Contract Law Summary Notes SQE PDF

Summary Notes – is En Contract Law im Solicitors Qualifying Examination – SQE ah br ,I an zk O © QLTS Schoo...

Summary Notes – is En Contract Law im Solicitors Qualifying Examination – SQE ah br ,I an zk O © QLTS School Ltd. All Rights Reserved. Not for Distribution.  Summary Notes – Contract Law 1. Introduction to the Law of Contract Definition – a contract is a legally binding agreement or, quite simply ‘a promise or set of promises which the law will enforce’ Guenter H. Treitel: The Law of Contract (Sweet & Maxwell, 11th ed. 2003). Core Elements of a Contract Agreement (Offer and Acceptance) – involves the court establishing an agreement through the process of offer and acceptance: Offer + Acceptance = Agreement. Formed when one party accepts the offer of another and involves a meeting of the minds. is Intention – the parties must have intended – objectively speaking – their agreement to have En legal consequences. Consideration – each side must promise to give or do something for the other. Other Essential Elements of a Contract im Capacity – the parties must be capable of entering into a legally enforceable contract. Capacity can be limited where, for example, a party is minor or mentally incapacitated. ah Consent – the agreement must have been freely entered into by the parties. Consent may be vitiated by duress, or by undue influence. br Legality – the purpose of the agreement must not be illegal, or contrary to public policy. ,I Form – a contract can be made verbally or in writing. It does not have to be in writing unless it is a contract by deed, or another contract that must be in writing, e.g. a guarantee. an Certainty of terms –the terms of the agreement must be certain to be enforceable. If it is not possible to perfect the contract by ascertaining its true construction on trade practice or course of dealings between parties, the contract is incomplete and unenforceable (Scammell zk and Nephew Ltd v Ouston ). Classification of Contracts O Bilateral contract – a promise by one party is exchanged for a promise by the other. It is enforceable on the basis of the exchanged promises. In a contract for the sale of goods, for example, the buyer promises to pay the price and the seller promises to deliver the goods. Unilateral contract – only one party makes a promise to do something in return for an act by the other party. Acceptance of an offer by an offeree need not be communicated to the offeror in a unilateral contract; performance of the condition to fulfil the promise is taken as acceptance, e.g. offer of a reward. 2 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Enforceability Void contracts – a contract where the whole transaction is regarded as a nullity. It means that at no time has there been a contract between the parties. Voidable contracts – a contract which is voidable operates in every respect as a valid contract unless and until one of the parties takes steps to avoid it. Unenforceable contracts – an unenforceable contract is a valid contract but it cannot be enforced in the courts if one of the parties refuses to carry out its terms. is En im ah br ,I an zk O 3 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law 2. Offer and Acceptance (Agreement) Offer + Acceptance = Agreement (a contract having all the essential elements is valid). Offer A proposal made by the offeror to the offeree subject to terms with a promise to be bound by that proposal if the offeree accepts the proposal. A valid offer of contractual terms may be made in writing, by words or by conduct, but must be complete, operable, and made with the intention that they should be binding on anyone that accepts them. is The majority of offers are negotiated on a ‘promise for a promise’ basis. Thus, an offer to sell a En house involves a promise by the offeror to sell, in return for the offeree’s promise to pay. This is called a bilateral offer. A unilateral offer, by comparison, is made to anyone who performs the conditions. treat is not an offer. Invitation to Treat (ITT) im An offer can be made to an individual, group, or the whole world. However, an invitation to ah An ITT is a statement of intention to negotiate by inviting offers on the part of one party which the other party is then free to pursue or not. Intention is therefore important. br A genuine offer is different from an ITT as the words in which the transaction is expressed are not themselves conclusive. ,I Examples: an Displays of goods – ITTs only (Fisher v Bell ; The Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd ) Adverts – these are usually ITTs unless the terms are certain and there is a unilateral offer: zk ‘Bramblefinch cocks and hens 25s’: Advertisement not an offer but an ITT (Partridge v Crittenden ) O Statements in adverts may form terms of a contract if a contract results from the initial ITT (Carlill v Carbolic Smoke Ball Co. ) Auction sales Adverts for auctions and the call for bids are ITTs only (Payne v Cave ) Auctioneer obliged to accept the highest bid in an auction without reserve Statements in adverts or catalogues may have binding effects due to the existence of a collateral contract (Warlow v Harrison ) 4 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Tenders – generally an invitation to tender is an ITT only and the bid is the offer but tenders can create binding contracts and an invitation to tender can have binding results for the inviter (Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council ). Requests and replies to requests for information – generally ITTs only (Harvey v Facey ). Tickets and timetables A ticket supplied after hiring a deck chair containing exclusion clauses on the back was not considered to give rise to a contract, because the customer wouldn’t expect them (Chapelton v Barry Urban District Council ) is A ticket containing exclusion clauses supplied after the completion of the contract is not effective (Thornton v Shoe Lane Parking Ltd. ) En The distinction between an offer and an ITT can be a fine one – e.g. in relation to advertisements and statements of the price. A letter to the tenant inviting him to purchase his house was considered an invitation to treat (Gibson v Manchester CC ). An application form sent to the tenant to purchase his house was considered an offer (Storer v Manchester CC ). Termination of Offers im ah Rejection and Counter-Offer – if a new term is added or terms of the offer are altered, this amounts to a counter-offer that ends the original offer and is in effect a new offer (Hyde v br Wrench ). A mere request for extra information is not a counter-offer (Stevenson v Mclean ). ,I Revocation – the offeror withdraws the offer prior to acceptance (Payne v Cave ). Revocation must be communicated to the offeree, but not necessarily by the offeror (Dickinson v Dodds ). an Lapse of time – unless specified, an offer is only open for a reasonable time, based on the subject matter of the contract (Ramsgate Victoria Hotel Co v Montefiore ). zk Failure of a condition precedent – if a condition of the offer fails there can be no offer (Financings Ltd v Stimson ). O Death – if the offeree dies before acceptance of the offer concludes. An offeree cannot accept an offer if they had notice of the offeror’s death but the offeror’s estate may be liable depending on the nature of the offer. Acceptance An acceptance is a final and unqualified assent to the terms of an offer, whether by express words or by action. It must fit the terms of the offer precisely and be clear and unequivocal, and be unconditional. Acceptance can be oral, written or by conduct (Brogden v Metropolitan Railways ). The fact of acceptance must be communicated to the offeror before there is a concluded contract. 5 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Silence is not usually sufficient (Felthouse v Bindley ), however there are some exceptions to the silence rule, such as previous course of dealing may give rise to acceptance by silence (Ammons v Wilson ), waiver (Carlill v Carbolic Smoke Ball Co ) and the Postal Rule. The Postal Rule Acceptance is valid from the moment of posting, not from when the letter was received. (Adams v Lindsell ). To be valid, posting must be a reasonable method of acceptance (Quenerduaine v Cole ). The Postal Rule applies to telegrams and possibly telemessages but not to other more is instantaneous methods of communication, such as fax or email communication (David Baxter Edward Thomas and Peter Sandford Gander v BPE Solicitors (a firm) ). A contact may En therefore be effective when the email of acceptance is received in the offeree/recipient inbox rather than when it is actually read by the recipient. The postal rule can be avoided and the method of acceptance can be stipulated (Holwell Securities Ltd v Hughes ). im ah br ,I an zk O 6 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law is En im ah br ,I an zk O 7 © QLTS School Ltd S/N 652910  Summary Notes – Contract Law 3. Capacity Any person can enter into a contract. In order to make an enforceable contract, however, the contracting parties must have capacity in law to enter into the agreement. There are certain classes of contracting parties considered to have limited capacity: (a) Minors Any person under 18 (Family Law Reform Act 1969). Contracts are unenforceable against minors but not against other party, and minors can void, except contracts that are beneficial to the minor, for necessary goods and services (have utility value and are not mere is indulgences/luxuries/gifts) (Fawcett v Smethurst ). For example, contracts of employment or education, or earning a living. En Section 3 Sale of Goods Act 1979 – necessary goods are those suitable to the condition in life of the minor and to their actual requirements at the time of the sale and delivery. It does not apply to services but common law follows statute and requires a minor to pay a reasonable price. Minor cannot recover monies or property transferred under a contract unless they can (Leeds) Ltd ). im prove they received no benefit whatsoever (total failure of consideration) (Steinberg v Scala Liability against a minor in restitution is possible but the court is likely to protect minors or ah indirectly impose liability on them (R Leslie Ltd. v Sheill ). The Minors’ Contracts Act 1987 – the court may order a minor to make restitution where just br and equitable to do so; a minor cannot be sued for price, and goods are recovered in the state as the possessor finds them. ,I (b) Mentally Incapacitated Persons Section 2 Mental Capacity Act 2005 – a person who is unable to make a decision for himself an in relation to the matter because of an impairment of, or disturbance in the functioning of, the mind or brain – temporary or permanent. zk A contract entered into by a person without capacity is valid but voidable by that person if they can show that: O they did not understand the nature of the contract; and the other party was aware of their impairment (Imperial Loan Co. v Stone ). The ratification renders the contract enforceable (Hart v Connor ). (c) Intoxicated Persons The same principles as mental incapacity apply in terms of the validity of contracts. Ratification after sobering up, or at any point, renders the contract enforceable (Matthews v Baxter ). 8 © QLTS School Ltd  Summary Notes – Contract Law (d) Corporations Ultra vires rule – acts or contracts beyond conferred powers of a company (i.e. by the articles of association) are ultra vires and thus void (Ashbury Railway and Carriage and Iron Co. v Riche , section 39 Companies Act 2006). However, ultra vires doesn’t apply to a third party who deals in good faith with a company (ss. 39-42 Companies Act 2006). is En im ah br ,I an zk O 9 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law 4. Consideration Definition of Consideration – ‘An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.’ (Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd ). It is the exchange component for the promise in an agreement. Generally, gratuitous promises are unenforceable. Consideration can be money, goods, services, or promises. Types of consideration Executory (consideration is an exchange of promises for future performance of an act). In a bilateral contract for the delivery of goods, for example, a seller promises to is deliver goods to a buyer at a future date and the buyer, in return, promises to pay for the goods on delivery. The parties have provided good consideration, even though En neither party has actually fulfilled its promise. Executed (consideration occurs where a party’s performance of an act provides the consideration). If one party makes a promise, in exchange for an act (or forbearance) by the other party, the consideration is said to be executed once the other party has carried out the act. Rules Governing Consideration im ah Consideration must be sufficient but need not be adequate. There must be some consideration provided but it may be of very small value (Roscorla v Thomas , Chappell v Nestlé br ). Performance of an existing legal duty is not sufficient: ,I Public duty imposed by law is not sufficient, but exceeding public duty is sufficient (Glasbrook Bros v Glamorgan County Council ) an Performance of an existing duty arising from a contractual obligation is insufficient (Stilk v Myrick , Williams v Roffey Bros & Nicholls (Contractors) Ltd. ), but where the existing duty is discharged by change of circumstances, the performance of zk such duty may be deemed part of a new contract (Hartley v Ponsonby ) Pre-existing duty owed to a third party, e.g. the performance of an existing contractual duty O owed to a third party may be sufficient (Shadwell v Shadwell , Scotson v Pegg ). Past consideration, i.e. an act or forbearance already carried out, is not sufficient and is no consideration (Roscorla v Thomas ). Consideration must move from the promisee. Third parties to the agreement have no entitlement to sue (Tweddle v Atkinson ) Part payment of a debt is not good consideration (Williams v Roffey Bros & Nicholls (Contractors) Ltd. , Re Selectmove ). Variation of the contract requires mutual agreement and consideration: 10 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Consideration for variation need not be monetary, could be acceptance of new obligations or rights In the absence of consideration, variation must be by way of deed If one party waives their right to consideration, the waiver can be enforced without consideration (Hartley v Ponsonby ) If a contract specifies that variation must be by a written agreement, parties must observe the formalities. Variation by oral agreement or conduct will have no effect (Rock Advertising Ltd v MWB Business Exchange Centres Ltd ) Part Performance of an Agreement (The Rule in Pinnel’s Case) is Where a debtor agrees to pay part of the debt owed to a creditor in full settlement of the En outstanding amount, the common law holds that partial payment of a debt is not good consideration for a promise to forego the balance. Hence, Pinnel stated that the creditor is not bound by his promise to consider a debt discharged by accepting part payment of a debt (confirmed by the House of Lords in the case of Foakes v Beer ). There are, however, limitations on the Rule in Pinnel’s case: Creditor shifts his position im Creditor agrees to accept goods or services rather than money, ‘horse, hawk, or robe’ ah Compositions with creditors Payment by a third party (Hirachand Punamchand v Temple ) br Promissory estoppel ,I Promissory Estoppel The equitable remedy of promissory estoppel (or equitable estoppel) provides a means of an enforcing a gratuitous promise even though the promisee has provided no consideration. It acts as a bar to a right of action arising from the claimant’s own act, and prevents a person reneging on a promise of future action. zk Promissory estoppel may be used to enforce promises which would otherwise fail for lack of consideration, e.g.: O Agreements to accept a lesser amount in payment of a debt (as an exception to the rule in Pinnel’s case (see above)) Pay more for a previously agreed obligation Reinstate previous payments subject to giving reasonable notice Vary a contract where obligations have been performed Limits on the Doctrine of Promissory Estoppel Existing legal relationship – an existing contractual relationship is not necessary for the doctrine to apply, provided that there is ‘…a pre-existing legal relationship which 11 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law could, in certain circumstances, give rise to liabilities and penalties…’ (Durham Fancy Goods v Michael Jackson (Fancy Goods) ) Clear and unequivocal promise required – there must be a promise, either by words or by conduct, that the promisor will not fully enforce its legal rights against the promisee, and its effect must be clear and unambiguous (Baird Textile Holdings Ltd v Marks and Spencer plc ) Reliance (change of position) – the promisee must have acted to their detriment, meaning that the promisee is placed in a worse position than before the promise was made, but need not be entirely detrimental (WJ Alan Co. Ltd. v El Nasr Export & Import Co. ) is Inequitable to break the promise – it must be equitable to stop the promisor from going back on their promise (D & C Builders v Rees ) En Suspensory not extinctive – legal rights suspended rather than extinguished (Tungsten Electric Co. Ltd v Tool Metal Manufacturing Co. Ltd. ) im ah br ,I an zk O 12 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law 5. Intention to Create Legal Relations The parties must intend to be legally bound before the court will recognise the existence of an enforceable contract (RTS Flexible Systems Limited v Molkerei Alois Müller GmbH & Co KG ). To establish intention is a question of fact for the court that is objectively assessed. The words used, conduct, circumstances and the relationship between parties are all relevant. The courts distinguish between domestic and commercial agreements. Social and Domestic Agreements There is a rebuttable presumption that domestic and social agreements, such as those is commonly exchanged between family members and friends, are not intended to be legally binding. The strength of the presumption depends on the closeness of the relationship and other circumstances. En Husband and wife – there is a rebuttable presumption that an agreement between husband and wife is unenforceable (Balfour v Balfour ). The presumption will not apply where the married couple are estranged or separated (Merritt v Merritt ). im Other relatives and non-relatives – if the family relationship is ruined by discord the court is more likely to infer a contract. Social and domestic agreements are presumed not to have legal effect in regard to parents and children (Jones v Padavatton ). ah However, domestic agreements need not be between relatives. There is a presumption against intention to create legal relations in a social situation (Lens v Devonshire Club ). br This presumption may be rebutted where the circumstances and conduct imply an intention (Simpkins v Pays ). ,I Commercial Agreements The court’s presumption is that there is intention and the presumption is difficult to rebut an (Edwards v Skyways ). The presumption can be rebutted in the following cases: Letters of comfort – written by a holding company to a lender about to lend money to zk a subsidiary of the holding company in order to reassure the lender of the financial viability of the subsidiary. These letters are not guarantees as the holding company is not willing to enter into a legally binding financial commitment (Kleinwort Benson Ltd. O v Malaysia Mining Corp. Bhd ) Letters of intent – a device by which one person indicates to another that they are likely to place a contract with them, but is not yet ready to be bound. Any contract formalised following a letter of intent may take either one of two species: (1) an ordinary executory contract; or (2) an ‘if’ contract, i.e. a contract under which A requests B to carry out a certain performance and promises B that, if they do so, they will receive a certain performance in return (British Steel v Cleveland Bridge ) Honour clauses – shows lack of intention to be legally bound (Rose & Frank Co v JR Crompton ) 13 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Collective agreements – an agreement between a trade union and an employer regulating rates of pay and conditions of work. Unless containing clear and express provisions to the effect that they are legally binding, they are presumed not to give rise to an intention to create legal relations, and, therefore, are not generally enforceable in the courts (Ford Motor Co v AUEFW ). The rebuttable presumption confirmed by statute in section 179 of the Trade Union and Labour Relations (Consolidation) Act 1992 Promotional offers – gifts free with a purchase deemed part of an offer, therefore subject to an intention to create legal relations (Esso Petroleum Ltd v Commissioners of Customs and Excise ) is Agreement to Agree En An agreement to agree is unenforceable due to uncertainty and will be considered as ‘incomplete’ and therefore not legally binding on the parties (Walford v Miles ). The exception is where an agreement to agree contains sufficiently definite terms and adequate consideration, even if it leaves certain details to be negotiated later by the parties. This may often create uncertainty as to enforceability. im If the court concludes that the true intention of the parties was that the matter to be agreed in the future is capable of being determined, in the absence of future agreement, by some ah objective criteria of fairness or reasonableness, then the bargain does not fail and the agreement will be enforceable in law (MRI Trading AG v Erdenet Mining Corporation LLC ). br ,I an zk O 14 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law 6. Contents of the Contract Certainty of Terms To create a binding contract the terms must be certain. If an important term is not established, the agreement is not enforceable (Scammell & Nephew Ltd v Ouston ). Previous reliance likely to lead to inferred or implied terms (Hillas & Co Ltd v Arcos Ltd ). An officious bystander test may be used to imply terms. Pre-contractual Statements is Mere puffs – these have no legal effect and are subject to consumer protection legislation. There is no intention on the part of the maker to be legally bound, unless there is evidence to En the contrary (Carlill v Carbolic Smoke Ball Co ). Representations – where a statement of fact made by one party induces the other party to enter into a contract, it may be construed as a representation. im Terms – a promise amounting to a term of the contract will allow a cause of action for breach of contract if unfulfilled. ah Factors Distinguishing Terms and Representations Timing – if there is a marked gap between the statement and the contract, the statement will generally be a mere representation. However, this is very unreliable as the court may treat the br contract as a protracted process (Routledge v McKay ). Importance of the statement – if the other party would not have entered into the contract ,I without this assurance it is a term (Bannerman v White ). an Special knowledge/skill – where one party has a special skill or knowledge, their statement will be treated as a warranty, whereas they will find it difficult to prove that a warranty has been given on the subject of their expertise by the other party, who does not have the requisite knowledge and skill (Dick Bentley Productions v Harold Smith Motors ). zk Reduction of oral agreements to writing – a statement not included in the written contract is generally taken as not intended to be a term. An oral statement of particular significance, O however, may be treated as a contractual term even though it was not subsequently contained in the written contract. Classification of Terms Express terms – these are distinctly or explicitly stated, either orally or in writing, rather than implied. Incorporation of written terms – incorporated terms generally stem from unsigned written standard form contracts. A party to the contract may protest that a particular clause should not be considered as being included in the contract, because they were unaware of it for some reason, and otherwise would have objected to it. 15 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Construction – if the parties disagree about what a particular clause is intended to mean, the court makes an objective evaluation of what the intentions of the parties were. If a dispute arises in an entirely written contract, such cases engage the parol evidence rule. This means that evidence, whether written or oral, from outside the contract itself, cannot be admitted to add to, vary or contradict a deed or other written instrument, unless evidence is provided of: Ambiguity – extra evidence may be adduced to resolve ambiguities (Robertson v Jackson ) Incomplete written agreements – oral or other extrinsic evidence can complete an incomplete written contract (Allen v Pink ) Trade usage or custom – word or phrase may be used through trade usage or custom is (Smith v Wilson ) Collateral contracts – a collateral contract is an additional and separate contract En made between the original parties. The consideration provided is the entry into the main contract, since the collateral contract runs independently parallel to the main contract (City and Westminster Properties (1934) Ltd v Mudd ) Operating status of the contract – evidence may be adduced to show that the im contract is not yet effective (Pym v Campbell ) Conditions – these are important terms that go to the root of the contract. Breach gives rise to ah the right to repudiate the contract and/or sue for damages (Poussard v Spiers & Pond ). Warranties – these are less important terms that do not go to the root of the contract. They br are merely ancillary, and breach gives rise to damages only. Innominate/intermediate terms – these terms cannot be classified as either conditions or ,I warranties from the contract. The effect of a breach depends on the seriousness of the consequences of the breach. an Interpretation of Express Terms In the event of a dispute, the courts must construe what the contract means. In the case of zk Investors Compensation Scheme Ltd v West Bromwich Building Society , Lord Hoffman set out the modern principle for the construction of contracts as follows: O ‘It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed.’ Certain rules of evidence enable the parties to establish what the words in the contract, in fact, mean. These include the following: The ‘matrix of fact’ or background includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man Previous negotiations of the parties and their declarations of subjective intent are excluded; admissible only in an action for rectification 16 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words (i.e. not literal) The ‘rule’ that words should be given their ‘natural and ordinary meaning’ does not require judges to attribute to the parties an intention which they plainly could not have had Implied Terms Implied terms are automatically introduced into the contract without having been expressly specified by the parties. Terms may be implied by the following methods: is (a) Implied by custom or trade usage En Where both parties are involved in the same business they are generally cognisant of a contract’s standard terms by course of prior dealing (British Crane Hire v Ipswich Plant Hire ). (b) Implied by statute im Sale of Goods Act 1979 – applicable to contracts between one business and another business, and contracts that are between one consumer and another consumer. It includes implied ah terms on the seller’s right to sell goods, goods correspond with their description, or with a sample, and that goods are of satisfactory quality (a standard that a reasonable person would regard as satisfactory, having regard to description, price and all other relevant br circumstances). In the case of a contract for sale by sample, there is an implied term that the bulk will correspond with the sample. ,I Supply of Goods and Services Act 1982 – service will be carried out with reasonable care and skill, in a reasonable time, and for a reasonable price (if not pre-agreed), and if the price for the service is not fixed by contract or determined by the course of dealing, the party an contracting with the supplier will pay a reasonable charge. The Act has been largely outdated since the introduction of the Consumer Rights Act 2015 (see below). Consumer Rights Act 2015 (consumer-traders contracts only) – consolidated existing zk consumer protection laws and offered consumers a number of new rights and remedies against traders. O Sale of Goods: Satisfactory quality Fit for a particular purpose Match the description, sample or model Be installed correctly Trader’s right to sell goods Remedies: short-term right to reject (30 days), repair or replacement, price reduction and the final right to reject 17 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Supply of Services: Service will be carried out with reasonable care and skill Information provided to the consumer is binding if relied upon Service must be performed for a reasonable price, and within a reasonable time Remedies: repeat performance, price reduction Digital content: Satisfactory quality (any description of the digital content, the price paid, any other relevant circumstances, especially any public statements in advertising and labelling is Fit for a particular purpose En As described Remedies: repair or replacement, price reduction (c) Implied in fact im The court considers whether the term represents the true intention of the parties. Any implication must be necessary. Previous tests included: ah ‘Business efficacy’ test: the term must be necessary to make the contract work – i.e. to make sense of commercial transactions ‘Officious bystander’ test. The term was so obvious, that the parties must have br assumed its inclusion The courts now apply the objective ‘construction’ approach. The court reaches a proper ,I interpretation of the contract by asking: ‘…what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?’ (Attorney General of Belize an and others v Belize Telecom Ltd and another ). Previous tests are not individual, merely a collection of different ways to find out what the contract actually means. ‘Necessity’ is still a determining factor in whether to imply a term into a contract (Mediterranean Salvage & Towage Ltd v Seamar Trading & Commerce Inc (The Reborn) ). zk (d) Implied in law O Terms implied by statute may be of two kinds: (a) obligatory terms, as in consumer protection legislation; (b) terms which will apply, unless the parties contract out of the statutory terms, such as the terms of a partnership implied by the Partnership Act 1890, which may be excluded. Such terms are applied independently of the parties’ intentions but due to the nature of the contract (Liverpool City Council v Irwin ). 18 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law is En im ah br ,I an zk O 19 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Contents of the Contract Pre-contractual statements: is Outside of the contract and not legally binding: To decide if a statement is a representation or a term the court will i. Puffs (general sales talk) consider: En ii. Representations (may give rise to misrepresentation) a) the interval between statement and execution of contract b) the importance of the statement Forms part of the contract: c) the reduction of terms to writing following the statement iii. Terms (fundamental to the contract) d) any special skill/knowledge of the statement maker im Express terms: Implied terms: Explicitly stated rather than implied Not expressed orally or in writing by the parties but are implied through fact, custom, or law (e.g. the Consumer Rights Act 2015 (business > consumer contracts), the Sale of Goods Act 1979, the Sale ah of Goods and Services Act 1982 (business > business contracts)) Conditions: essential terms Warranties: non-essential terms Innominate Terms: cannot be assigned as a condition or warranty br Exemption clauses: limit or exclude liability for the benefit of one party only Statutory controls: Unfair Contract Terms Act 1977 (business > business contracts) Consumer Rights Act 2015 (business > consumer contracts) ,I Exclusion/limitation of liability clauses are subject to the test of reasonableness (or are not permitted at all). Clauses are subject to the test of unfairness. s. 62, a term is unfair, if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations an s. 2, liability for death or personal injury resulting from negligence under the contract, to the detriment of the consumer. cannot be excluded or restricted (not subject to the requirement of Examples of unfair terms include those which: reasonableness). zk exclude or limit the trader's liability for death of/personal injury where the trader is liable s. 3, a person who imposes standard terms of business cannot exclude/limit the legal rights of the consumer in the event restrict liability for their own breach (unless the term is reasonable). of total or partial non-performance by the trader O enable the trader to terminate a contract of indeterminate duration without reasonable notice 20 © QLTS School Ltd S/N 652910  Summary Notes – Contract Law 7. Exclusion Clauses Incorporation An exclusion clause is a condition that excludes, qualifies or limits the liability of a party for the wrongful conduct specified in that clause. The important characteristic of an exclusion clause is that it operates for the benefit of one party only. Due to their potentially prejudicial effect, strict common law rules and statutory rules apply to govern such clauses. For the clause to be contractual, it must be incorporated into the contract. A document given after the contract has been made cannot contain any terms of the contract and so cannot be is binding on the recipient. The clause must be contained in a document which the reasonable person would consider to be contractual (Chapelton v Barry Urban District Council ). En Signed documents – where a party signs a written contract which includes an exclusion or limitation clause, they will be bound by the clause even if they are unaware of it (e.g. as they have not read the document), unless there has been fraud or misrepresentation. Where reasonable steps have been taken to bring a limitation clause to the other side’s attention, im that information must not be misleading (Curtis v Chemical Cleaning & Dyeing Co Ltd ). Unsigned document – where the clause is contained in an unsigned document, reasonable steps must have been taken to draw it to the other side’s attention. These steps must, ah normally, have been taken before the contract is entered into, unless the parties have had consistent dealings with each other in the past, and the documents used then contained similar clauses, even if the injured party did not read the clauses (Parker v South Eastern br Railway ). A limitation clause was ineffective where a hotel guest made a contract for the use of a hotel ,I room at the reception desk, and was afterwards greeted by the notice, displayed in the bedroom, excluding liability for articles lost or stolen unless they were handed to reception for safe custody (Olley v Marlborough Court Hotel ). an Construction zk Rules of construction function to prevent the enforcement of exclusion clauses. The key rules of construction are: O The contra proferentem rule – the courts will interpret any ambiguities in such clauses against the party seeking to rely on it The repugnancy rule – an exclusion clause is repugnant if it is in direct contradiction to the main purpose of the contract (Pollock v McRae ) The four corners rule – an exclusion clause can only apply where a party is operating within the four corners of the contract. The exclusion clause may be nullified if the party steps beyond the terms of the contract 21 © QLTS School Ltd  Summary Notes – Contract Law The Unfair Contract Terms Act 1977 (UCTA) The UCTA does not replace the common law rules but supplements them. It only deals with exclusion/limitation clauses, not with all unfair contract terms. It concerns liability arising in contract and tort, and only applies to actions in contract and tort arising from business liability. At least one party must be entering into the contract in the course of business. The act principally protects those dealing as a consumer. Some contract types are excluded, for example, contracts of insurance, the sale of land and shares, etc. The UCTA outlaws certain types of exclusion/limitation clauses and subjects others to a statutory test of reasonableness: is No exclusion for liability for negligence (in contract or tort) resulting in death or personal injury; such clauses are invalid. Negligence covers (i) a breach of contractual En obligations of skill and care; (ii) the common law duty of skill and care; and (iii) the common duty of occupiers of premises, under the Occupiers’ Liability Act 1957 Exclusion of liability for negligence resulting in other damage e.g. to property subject to the reasonableness test im In consumer or standard form contracts, exclusion of liability for other contract breaches is also subject to the reasonableness test Consumers may not be subject to unreasonable indemnity clauses ah Manufacturers and distributors may not exclude product liability for consumer loss or damage caused by negligent manufacturing br The reasonableness test is set out in s. 11 and schedule 2 UCTA: A clause must be fair and reasonable in the circumstances known to the parties ,I Regarding a financial limitation clause – regard is given to the resources and availability of insurance an The guidelines in schedule 2 as to how to determine reasonableness include: The strength of the bargaining positions of the parties relative to each other, zk considering other means by which customers’ needs could have been met Whether the customer received an inducement to agree to the term, or in accepting it O had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term Whether the customer knew or ought reasonably to have known of the existence and extent of the term, with consideration given to any custom of the trade and any previous course of dealings between the parties Where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable Whether the goods were manufactured, processed or adapted to the special order of the customer 22 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Where a seller does not in fact usually rely on their own limitation of liability clause, and they could have insured against the loss caused by their negligence, the clause will be held as unreasonable (George Mitchell Ltd v Finney Lock Seeds Ltd ) The burden of proof lies with the party seeking to rely upon the exclusion/limitation clause. The reasonableness test under the UCTA applies only to exclusion/limitation of liability clauses, not to other clauses in the agreement. The Consumer Rights Act 2015 The 2015 Act concerns fairness of all types of consumer contract clauses and applies only to contracts between traders and consumers, but not to contracts of employment, apprenticeship is or other types of contracts. En The 2015 Act sets down definitions of ‘consumer’ and ‘trader’. Consumer means a natural person acting for purposes wholly or mainly outside of their trade, business, craft or profession. Trader means someone acting for the purposes of their trade, business, craft or profession, whether acting personally or through another person acting on the trader’s behalf. The 2015 im Act therefore applies to an individual who received goods or services and who benefited from them both personally and for their work or business. The burden of proof lies with the business to prove that an individual is not a consumer. ah Terms may also be implied into special types of consumer contracts, such as distance sales contracts, under the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013. br The 2015 Act subjects clauses to a test of unfairness (s. 62 and schedule 2): ,I ‘A term is unfair, if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract, to the detriment of the consumer’. Whether or not a term satisfies the requirements of good faith depends on a variety of factors, an including: the strength of the parties’ bargaining positions; zk whether the consumer had an inducement to agree to the term; whether the goods or services were sold or supplied to the special order of the O consumer; the extent to which the seller or supplier has dealt fairly and equitably with the consumer. Whether a contractual term is unfair depends on a variety of factors, including: the nature of the goods or services in question, e.g. a term which would be unfair in the sale of new goods may not be unfair in relation to second-hand goods; the surrounding circumstances attending the conclusion of the contract, e.g. whether the consumer had, at that time, examined the goods; 23 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law all the other terms of the particular contract, or any other contract on which it is dependent. The 2015 Act lists examples of unfair terms. However, the items listed will only be prima facie unfair, not automatically unfair. The examples include terms which: exclude or limit the trader's liability in the event of the death of, or personal injury to the consumer resulting from an act or omission of the trader; inappropriately exclude or limit the legal rights of the consumer in the event of total or partial non-performance or inadequate performance by the trader; authorise the trader to dissolve the contract on a discretionary basis where the same is facility is not granted to the consumer; enable the trader to terminate a contract of indeterminate duration without En reasonable notice except where there are serious grounds for doing so; automatically extend a contract of fixed duration where the consumer does not indicate otherwise; or im irrevocably binds the consumer to terms with which the consumer has had no real opportunity of becoming acquainted before the conclusion of the contract. The 2015 Act does not govern the fairness of any terms which define the subject matter of the ah contract, or which concern the adequacy of the price or other remuneration in relation to the goods or services, insofar as such terms are in plain, intelligible language. br Unfair terms in a contract to which the 2015 Act applies will not be binding on the consumer, although the rest of the contract will be enforceable, provided the unfair terms are voidable and can be severed from the rest of the contract. ,I an zk O 24 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law 8. Vitiating Elements Vitiating elements apply to the following: where one party entered into the contract relying upon some statement of the other party, which later proves to have been untrue (misrepresentation); where one party was coerced by threats to enter into the contract (duress), or by some subtler influence exerted by the other party, which compromised their ability to exercise independent judgement (undue influence); certain forms of mistake, e.g. a mistake of law; and is where a contract is invalid for want of a lawful or proper purpose (illegality). Evidence of a vitiating element may render a contract void, voidable or unenforceable. En A void contract is a contract where the whole transaction is considered as a nullity. It means that at no time has there been a contract between the parties. Therefore, the parties to the agreement must be returned, as far as possible, to their former positions. im A voidable contract is one that operates as a valid contract until one of the parties takes steps to avoid it. This allows the injured party to set the contract aside through the remedy of rescission. The purpose of rescission is to restore the parties to the ah position that existed before they entered into the contract. Damages are also available to the same effect. An unenforceable contract is otherwise valid but contains a material defect. Generally br such a contract is formatively or operatively illegal, such as being contrary to public policy (the common law) or the will of Parliament (statute). The courts will not enforce such a contract if a party refuses to perform its obligations or they may declare the ,I contract void. an Misrepresentation A misrepresentation is an untrue factual statement, made by one party to the other either before or at the time of the making of the contract that does not become a term of the zk contract, which induces the other to enter the contract. The effect of an actionable misrepresentation is to render the contract voidable, giving the innocent party the right to rescind the contract, or to claim damages. O The following core elements must be present for a misrepresentation to arise: (i) There must be a false statement. (ii) The statement must be of a material fact. (iii) The statement must induce the other party to enter into the contract. False Statement The claimant must show that the representation was untruthful. 25 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Misrepresentation by Silence – silence generally does not amount to representation. However, a person will be liable for misrepresentation where they make a representation and fails to correct the impression given by their conduct (Gordon v Selico ). Half-Truths – half-truths, such as describing property as ‘fully let’, without disclosing to the buyer that the tenants had given notice to quit, has been held to be a misrepresentation (Dimmock v Hallett (1866)). Change of Circumstances – statement may be true when first made. However, if the circumstances change and it is no longer true, and a party acts or relies on the original statement, a duty to disclose the truth arises (With v O’Flanagan ). is Contracts of the Utmost Good Faith – contracts that involve a duty of utmost good faith (uberrimae fidei) impose a duty of disclosure of all material facts. A material fact is said to be En one which would influence a prudent and reasonable person to decide whether or not to enter into a contract (Locker and Woolf Ltd. v Western Australian Insurance Co. Ltd ). Non-disclosure of a material fact by one party may give rise to a right of rescission by the other party (Lambert v Co-operative Insurance Society ). The principle of uberrimae (i) im fidei also operates in the following classes of contract: Contracts for the sale of land. The vendor of an estate or interest in land is under a ah duty to the purchaser to show good title to the estate or interest they have contracted to sell. All defects in title must, therefore, be disclosed. This duty does not extend to physical defects in the property itself; br (ii) Family settlements. These are agreements between members of a family for the protection or distribution of family property. If any member of the family has withheld material information, the agreement or arrangement may be set aside (Gordon v ,I Gordon (1821) 3 Swan 400; see also Greenwood v Greenwood (1863)); and an (iii) Fiduciary relationships. A fiduciary relationship arises where the parties share a confidential relationship. Some examples include: trustee and beneficiary, solicitor and client, or principal and agent. Such relationships give rise to a duty that the fiduciary will reveal any material fact to the beneficiary. zk Material Fact O The statement must be one of past or existing fact; not one of opinion, intention or law. Statements of Opinion – an honest expression of opinion or a statement of belief, rather than a statement of fact, does not give grounds for actionable misrepresentation (Bissett v Wilkinson ). On the other hand, a statement of opinion by one who knows the true facts, where the other party does not know the true facts, may amount to a statement of fact. Statements as to Future Intent – a statement as to future conduct or intention is not generally actionable if false and does not bind the person making the statement. However, a false statement of future intention made by a person with no intention of so acting may be interpreted as a statement of fact (Edgington v Fitzmaurice (1885)). 26 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Statements of Law – contracting parties are presumed to know the law and are expected to seek legal advice rather than relying on the statement. Inducement For the false statement to be actionable there must have been material reliance on the false statement by the induced party: Materiality – if the false statement would have induced a reasonable person to enter into the contract, a presumption arises that it did so. The burden of proof is then shifted to the representor to show that the representee did not in fact rely on the false statement (Museprime Properties v Adhill Properties ). is Reliance – the claimant must have relied on the misrepresentation when entering into the En contract. However, an inducement might be material even though the representee did not believe that the representation was true (Hayward v Zurich Insurance Company plc ). A misrepresentation is considered to be an inducement even if the representee chose not to discover the truth when given the opportunity. For that reason, rescission was permitted where im a solicitor purchased a legal practice based on statements that overestimated its value. Further, the misrepresentation need not be the sole reason for the representee contracting, ah provided it was a relevant factor. However, there will be no inducement in the following circumstances: br (a) The claimant was unaware of the misrepresentation (b) The claimant did not allow the misrepresentation to affect their judgement ,I Categories of Misrepresentation an (1) Innocent Misrepresentation An innocent misrepresentation occurs where the person making the statement honestly zk believes it to be true, and it is a statement that is not made fraudulently or negligently. The person making the statement must prove that they reasonably believed the statement to be true both at the time the statement was made and when the parties entered into the contract. O (2) Fraudulent Misrepresentation Fraudulent misrepresentation is actionable in the tort of deceit. The crux of fraudulent deceit is dishonesty; the maker of the statement does not believe in the truth of the statement. A claimant must prove a fraudulent misrepresentation by showing that: …a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false (Derry v Peek ). (3) Negligent Misrepresentation A negligent misrepresentation is an honest statement made by a person who has no 27 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law reasonable grounds for believing it is true. Negligent misrepresentation can be divided into common law misrepresentation and statutory misrepresentation: (a) At Common Law A negligent misrepresentation is made when a representor, who owes a duty of care to a representee, acts carelessly in making the statement. Hedley Byrne v Heller & Partners Ltd established that damages may be recoverable in tort, in some circumstances, where financial loss is caused by the negligent misstatement. The claimants had relied on a ‘without responsibility’ reference to extend credit to a third party, given by the third party’s bank. The House of Lords held that no duty of care had arisen because the bank’s disclaimer was effective. In obiter dicta, however, the court stated that in the absence of any appropriately is worded disclaimer, the bank may have been liable in negligence. This is because where a ‘special relationship’ exists, a duty of care may be owed even if no fiduciary or contractual En relationship exists between the parties. The duty can arise in commercial relationships in which the person making the statement has some special skill or knowledge and the person knows, or can reasonably assume, that the person to whom the statement is made will rely on that statement. The burden of proof rests im on the person to whom the statement was made to prove that the statement was a negligent misstatement. ah (b) Under Statute The Misrepresentation Act 1967 was introduced with the purpose of addressing the difficulties br involved in proving common law negligent misrepresentation. Section 2(1) of the Act provides: ,I ‘Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, an then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently unless he proves that he had reasonable ground to believe and did believe up to the zk time the contract was made that the facts represented were true’. In claiming negligent misrepresentation under s. 2(1), rather than under common law, there is O no requirement of a ‘special relationship’ and the burden of proof is reversed, so that the maker of the statement must prove that they reasonably believed their statement to be true (Howard Marine & Dredging Co Ltd v Ogden & Sons (Excavations) Ltd ). However, where the representor is not a party to a contract, then s. 2(1) will not be available and the representee will only be able to sue under the common law principle of Hedley Byrne. Section 2(1) is regarded as having been clumsily drafted in its reference to fraud. Establishing fraudulent misrepresentation is not necessary. A representee need only establish that there was a misrepresentation. The representor must then demonstrate that they had reasonable grounds to believe that the facts they represented were true. 28 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Remedies for Misrepresentation The main remedies available for misrepresentation are rescission and damages. Rescission Rescission is the principal remedy for misrepresentation, since all misrepresentations, give the innocent party the right to set aside the contract and be restored to the pre-contractual position. The injured party may rescind the contract, by giving notice to the representor. There is no need to resort to legal action for a formal order of rescission. is However, notice is not always necessary, as any act indicating repudiation, including notifying the authorities or publicising their decision in some other appropriate way, may suffice, if the En communication of the decision to rescind is not practicable (such as where the other party has disappeared). Bars to Rescission: (1) Affirmation of the contract im A representee who affirms the contract, with full knowledge of the facts, cannot subsequently ah avoid the contract. Accordingly, a claimant who continued to drive a vehicle after realising that its condition had been misrepresented to him had no right of rescission (Long v Lloyd ). Where the claimant, however, is not aware of their right to choose between rescission br and affirmation, the right to rescind may remain (Peyman v Lanjani ). (2) Lapse of time ,I Rescission is an equitable remedy which applies to both innocent and negligent misrepresentation. The maxim ‘delay defeats equity’ applies. If the injured party does not act an within a reasonable time frame, the right to rescind is lost. In non-fraudulent misrepresentation cases time runs from the date of the contract. zk For fraudulent misrepresentation, however, the clock starts when the fraud is, or should have been, discovered (s. 32 Limitation Act 1980). O (3) Restitution is impossible Where substantial rescission is impossible, the parties cannot be restored to their original position. This means that the right to rescind is lost. An example is where consumer goods have already been consumed, or where natural resources had been totally exhausted by the time the claimant elected to plead rescission (Vigers v Pike (1842)). However, as rescission is essentially an equitable remedy, precise restoration is not required and the remedy is still available if substantial restoration is possible. Thus, deterioration in the value or condition of the property is not a bar to rescission. 29 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law (4) Third parties have acquired rights in the subject matter of the contract If a third party acquires rights in property, in good faith and for value, the misrepresentee will lose their right to rescind (Phillips v Brooks Ltd ). A person who relies on a misrepresentation when purchasing goods, and subsequently sells those goods to a good-faith third party purchaser, loses the right to rescind. This is because the third party is considered to have purchased the goods without notice of the representation (s. 2(2) Misrepresentation Act 1967). (5) Award of damages in lieu of rescission is Section 2(2) of the 1967 Act allows the court to grant an award of damages in lieu of rescission if: En the claimant would have a right to rescind, and the misrepresentation was non-fraudulent, and it would be equitable to award such damages with reference to the type of Damages were to be maintained. im representation involved and the loss that the claimant would suffer if the contract ah While the Misrepresentation Act 1967 does allow for damages in lieu of rescission, this remedy is subject to certain limitations: br it is an equitable remedy within the court’s discretion; and the award of damages is in lieu of rescission: a claimant cannot, therefore, both ,I rescind and be awarded damages for innocent misrepresentation (cf. fraudulent or negligent misrepresentation, for which both remedies can be awarded). an (1) Innocent Misrepresentation The remedy for an entirely innocent misrepresentation is either: (i) rescission with an zk indemnity; or (ii) damages in lieu of rescission, at the court’s discretion, under s. 2(2) Misrepresentation Act 1967. O In cases of non-fraudulent misrepresentation, there is no automatic right to damages. Instead, under s. 2(2) Misrepresentation Act 1967, the court is given a discretion, where the injured party would be entitled to rescind, to award damages in lieu of rescission. Damages under s. 2(2) cannot be claimed as such; they can only be awarded by the court. In exercising its discretion as to whether to grant damages in lieu of rescission, the court must have regard to the nature and seriousness of the misrepresentation, the loss that would be caused if the contract were upheld, and the loss that rescission would cause to the other party. So, where the misrepresentation is trivial and where rescission itself would have serious consequences for the representor, the court is unlikely to grant rescission (Williams Sindall plc v Cambridgeshire CC ). 30 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law (2) Fraudulent Misrepresentation A person induced by fraud to enter into a contract may affirm (or rescind) the contract and claim damages for the tort of deceit. The purpose of damages is to restore the victim to the position they occupied before the representation had been made. The test of remoteness in deceit is that the injured party may recover for all the direct loss incurred as a result of the fraudulent misrepresentation, regardless of foreseeability (Doyle v Olby (Ironmongers) Ltd ). (3) Negligent Misrepresentation The remedies for negligent misrepresentation are rescission (subject to the court’s discretion) is and damages in the tort of negligence. En Damages at common law The injured party may elect to claim damages for negligent misrepresentation at common law. The test of remoteness in the tort of negligence is that the injured party may recover for only reasonably foreseeable loss (Esso Petroleum Co Ltd. v Mardon ). Damages under s. 2(1) Misrepresentation Act 1967 im An injured party may claim damages for negligent misrepresentation, under s. 2(1) ah Misrepresentation Act 1967. This will be the normal course to pursue, as s. 2(1) reverses the burden of proof. Damages will be assessed on the same more generous basis than fraudulent misrepresentation (Royscott Trust Ltd v Rogerson ). br Excluding Liability for Misrepresentation ,I Any term of a contract which excludes liability for misrepresentation or restricts the remedy available is subject to the test of reasonableness. an In relation to consumer contracts, the Consumer Rights Act 2015 invalidates any terms restricting liability for misrepresentation to the extent that they fail the test of unfairness, as set out in s. 62 of the Act. zk Duress O In order for a contract to be valid, the parties must act freely when entering into their legal obligations. If one of the parties is forced to make the contract by some form of improper pressure, this amounts to (the common law doctrine of) duress, and renders the contract voidable. While the original common law doctrine of duress confined the doctrine to very narrow limits, other forms of duress have gradually been recognised by the law, including damage to goods or business and even a threat to break a contract. Physical threats exerted on the victim, which are illegal to the extent it would constitute a crime or a tort, will likely result in the contract being set aside. Whether the victim protested at 31 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law the time or took steps to avoid the contract once they entered into it will be relevant considerations when determining coercion (Barton v Armstrong ). Threats to property were once considered insufficient to amount to duress to enable the threatened party to avoid the contract (Skeate v Beale ). However, and in Occidental Worldwide Investment Corp v Skibs A/S Avanti (The Siboen and The Sibotre) , it was stated obiter that duress would be a defence if a person was forced to enter into a contract because of the threat of having a valuable painting slashed or his house burnt down. Economic Duress Economic duress refers to a threat to an individuals’ financial interests. In its first consideration is of the doctrine in the case of Pakistan International Airline Corp v Times Travel (UK) Ltd , the Supreme Court set out that for there to be a successful claim for rescission of En any contract on the basis of lawful act economic duress, the claimant would need to establish that: (i) there was a threat (or pressure exerted) by the defendant that was illegitimate; (ii) im the illegitimate threat (or pressure) caused the claimant to enter into the contract; and ah (iii) in the context of economic duress, the claimant had no reasonable alternative to giving in to the threat or pressure. The court will only rarely find economic duress in the context of commercial negotiations as br commercial parties are entitled to use their bargaining power. It is therefore open to a powerful commercial party to impose onerous terms as a condition for entering into a transaction. ,I Remedies for Duress an The effect of duress is clearly to make the contract voidable, not void. The injured party will, therefore, be entitled to have the contract set aside for operative duress, unless they have expressly or impliedly affirmed it, allowed time to lapse or if there is an intervention by a third zk party. The claimant cannot claim for damages itself, but if rescission is no longer possible, the court may award such. O Undue Influence In contrast to the common law concept of duress, undue influence is an equitable doctrine. It applies when one party is able to exert influence over another, to the extent of preventing them from exercising independent judgement, and uses this influence to force them into making a gift or entering into a contract. There are two classes of undue influence: actual (express) influence; and influence which is presumed from the special relationship between the parties. 32 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law (1) Actual (Express) Undue Influence Actual undue influence occurs where the claimant can prove they would not have entered a contract but for the undue influence from the other party. The claimant need not show that there has been a previous history of such influence, nor show that the transaction was manifestly disadvantageous to the claimant. The doctrine can apply even if it’s the first time that undue influence for the particular disputed transaction has occurred. (2) Presumption of Undue Influence – on Basis of Special Relationship A transaction can be set aside, in equity, where undue influence is presumed from the relationship between the parties. Here, the onus is on the party receiving the benefit to show is that the benefit was not obtained by undue influence. En Such a confidential relationship can be established in two ways: Class A: Where a protected relationship exists between the parties (solicitor-client, parent- child (minor), doctor-patient, etc.). and confidence in the wrongdoer. im Class B: Where a confidential relationship exists and the complainant can prove it placed trust The following points should be noted, in respect of Class B cases: ah No Need to Prove Abuse br Where no protected relationship exists, and in the absence of evidence disproving undue influence, the presumption of undue influence still applies where the complainant can prove that a relationship existed and that trust and confidence was placed in the wrongdoer under ,I that relationship. Thus, there is no need to prove any abuse of that relationship through undue influence by the wrongdoer (Hewett v First Plus Financial Group ). an A bank/customer relationship will not give rise to the presumption of undue influence unless the customer placed him or herself entirely in the hands of the bank and was provided no opportunity to seek independent advice (Royal Bank of Scotland plc v Etridge (No 2) ). zk Need to Prove ‘Manifest Disadvantage’ O In these cases, therefore, the complainant only has to show, in the first instance, that there was a relationship of trust and confidence between the complainant and the wrongdoer, of such a nature, that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the impugned transaction. There is no need to produce evidence that actual undue influence was exerted in relation to the particular transaction impugned: once a confidential relationship has been proved, and provided it has been shown that the transaction was ‘manifestly disadvantageous’ to the party alleged to be influenced (National Westminster Bank v Morgan 1 AC 686), the burden then shifts to the wrongdoer to prove that the complainant entered into the impugned transaction freely, for example, by showing that the complainant had independent advice. In cases of ‘actual’ undue influence, whilst the person seeking to avoid the contract must prove 33 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law improper pressure, it is not necessary to prove a manifest disadvantage to the influenced party (CIBC Mortgages PLC v Pitt ). is En im ah Remedies for Undue Influence The remedy, in cases of undue influence, is rescission, in which case the whole transaction will br be set aside. However, in both duress and undue influence cases, the right to avoid the contract may be lost: ,I if the party affirms the contract, by performing obligations without protest; if the party delays in taking action (laches) after the influence has ceased to have an effect; if an innocent third party has acquired rights; zk if the parties cannot be substantially restored to their original positions. Damages are not available for undue influence except in cases where a bank has broken a duty of care to a wife-surety, in which case damages may be available in negligence, under O Hedley Byrne v Heller & Partners Ltd , as indicated in National Westminster Bank v Morgan. Mistake Mistake occurs where either one or both of the parties believe that certain facts exist, which is subsequently shown to be wrong, rendering a contract automatically void. The mistake must, however, occur during the formation of the contract (see Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd ). 34 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law The main species of mistakes are: (1) Common Mistake Common mistake occurs when both parties are mistaken about the same fact, or set of facts. Within the specie of common mistake, three further sub-species exist: Mistake as to the existence of the subject matter of the contract (res extincta) – where parties enter a contract with the mistaken belief as to the existence of the subject matter, and it turns out that it does not exist anymore or have never existed in the first place (Galloway v Galloway (1914)). is Mistake as to the possibility of performing the contract – a contract may be declared void at common law as a result of common mistake where, for example, both parties mistakenly En believe that arable land should produce a specific amount of a particular crop in a given season, but this turns out to be physically impossible (Sheikh Bros Ltd v Ochsner ). Mistake as to quality – whether mistake as to quality fundamentally undermines the contract, so as to render it void, depends on the facts and circumstances. Generally, neither party can im rely on their own mistake to void a contract when the issue of quality is engaged. (2) Mutual Mistake ah A mutual mistake occurs when both parties contract, but the terms of the agreement are so uncertain that it prevents the formation of a legally binding agreement (Raffles v Wichelhaus (1864)). br (3) Unilateral Mistake ,I A unilateral mistake occurs where just one party errs regarding a particular fact. Unilateral mistake can take two forms: an Mistaken as to the terms of the offer – this occurs where one party is mistaken as to the terms of the offer and the other party is aware, or ought to be aware, of it. Under these circumstances, the party that is aware of the other party’s mistake will be unable to enforce zk their version of the contract, as they have a duty to disclose the existence of the mistake (Hartog v Colin & Shields ). O A unilateral mistake as to the identity of the other party – a unilateral mistake as to the identity of the other party will render the contract void; however, if the mistake is simply one as to the attributes of the other party, it will not render the contract void (Cundy v Lindsay (1878)). Documents Mistakenly Signed A party that signs a contract in the mistaken belief that they are signing a document of a different nature may be able to plead non est factum (it is not my deed). A successful plea of non est factum may allow the party to avoid the contract. It must be shown, however, that the mistake was made despite all reasonable care being taken (Saunders v Anglia Building Society ). 35 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Illegality Illegality, where operative, acts as a defence to the general right that a party would otherwise have to enforce a contract. The case law draws a distinction between contracts which are rendered unenforceable by the operation of common law and those rendered unenforceable by operation of statute. Contracts Rendered Unenforceable at Common Law (a) Contracts to commit a legal wrong or carry out conduct which is otherwise contrary to public policy (b) Where one or both parties enter into the contract for the purpose of furthering the is commission of a legal wrong, or carrying out conduct which is otherwise contrary to public policy En (c) Where one or both parties commits a legal wrong, or acts in a manner which is otherwise contrary to public policy in the course of performing the contract (d) Contracts prejudicial to family life and the status of marriage (e) Contracts to commit a crime or tort (f) Contracts to defraud the public revenue im ah (g) Contracts prejudicial to the administration of justice (h) Contracts tending to corrupt public officials (i) Contracts promoting sexual immorality br Contracts Rendered Unenforceable by Statute ,I Express statutory prohibition – a statute may declare, expressly, that a particular contract is void (Curragh Investments Ltd v Cook ). an Implied statutory prohibition – where the court finds that a contract is impliedly prohibited by statute, it may be unenforceable by the claimant, regardless of their intentions or knowledge of the breach. An unmeritorious defendant, who is aware of and might even have induced the zk breach of statutory provision, may, therefore, be able to rely on a defence of illegality, in order to defeat a claimant’s claim (Re Mahmoud and Ispahani ). O Exceptions Illegal contracts may be enforceable, in deference to the following situations: (a) Where the parties are not at equal fault or in pari delicto (b) Where the claimant has repudiated the illegal purpose in time (c) Where the claimant does not found their claim on the illegality (d) The range of factors test 36 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Severance Severance allows the court to eliminate the objectionable parts of a contract, while enforcing the remainder. Severance of a clause will only be allowed if the clause forms a subsidiary, rather than substantial, part of the contract. This power is seldom used, as the fear is that it may be considered tantamount to condoning illegal actions (Goodinson v Goodinson ). Restraint of Trade A restraint of trade is a condition in a contract that imposes restrictions or limitations on the freedom to conduct business between a buyer and a seller of a business or between an employer and employee. Generally, clauses in restraint of trade are prima facie void and will is be unenforceable. This means that the contract must go no further than necessary to protect the legitimate interest of the party relying upon the clause, both within a specified En geographical area and within a specified period. The clause must be reasonable in terms of the public interest and this will be determined as a matter of law by the court, which may take into account such matters as trade practices and customs. The common law is reluctant to impose restrictions on a person’s ability to earn a living (Faccenda Chicken Ltd v Fowler ). im The court has the power to sever the whole, or part(s) of the condition which is too wide to be enforceable, while leaving in place the provision which the court considers to be reasonable. ah Whether or not this is possible is a matter of construction as the part to be severed must be independent of the remaining provisions. br The test to be applied for the severance of restrictive covenants in employment contracts was set out in Sadler v Imperial Life Assurance Co of Canada Ltd : ,I i. the court must be able to sever without having to add words to the agreement, or modify the wording of what remains; ii. there must remain adequate consideration to support the part(s) of the covenant an which remain; and iii. the removal of the unenforceable provision must not so change the character of the contract that it becomes ‘not the sort of contract that the parties entered into at all.’ zk The court is not however permitted to uphold a restrictive covenant by imposing a new restraint on the parties (JA Mont (UK) Ltd v Mills ). O Employment Contracts Employment contracts are contracts entered into voluntarily by employer and employee. The two main issues an employer is concerned to protect are: (i) trade secrets; and (ii) business connection. Trade secrets – a restraint against competition may be justified if the aim of the employer is to prevent the use by the employee of trade secrets acquired in the course of their employment. If the area and duration of restraint is considered to be disproportionate it is likely to be invalid (Forster and Sons Ltd v Suggett ). 37 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law Business connection – an employer may use a covenant against solicitation of persons with whom the employer does business. The longer the duration of the covenant, the higher the burden on the employer to show it is reasonable. Sale of Business Any restraint will be void unless it is necessary to protect the business sold and not to hinder competition. Restraints against mere competition will not be allowed by the courts, such as in the case of British Reinforced Concrete Co v Schelff , where a restraint to not sell any road reinforcement in any part of the UK was far too wide in the context of a small business. Exclusive Dealing Agreements is These may be prohibited under retained EU law as anti-competitive and may also be En challenged under the common law. In order to increase the efficiency of distribution, manufacturers or wholesalers may impose certain conditions on distributors. These agreements are void subject to reasonableness. im ah br ,I an zk O 38 © QLTS School Ltd S/N 654814  Summary Notes – Contract Law is En im ah br ,I an zk O 39 © QLTS School Ltd S/N 652910  Summary Notes – Contract Law 9. Privity of Contract Doctrine ‘The doctrine of privity means that a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person except the parties to it’ (G H Treitel, The Law of Contract). Remedies Available on Breach of Contract Where a contracting party (A) has made a contract with B for C’s benefit, A can sue B, but can only recover substantial damages for A’s own loss, not for the loss sustained by a third party (C) (Woodar Investment Ltd v Wimpey Construction (UK) Ltd ). is An agent may contract on behalf of their principal with a third party and form a binding contract between the principal and the third party. In such case, the agent is not privy to the En contract and cannot generally sue, or be sued, upon it (Scruttons v Midland Silicones Ltd ). Exceptions to the Privity Doctrine (Lumley v Gye ) im Actions in tort – for example, wrongful interference with another’s contractual rights ah Collateral contracts – if the claimant contracted with a third party in order that the third party would contract with the defendant, the claimant may be able to sue based on having collateral contracts (Shanklin Pier Ltd v Detel Products Ltd ) br Statutory exceptions – e.g. compensation from an insurance company to an injured person, after the insured party has been held liable, under s. 151 of the Road Traffic Act 1988 ,I Agency – Creation of an additional contract with the thir