GDL Contract Manual PDF

CONTRACT July 2024 Reproduced by the College of Legal Practice Ltd (UK ID 11734212). © Copyright 2024 (used under licence from the copyright owners College of Law Ltd (ACN 138 459 015)). This publication is copyright. Except as permitted under the Copyright, Designs and Patents Act 1988, no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Disclaimer This manual has been prepared as a practice guide for students at the College of Legal Practice. It is not intended to be a comprehensive statement of the law or practice and should not be relied on as such. If advice on the law or practice is required or is required to be given, professional advice should be sought. Printed in the United Kingdom. Contract Law Table of Contents 1.1 FORMATION...................................................................................................................... 4 Relevant SRA SQE Assessment specification...................................................................... 4 1.1.1 Introduction.................................................................................................................. 4 1.1.2 What is a contract?...................................................................................................... 4 1.1.3 Offer............................................................................................................................. 5 1.1.4 Acceptance.................................................................................................................. 7 1.1.5 Consideration............................................................................................................. 10 1.1.6 Promissory estoppel................................................................................................... 12 1.1.7 Intention to create legal relations............................................................................... 13 1.1.8 Additional issues........................................................................................................ 14 1.1.9 Privity and the rights of third parties........................................................................... 16 1.1.10 Summary of key principles....................................................................................... 17 1.2 TERMS............................................................................................................................. 19 Relevant SRA SQE Assessment specification.................................................................... 19 1.2.1 Introduction................................................................................................................ 19 1.2.2 Contents of the contract............................................................................................. 19 1.2.3 Parol evidence rule.................................................................................................... 20 1.2.4 Entire agreement clause............................................................................................ 20 1.2.5 Categorisation of terms.............................................................................................. 20 1.2.6 Conditions.................................................................................................................. 20 1.2.7 Warranties.................................................................................................................. 21 1.2.8 Innominate terms....................................................................................................... 21 1.2.9 Implied terms.............................................................................................................. 22 1.2.10 Exclusion clauses and unfair terms.......................................................................... 24 1.2.11 Statutory unfair terms............................................................................................... 26 1.2.12 Consumer Rights Act 2015...................................................................................... 28 1.2.13 Variation of contract terms....................................................................................... 30 1.2.14 Summary of key principles....................................................................................... 31 1.3 VITIATING FACTORS..................................................................................................... 32 Relevant SRA SQE Assessment specification.................................................................... 32 1.3.1 Introduction................................................................................................................ 32 1.3.2 Misrepresentation....................................................................................................... 32 1.3.3 Mistake....................................................................................................................... 37 1.3.4 Illegality...................................................................................................................... 40 1.3.5 Duress........................................................................................................................ 41 College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 2 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE 1.3.6 Undue influence......................................................................................................... 43 1.3.7 Summary of key principles......................................................................................... 45 1.4 TERMINATION................................................................................................................ 47 Relevant SRA SQE Assessment specification.................................................................... 47 1.4.1 Introduction................................................................................................................ 47 1.4.2 Discharge by performance......................................................................................... 47 1.4.3 Discharge by agreement............................................................................................ 49 1.4.4 Discharge by breach.................................................................................................. 50 1.4.5 Frustration.................................................................................................................. 51 1.4.6 Consequences........................................................................................................... 53 1.4.7 Law Reform (Frustrated Contracts) Act 1943............................................................. 53 1.4.8 Summary of key principles......................................................................................... 54 1.5 REMEDIES...................................................................................................................... 55 Relevant SRA SQE Assessment specification.................................................................... 55 1.5.1 Introduction................................................................................................................ 55 1.5.2 Damages.................................................................................................................... 55 1.5.3 Equitable remedies.................................................................................................... 60 1.5.4 Restitution.................................................................................................................. 61 1.5.5 Summary of key principles......................................................................................... 61 College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 3 Contract Law 1.1 FORMATION Relevant SRA SQE Assessment specification Functioning Legal Knowledge: Formation: Offer and acceptance certainty consideration intention to create legal relations, and capacity. Parties: privity of contract, and rights of third parties. 1.1.1 Introduction This chapter will introduce you to fundamental principles that underpin your knowledge of formation of contract – offer and acceptance, certainty, consideration, promissory estoppel, intention to create legal relations, capacity, privity of contract and rights of third parties. Commentary Contract law aims to provide guidelines and regulations so agreements can be created with a degree of confidence, certainty and fairness, while at the same time ensuring the state and courts do not unduly interfere in the freedom of contracting parties, particularly in commercial contracts. It also provides rules for resolution and relief when things go wrong. Contract law has developed primarily through common law case precedent and, more recently, through statutory regulation. Millions of contracts are entered into everyday, ranging from the purchase of a packet of crisps to complicated commercial agreements worth many millions of pounds. What was the last contract you entered into? 1.1.2 What is a contract? A contract can either be a simple contract (oral or written) or it can be a contract by deed (in writing). We are going to look at simple contracts, which are the most common. Simple contracts can be either bilateral, where there is an exchange of promises, or unilateral, where there is a promise to pay in exchange for performance of a specified act. We need to establish the core elements of a contract: offer, acceptance (both together are also referred to as “agreement”), intention to create legal relations and consideration. There are many issues which need to be considered when trying to determine whether there is a binding contract and on what terms any contract has been formed. In many, but not all, contracts, there will be an element of negotiation. For example, if you are buying a cup of coffee there is a usually a set price on the menu; but if you were buying a car, you would probably try to negotiate the price down. It is important to distinguish between an offer and a statement made during the negotiation phase. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 4 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE 1.1.3 Offer An offer needs to be specific, comprehensive and capable of acceptance. The person making the offer is called the offeror. The person to whom the offer is made is called the offeree. Note that there may be a number of offerors and offerees if more than one offer is involved. It depends on which offer is finally accepted – the offer to sell or the offer to buy. 1.1.3.1 Opening negotiations Look to see if an offer has actually been made. If not, there is no contract. The most commonly confused situation is where there is a simple statement of price in response to an inquiry. The wording used may indicate if you are dealing with an offer or an invitation to treat. For example, if the words “prepared to sell” are used, that will be regarded as an invitation to treat, rather than an offer. 1.1.3.2 Invitation to treat It is also important to identify whether an offer has actually been made or whether a party is inviting offers to be made. This is known as an invitation to treat. An invitation to treat is not an offer and is not capable of acceptance. Some examples of invitations to treat are adverts or displays of goods in a shop. You should be aware that it is possible for an advert to be a unilateral offer, which can be accepted by performance. 1.1.3.3 Offers and adverts Adverts are usually an invitation to treat. Occasionally, they are unilateral offers which, if all the other elements to form a contract are present, can form a legally binding agreement. Look carefully at the circumstances to see if there is a unilateral offer made to all the world which is capable of acceptance. Note that, if there is a unilateral offer, then there is no need for communication of acceptance. Cases In English law, we take the objective, or reasonable bystander approach, to establish if a binding contract has been formed. As Lord Denning stated in Storer v Manchester City Council 1 WLR 1403, 1408: In contracts you do not look into the actual intent of a man’s mind. You look at what he said and did. A contract is formed when there is, to all outward appearances, a contract. A man cannot get out of a contract by saying “I did not intend to contract” if by his words he has done so. The objective approach is largely perceived as the best way to agree some level of fairness and certainty. The subjective approach would involve trying to establish what individuals actually meant at the time of the agreement and trusting them not to subsequently change their minds or lie. Once a binding contract is agreed, it creates a civil liability that can be enforced in the courts, usually by payment of “damages” or financial compensation, if breached. Some key cases on offers include Partridge v Crittenden 1 WLR 1204. This case found that an advertisement for the sale of goods will generally be an invitation to treat, partly for the practical reason that there is probably limited stock available – unless the advert is placed by a manufacturer when it is more likely to be an offer (as a manufacturer can always just make more product). College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 5 Contract Law The cases of Fisher v Bell 1 QB 394 and Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd 1 QB 401 applied the same principle to window displays and shop shelves, respectively. These are the rules that make everyday shopping transactions workable so that, when a shopper takes goods to a till, they are making an offer and the cashier, whether in person or by machine, then accepts – meaning the contract is only formed at the till (and of course the cashier can still refuse to accept the offer. For example, a cashier may refuse an offer from a young person trying to buy alcohol without ID). The most famous case relating to unilateral offers is Carlill v Carbolic Smokeball Company 1 QB 256, which held that an advert could be a unilateral offer if it was very clearly worded, demonstrating an apparent intention to be bound on the part of the offeror. Also, acceptance could be by performance, with no need to communicate acceptance. This contrasts with bilateral offers, where acceptance must be communicated, even if it is just by a cashier offering you a card machine or by an automated till telling you to put your goods in the bagging area. 1.1.3.4 Auctions An advert for an auction will be an invitation to treat. The process for creating an offer at an auction is that the auctioneer will invite bids. Offers to buy will be made by the bidders. The acceptance takes place when the gavel falls. Case Note, however, that, if an item for auction is advertised as “without reserve”, the auctioneer enters into a collateral contract to accept the highest bid (however low that may be) or to pay damages to that bidder: Barry v Davies 1 WLR 1962. 1.1.3.5 Tenders A tender is a written or formal invitation to supply goods or services. The offer is made by the person responding to the tender. So, a statement that goods were to be sold by tender is not normally an offer and no obligation is created to sell to the person making the highest offer. The terms of the tender may be to sell to the highest bid or to the “best” bid. This should be made clear in the tender document. It is not possible to make what is called a “referential bid”, that is, a bid which sets a price but also offers to pay more than anyone else (for example, £5,000 more than any other bid). If parties were allowed to make referential bids, then it is possible that no tender would be successful, as no price would be determined. If there is a procedure set down in the tender for submission of a bid, then all parties will be expected to adhere to that process and all bids submitted in accordance with the procedure will be considered. Case The government and local authorities generally invite tenders for their contracts, as this is seen as the fairest and most economical method, particularly when spending taxpayers’ money. The tender procedure is also designed to reduce the possibility of fraud and bribery. The leading authority on this is Blackpool and Fylde Aero Club v Blackpool Borough Council 1 WLR 1195. 1.1.3.6 Counter-offers A counter-offer is created if an offer is made in response to the original offer. The effect of a College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 6 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE counter-offer is to destroy the original offer, so it is no longer available for acceptance. 1.1.3.7 Request for information Requests for information can look very much like counter-offers. Context is important to avoid not accepting an offer. For example, if the offeree asks the question about the terms of the offer (for example, “would you take cash or a bank transfer?”), that is not a counter-offer. That is a request for information. Cases The leading case authorities are Hyde v Wrench (1840) 3 Beav 334; 49 ER 132 and Stevenson, Jacques & Co v McLean (1880) LR 5 QBD 346. 1.1.4 Acceptance For an acceptance to be valid, the acceptance must match the offer exactly. This is known as the “mirror image” rule. Once an offer capable of acceptance has been identified, then whether or not the offer has been accepted needs to be established. The key issue with acceptance is that it takes place when it is communicated, unless it is by post. Look out for problems in communicating acceptance. Receipt of an acceptance does not automatically mean “communicated”. 1.1.4.1 Acceptance can be by words or conduct Even if there is a written contract or a document purporting to be a contract, it is possible for the parties to bring a contract into being by their conduct. The issue here is to determine on what terms the contract has been formed. 1.1.4.2 Battle of the forms A “battle of the forms” is a common issue where two businesses endeavour to contract on their own terms and conditions. The principle that is applied is that of the last shot wins, so whichever company put forward their terms last and those terms were agreed to by the other side is the company whose terms govern the contract. This can be very important if there are terms in one contract which are not in the other (for example, a price escalation clause to allow a seller to charge more if the cost of raw materials increases) or terms which are much more favourable to one side than the other. 1.1.4.3 Postal rule The postal rule is an exception to acceptance taking place when communicated. If a letter is correctly addressed and posted, acceptance takes place on posting. This rule was developed when the post was very reliable and there could be several deliveries of post a day. Assessment tip If you see mention of letters in a question, that usually means that you will need to consider the postal rule or some of the variations/exceptions to it. The postal rule still applies, even if the letter does not arrive, as long as the letter was posted in a post box and correctly addressed. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 7 Contract Law 1.1.4.4 Communication of acceptance The method of acceptance can be stipulated but it is possible that an equally efficient method can be used. In some cases, the postal rule will be displaced if there is a requirement of “notice in writing”. This means that any acceptance must be communicated for a contract to come into being. 1.1.4.5 Can silence constitute acceptance? Silence cannot constitute acceptance where notice in writing of acceptance is required because acceptance must be communicated. 1.1.4.6 When is acceptance communicated? Note that there may be a difference between when the acceptance is communicated and when the acceptance is received. In many situations, an acceptance may arrive but not be seen by the offeror for some time, particularly if sent by telex. A telex was basically a phone with a printer attached. Messages would be typed in at one end and printed out at the other. If a message was received outside office hours, it could not be “communicated” until someone was there to read it. To date, there is no clear authority on when an email is considered communicated. The issue of communication of acceptance is important because it could determine under which jurisdiction a contract has been made. Cases As already mentioned, acceptance must be communicated in bilateral contracts. Problems can arise where acceptance is by instantaneous (or electronic) communication. The telex case referred to above is Entores LD v Miles Far East Corporation 2 QB 327 (Entores) and it remains the leading authority on electronic or supposedly “instantaneous” communications. Lord Denning’s stated view in Entores was that there must be some duty on the offeror to keep ink in their telex machine. In modern terms, this can translate to checking emails and phone messages, at least during office hours. In Brinkibon Ltd v Stahag Stahl und Stahlwarenhandels-Gesellschaft mbH 2 AC 34, additional guidance was given, indicating it would depend on the exact facts of each case. In commercial contracts, reg 11 of the Electronic Commerce (EC Directive) Regulations 2002 provides for an electronic confirmation of an order in e-commerce to be just that and not have the status of an acceptance. In consumer contracts, internet shopping sites generally state, in the small print, that an order or offer is not actually accepted until such time as the goods are dispatched (which also gets around the risk of them running out of stock between acceptance and dispatch). Postal rule The main case that established the postal rule was Adams v Lindsell (1818) 1 B & Ald 681; 106 ER 250. The postal rule still applies, even if the letter does not arrive, as long as the letter was posted in a post box and correctly addressed: Household Fire and Carriage Accident Insurance Company (Ltd) v Grant (1879) 4 Ex D 216. This rule can be seen as anachronistic, but it only applies today if acceptance by post is deemed to be reasonable in all the circumstances and it is possible for the offeror to rebut it by specifying that acceptance should be by a specific method. Note the postal rule only ever applies to acceptances, not offers, or revocations (that is a common mistake that students make). The leading case on silence not constituting acceptance is Felthouse v Bindley (1862) 11 CBNS 869; 142 ER 1037. In this case, it was held that an offeror cannot say “unless I hear College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 8 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE from you by such a date, I will assume that you accept”. Obviously, this is to avoid people inadvertently entering into a binding contract. Butler Machine Tool Co v Ex-Cell-O Corporation (England) Ltd 1 WLR 401 is the case where the “last shot” rule was confirmed in the battle of the forms. Do you think the postal rule should be overruled altogether? 1.1.4.7 Revocation of offer Revocation is effective when it is communicated. Check dates and methods of acceptance and revocation in any scenario. It may be that the offeror changes their mind about the sale but still ends up with a binding contract. Even if an offer is stated to be open for a set period of time, it may be revoked before the end date, as long as that revocation is communicated. Note that it does not have to be the offeror doing the communicating. Assessment tip Look out for third parties communicating a revocation. They may be mentioned for a reason. As long as they are deemed to be reliable, they will be able to revoke an offer. Also be sure to check dates in questions. Look out for any mention of “normal office hours”. There is authority which states that, if the revocation is received during normal office hours, then the revocation is effective from the time that it is received. The reasoning for this is that, in the normal course of business, the revocation would come to someone’s attention if they were acting in a business-like manner. As regards the method of revocation, there is less certainty. There is persuasive precedent that holds that revocation can be made by giving the approach to the “same notoriety … to the revocation” as had been given to the offer; that is, notice of the revocation is given in a similar way to the manner in which the offer was accepted: see Shuey v United States (1875) 92 US 73. When dealing with a unilateral offer, once the offeree has started performance, then the offer cannot be revoked. Cases Byrne & Co v Leon Van Tien Hoven & Co (1880) 5 CPD 344 is the leading authority stating that a revocation is only effective on communication. Routledge v Grant (1828) 4 Bing 653; 130 ER 920 held that, whatever an offeror may say, they are only actually bound by a promise to keep an offer open for a period of time if the offeree provides some consideration, usually by way of paying a deposit. The leading authorities on the issue of not withdrawing a unilateral offer once the offeree has started performance are Errington v Errington 1 KB 290 and Soulsbury v Soulsbury Fam 1; EWCA Civ 969. 1.1.4.8 Lapse of time If there is not a time limit set on how long an offer will be open for, the position is that an offer should be accepted within a reasonable time. The problem is determining what is reasonable in the circumstances. This will vary depending on the subject matter of the contract. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 9 Contract Law 1.1.4.9 Death of the offeree or offeror If the offeree dies before the offer is accepted, there is no longer an offer. It ceases to be capable of an acceptance. If the offeror dies, the situation is a little more complex. Case law suggests that, if the offeror has made an offer, the death of the offeror does not necessarily terminate that offer. If the offeree is ignorant of the offeror’s death, the offer can still be accepted. The reasoning is that it is likely that the executors or administrators of the estate would act to perform the contract. 1.1.5 Consideration Consideration comes in several forms. It can be “executed” – an act in return for a promise. For example, if a reward is offered for finding a lost pet (a promise), the person who finds and returns the pet (the act) gets the reward, but only when the act is complete. This is usual for unilateral contracts. Consideration can also be “executory” – a promise for a promise. For example, you order a freezer from a shop and promise to pay for it. The shop promises to supply your freezer. This is a bilateral contract. 1.1.5.1 Definition of consideration In Currie v Misa (1875) LR 10 Ex 153, 162, Lush LJ defined consideration as “some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other”. This is a useful definition, as it includes examples of burdens that can be placed on a party to a contract as well as benefits. 1.1.5.2 Consideration must be sufficient, not adequate The consideration needs to have some value. It might not be very much. It must be legal. For example, the payment of £1 as an annual rent, coupled with a promise to keep a property in good order, has been deemed to be sufficient consideration. Be careful not to muddle “sufficient” with “adequate”. As long as the item has value to the promisor, then it will be good consideration. Cases Thomas v Thomas (1842) 2 QB 851is the case referred to with £1 annual rent. In Chappell & Co Ltd v Nestle Co Ltd AC 87, used chocolate wrappers were held to be enough to be valid consideration, although they had “no intrinsic economic value”. Note that consideration is a peculiarly English concept and, in many jurisdictions, a bare promise or “nudum pactum”, with clear intention to be bound, can be sufficient for formation of a binding contract. 1.1.5.3 Past consideration For consideration to be effective in supporting an agreement, it must not happen after the contract or act is concluded. Past consideration is no consideration. For example, a warranty given after a sale is complete or reimbursement for work that has been carried out is unenforceable. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 10 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE 1.1.5.4 Exceptions to the past consideration rule There are some exceptions to the rule. Look out for these scenarios: the act was done at the request of the promisor the parties understood that the act was to be remunerated by a payment or the conferment of some benefit, or the payment or conferment of benefit must have been legally enforceable had it been promised in advance. 1.1.5.5 Contractual duty to a third party It is possible that an existing contractual duty owed to a third party can be treated as good consideration. 1.1.5.6 Existing public duty If there is an existing public duty imposed on the claimant, then the usual rule is that carrying out that existing duty would not provide good consideration for any other agreement, unless the claimant goes beyond the scope of the public duty. For example, claiming a payment to attend court as a witness when already obliged to attend would not be consideration, but providing policing services for a football match could be beyond the normal legal obligation and would then be good consideration for any agreement to pay. 1.1.5.7 Duty imposed by law: public policy At some point, most of us will find ourselves subject to duties imposed by law. Merely complying with those duties will not be sufficient to be good consideration, but going beyond those legal duties will be. Cases Re McArdle (Dec’d) Ch 669 is a leading authority on past consideration. For example, you cannot paint somebody’s house for them and then ask for payment afterwards. Collins v Godefroy 1 B & Ald 950; 109 ER 1040 is a leading authority on existing duties imposed by law. In this case, a promise to pay an expert witness to attend a court hearing that they were already legally bound by summons to attend was not binding and did not have to be paid. 1.1.5.8 Promisee already under a contractual duty If the promisee is already under a contractual duty to carry out their duties, if they were then offered more money, there would not be fresh consideration for that promise. However, if carrying out their duty became substantially different from that which was contracted, then that would be fresh consideration. There is also the issue of whether a valuable benefit can be sufficient to amount to fresh consideration. 1.1.5.9 Consideration for a variation to the contract The basic rule is that any variation requires fresh consideration. It does not always have to be money. Look out for parties trying to pay off debts earlier with things rather than money or in different places. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 11 Contract Law Part payment of the debt on the date that full payment is due cannot be regarded as a satisfaction of the whole debt. It is not binding on the creditor because of the absence of consideration. But there are three exceptions: the creditor asks for a chattel instead of money – “horse, hawk or robe”, as this might be more beneficial to the creditor than the money: see Pinnel’s case 5 Co Rep 117a; 77 ER 237 the creditor states that they will accept smaller payment on an earlier date than the date originally set, or the creditor accepts a smaller amount at a different location. If the debt is a judgment debt, it will carry interest. To clear a debt in that situation, you must clear the interest as well as the original debt. Cases In Stilk v Myrick (1809) 2 Camp 317; 170 ER 1168, a sailor was not allowed extra wages for extra work for a voyage when two of his colleagues had deserted, as any extra work was minor. However, in Hartley v Ponsonby (1857) 7 EL & BL 872; 119 ER 1471, a sailor was entitled to extra wages for a voyage after approximately half the crew had deserted, as there was so much extra work that it had become hazardous to continue. The rule in Stilk v Myrick is still good law but it was “refined and limited” by the leading judgment in Williams v Roffey Bros & Nicholls (Contractors) Ltd 1 QB 1 (Williams) Williams held that a builder’s promise to pay extra to a carpenter for an existing contractual duty could be binding, so long as there was no economic duress and the promisee gained a practical benefit (even if that was just by avoiding a disbenefit). In Williams, the “disbenefit” that the builder had avoided was deductions from its own payments that could be made for any lateness due to a penalty clause in the builder’s own contract with the property developer. In DSND Subsea Ltd v Petroleum Geo Services ASA BLR 530, economic duress was described as creating “no practical choice” for the promisee but to pay more. Does this seem fair to you? 1.1.6 Promissory estoppel Promissory estoppel is a promise not to enforce contractual rights which is given without consideration. Promissory estoppel can be used where there is a pre-existing legal relationship between the parties and a promise not to enforce contractual rights is made without consideration, as long as all of the elements of promissory estoppel are met. These are: A clear and unequivocal representation or promise that rights would not be fully enforced. If it is not clear what has been promised, then it will not be found to be an estoppel. It can only be used as defence; an action cannot be based on it. The promise was intended to be binding. There must be an alteration of position in reliance on the promise. The party making the promise must act equitably. Promissory estoppel can only be used if it would be inequitable for a creditor to enforce their legal rights. If a claimant is estopped from enforcing the contractual rights, then it is possible to restore the original contractual rights by giving notice. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 12 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE Cases Foakes v Beer (1884) 9 App Cas 605 upheld the rule in Pinnel’s case 9 App Cas 605. In Re Selectmove Ltd 1 WLR 474, the court held that the “practical benefit” principle from Williams could not be applied to part-payment situations, only additional-payment situations. Thus, a party looking to enforce a promise to pay less needs to resort to promissory estoppel. Central London Property Trust Ltd v High Trees House Ltd KB 130 is the leading authority on promissory estoppel in which Lord Denning set out the above criteria. The most recent case looking at the issue of contractual variations to payment was MWB Business Exchange Centres Ltd v Rock Advertising Ltd AC 119; UKSC 24, where the Supreme Court judges looked favourably on Williams and the idea of allowing the practical benefit argument to apply to part-payment promises. However, the Supreme Court decided that was not a point they needed to decide on for the purposes of the case before them. Do you think we should keep the need for consideration for contractual variations? Assessment tip Look out for letters being written or previous litigation as possible evidence of clear and unequivocal representation. 1.1.7 Intention to create legal relations The final element needed to make a binding contract is intention to create legal relations. If there is no intention to create legal relations, then it is just an agreement with no legal force or sanctions. The courts will apply a rebuttable presumption to an agreement to determine whether it is legally binding or not. Social/domestic agreements are presumed not to be legally binding, while commercial agreements are presumed to be binding. Evidence can be adduced to disprove the relevant presumption. 1.1.7.1 Intention in social/domestic agreements Look out for any relationships. If there is mention of parents and children or, for example, aunts and nephews, there is a question over any agreement as to whether it is binding. The position of spouses/civil partners will depend on their circumstances. Separation is not sufficient to rebut the presumption, but divorce or dissolution is. Assessment tip Look out for unrelated individuals who “have agreed to share their winnings” if their numbers come up in lottery syndicates. It may be that there was no intention to create legal relations. 1.1.7.2 Intention in commercial agreements In commercial agreements, an ex-gratia payment will be non-contractual. Look out for situations where it may have become binding. An agreement may contain a clause which is described as “an honourable pledge” clause or a “TINALEA” (this is not a legally enforceable agreement) clause. Either will be sufficient to make the agreement non-enforceable. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 13 Contract Law Cases Balfour v Balfour 2 KB 571 is the leading authority on there being no intention to create legal relations in socio/domestic situations. MacInnes v Gross EWHC 46 (QB) is one of the leading authorities for a finding of intention in commercial agreements. Do you agree that these principles are logical? 1.1.8 Additional issues Having covered the four principal elements of a contract, there are several additional issues of which to be aware in ensuring that there is a binding contract. 1.1.8.1 Certainty An offer needs to be specific, comprehensive and capable of acceptance and an acceptance needs to be a mirror image of the offer. It follows that any terms of a contract then formed should be certain. The terms could be either express or implied. It is possible to look at previous dealings between the parties to clarify a term of the contract. 1.1.8.2 Formalities Most contracts do not have to be in any particular format. These contracts are known as simple contracts. However, there are some instances when contracts must be in a given format in order to be effective. 1.1.8.3 Contract by deed For a contract to be recognised as a deed, it must be clear that the contract is intended to be a deed – in other words, it is described as a deed, it must be in writing and it must be correctly executed. The requirements of execution consist of getting the person making the deed to sign it, getting that signature witnessed (attested) and then the deed must be delivered. The witnesses who attest the signature must do it in the presence of the signatories. 1.1.8.4 Contracts which must be in writing Examples of contracts which must be in writing include contracts relating to land, contracts relating to share transfers and some consumer credit agreements. Contracts relating to land are covered by the Law of Property (Miscellaneous Provisions) Act 1989. Section 2(1) states that a contract for the sale of land may only be made in writing; all terms which the parties have expressly agreed must be “incorporated” in one document. However, if the parties are exchanging contracts, then the terms must be contained in both documents. “Incorporated” means that it is possible for the terms of the contract to be contained in another document and included into the contract by reference to that other document under s 2(2). The document which incorporates the terms should be signed by each party unless the contracts are being exchanged. In the case of exchanged documents, the same document does not have to contain the signature of both parties. 1.1.8.5 Contracts which must be evidenced in writing Contracts which must be evidenced in writing are less formal than having to put the contract in writing. In this case, the contract merely has to be supported by a note or memo in writing, which covers all the material terms. It is a very old requirement, which dates back to the Statute College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 14 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE of Frauds 1677. Now, the requirement only applies to contracts of guarantee and contracts relating to land. A contract of guarantee is defined under the statute as a “promise to answer for the debt default or miscarriages of another person”: s IV. 1.1.8.6 Contracts via email Under s 7 of the Electronic Communications Act 2000 and art 25(1) of the Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC OJ L 257/73 electronic signatures are legally recognised and allow contracts to be formed via email. 1.1.8.7 Capacity Capacity is necessary to enter into a contract. All adults will normally have capacity but there are several categories that have special rules. There are also rules which apply to corporations but we will concentrate on those applying to minors, substance abusers and those under a mental incapacity. Minors Minors are classed as those under 18. The basic common law principle is that minors are not bound by contracts they have entered. However, there are two groups of minors’ contracts which can be binding – some contracts are valid and some contracts are voidable. Contracts for necessaries are valid contracts. Necessaries may be goods or services. A minor is bound by a contract for necessaries if it is for the minor’s benefit. If the contract is not for the minor’s benefit, then it will not be binding, unless the minor ratifies it on reaching majority. The Sale of Goods Act 1979 defines necessaries as goods “suitable to the condition in life of the minor and to his actual requirements at the time of sale and delivery”. Therefore, it can be said that necessaries extend beyond absolute essentials but what is necessary for any particular minor depends, to an extent, on their social status and their actual requirements at the time of making the contract. In other words, whether a contract is a contract for a “necessary” is a question of fact and will change over time. So, these kinds of contract might include, for example, the purchase of clothes or a mobile phone. A contract of employment is binding on a minor if it is for the minor’s benefit. In the case of voidable contracts, the minor can repudiate the contract before they reach majority or within a reasonable time afterwards. If a minor repudiates a contract, there is no further liability. Under the Minors’ Contract Act 1987, a guarantee of a minor’s obligations is enforceable: s 2. Under s 3, if a contract is unenforceable against a minor or repudiated by the minor, then the minor may be ordered to transfer to the other party any property acquired by the minor, if it is just and equitable to do so. Substance abuse Substance abuse can also impact upon capacity. A substance abuser may not be liable under a contract if, at the time the contract is made, the person is not aware what they are doing and the other party knows this. If this is the situation, then the contract is voidable. In regard to necessaries, s 3(2) of the Sale of Goods Act 1979 states, “where necessaries are sold and delivered to a minor or to a person who by reason of mental incapacity or drunkenness is College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 15 Contract Law incompetent to contract, he must pay a reasonable price for them”. Mental incapacity Mental incapacity is dealt with under s 2 of the Mental Capacity Act 2005 and refers to the situation where individuals are unable to make a decision for themselves in relation to the matter when the contract was made. It does not matter whether the impairment is permanent or temporary. If a person with a mental incapacity enters a contract for necessaries under s 7, then the situation is treated similarly to a minor – it needs to be considered whether the goods or service are “suitable to the person’s condition of life and to his actual requirements”: see Nash v Inman 2 KB 1. Commentary Mental Incapacity Act 2005 s 3(1) gives further guidance on the required mental impairment in terms of the inability to: understand the information relevant to the decision retain that information use or weigh that information as part of the process of making the decision, or communicate the decision (whether by talking, using sign language or any other means). 1.1.9 Privity and the rights of third parties The rule at common law is that a third party cannot acquire rights under a contract nor can a third party be made liable under it. The reasons for this are: there is an absence of consideration there is no direct promise by a contracting party, and the difficulty in varying the contract (but see Contracts (Rights of Third Parties) Act 1999). Only a person who is a party to a contract can sue on it. 1.1.9.1 Collateral contract There are circumstances where a separate contract can arise between the promisor and the third party. This is known as a collateral contract and will enable the third party to bring an action in contract against the third party. For example, if A enters into a building contract with B and instructs B to enter into a contract with C for a material used in the construction, A may have the right to claim damages from C if the material turns out to be defective. 1.1.9.2 Third-party rights At common law, there may be ways to find a remedy if a claimant is a third party to a contract. It may be possible to exercise rights in a different capacity, such as an executor or administrator, or for a party to the contract to make a recovery which encompasses damages on behalf of the third party. For example, a claim in damages for distress for a holiday which does not live up to the brochure by a party to the contract and an additional claim for that party’s distress caused by their family’s disappointment. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 16 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE 1.1.9.3 Contracts (Rights of Third Parties) Act 1999 The Contracts (Rights of Third Parties) Act 1999 allows a third party to enforce a term of a contract under which they benefit and have been identified as a third party: see s 1(3). However, it does not permit contracts to be enforced against third parties. Case The traditional leading authority regarding rights of third parties to a contract is Tweddle v Atkinson (1861) 1 B & S 393; 121 ER 762. In this case, the fathers of a man and a woman who were about to be married entered into an agreement between themselves that each would pay sums of money to the couple. Unfortunately, the father of the bride died before he paid the money to the couple and the father of the son died before he could sue on the agreement between the parties. As a result of this, the groom brought a claim against the executor of the will for the payment that was previously agreed between the fathers. The court rejected the groom’s claim. It held that the groom was not a party to the agreement between the fathers and he did not provide any consideration for the promise made by the father of the bride. Also, as a stranger to the contract, the son could not enforce it. On this basis, the court found in favour of the executor of the father of the bride’s will. The decision would be different today due to the Contract (Rights of Third Parties) Act 1999. 1.1.10 Summary of key principles The core elements of a contract are offer, acceptance, intention to create legal relations and consideration. An offer needs to be specific, comprehensive and capable of acceptance. It should be distinguished from an invitation to treat, such as an advert. For an acceptance to be valid, it must match the offer exactly (“mirror image” rule). Note the different rules around when and how acceptance is communicated and received. Consideration can be executed (an act in return for a promise, which constitutes a unilateral contract) or executory (a promise for a promise or a bilateral contract). Consideration must have sufficient value and must not be past consideration, unless an exception applies. Promissory estoppel is a promise not to enforce contractual rights which is given without consideration. It can be used where certain conditions are met. There must be an intention to create legal relations. Social/domestic agreements are presumed not to be legally binding, while commercial agreements are presumed to be binding. Capacity is also required to enter into a contract – note the rules for minors, substance abusers and those under a mental incapacity. Only a person who is a party to a contract can sue on it (privity of contract), however note the exceptions to enforce third party rights. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 17 Contract Law Assessment tip Check any dates in a question and confirm if all the elements of a contract are present to make it binding. Consider the following questions: Offer and acceptance – mirror image? Communicated? Postal rule? Certainty – are the terms clear? Consideration – is it sufficient or not adequate? Intention to create legal relations – relations or friends? Capacity – over 18? Under the influence? Mental impairment at the time of contract? Privity of contract – who are the parties to the contract? Rights of third parties – is there a benefit to the third party? College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 18 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE 1.2 TERMS Relevant SRA SQE Assessment specification Functioning Legal Knowledge: Contract terms: express terms incorporation of terms terms implied by common law and statute exemption clauses the interpretation of contract terms (conditions, warranties and innominate terms) variation, and unfair contract terms. 1.2.1 Introduction This chapter will introduce you to the fundamental principles that will underpin your knowledge of contractual terms – incorporation of terms, the interpretation of terms, express terms, implied terms, variations, exemption clauses and unfair contract terms. Once it has been determined that a contract exists between the parties, it is necessary to know on what basis that contract has been concluded to work out what rights and obligations the parties have. This is not always straightforward, as many contracts are not in writing and most parties do not actually negotiate the terms before they enter into the contract – for example, when you buy a coffee, there is generally no negotiation. But if the contract is more complex, then there are various sources from which the terms can be drawn. It is still important to know what terms are contained within the contract because rights and obligations will arise as a result of that contract. So, even though the purchase of the coffee was not negotiated, there are a large number of terms which will set down by the store and usually found on their website, as well as terms which are implied into the purchase by statute. These might include, for example, that the goods are of satisfactory quality or that they are fit for the purpose for which they have been bought. 1.2.2 Contents of the contract 1.2.2.1 Term or representation? If a contract is being negotiated, it is important to determine whether any statement made before the contract is entered into becomes either a term of the contract (which then becomes binding on both sides) or whether the statement is regarded as being a mere representation which has induced somebody to enter into a contract. If the statement is a term, then remedies for breach of contract are available in case of breach. If it is a representation, then the remedy will be under misrepresentation. The starting point is usually to decide whether a statement made in negotiations is a term of the contract or a “mere representation” (a negotiating tactic to persuade a party to enter into a contract). College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 19 Contract Law There are a series of tests which are used for determining the intention of the parties: The terms contained in writing are not the whole agreement: if, when the contract is written down, any statements made beforehand are not included, then the court may treat the contract as the entire agreement. However, there are situations where a pre-contractual statement becomes an overriding oral warranty. Importance of the statement: the test which is applied here is whether the statement made is so important that the contract would not have been entered into if it had not been made. Timing: the closer in time to the point at which the contract was made, the more likely it is that any representation will become a term. Skill and knowledge of the maker of the statement: the courts will take into account whether the maker of the statement had any particular expertise relevant to the contract. If the seller did not have the necessary skill or expertise, then their statement will not become a term of the contract. If the seller is an expert, it will. Verification: if one party advises the other to verify the truth of information given, then that statement is likely to be a representation. Case Inntrepreneur Pub Co v East Crown Ltd Lloyd’s Rep 611 is the leading authority for some of these tests. Why does it matter if a statement is a term or representation? 1.2.3 Parol evidence rule The parol evidence rule states that external evidence should not be used to determine the terms of a contract. However, there are now so many exceptions to the rule that it is usually confined to situations where the parties have agreed that the written agreement contains the whole agreement (see below). 1.2.4 Entire agreement clause An entire agreement clause means that the written version of the contract is a complete record of what the parties have agreed. The courts will generally disregard any oral warranties. 1.2.5 Categorisation of terms Once it has been decided whether a statement is a term or representation of the contract, the next stage is to consider, if it is a term, what type of term it is. Again, this has consequences for the operation of the contract and what remedies are available if a term of the contract is broken. There are three groups of terms: conditions (major terms) warranties (minor terms), and innominate terms (undetermined until they are breached). 1.2.6 Conditions A condition is a major term of the contract, breach of which is so fundamental that the contract will come to an end and damages can be claimed. There are several different types of conditions. Probably, the most common and most important are “promissory” conditions and time conditions. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 20 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE A promissory condition is defined as a term of the contract under which a party promises to do something and, if they fail to perform the promised act, it will be regarded as a breach of contract. A term may be classified as a condition by statute such as in the Sale of Goods Act 1979 (SGA) or the Consumer Rights Act 2015 (CRA). If a condition precedent exists, this means that the contractual obligation will not come into existence until a specified event has happened. A condition subsequent operates in the opposite way; if a specified event happens, then it brings an existing contractual obligation to an end. The parties may describe a term as a “condition”, but this is not conclusive. For the court to decide that a term of the contract is a condition, either: performance of that term “goes to the root” of the contract, or certain terms will be regarded as conditions because of an “industry standard” and the need for certainty in maintaining that standard. It is possible to make time of the essence in a contract. For an example, if the contract is for perishable goods or if a contract has to be completed by a certain date or for a certain event, then there will be a condition of the contract which states that time is of the essence. If there is a time clause in the contract, the courts usually construe this strictly. If time is of the essence in a contract, then breach of a term relating to time will be regarded as a breach of condition and entitle the non-breaching party to terminate the contract. It may be possible that, if the performance required under the contract happens 10 minutes after the specified time, it will be treated as being too late and the party in breach if time is of the essence. Time can be made of the essence by the innocent party giving notice in the following situations: the innocent party was ready and willing to complete the other party has been guilty of unreasonable delay, or a reasonable period within which completion must take place. 1.2.7 Warranties With a warranty, the consequences are usually less serious. A breach does not bring the contract to an end but does allow the innocent party to claim damages. 1.2.8 Innominate terms An innominate term is one which is not categorised either as a condition or a warranty until after it has been breached. The courts will then decide if it is a condition or a warranty by determining whether the “substantial benefit” of the contract has been lost. If so, then the court will determine that it is a condition of the contract which brings it to an end. If it is a minor breach, in other words, the substantial benefit of the contract is still available, that will be a breach of warranty. Cases The harshness of being 10 minutes late when time is of the essence was demonstrated in the Privy Council case of Union Eagle Ltd v Golden Achievement Ltd AC 514 when the prospective purchaser paid the balance due on a flat they were trying to buy in Hong Kong 10 minutes late and lost their deposit (and the flat). College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 21 Contract Law Leading authorities on the difference between a condition and a warranty are Poussard v Spiers (1876) 1 QBD 410, where a term for an opera singer to attend the opening night of a production was held to be a condition and Bettini v Gye (1876) 1 QBD 183, where a term requiring a singer to attend all rehearsals was held to be merely a warranty. L Schuler AG v Wickman Machine Tools Sales Ltd AC 235 is a leading example of a case where the parties labelled a clause as a condition, but the court held that it was, in fact, merely a warranty due to its relative lack of importance in the contract. Hong Kong Fir Shipping Co Ltd v Kawasaki Kishen Kaisha Ltd 2 QB 26 is the leading authority on innominate terms. It was held that a term describing a ship as “sea- worthy” was too vague to be labelled until such time as it was breached, when it was found that the problems with the engine could be either a breach of warranty or a breach of condition depending on how long the ship was stuck in port being repaired. Can you see how the existence of innominate terms allow for greater flexibility? 1.2.9 Implied terms An implied term is a term in a contract which has not been expressly stated, but which the courts are willing, or required by statute, to imply. It should be noted generally that an express term will override an implied term, unless it is implied by statute. Terms can be implied in several ways: by statute in law in fact, and by custom. 1.2.9.1 Statutory examples of implied terms There are many statutory examples of implied terms. For example, commonly used implied terms are found in statutes such as the Unfair Contract Terms Act 1977 (UCTA), the CRA and many statutes which relate to employment. The parties to the contract have no choice whether they wish to include the term. The term is part of the contract whether the parties intended it to be or not. Additionally, the statute will state what the type of term should be; for example, the terms implied under the CRA and the SGA are all conditions of the contract. Assessment tip If you find that a question involves a term implied by statute, be wary. Within the suggested answer, the options might include the right statute but wrong section, a statute which did apply but has been repealed or a statute which has a plausible name but does not actually exist. 1.2.9.2 Terms implied “by law” Terms implied “by law” are terms which should be present in certain types of contract regardless of whether the parties want them. For example, in relation to contracts of employment, there are a group of implied terms which have developed over the years, which the courts recognise as being so important that they are implied into all contracts of employment. These “implied duties”, as they are sometimes called, include terms such as a duty of mutual respect placed on both parties, the employer has a duty to pay wages and provide a safe system of work and the employee is under a duty to use reasonable skill and care in the performance of their duties. These terms can be added to and re-interpreted. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 22 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE Assessment tip This area overlaps with the employer’s non-delegable duty, so be careful in case a question suggests tort-based answers to what is a contract-based question and vice versa. There are two conditions to be complied with before a term could be implied by law. Firstly, the term would have to be common for the type of contract. Secondly, there must be a gap in the contract to be filled. 1.2.9.3 Terms implied “in fact” For terms implied “in fact”, the courts will apply a subjective test to ascertain the intention of the parties. This test is used for individual contracts, not a class of contracts, as seen with terms implied by law. The term will only be applied if necessary. There are several tests that can be used to determine necessity: The “business efficacy” test looks at the “workability” of the contract and whether it needs a term to make it work as the parties intended. As the business efficacy test is very restrictive, the courts later developed the officious bystander test. It is an attempt to find both the parties’ presumed intentions at the time of the contract – in other words, a term may be implied where it is so obvious that it goes without saying. There is a third category where the courts will look to see what the reasonable expectations of the parties are under any given agreement. Case These tests are quite strictly applied, as the courts do not wish to unduly interfere in business agreements. The courts will not imply terms simply to make a contract more reasonable or efficient: Attorney General of Belize v Belize Telecom Ltd 1 WLR 1988; UKPC 10. Assessment tip Be careful if a question tries to incorporate both terms implied in law and terms implied in fact. 1.2.9.4 Customary term For a customary term to be implied into a contract it should be: certain notorious (well-known in the area or market), and reasonable. For example, it may be customary that there is a local factory shutdown in an area at a certain point in time. It will be a customary term of the contract that the employees’ summer holidays are taken during the shutdown. Customary terms can work either by a location or an industry. Make sure that all three elements are present. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 23 Contract Law Case British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd QB 303 is the leading authority on customary terms in commercial contracts. 1.2.10 Exclusion clauses and unfair terms An exclusion clause is “a clause in a contract or a term in a notice which appears to exclude or restrict a liability or a legal duty which would otherwise arise”. These are terms which purport to exclude or limit obligations under the contract. The purpose of an exclusion clause is to either exclude or restrict liability or a legal duty which could arise under that contract. Exclusion clauses are dealt with both at common law and also by statutes. The courts protect consumers in two ways: an exclusion clause must be properly incorporated into contract, and it is interpreted strictly. Commentary Exclusion clauses are necessary in commerce and in everyday life for the parties to be able to allocate risk with some certainty and to keep prices down. However, both parties need to be fully aware of them and agree to them and they need to be understandable and fair. Assessment tip You need to look out for clauses which exclude liability for death or personal injury or that try to exclude statutory rights under the SGA or the CRA. Also, be aware of the parties involved. Are they consumers or businesses? Remember that businesses can act as consumers too. 1.2.10.1 Exclusion clauses at common law When dealing with exclusion terms under common law, it has to be shown that: the clause is incorporated the terms are clear, and there is no reason in law that the term cannot be applied. A party attempting to exclude/limit liability will have to show: incorporation – in other words, that the clause is a term of the contract: o a document containing notice of clause must be an integral part of the contract o a term is not usually disputed if it is included in a document which is signed o a term cannot be part of contract unless it is put forward before the contract is signed o a term is not binding unless the person whose rights it restricts is sufficiently aware of it at time of agreeing to it, and o any onerous terms must be highlighted construction – in other words, that the term deals with actual loss or damage incurred and protects the person/body seeking to rely on it, and College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 24 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE effectiveness – in other words, that the law does not prevent or restrict the operation of the clause. 1.2.10.2 Incorporation Incorporation may be by signature, notice or course of dealing. Incorporation by signature You should check whether the document has been signed or not. If the document has been signed, then the party will be bound. If you sign a document, you are held to have agreed to terms, even if not you have not read it. However, this rule will not apply if the party who puts forward the document gives a misleading explanation of the term’s legal effect. Incorporation by reasonable notice For a term to be part of contract, the party affected by it must have been given adequate notice of the term. Therefore, reasonable notice of the existence of clause must be given by the party relying on it at or before the time the contract was entered into. One issue to be aware of is the form of the notice. You should distinguish between a contractual document or a receipt. The courts developed the following principles to apply when deciding whether a document is a contract or mere receipt: If the recipient did not see or know that there was writing on the ticket, they are not bound by the clause. If the recipient knew that there was writing on the ticket and knew and believed that writing contained conditions, then they are bound by them. If the recipient knew that there was writing on the ticket and the delivery of the ticket to them was in such a manner as to amount to reasonable notice that the writing contained conditions, then they are bound by them whether or not they knew or believed that the writing contained conditions. Onerous terms Onerous and unusual terms should be drawn to the attention of the party affected by it. Even if the same practice is followed on every occasion, those occasions must be sufficiently numerous and proximate in time to make it clear to the reasonable person the terms on which the party does business. Check when any notice could have been seen by the party affected. If it is post-contractual, it will not be effective. Course of dealing An exception to the rule that there should always be prior notice is when parties have had consistent dealings with each other in the past and documents contain similar terms. However, be aware the courts take a stricter approach to businesses in deciding a clause can be incorporated by course of dealing than they do consumers. The courts have distinguished the situation where there were three or four transactions over a five-year period and where one party was a consumer and one where both parties are businesses. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 25 Contract Law Cases The above principles come from the following cases. L’Estrange v F Graucob Ltd 2 KB 394 – incorporation by signature – but note this principle can be rebutted if the party seeking to rely on the clause has misrepresented its significance in some way. For example, by saying something like “don’t worry about that we never rely on it”: Curtis v Chemical Cleaning and Dyeing Co 1 KB 805. Parker v South Eastern Railway 2 CPD 416 – incorporation by reasonable notice – which must be easily visible/accessible. Also, such notice must be prior to the contract being entered into: Olley v Marlborough Court Ltd 1 KB 532. J. Spurling Ltd v Bradshaw 1 WLR 461, 466 – onerous terms – where Lord Denning said such terms should be particularly highlighted. Hollier v Rambler Motors (A.M.C.) Ltd 2 QB 71 – incorporation by a previous course of dealings. British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd QB 303 – in commercial contracts, incorporation can also be by well-known trade custom. Can you think of any other ways in which incorporation could take place? 1.2.10.3 Construction The exclusion clause must be clear and unequivocal. Any ambiguity will be interpreted against the person who relies on the clause. This is called the “contra proferentem” rule. However, the contra proferentem rule is not applied so strictly to limitation clauses. Liability can only be excluded if clear words are used. It is unlikely that a clause would cover negligence unless it was specific. If it is wanted to exclude/limit damage by negligence, then the word “negligence” or an accepted synonym for it must be used in the clause. 1.2.10.4 Effectiveness The effectiveness of an exclusion clause may be limited by misrepresentation, an overriding oral assurance, collateral contracts or third parties. Cases Contra proferentem is of very limited application in commercial contracts: Persimmon Homes Ltd v Over Arup & Partners Ltd 2 CLC 28; EWCA Civ 373. Canada Steamship Lines v The King AC 192 is the leading authority on whether an exclusion clause covers negligence. Lord Morton stated: If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens … If the words used are wide enough for the above purpose, the court must then consider whether “the head of damage may be based on some ground other than that of negligence”... Phrases such as “howsoever caused”, “howsoever arising” are generally accepted as including negligence. Were you aware this was the case? 1.2.11 Statutory unfair terms Unfair terms are governed by statute for both business to business and consumer contracts. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 26 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE Business to business contracts are covered by UCTA. Business to consumer contracts are covered by the CRA. 1.2.11.1 Unfair Contract Terms Act 1977 UCTA applies when certain types of exemption clauses have no effect and other types of exemption clauses are effective if they are reasonable. It only applies to business liability – that is, acts done or to be done in the course of a business and liability arising from occupation of business premises. It includes the activities of professions, government departments and local/public authorities. The most important clauses are dealt with below. 1.2.11.2 Section 2(1) and (2): negligence liability Under UCTA s 2(1), it is not possible to exclude liability for death or personal injury. It is possible to exclude liability for negligence which involves damage to property so long as the exclusion clause is reasonable: s 2(2). Commentary Did you realise that it is impossible for companies to exclude all liability for death or personal injury? Does that make you feel safer? 1.2.11.3 Section 3: liability arising in contract Section 3 applies where one party deals on the other’s written standard terms of business. The other party cannot seek to exclude or restrict liability for breach of contract except where the exemption clauses pass the reasonableness test. For example, a contact term which states that a buyer cannot refuse to pay for incorrect or defective goods is an exemption clause and, under UCTA s 3, would fail the reasonableness test. 1.2.11.4 The reasonableness test Schedule 2 to UCTA sets out the criteria that are used to determine whether the clause is reasonable: the relative strengths of the parties' bargaining positions whether the customer received any inducement to accept the term whether the customer knew or should have known that the term was included in the case of a term excluding liability if a condition is not complied with, the likelihood of compliance with that condition at the time the contract was made, and whether the goods were made or adapted to the special order of the customer. The following factors are relevant to reasonableness: any fault wholly on the defendant’s part the claimant should not be expected to insure against such loss, whereas the defendant could there was a grossly disproportionate and unreasonable allocation of respective risks, which was not negotiated by the defendant the clause was not normally relied upon where there was a genuine and justified claim, and College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 27 Contract Law the meaning and effect of the clause was obscure. Where a clause limits liability to a specific sum of money, the sum specified should be justifiable. Cases One factor that is not listed in Sch 2 but whose relevance is stressed in UCTA s 11(4) is the importance of which party could or should take out or have the benefit of relevant insurance to protect them from loss of the type that has occurred. Section 11(4) states: Where by reference to a contract term or notice a person seeks to restrict liability to a specified sum of money, and the question arises (under this or any other Act) whether the term or notice satisfies the requirement of reasonableness, regard shall be had in particular (but without prejudice to subsection (2) above in the case of contract terms) to — (a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and (b) how far it was open to him to cover himself by insurance. There is also the matter of how s 2 factors can be interpreted and applied. Leading case authorities on how the courts have interpreted the issue of reasonableness under UCTA, include George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd 2 AC 803 – the traditional approach where the courts were quite happy to rule a commercial exclusion clause to be unfair under the terms of the Act and the more modern approach as seen in Watford Electronics Ltd v Sanderson CFL Ltd 1 All ER (Comm) 696; EWCA Civ 317, where the courts were reluctant to intervene in the business of commercial parties, not wanting to be seen as unduly interventionist. Do you agree that the courts should be reluctant to intervene in commercial contracts? 1.2.12 Consumer Rights Act 2015 The CRA offers four strands of protections. It: makes certain exclusions of liability for negligence automatically ineffective makes certain unfair terms ineffective provides that contracts must be in clear and intelligible language, and implies terms that protect the consumer into all consumer contracts. There is little precedent law to date, so cases decided under the previous legislation offer some guidance on the interpretation of the CRA. 1.2.12.1 Consumer contracts The CRA only applies to consumer contracts. These are defined in s 61 as “a contract between a trader and a consumer”. A “consumer” is defined in s 2(3) as “an individual acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession”. Consumer contracts fall into three groups under the CRA: contracts for goods, contracts for services and contracts for digital content. Check whether any purchase is for business use or personal. If it is for business use, then the UCTA applies. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 28 THE COLLEGE OF LEGAL PRACTICE SOLICITORS LEGAL KNOWLEDGE Commentary For example, if a mobile hairdresser buys a hairdryer to use as part of their business, they are not acting as a consumer but, if they buy it for their own personal use at home, they are acting as a consumer. 1.2.12.2 Unfair terms Protection from unfair terms is found in CRA s 62(4). Pursuant to that section, 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”. In deciding whether a term is unfair under s 62(5), the court will take into account the nature of the subject matter and the circumstances existing when the term was agreed. The court should also look at all the other terms of the contract to put the term in context. The CRA contains a list of the type of terms that could be unfair in Sch 2, but this is not exhaustive. 1.2.12.3 Good faith “Good faith” means that the term in dispute did not cause a significant imbalance in the parties’ rights and obligations: Director General of Fair Trading v First National Bank plc 1 AC 481; UKHL 52. 1.2.12.4 Notices Look out for “consumer notices”, which relate to rights or obligations as between a trader and a consumer or purport to exclude or restrict a trader’s liability to a consumer. Examples include signs in a shop or statements on a firm’s website that could restrict a trader’s liability to a consumer. Similar to the test for unfairness, here the test is “a notice is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer”: s 62(6). 1.2.12.5 Fairness and transparency The CRA excludes core terms from the scope of fairness but only if they are “transparent and prominent”: s 64(2). Kásler v OTP Jelzálogbank Zrt (Court of Justice of the European Union, C- 26/13, ECLI:EU:C:2014:282, 30 April 2014) suggests that these core terms are those that “lay down the essential obligations of the contract and, as such, characterise it”. The CRA s 64(3) defines “transparent” as being “expressed in plain and intelligible language and (in the case of a written term) is legible”. Section 68 requires written terms in consumer contracts and written consumer notices to be transparent. In assessing transparency, the court can look at font style and size, as well as the layout of the term and where it is in the contract. The CRA s 64(4) states that a term is prominent “if it is brought to the consumer’s attention in such a way that an average consumer would be aware of the term”. An average consumer is defined as being “reasonably well-informed, observant and circumspect”: s 64(5). Basically, this means check for core terms in the small print. If there are any hiding there, they will be subject to the fairness test. Additionally, under s 64(1)(b), the price can be excluded from the fairness test. If a term is found to be unfair, then it will be deleted from the contract. College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 29 Contract Law 1.2.12.6 Enforcement Enforcement of contract is also undertaken by various regulators but is mainly in the remit of the Competition and Markets Authority. Under CRA s 69, injunctions are set out as the remedy to prevent the continued use of unfair terms and terms which are not transparent. 1.2.12.7 Excluding or restricting liability The CRA ss 31, 47 and 57 deal with attempts to exclude or restrict the liability of traders in relation to the terms that the CRA implies into goods, digital content and services contracts. Section 65 provides that a trader cannot exclude or restrict liability for death, personal injury or negligence. This is the consumer equivalent of UCTA s 2(1). 1.2.12.8 Miscellaneous provisions Section 6 of UCTA relates to attempts to exclude terms implied by the SGA. It provides that SGA s 12 (the seller’s implied undertakings as to title) can never be excluded: s 6(1). The SGA ss 13–15 (seller's implied undertakings as to conformity of goods with description or sample or as to their quality or fitness for a particular purpose) cannot be excluded, unless the term satisfies the requirement of reasonableness. Section 31 of the CRA covers liability that cannot be restricted or excluded in a consumer contract. A consumer is not bound by a contract term purporting to exclude or restrict liability for (s 31(1)): goods to be of satisfactory quality goods to be fit for particular purpose goods to be as described other pre-contract information included in contract goods to match a sample goods to match a model seen or examined installation as part of conformity of the goods with the contract goods not conforming to contract if digital content does not conform trader to have right to supply the goods etc delivery of goods, and passing of risk. 1.2.13 Variation of contract terms Sometimes, the parties may wish to make changes to a contract, for example, to increase or reduce work or change timescales. Common law allows for a written contract to be changed or varied by subsequent mutual agreement of the parties, whether oral or written. However, for such variations to be effective, there must be: a valid agreement between the parties – mere notification by one party to the other is not effective, and some form of consideration supporting this agreement (see 1.1.5.9). Variation can also lead to discharge of the contract by agreement (as dealt with in 1.4.3). College of Legal Practice Ltd (UK ID 11734212) © Copyright 2024 (used under licence from the copyright owner) 30

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