property in”) the goods. So the seller must have the right to sell them; s12(1) states that there is:

“An implied CONDITION on the part of the seller that in the case of a sale he has a right to sell the goods, and in the case of an agreement to sell, he will have such a right at the time when the property is to pass.”

So, if the seller has no right to sell the goods, e.g. they are stolen or are on H.P., it is a breach of a condition under the Act. Note that it is okay to arrange to sell you something you don’t yet own, as long as you do own it at the time that it is sold.

The section contains also two WARRANTIES which can be implied into a contract for the sale of goods:

1. The goods are free from third party rights not made known to the buyer before the contract, and
2. The buyer will enjoy quiet possession of the goods.

Niblett v Confectioners Materials Co. Ltd [1921] – ownership of the goods was challenged because of trademark infringements.

Microbeads v Vinhurst Road Markings Ltd [1975] – the challenge was based on an infringement over the patent to the goods.

Section 13: Description

“where there is a contract for the sale of goods by description there is an implied condition that the goods will correspond with that description.”

Apart from pre-contractual descriptions used by a prospective seller, the section applies to goods in catalogues and brochures and descriptions on packaging of articles. So the box which describes the contents as a ‘blue and white striped shirt, size 16” collar’ does not apply to red and pink striped shirt with a 24” collar. Obvious really, but not always so. The description applies to many aspects, e.g. ingredients, age, packaging, quality.

Beale v Taylor [1987] – a “white Herald convertible 1961” was advertised, the buyer later discovered that the back half matched the description, but not the front! A breach of the implied term.

Once the term is found to apply, the duty it imposes is very strict, with a slight deviation amounting to a breach, which will entitle the buyer to reject the goods.

Re Moore and Co. Ltd [1921]– the agreement was for 3,000 tins of fruit packed in cases of thirty tins. The correct number of tins were delivered, but in cases of twenty-four. There was no difference in the market price. Despite the fact that there was no loss, the Court of Appeal held that the goods could be rejected because of the breach.

Section 14: Quality

Terms relating to quality have appeared in statutes since the first SALE OF GOODS ACT 1893, now 1979. This has been amended by the SALE and SUPPLY OF GOODS ACT 1994. Whereas formerly the term “MERCHANTABLE QUALITY” was used, “SATISFACTORY QUALITY” is the replacement term.

Section 1 SSGA 1994 provides:

s14(2) SGA – where goods are sold in the course of business, there is an implied term that the goods are of satisfactory quality;

s14(2a) and (2b) – satisfactory quality is defined as being of a standard that the reasonable person would regard as satisfactory having regard to the description, price and all other circumstances;

s14 (2c) –if anything making the goods unsatisfactory is drawn to the attention of the buyer, or the buyer examines the goods beforehand and the examination revealed/ought to have revealed the defect, then the implied terms of s14 do not apply.
Important points to note are:

The terms in s14 apply only to sales ‘IN THE COURSE OF BUSINESS’, and so do not protect a buyer answering a small ad in a newspaper.

Liability for quality under s14 is strict. Thus, if the dispute is over quality, an argument by the seller that he took all reasonable care will fail.

Frost v Aylesbury Dairy [1905] – the dairy had supplied the claimant and his family with milk infected by typhoid germs. The claimant’s wife died as a result. It was proved that the production methods at the dairy were most careful and that the typhoid germs could only be detected by prolonged and detailed investigation. As the milk must be fit for human consumption any other arguments were irrelevant.

The terms as to satisfactory quality and fitness for purpose are conditions and, therefore, if breached the innocent party may reject the goods.

The terms apply to the “goods supplied under the contract of sale”, and so packaging, instructions and anything accidentally supplied with the goods are also included.

Wormell v RHM Agricultural (East) Ltd [1987] - incorrect instructions on weedkiller made it completely ineffective.

Wilson v Rickett Cockerell and Co. Ltd [1954] - coal contained a detonator which exploded and injured the buyer.

Satisfactory Quality

This replaces “merchantable quality” as it was considered unsuitable in relation to consumer contracts, and not easily understood by the ordinary private buyer. The courts, however, still hark back to the older cases for decisions. Bear that in mind whilst we look at the new law, s1 SALE and SUPPLY OF GOODS ACT 1994 which states:

ss(2) - where the seller SELLS GOODS IN THE COURSE OF BUSINESS, there is an implied term that the goods supplied under the contract are of SATISFACTORY QUALITY.

(2a) - goods are of satisfactory quality if they meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.

(2b) - the quality of the goods include their state and condition and the following (among others) are in appropriate cases aspects of the quality of the goods:

fitness for all the purposes for which goods of this kind in question are commonly supplied,
appearance and finish,
freedom from minor defects,
safety, and
durability

(2c) The term implied by ss (2) does not extend to any matter making the quality of the goods unsatisfactory:

a) which is specifically drawn to the buyer’s attention before the contract is made,
b) where the buyer examines the goods before the contract is made, which the examination ought to reveal,
or
c) in the case of a contract for sale by sample, which would have been apparent on a reasonable examination of the sample.

So the term ‘satisfactory quality’ requires that the goods meet the standard that a reasonable person would regard as satisfactory. In that way a brand new item would be of a more satisfactory quality than a second hand version of the same item.

s14(2a) clearly states where the standard of satisfactory quality may be judged.

The goods must be fit for ALL the purposes for which the goods in question are commonly supplied. No problem where there is but one use, kettles, computers, washing machines. If the goods have more than one purpose the law is now much improved. Previously the goods would be merchantable if they fit for some of the purposes for which they were commonly bought, even if they did not fit the purposes of the buyer.

s14(2a) - mentions appearance, finish and freedom from minor defects. The first two will again be dependent upon new or second hand goods, whilst minor defects now affects matters more favourably for the buyer. Under the previous law the courts were reluctant to find that goods were not of merchantable quality after minor repairs had been made.

Thus, durability cannot be applied to perishable or fragile goods, but it does mean that the courts will consider it as a factor when considering other household goods, especially those that stop working within a few weeks of purchase.

s14(2c) - two situations where the goods will not be found unsatisfactory:

1. where the defects are drawn to the buyer’s attention (similar to the old law).
2. where the buyer examines the goods before the contract is made, and therefore the seller will not be liable for defects which that examination ought to reveal.

It does not require the buyer to examine the goods, it just lays out what will occur if he does. Neither does it cover latent defects which could not have been found by such an examination.

s14(3): Fitness For the Purpose

“Where the seller sells goods in the course of business and the buyer, expressly or by implication, makes known .. to the seller... any particular purpose for which the goods are being bought, there is an implied condition that the goods supplied are reasonably fit for the purpose, whether or not that is a purpose for which such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it is unreasonable for him to rely, on the skill or judgement of the seller.”

Three reminders here:

This term is a CONDITION and therefore the buyer may reject
It is a condition that applies only in a contract conducted in the course of business
The condition applies to all the goods supplied, including wrappings, instructions and foreign bodies

Grant v Australian Knitting Mills Ltd [1938] – defective men’s underpants.

Particular Characteristics of the Buyer

If the goods are generally fit for the purpose, but the buyer is particularly sensitive to those goods, which he does not discuss beforehand with the seller, then the goods will be fit for the purpose and the seller will not be liable for the damage caused.

Griffiths v Peter Conway Ltd [1939] – the claimant bought a new tweed coat from the defendant. He developed a skin rash and so she sued the defendant for a breach of what is now s14(3). As the garment was fit for the purpose for normal wear and the claimant had not made known to the defendant that she had a sensitive skin she could not succeed. Had the matter been discussed beforehand and the claimant had asked the defendant to recommend a coat suitable for sensitive skin, the defendant would have been liable for any consequential damage.

s15 Sale By Sample

If goods are sold by sample there are three implied CONDITIONS:

1. The bulk will correspond with the sample in quality
2. The buyer will have a reasonable opportunity of comparing the bulk with the sample
3. The goods will be free from any defect rendering them unmerchantable which would not be apparent on a reasonable examination of the sample.

Clearly, the section applies to wallpaper, carpets, curtain or suit material which are ordered from pattern books.

Godley v Perry [1960] – a boy was injured by a defective catapult, losing an eye, when he used the catapult which had been bought from a local shop. On pulling the elastic the plastic fork had broken. It was one of a boxful that the shopkeeper had bought after being shown samples.

The boy had a claim against the retailer for a breach of 14(2) – satisfactory quality – and 14(3) – fitness for purpose.
The retailer had a claim against the wholesaler for a breach of s15 – goods free from defect.
The wholesaler had a similar claim against the importer.

If a condition is breached the CONSUMER has the right to consider the contract at an end. This means returning the goods and receiving a refund plus costs incurred. A NON-CONSUMER can claim only damages where the breach is so slight it would be unreasonable to reject the goods.

Additionally, the SALE AND SUPPLY OF GOODS TO CONSUMER REGULATIONS 2002 entitles the consumer to a repair or replacement, a reduction in price or a refund, if the goods do not conform to the contract at the time of delivery. Goods becoming faulty within six months are presumed not to conform to the contract at the time of delivery.

Clegg v Olle Anderson [2003] – there is no obligation on the consumer to act reasonably in choosing rejection over one of the other remedies (Court of Appeal).

A consumer loses his right to reject once he has accepted the goods. He may still seek damages, but not a complete refund. Acceptance may be by words or action, but by virtue of the SALE AND SUPPLY OF GOODS TO CONSUMER REGULATIONS 2002 six months is the apparent benchmark.

PROVISION OF SERVICES

The SALE and SUPPLY OF GOODS ACT 1994 amended the SUPPLY OF GOODS and SERVICES ACT 1982, implying a further set of terms. They apply where a supplier has agreed to carry out a service.

The terms are implied into contracts not only where there is a simple supply of services, but also to the sale or hire of goods where the seller undertakes to provide a service in addition, e.g. installation of a TV satellite system. The terms are:

s13 – in a contract for the supply of a service by a supplier acting in the course of a business, there is an implied term that the supplier will carry out the service with ‘reasonable care and skill’.

s14 - Where, under a contract for the supply of a service by a supplier acting in the course of a business, the TIME for the service to be carried out is not fixed by the contract but is left to be fixed in a manner agreed by the contract, or determined by the course of dealing between the parties, there is an implied term that the supplier will carry out the service within a REASONABLE TIME. This is a question of fact.

The 1994 Act amended the SUPPLY OF GOODS (IMPLIED TERMS) ACT 1973, extending protection to customers acquiring goods on hire purchase. Thus, a hire purchase contract has the following implied terms:

s15 - Where under a contract for the supply of a service, the consideration for the service is not determined either by the contract, or is not left to be determined in a manner agreed by the contract, or determined by the course of dealing between the parties. There is an implied term that the party contacting with the supplier will pay a reasonable charge; a matter of fact.

TRANSFER OF OWNERSHIP

The general rule comes from s17 SALE OF GOODS ACT 1979:

“Ownership passes when the parties intend it to pass, even though the time for payment may be postponed.”

When it comes to the sale of goods, the goods can be classified as ‘UNASCERTAINED’ or ‘SPECIFIC’. This distinction is vital as different rules apply as to when the property passes from the seller to the buyer.

Usually, when the property passes, the risk passes also. So insuring the goods becomes important. No problem until the goods become damaged or lost.

s16 – Property in unascertained goods does not pass until the goods are ascertained. Go to a warehouse and order two dozen cases of Moet and Chandon champagne ready for a wedding, the goods will not be ascertained until they are separated from the rest of the same cases and loaded for you.

Problems arise in unascertained goods for buyers who had paid for the goods and received documents of title. If the seller becomes insolvent while the goods are still unascertained they were retained for the benefit of all the creditors, with the buyer becoming just another unsecured creditor. This was addressed following a Law Commission report and enacted in the SALES OF GOODS (AMENDMENT) ACT 1995. If the unascertained goods form part of an IDENTIFIABLE BULK, and the buyer pays for the goods, property in those goods passes at the time of payment - not when the goods are actually ascertained.

s18 SALE OF GOODS ACT provides five rules to assist in determining when the parties intend property to pass:

RULE 1 – Where there is an unconditional contract for the sale of specific goods in a DELIVERABLE STATE the property passes to the buyer when the contract is made.

RULE 2 - Where there is a contract for the sale of specific goods NOT IN A DELIVERABLE STATE (i.e. The seller has to do something to the goods to put them in a deliverable state), the property does not pass until that thing is done and the buyer has notice of it. Apples still growing on trees have to be picked and packed, for instance.

RULE 3 - Where, in a contract for the sale of specific goods in a deliverable state, the seller is bound to weigh, measure, test or do something with reference to the goods for the purpose of ascertaining the price, the property does not pass until that thing is done and the buyer has notice of it.

RULE 4 - When goods are delivered to the buyer on approval or on sale or return, the property therein passes to the buyer:

1 When he signifies his approval or acceptance to the seller or does any other act adopting the transaction, or

2 If he retains the goods without giving notice of rejection beyond the time fixed for the return of the goods, or if no time is fixed, beyond a reasonable time.

RULE 5 - Applies to unascertained goods. The property in unascertained or future goods sold by description passes to the buyer when goods of that description and in a deliverable state are unconditionally appropriated to the contract either by the seller with the assent of the buyer or by the buyer with the assent of the seller.

Federspiel v Charles Twigg [1957] – the claimant had bought from the defendant 85 bicycles in a contract provided that the defendants ship them in June 1953. The purchase price was paid in advance. Receivers were appointed in July 1953, with all the assets (including the bicycles) becoming charged to the receiver. The claimants alleged that as the bicycles had been packed into cases marked with their name the property had passed to them. As there was no appropriation within rule 5 the action must fail.

To protect their possession sellers now include in their standard form contracts ‘Romalpa Clauses’. This allows the seller to trace goods and reclaim the proceeds of the sale.

Aluminium Industries BV v Romalpa Aluminium Ltd [1976] – the claimant supplied aluminium foil to the defendants. The contract provided that ownership would pass only when the purchase price was paid. If the foil was processed into other items the claimants would have ownership of such items until the foil was paid for. Moreover, if the processed items were sold on, the claimant would be able to call on the proceeds of sale. The Court of Appeal accepted the validity of the clause and recognised that, where the manufacturer in such circumstances became bankrupt, the effect would be to give the supplier a priority claim to that of secured creditors of the company.

SALE BY SOMEONE NOT THE TRUE OWNER

A seller with no title to goods cannot pass ownership in them. If the rule is strictly applied it can prove onerous for a buyer who may purchase goods in good faith yet, because the seller had no title to pass, be in a position of losing the goods as well as the sale price. To mitigate this a number of rules have been developed whereby an innocent purchaser can get good title, enforceable ‘against the world’, from a seller who has no title. The exceptions are:

ESTOPPEL - s21 SALE OF GOODS ACT 1979. The owner allows someone else to hold themselves out as the true owner and so be able to give good title. EXAMPLE: I collude with you to sell my washing machine to X, I reclaim it from X on the grounds that you had stolen it. We split the cash, and I now have my washing machine back.

AGENCY - s21(2) SALE OF GOODS ACT 1979. The seller appoints someone to sell the goods on his behalf, as his agent.

MOTOR VEHICLES ON HP - Part III HIRE PURCHASE ACT 1964, now contained in a schedule to the CONSUMER CREDIT ACT 1974. There are special rules relating to motor vehicles bought on HP.

Dodds v Yorkshire Bank Ltd [1992] – a vehicle sold by a hirer to a buyer who is a private individual will get a good title.

Traders don’t get this benefit, they can check easily with HPI.

Ss 24-25 SALE OF GOODS ACT 1979 - Where the seller retains possession of the goods, and then disposes of them to a third party. That third party obtains good title. Conversely, where a buyer obtains possession of goods before paying for them, a disposal to a third party gives that third party good title.

SALE UNDER A VOIDABLE TITLE - s23 SALE OF GOODS ACT 1979. The seller’s title is voidable, but has not been avoided at the time that the sale to the buyer is concluded, the buyer gets good title: Lewis v Averay [1972] and Shogun Finance v Hudson [2002].

CONSUMER PROTECTION (DISTANCE SELLING) REGULATIONS 2000
Applies only to deals conducted by means of distance communications, e.g. Internet, mail-order catalogues. The aim is to provide a “cooling-off” period.

REG 7 – supplier must provide certain information, including characteristics of goods/service, price and right to cancel.

REG 8 – must be confirmed in writing. Right to cancel is seven days, from the day after the goods are received. Period is extended if the information regarding cancellation is sent late, or not at all. For services, period begins the day after contract is concluded, for seven days.

If consumer exercises his rights he must be reimbursed, and any credit agreement is ended. If goods have been provided he must keep them safe for collection by the vendor.

THE RIGHT EXISTS WHETHER OR NOT THE GOODS ARE FAULTY.

We will start with buying goods on credit next time.

Tuesday 6 March 2007

Our last vitiating factor is that of VAGUENESS. If people are going to enter into contracts with one another, they must be clear about what they are contracting for. The courts will not enforce a vague or ambiguous contract.

Scammel v Ouston [1941] – the parties had agreed to the supply of a lorry on ‘hire purchase terms’. In the absence of any other evidence of the higher purchase terms (duration, number of instalments, etc.) the term was too vague to be enforceable.

The courts, however, want to uphold a bargain where they can, and so if they feel able to clarify a point they will.

Hillas v Arcos [1932] – the contract was to supply timber ‘of fair specification’. Now that is certainly vague, but the courts found that the parties knew each other and had dealt with each other in the past, both knew the timber trade well. As there had already been part performance the phrase ‘fair specification’ must be capable of being given a reason by reference to the previous dealings.

If you were an unscrupulous trader you could try to avoid a contract which was going wrong on you by trying to insert some meaningless term which you could later hope the court would interpret as being too vague and bringing the contract to an end. This appears to be the case in:

Nicolene v Simmons [1953] – the contract contained the statement “we are in agreement that the usual conditions of acceptance apply”. There were no usual conditions of acceptance, but the defendant tried to use the phrase as evidence that the phrase was too vague and the contract was, therefore, unenforceable when he was sued for non-delivery of a quantity of steel bars. The phrase can be severed from the contract and what was left made sense. Thus the court can ignore it.

THE DISCHARGE OF A CONTRACT. Contracts do not go on forever, there must come a time when the parties have no further obligations. There are five main ways:

(1) Performance
(2) Agreement
(3) Accord and satisfaction
(4) Breach
(5) Frustration

PERFORMANCE. The most straightforward. “Here is the money - here is the newspaper”. It’s over, the contract has been performed by both parties undertaking what they contracted to do. The problem arises where:

One party has not performed his part of the bargain, or
He has tendered performance late and time was of the essence in the deal (supply ticket to a concert the day after the performance), or
He has only partially performed his obligations

The general rule is – “PART PERFORMANCE IS NO PERFORMANCE AT ALL”. To discharge a contract you must do all that you contracted to do. It may be harsh, but you should think carefully before entering into the contract ...

Cutter v Powell [1795] – the defendant agreed to pay Cutter thirty guineas provided that he served as second mate on a voyage from Jamaica to Liverpool. The voyage set off on 2/8 and Cutter died on 20/9, nineteen days short of Liverpool. His widow brought an action to recover a proportion of the thirty guineas. The contract was an ‘entire’ contract for a lump sum, with nothing payable until completion. He had not fulfilled his part of the bargain, so no payment was due.

If we left it at that it may seem very harsh on the widow Cutter indeed. However, that thirty guineas was about four times the going rate for the job it may not appear so harsh. Cutter was willing to gamble a weekly sum for the chance of a much greater prize and he lost.

Bolton v Mahadeva [1972] –the case makes two important points. The claimant agreed to install a central heating system for the defendant, for a lump sum of £560. He also agreed to supply a bathroom suite. On completion of the central heating installation it was inefficient, and cost of repairs was £174. The Court of Appeal held that the claimant had not substantially performed and was not entitled to payment in relation to the heating. The supply of the bathroom suite, however, was severable and an appropriate proportion of the contract price was recoverable in relation to this obligation.

The courts have brought in exceptions to mitigate the situations.

SUBSTANTIAL PERFORMANCE – where performance is nearly complete some payment is made to match the extent of the performance on a basis called quantum meruit (as much as he has earned).

Hoenig v Isaacs [1952] – there were found to be defects (repairable at a cost of £55) in work done in redecorating a flat. The total contract price was £750. There was substantial performance and the claimant could recover the contract price less the cost of repair.

SEVERABLE CONTRACTS –discussed in Bolton v Mahadeva [1972] (above). If a contract can be seen as a collection of smaller ones, e.g. instalment deliveries, then payment can be claimed for those actually delivered.

PREVENTING PERFORMANCE – one of the parties prevents the other from fulfilling his obligations, payment can be awarded up until that time. Contract with a decorator for the lounge to be decorated. He comes on day one and does the gloss work, and you find out he has a conviction for child molesting so you won’t let him in again. You owe him for the day’s work.

Planche v Colburn [1831] – an author was commissioned to write a book, and the contract was cancelled after he had half completed it. He recovered 50% of the contract.

PART PERFORMANCE ACCEPTED – okay, I’ll settle for what you have sent. You have to pay for it. Contract with someone to deliver a load from Dover to Newcastle and the lorry breaks down in Leicester. You agree to send another vehicle to carry on with the load, you will be liable to pay for the Dover to Leicester journey.
AGREEMENT. A contract is formed by an agreement, and so can be discharged in exactly the same way. Both parties agree to bring it to an end. In fact, both parties enter into an agreement not to sue each other for a breach of the contract, and this is a valuable consideration.

ACCORD AND SATISFACTION. A performs his part of the contract, but B has yet to perform his part of the bargain. A may release B from his obligations, but to do so this release must be:

By deed so requiring no consideration in order to be valid, or
With valuable consideration.

In the second instance A receives a benefit for giving up his rights against B. It is this agreement, coupled with valuable consideration, that is said to accord and satisfy, the original obligation becomes discharged.

The accord is the agreement by which the original agreement is discharged, the satisfaction is the consideration which makes the new agreement operative.

The agreement will provide accord and satisfaction if the creditor offers the debtor something different. This is known as the rule in -

Pinnels Case [1602] – Cole owed Pinnel £8/10/6d, due on 11th November. At Pinnel’s request, Cole paid £5/2/2d on 1st October, which Pinnel accepted in full settlement of the debt. We know that part payment in itself was not good consideration, there has to be the something extra, a chattel, or payment at a different place or on a different date. As payment had been made early this was valid consideration and met the requirements of accord and satisfaction.

Foakes v Beer [1884] – confirmed the rule in Pinnels Case. Dr Foakes owed Mrs Beer a sum of money in relation to a judgement debt. She agreed that he could pay off the debt in instalments, and when he had done so she sued for the interest on the debt that had been lost by waiting for the money. Dr Foakes claimed that she had agreed to the instalments and to forgo the interest, but even if that were true it was unenforceable as he had not provided consideration for the promise.

BREACH. The innocent party to a breach is entitled to recover damages. A serious breach also allows for the contract to be discharged as well, leaving him with no further obligations under it.

This would follow from the breach of a CONDITION, but not a WARRANTY.

If a party refuses in advance to keep his side of the contract it will be an ‘anticipatory breach’. The other party may then:

sue immediately – Hochster v De La Tour [1853]
wait until the performance date arrives to see what happens. Can then sue for an actual breach if no performance is made.

The danger in the latter is that the innocent party remains a party to the contract until the breach, a frustrating event means that he would then receive nothing.

FRUSTRATION. A contract, as a result of some event outside the control of the parties, becomes impossible to perform, at least in the way that was originally intended. What are the rights and liabilities of the parties?

The rule is that if you take on a contractual obligation you are bound absolutely.

Paradine v Jane [1647] – the court took the view that obligations were not discharged by a frustrating event, and that a party who failed to perform as a result of such an event would still be in breach of contract. The justification for such a harsh approach is because the parties could, if they had wished, provide for the eventuality within the contract itself.

This rule was considered too strict, even for 19th century courts, with the courts taking the view that it was not for them to interfere to remedy a perceived injustice resulting from a freely negotiated bargain. The modern law comes from the case of:

Taylor v Caldwell [1863] – Caldwell agreed to let a music hall to Taylor to hold concerts there. After the agreement, but before the first performance, the hall was destroyed by fire. The Music Hall having ceased to exist without the fault of either party, both parties are excused, the claimant from taking the premises and paying the money and the defendant from performing the promise to grant the use of the hall.

It was from this decision that the doctrine of frustration developed; where parties to a contract are excused from further performance of their obligations if some event occurs which, without the fault of either party:

makes further performance impossible, or
makes further performance radically different from what was originally undertaken, or
makes further performance illegal.

Condor v The Barron Knights [1966] – the drummer in the group became ill, and was available for only four nights of a seven night engagement. The contract was discharged by frustration.

Krell v Henry [1903] – the claimant hired a room to overlook the route of the Coronation procession. The procession was cancelled, and whilst it was possible to still hire the room and look out of the window the whole purpose of the contract was futile and discharged by frustration.

By contrast, another case involving the cancellation of the Coronation, is:

Herne Bay Steamboat Co v Hutton [1903] – here the contract was that the claimant’s boat should be ‘at the disposal’ of the defendant on the 25th June to take passengers from Herne Bay to watch the naval review, which the King was to conduct, and for a day’s cruise around the fleet. The King’s illness led to the review being cancelled. This contract was not frustrated. The fleet was still there, only the King was missing, and so the tour could still go ahead. The effect on the contract was not sufficiently fundamental to lead to it being regarded as frustrated.

The Super Servant Two [1990] – the defendant agreed to carry the claimant’s drilling rig from Japan to Rotterdam. It was to be delivered between 20/6/81 and 20/8/81, and was to be carried by what the contract described as the ‘transportation unit’. This was either Super Servant One or Super Servant Two. The defendant had intended to use Super Servant Two, but on 29/1/81 it sank. Super Servant One had already been contracted to a third party. The defendant decided not to break the contract with the third party and claimed that the contract to carry the claimant’s drilling rig was frustrated. The claimant alleged that the impossibility of performance arose from the defendant’s own acts, and that they should not, therefore, be discharged from performance. The matter ended up at the Court of Appeal who agreed with the claimant. Even though the defendants were not negligent, nor in breach of contract, in the way that they had allocated the vessels, they were still liable under the contract to the claimant.

Just because it becomes more expensive to perform the contract it will not amount to frustration: Davis v Fareham UDC [1956] – the claimant agrees to build seventy-eight houses in eight months at a fixed price. Bad weather and labour shortages extended this to twenty-two months, and ran £17,000 over budget. Builders claim the contract to be frustrated, court didn’t agree.

Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] – an English company made a contract to supply machinery to a Polish company, and they paid £1,000 on account. Germany invaded Poland, frustrating the contract and the Poles sought their £1,000 back. Since they had received nothing at all under the contract there had been a total failure of consideration, and recovery was therefore possible.

So the law at that time seemed to be in a mess, which is where statutory intervention was to come in. The LAW REFORM (FRUSTRATED CONTRACTS) ACT 1943 provides as follows:

The Fibrosa decision was extended by providing that money PAID BEFORE the frustrating event CAN BE RECOVERED even though the failure of consideration is only partial.
Money DUE but not paid before the frustrating event is not payable.
A party incurring expenses may be awarded them UP TO THE LIMIT OF THE SUMS PAID OR PAYABLE TO HIM ...
A party who has obtained a VALUABLE BENEFIT under the contract may be required to pay a just sum for it.

Gamerco SA v ICM [1995] – “Guns ‘n’ Roses” were booked to appear in a concert in Madrid, but a few days before the concert the venue was banned on safety grounds. The promoters claimed the fee back from the band’s agents, and they in turn counter-claimed for breach of contract. The High Court held that the contract was frustrated, allowing the promoter to recover their money, less “reasonable expenses” incurred by the band’s agent. In fact, the court ordered no expenses to be paid as the claimants had already suffered a considerable loss.

REMEDIES FOR A BREACH OF CONTRACT
The remedies available are:

Damages (the main remedy)
Specific Performance ]
Injunction ] equitable only
Rescission ]

DAMAGES. The basic principle of the award of damages is to put the parties in the position that they would have been had the contract been performed satisfactorily. Thus it is compensation, not punishment.

Victoria Laundry v Newman [1949] – a contract for a laundry boiler was breached because of late delivery. The loss claimed was twofold:

(1) loss of extra business profit and
(2) the loss of certain special Ministry of Supply contracts.

The claimant had not told the boilermakers of these special contracts, but could have foreseen the normal business loss. Asquith LJ said:

“It is well settled that the governing purpose of damage is to put the party whose rights have been violated in the same position, so far as money can do so, as if the rights had been observed... This purpose, if relentlessly pursued, would provide him with a complete indemnity for all loss de facto resulting from a particular breach, however improbable, however unpredictable. This, in contract at least, is recognised as too harsh a rule. Hence, in cases of breach of contract the aggrieved party is entitled to recover such part of the loss actually resulting as was at the time of the contract reasonably foreseeable as liable to result from the breach. What was at the time reasonably foreseeable depends on the knowledge possessed by the parties or, at all events, by the party who commits the breach.”

The rule on remoteness of damages, as this is called, came from the case of:

Hadley v Baxendale [1854] – a replacement crankshaft for a mill was very late in being delivered. No damages were recoverable because the carriers were unaware that no spar shaft was kept, or that the mill was at a standstill.

A claimant is always expected to mitigate his loss. So if you cancel a hotel booking the hotel should try to re-let the room, even at a discount if necessary. You will be liable for the difference. The hotel loss would be the ordinary, reasonably foreseeable, loss. Any extra loss could only be claimed if you were made aware of it at the time that the contract was formed.

QUANTUM OF DAMAGES. Before an award of damages can be made, you look at remoteness and causation as we have already seen. The main issue relates to the quantum, which simply means being put in the same position he would have enjoyed had the promise been fulfilled.

No loss leads to only nominal damages.

Damages may be recovered for physical injury but not usually for injury to feelings. There is an exception to this, where the provision of enjoyment is a purpose of the contract.

Addis v Gramophone Co. Ltd [1909] – the claimant was wrongfully dismissed by the defendants. As well as claiming for his dismissal he claimed for injured feelings. It was held that such damages are not recoverable.

Johnson v Unisys Ltd [2001] the claimant sought damages from his former employer for suffering a nervous breakdown as a result of the manner of his dismissal. Both the High Court and Court of Appeal dismissed the claim on the basis of the Addis decision. The House of Lords also dismissed the claim, but stated that to allow the claim would side-step the statutory scheme for unfair dismissal and its statutory maximum.

Jarvis v Swan Tours [1973] – a package holiday fell below the standard promised, and damages were awarded for the distress and disappointment caused.

SPECIFIC PERFORMANCE. Forces the party in breach to perform what he has agreed to perform. This is only granted where the subject matter of the contract cannot be expressed in monetary terms, e.g. Van Gogh painting, Stradivarius violin. As the law considers all land as unique commodities it is very commonly used as a remedy where contracts for sale of land go wrong.

INJUNCTIONS. These are to stop a breach from occurring, e.g.:

Warner Brothers v Nelson [1937] – a strange decision in some ways, and has been disapproved of in later cases (although not overturned). Bette Davis had been restrained for working in films or theatre companies. The court held that this didn’t mean that she was compelled to work for Warner Brothers because she could have found work in professions other than acting!

RESCISSION. It undoes a contract and puts the parties, as far as it is possible, back to their pre-contractual positions.

QUANTUM MERUIT. The performance is rewarded according to worth - ‘as much as he has earned’.

TIME LIMITS
On a simple contract - six years.
On a deed – twelve years.

Don’t take this long over an equitable remedy: “Delay defeats equity”.
LIQUIDATED DAMAGES CLAUSES. Most arguments do not involve whether or not there has been a breach of the contract, rather how much the breach will cost. This assessment takes a lot of court’s time and is, therefore, expensive for the parties. The way around this is to include ‘liquidated damages’ clauses into the contract to pre-determine the amount payable in the event of a breach. The law requires this to be a fair and genuine assessment of the loss, but if it is not and the amount actually exceeds the loss suffered it is called a penalty and is not enforceable.

Kemble v Farren [1829] where an actor’s contract provided that a party in breach must pay £1,000 in “liquidated damages”. This was held to be a penalty clause, as the actor’s daily fee was £3.33, out of all proportion to the clause.

If the parties are of equal bargaining power, as is normal in commercial contracts between businesses, then other factors may outweigh a plea that a term is, in reality, a penalty.

Philips Hong Kong Ltd v A. G. of Hong Kong [1993] –unless the parties were on very unequal terms, the desirability of achieving certainty in a commercial contract was paramount. Thus a term normally considered to be a penalty can become a perfectly valid liquidated damage clause.

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.