English Contract Law Formation Part 1 PDF

DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite ENGLISH CONTRACT LAW : THE FUNDAMENTALS Part 1 How to create a contract: Formation PART 1 In the common law jurisdiction of...

DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite ENGLISH CONTRACT LAW : THE FUNDAMENTALS Part 1 How to create a contract: Formation PART 1 In the common law jurisdiction of England and Wales the main sources of Contract Law is case law based rather than statutes based. However, contract law has seen an increasing number of statutes regulating specific contracts such as : 1 working contract with the Employment Right Acts 1996, Sale of goods contract with the Sale of Goods Act 1979, lease with Landlord and Tenant Act 1954, or consumer contract with the Consumer Protection Act 1987 or The Unfair Contract Terms Act 1997. This legislative increase made Contract Law and its general principles, turn into the Law of contracts, with more and more particularities nowadays. This chapter is meant to be an introduction to general principle of contract law; to the fundamental issues of the topic. The first issue to consider is the one of the definition of what is a contract ? Quoting from Pollock : ‘The most popular description of a contract that can be given is also the most exact one, namely that it is a promise or set of promises which the law will enforce.’ F. Pollock, Principles Of Contract, 9e éd. Stevens and Sons 1921. Contact is defined considering its purpose. “why to pass a contract?”. In England and Wales the aim of having a contract is clearly to enable the parties to have a legal claim for enforcement, where the agreement is not complied with. As quoted from Pollock, English contract is then “no more” than an enforceable agreement. In France, there is no different goal. The two systems English and French are pursuing the same purpose: the legal certainty of agreements. English and French laws of contracts are then following the same objective. However, they are using to that aim a legal tool: the contract, that differs in its nature. Indeed the answer to the question “what is a contract?” is not the same in each of these systems. In the French legal system contract is a “mutual agreement that creates a set of rights and obligations”. Whereas the English one refer to a contract as a “mutual agreement that creates a reciprocal set of rights and obligations”. An agreement that does not create mutual obligations can be an enforceable agreement, such as the deed, however, from a legal perspective the deed is not a contract. In England and Wales the reciprocity of promises is essential to turn an agreement into a binding contract. Whereas in France what makes an agreement a contract lies in the fact that both parties abide to it. DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite  DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite 1 How to create a contract : Formation The legal criteria that must be met to make an agreement a binding contract can be divided in three: a proper agreement whose terms are certain, an intention to create contractual relations between the parties, a mutual benefit that implies the existence of a promise and its counterpart namely consideration. 2 1.1 An agreement The existence of a proper agreement is scrutinized by the judge who assesses the existence of a contract. The judge will refer to the so called “mirror image test” (Butler v. Ex-Cell-O Corporation (England) Ltd ). The judge must be able to find in written documents that have been exchanged by the parties (so call battle of forms), or in the propositions made orally, or any set of negotiation, or sometime in the conduct of the parties : a clear and unequivocal offer which is ‘mirrored’ by an equally clear and unequivocal acceptance. Consistently the content of the agreement is scrutinized in order to know if the parties have indeed come to an agreement. If no agreement has been reached there can’t be any contract between them. Therefore, the content of the agreement is a core issue even before the proper existence of a contract has been clearly established. Though, In the Gibson v Manchester City Council case, Lord Denning used a more flexible approach. Indeed the mirror image test is sometime very hard to pass. Indeed, when the terms of the agreement cannot be construed as encompassing a clear offer and a clear acceptance, this agreement is not a contract and is not legally binding. And more flexibility is sometimes needed. Lord Denning dissociated the formation of a contract and the existence of a proper agreement. However, in the end the court stuck on a more traditional analysis. In most cases, the agreement is reached by a rather simple an offer and acceptance process. 1.1.1 Offer An offer is a statement or a promise made by one person, with intention to enter into a contract on stated terms, provided that these terms are subsequently accepted by the party to whom the offer has been addressed. The offer can take any form: oral or written one, provided that it is clear and precise. Indeed, the offeror will be bound by a simple yes of acceptance from the offeree. Offer has to be distinguished from an invitation to treat. An invitation to treat is a statement or a proposal made by one person, with intention to enter into negotiation with the addressee. Negotiation may lead to the conclusion of a prospective contract whose terms will be discussed in due course. DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite  DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite 1.1.1.1 The distinction between offer and invitation to treat The nature of some particular proposals has been discussed by judges so as to determine whether they must be construed as a clear offer or as a mere invitation to treat.  The display of goods for sale : is construed as an invitation to treat rather than 3 an offer. The offer takes place at the cash desk and acceptance is the fact to pay the price for it. The fact to have taken the goods from the shelves is not an acceptance. However, case law may vary according to the nature of some particulars goods. EX : in the Chapleton v Barry UDC case, the display of deck chairs for hire on a beach has been held to be a clear offer. That offer having been accepted by the customer by taking the chair and using it for sunbathing.  Advertisement is an invitation to treat rather than an offer even where a price- list is joined to it. As Lord Herschell pointed out in Grainger v Gough , if an advertisement was to be construed as an offer “a merchant may find himself involved in any number of contractual obligations to supply [goods] of a particular description which he would be quite unable to carry out” Lord Parker CJ in Partridge v. Crittenden confirmed that this solution is not only what the law is but common sense. However, some particular advertisements have been construed as offer, such as in the remained famous Carlill v Carbolic Smoke Ball Co case. The advertisement issued by the manufacturer of the Carbolic smoke ball offered to pay 100 £ to any person who caught the flu despite” having used the ball three times daily for two weeks”. That statement was held to be a clear offer. Indeed, the intention of the manufacturer to be bound to pay the £100 made no doubt for judges as £1000 were on deposit for that purpose.  In auction sales, the auctioneer by inviting bids makes an invitation to treat. The offer is made by the bidder. The offer is accepted when the auctioneer strikes the table with the hammer. In the British Car Auctions Ltd v Wright case, the auctioneer successfully appealed against conviction under the Road Traffic Act 1968 for offering to sell a car unsuitable for road driving, as he has not made an offer but an invitation to treat. As a consequence, the literal interpretation of statutes led the court to the conclusion that legal criteria for committing the offence were not met  Tenders are construed as invitation to treat with the prospective suppliers (see Harvela Investments Ltd v Royal Trust Co of Canada (Cl) Ltd ). The offer comes from the supplier of goods or services who submit the tender. The one who invites for tenders is compelled to accept the highest bid : Harvela case. DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite  DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite 1.1.1.2 The time of the offer The classical position rules that offer will remain open for acceptance either for the time specified in the offer or for a reasonable time depending on circumstances. The offer terminates in consequence of :  Revocation: 4 The English Law position differs radically from the French Law one regarding the revocation of the offer. Unlike the French one, the common law offer can be withdrawn by the offeror at any time before it has been accepted. The fact that the offer may have been made for a fixed time does not change the rule. The offeror will be “bound” to leave the offer open for acceptance for the fixed time only where this is supported by consideration coming from the other part. To prevent the early withdrawal of an offer the offeree must “give” something in return to support irrevocability. Yet, to be effective the revocation of the offer by the offeror must be brought to the attention of the offeree by direct communication. In the leading case Byrne v Van Tienhoven , the court refused to apply the so called Postal rule, which rules the time of acceptance (infra), to the revocation of the offer. Revocation is effective at the time it reach the offeree, not at the time it is posted and sent by the offeror.  Counter-offer: An offer ends either by its refusal by the offeree or by a counter-offer emanating from him. According to the leading case Hyde v. Wrench (1840) the counter-offer kills off the original offer that cannot subsequently be accepted.  End of the fixed term: The offeror may fix a term in his offer. It can be a precise date and hours or the occurrence of a specific event. The offer is closed to acceptance after that date or after the event has occurred.  The death of the offeror automatically terminates the offer at the time of the death. DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite  DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite 1.1.2 Acceptance Acceptance is an unqualified expression of assent to the terms and conditions of the offer. An acceptance that introduces new terms is a counter offer Acceptance can take any form. It can be an oral or a written one, and can also be inferred from conduct of the offeree. 5 Indeed in the Carlill v. Carbolic Smoke Ball Co , acceptance was inferred from the conduct of Carlill who has bought the smoke ball and has used it according to the Carbolic smoke ball Co prescription. However, if acceptance can be implied from conduct it is never implied from silence. If the offeror wishes the acceptance to reach him in a specific manner he has to state it clearly in the offer. This will prevent him from being bound by an acceptance having reached him in an improper manner. The classical position rules that the offeree must communicate acceptance to the offeror. In the Entores v Miles Far East Corp case, Lord Denning held: “The contract is only complete when the acceptance is received by the offeror: and the contract is made at the place where the acceptance is received. Acceptance has to be brought to the attention if the offeror.” However there are some exceptions to the rule, where for example the terms of the offer make it obvious that the offeror has waived his right to have acceptance communicated to him. Such is the case where the offer has been made to the all world, and were notice of performance can be construed as acceptance. Indeed, in the case Carlill v. Carbolic Smoke Ball Co Lord Justice Lindley held: “I, however, think that the true view, in a case of this kind, is that the person who makes the offer shews by his language and from the nature of the transaction that he does not expect and does not require notice of the acceptance apart from notice of the performance”. Acceptance takes place at the moment the acceptance is received by the offeror and will occur at the place of the offeror (Brinkibon Ltd v Stahag Stalh ). Nevertheless, this rule does not apply when acceptance is send via post mail. The so called Postal rule rules any agreement where postal mail is used as a communication tool between the parties. It does not rule the use of direct and instantaneous means of communication such as telephone, radio... According to the leading case Adams v. Lindsell (1818), acceptance takes place at the time the letter of acceptance is posted by the offeree although having not reached yet the offeror. With the development of instantaneous means of communication, to rely on the Postal rule may sometimes seems odd. However it has not been overruled but has been subjected to limitations. DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite  DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite This rule will still apply where it is reasonable to use the post as a mean of communication. In the Henthorn v. Fraser 2 Ch 27, Lord Hershell held : “Where the circumstances are such that it must have been within the contemplation of the parties that, according to the ordinary usages of mankind, the post might be used as a means of communicating the acceptance of an offer, the acceptance is complete as soon as it is posted” Contemporary issues are about the application of the postal rule to electronic mail 6 (see Macdonald, ‘Dispatching the dispatch rule? The postal rule, e-mail, revocation and implied terms.’ (2013) 19(2) Web JCLI). Electronic email is currently considered as an almost instantaneous means of communication but not as a direct means of communication. Therefore, analogy with Postal mail can be made. Although controversial, the position seems to be that the Postal rule does apply to electronic mail. 1.2 Certainty of terms During the negotiation of an agreement a certain amount of statements and proposals are discussed between parties. Not all of them constitutes the terms of the agreement and the subject matter of the contract. For an agreement to turn into a contract its terms must be certain. This is a crucial point. Difficulties relating to certainty of terms may recover either initial failure in the agreement process where terms are ambiguous or too vague, or future failure in the agreement where the terms are incomplete there is a gap in the agreement or where the parties have not anticipated all the prospective difficulties of implementation. (see N. Andrews, Contract law, Cambridge University Press 2010, n° 3.34). 1.2.1 What is a term? A statement is likely to be a term of the contract where it is clear in the agreement that the parties will abide by it. Non-compliance will give rise to a legal claim for breach of contract. A term must be distinguished from a representation. A representation is a statement made by one party to persuade the other to enter into the contract. But is not intended to be binding on the parties. The innocent party can take no action to enforce it if the representation is not complied with. (However a false representation vitiates the contract that can subsequently be nullified see infra on misrepresentation – PART 2 NULLITY). Case law drew some guidelines to make the distinction between the two:  A statement is unlikely to be a term of the contract where the one who makes the assertion asks the other party to verify the truth of it. The degree of skill and knowledge of the parties is taken into account. DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite  DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite Whether the one who makes the assertion has some special skills on the subject matter of the contract, the statement is more likely to be a term (Schawel v Reade ). However, where the one to whom the assertion is made has better knowledge or when both of the parties’ skills are equal, the statement is more likely to be a representation of facts (Oscar Chess Ltd v. Williams ).  Secondly, a statement is likely to be a term where it is of such importance that 7 had it not been stated, the person to whom it has been made would not have entered into contract. In the Schawel v Reade case Schawel informed Reade that he was looking for a horse for stud purposes. During the horse examination by the prospective buyer, Reade the owner of the horse said to Shawel that the horse was “perfectly sound” and that there was no need to get a vet to check it out. The sale was agreed and completed. Later the horse proved to be unfit to stud because of some eye disease. Reade was held to be in breach of contract. The affirmation that the horse was sound made to a buyer who had informed the seller that he was looking for a racer was held to be a term of the contract and not a mere representation of facts. An agreement on essential terms is enough to pass a valid contract. Indeed, judges or any applicable statutory framework can fill gaps in the agreement where needed. (May & Butcher v R ; Scammell v Dicker ). Common law distinguishes the essential terms of the contract that are at the core of the agreement named condition, from the terms that are of lesser importance with respect to the equilibrium of the agreement named warranty. 1.2.2 Implied terms and incorporation Express terms are terms that are especially agreed on by the parties, either orally or in a written way. Implied terms are terms that are implied from the contract by the judge. Implied terms are rooted in the contract because of its nature. As a consequence there is no need for the parties to make them obvious or to formally agree on them. Implied terms are those needed to guaranty the business efficiency of the contract In The Moorcock (1889) case, a contract was passed between the owner of a ship and the port authority. According to the contract the ship would go to a certain point on the river Thames for mooring. The Thames being a tidal river, at low tide the river was not deep enough at the point indicated by the port authority and the hull of the ship was damaged. The owner of the Moorcock sued the port authorities for damages. The defendant argued that there was no term in the contract according to which the safety of the boat has to be ensured. The Court of appeal held that although there was no express term into the contract guaranteeing the safety of the ship, it was an obvious and implied term. To rule otherwise would deprive such contract of legal efficiency. DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite  DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite Some implied terms may be inferred from custom and customary rules (Hutton v Warren (1836). To be effective custom needs to be: “certain, notorious, reasonable, recognised as legally binding and consistent with the express terms” (Cunliffe-Owen v Teather & Greenwood case.) Some implied terms may be inferred from particular Statutes (such as for example the Unfair Contract Terms Act 1977, the Sale of Goods Act 1979 or the Supply of Goods and Services Act 1982, Supply of goods (implied terms) Act 1973). 8 In sale of goods contracts for example, statutory provisions makes the conformity of the good delivered to the one described in the advertisement, or the sample provided, an implied term of the sale contract. Therefore, it does not need to be specifically agreed on by the parties to be effective. Some additional rules have been created by case law where the determination of the terms of the contract is disputed.  Firstly, a person is bound by any document that he signed, had he read it or not (L’Estrange v F Graucob Ltd ).  Secondly, according to the so called Parol evidence rule, where the parties enshrine their contract in a written document, no extrinsic evidence can be produce to add, vary or contradict its content (Jacobs v Batavia & General plantations Trust Ltd ). Only another written statement can be opposed so as to contradict an anterior written one. However, there are some exceptions to second rule. Such is the case where the written document is not intended to contain the whole agreement. Indeed, some extrinsic written documents can, sometimes, be incorporated into a contact (Olley v Marlborough Court Ltd ). In this case, Mrs Olley was the owner of a very expensive fur coat. She was a regular resident in a hotel. One day, back to her room she noticed that her fur coat has been stolen in her room. Then she sued the hotel manager for damages. The defendant pointed out an exclusion clause that has been written down on a notice, stuck behind a door of Mrs Olley’s suite. The clause stated: “The proprietors will not hold themselves responsible for articles lost or stolen, unless handed to the managers for safe custody”. The hotel manager defended the claim arguing that the resident had not handed her fur coat to them for its safety. The question was then to know whether such a notice was part of the room rental contract between the resident and the hotel. The Court refused to incorporate this notice into the contract as there was no way that Mrs Olley could have been aware of the disclaimer at the time of the conclusion. DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite  DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite Case law made it clear that incorporation of extrinsic written terms into a contract is possible only where three conditions are met cumulatively: - The notice of existence of extrinsic terms is given before or at the time of the conclusion of the contract. - The terms are contained in a document which is intended to have contractual effect (notice of use, disclaimer…). - Reasonable steps have been taken to bring the terms to the attention of the other party had he read them or not. 9 1.2.3. Difficulty in enforcement: Interpretation of terms and rectification Once a contract has been validly passed parties are bound to implement it in accordance with its terms. However, compliance with the terms is sometimes difficult when the apparent contract reveals itself not to be what was really intended by the parties. In such a case, the judge can scrutinize the agreement so as to assert the true intention of the parties. To some extent, the court can rectify the apparent contract to make it consistent with the intended one. Terms of the apparent contract may be subject to interpretation. The court in construing the contract must seek to ascertain and give effect to the real intention of the parties. In the Charter Reinsurance Co Ltd v Fagan (1997) case Lord Mustill held that the court should not: “force upon the words a meaning which they cannot fairly bear (…) [and not] substitute for the bargain actually made one which the court believed could better have been made” If the contract is a written one, the true intention of the parties must be ascertained using the document they have used to enshrine their agreement. The interpretation of the contract is made regarding objective standards of interpretation. Indeed, the personal and undisclosed understanding of the terms by the parties is irrelevant. Tele2 international card company v Post Office Ltd EWCA civ 9. Additionally, the contract shall not be construed according to subsequent conduct of the parties. The terms of the contract must always be interpreted in their original context rather that in their strict semantic and syntactical sense. Indeed, in the Antaios Cia Naviera SA v Salen Rederierna AB case lord Diplock held: “if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense”. The context and the background of the contract are fundamental elements with regards to interpretation. DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite  DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite Were the proper interpretation of the apparent contract does not match with the real intention of the parties, the rectification of the contract can ordered. The power for the court to rectify a contract is born from Equity. Rectification is an equitable remedy that allows the judge to amend the words of the original contract so as to make apparent the true meaning of the terms. When rectification is claimed the court may rely on oral or written extrinsic evidence, such as pre-contractual documents, to amend the contract consistently. 10 DU de droit anglais – STUDENT HANDOUT - L. Francoz Terminal Toute reproduction ou diffusion non autorisée est interdite