Business Law (BLM1007) - Contract Law Notes PDF

40701102\_s**Business Law (BLM1007)** **Topic 3: Law of Contract** [Topics:] - - 1. Offer 2. Acceptance 3. Intention to create legal relations 4. Consideration [ ] - - - - - Unfair Contract Terms Act - *Contra Proferentum* Rule - - - Common Law remedies - Equi...

40701102\_s**Business Law (BLM1007)** **Topic 3: Law of Contract** [Topics:] - - 1. Offer 2. Acceptance 3. Intention to create legal relations 4. Consideration [ ] - - - - - Unfair Contract Terms Act - *Contra Proferentum* Rule - - - Common Law remedies - Equitable remedies [Lesson Objectives:] By the end of this topic, you will be able to: - Describe the four elements of a contract - Distinguish an offer from an invitation to treat - Understand the basic difference between conditions, warranties and innominate terms - Understand the meaning of void and voidable contracts - Understand the basic difference between conditions, warranties and innominate terms - Understand the effects of an exemption clause - Explain how a contract may be discharged - Describe the effects of frustration under common law and statute - Identify the remedies available for breach of contract **\* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \*** **1.1 Introduction** The Law of Contract is a very important part of the business world. The rules in this area touch every one of us almost daily, particularly at the workplace. Knowledge of these laws would help you to plan and manage your business activities better and also to protect your interests. As such, the two lectures on the Law of Contract have been designed to give you a general overview of the laws which govern contractual relationships. At the end of these lectures, you should know the basic principles and understand how they would apply in simple everyday situations. **1.2 Definition of a Contract** **A contract is an agreement which is enforceable by law between two or more persons for some purpose, their intention being to create a legally binding contract.** **1.3 Elements of a contract** The basis of a contract is **an agreement**. To have an agreement, there must be **a meeting of minds**. Thus, if one party has one thing in mind and the other party has something else in mind, there is no agreement, hence no contract. An agreement is usually found to exist when one party makes an offer which the other party accepts. The use of "Offer" and "Acceptance" is essential for determining whether a contract exists. The following **four elements** make up a **binding contract**: a. offer b. acceptance c. intention to create legal relations d. consideration All four elements **must be present** in order for a **contract to be valid**. **[\ ]** **[2. Elements of Contract]** **[2.1 Offer (1^st^ element)]** **2.1.1 What is an offer?** A person is said to make an offer when he indicates to another his willingness to enter into a contract on the terms which he sets out in the offer. **2.1.2 Terminology** **Offeror**: The party who makes the offer **Offeree**: The party to whom the offer is made Once the offeree accepts the offer, an **agreement** comes into being. **2.1.3 General Rules on Offer** 1\. An offer may be oral or in writing. 2 An offer may be made to: - a single, definite person - if so, only that person can accept the offer; - a group of persons - if so, someone from the group can accept; or - the world at large - if so, anyone may accept by complying with the terms **[Case law:]** [Carlill v. Carbolic Smoke Ball Co. \[1893\]] **[Facts]**: The defendants (D) placed an advertisement promising to pay £100 to any person who contracted influenza after using their product, "the Carbolic Smoke Ball". They stated that the £1,000 had been deposited in a bank to prove their sincerity. Mrs Carlill used the smoke ball as prescribed but still contracted influenza. She claimed the £100 from D, but D refused to pay, saying their promise to pay was not 'a serious offer'. Mrs Carlill sued D. **[Held]**: The advertisement [was] a valid offer, and therefore capable of being accepted by anyone who used the smokeball and caught influenza. 3\. An offer must be **communicated** to the offeree [before] it can be accepted. The offeree cannot accept an offer unless he knows of its existence. *[Example]: The police offer a reward of \$10,000 to any member of the public who can give information on a wanted criminal. Andy is not aware of the reward but he knows where the criminal is hiding. He informs the police, who catch the criminal. Andy finds out later about the reward, and tries to claim it. Unfortunately, Andy cannot collect the reward because he cannot accept an offer he did not know about.* **2.1.4 Situations which do not amount to an Offer** An offer is the last step before acceptance by the offeree. Once accepted, you have an agreement. Therefore there is a difference between an offer and the following situations: a\. invitations to treat b\. supply of information c\. declaration of intent In these instances, the courts have ruled that [these are not \"offers]\" but [only a step in the negotiations] which may or may not lead to an offer being made. **(a) Invitation to Treat** An invitation to treat is **an invitation to others to enter into negotiations** which may lead to the making of an offer, e.g. the display of goods in a self-service shop or in a shop window is an invitation to treat, not an offer. **[Case law]**: [Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd \[1953\]] **[Facts]**: It was an offence to sell certain restricted medicines in a pharmacy without consulting a registered pharmacist. In the defendant's pharmacy, customers could select any of the products (including restricted medicines) and bring them to the counter for payment where the pharmacist could remove any prescriptive drugs. Whether the pharmacy committed an offence depended on whether a sale (contract) was concluded when the customer brought the drugs to the counter. **[Held]**: The display of goods on the shelves was merely an invitation to treat. Hence, when the customer selects a prescriptive drug from a shelf and brings it to the counter, it is an offer from the customer to buy the drug. There is therefore no sale (no contract) until the customer's offer to buy the product is accepted by the Pharmacist. **[Case law]**: [Fisher v. Bell \[1961\]] **[Facts]**: A flick knife was displayed in the shop window with a ticket stating the price. The shopkeeper was prosecuted for offering to sell the flick knife, a prohibited item. **[Held]**: The display of goods in a shop window is not an offer for sale but merely an invitation to treat. Therefore, the shopkeeper is not guilty of the offence. **(b) Supply of Information** The supply of information or a statement of selling prices given in reply to a request is not an offer. *[Example]:* *A asks B: \"What is the lowest price for your car?\"* *B replies:\"\$30,000.\"* *A says: \"I agree to buy your car for \$30,000.\"* Is there a contract between A and B? No, there is no contract. B was merely supplying the information requested by A. B was not making an offer, and A cannot purport an offer that has not been made. **[Case law]**: [Harvey v Facey \[1893\] ] **[Facts]**: Harvey telegraphed Facey in relation to a piece of property known as Bumper Hall Pen, asking "What is the lowest price for Bumper Hall Pen?" Facey replied "Lowest price for Bumper Hall Pen is £900." Harvey replied "We agree to buy Bumper Hall Pen for £900 pounds asked by you". Facey refused to sell the property for £900 and Harvey sued him for breach of contract. **[Held]**: There was no contract between Harvey and Facey. Facey was merely stating the lowest price as requested by Harvey. He was not offering to sell the property to Harvey. **(c) Declaration of Intent** A statement expressing an intention to do something is not an offer capable of being accepted. *[Example]: Twangs Department Store announced that there would be a big mid-year sale, but it was later cancelled. If you had gone to Twangs believing there to be a sale, can you sue Twangs for breach of contract? In the first place, was it an offer at all? No.* **2.1.5 Termination of Offers** An offer may be terminated in three ways: a\. revocation of the offer b\. rejection by the offeree c\. lapse of offer **(a) Revocation of the offer** An offer can be revoked at any time before it is accepted but the revocation must be **communicated** to the offeree. This means that the offeree must [actually know] of the revocation of the offer by the offeror. **[Case law]**: [Byrne v Van Tienhoven \[1880\]] **[Facts]**: The following was a series of communications between the plaintiff and defendant: Oct 1^st^: D, a company in the UK, sends a letter offering to sell tinplates to P in New York for a certain price Oct 11^th^: P receives the letter and immediately telegraphs his acceptance Oct 8t^h^: D writes another letter revoking his earlier offer (because the price of tinplates had gone up) Oct 20^th^: P receives the letter of revocation P sued D for breach of contract. **[Held]**: The court agreed with P. P had accepted the offer on Oct 11^th^. P only knew about the revocation on Oct 20^th^. The revocation was therefore ineffective as it was received [after] P had accepted the offer. **(b) Rejection by Offeree** Rejection of an offer can take place when: a\. the offeree communicates his rejection of the offer to the offeror; or b\. the offeree makes a counter offer. A **counter offer** is a new offer made by the offeree by modifying the original terms of the offeror\'s offer. The party who made the original offer may accept the counter offer which then becomes a binding contract but the offeree who makes the counter offer cannot change his mind and revive the original offer unless the offeror agrees to do so. *[Example]:* *Jack: I will sell you my camera for \$500. (offer)* *Jill: That's too much. How about \$400? (counter offer = new offer + rejection of Jack's offer)* *Jack: No thanks. (rejection of Jill's offer)* *Jill: Okay, alright. I will take it for \$500.(tries to accept Jack's offer)* *Jack: No thanks. I've decided to keep the camera.* *Jill: You can't do that! I accepted your offer of \$500. We have a contract. I will sue you!* *Jill is wrong. She had rejected Jack's offer when she made the counter offer. His offer therefore no longer exists and she cannot accept an offer that no longer exists.* **[Case law]:** [Hyde v Wrench \[1840\]] **[Facts]**: D offered to sell a farm to P for £1000. P rejected the offer and made a counter offer to D to buy the farm at £950. D rejected it. P then said he would pay £1000 after all. D by now had decided that he did not want to sell to P for £1000. P sued for breach of contract. **[Held]**: **P** failed in his suit because his offer of £950 was a counter offer which terminated **D\'s** original offer of £1000 which could not be revived after the rejection by **P.** **(c) Lapse of offer** An offer lapses in the following situations: a\. Death of either offeror or offeree before acceptance. Death after acceptance does not affect the contract. b\. Where the offer has not been accepted within the prescribed time. If there is no time limit set, it lapses after a [reasonable] time. **[Case law]**: [Ramsgate Victoria Hotel v Montefiore \[1866\]] **[Facts]**: On 8^th^ June, D wrote to P (a company) offering to buy its shares. D also paid a deposit into P's bank account. P replied on 23^rd^ November stating that it had allotted shares to D and demanding payment of the balance of the share price. D refused to pay the balance. P sued D for breach of contract. **[Held]** P took too long (almost 6 months) to respond to D's offer. D was entitled to refuse to take up the shares in the company because his offer to buy the shares had lapsed after a reasonable time. **[2.2 Acceptance (2^nd^ element)]** **2.2.1 What is Acceptance?** It is the **unconditional** **consent** by the offeree to all the terms of the offer. **2.2.2 General Rules on Acceptance** \(a) Acceptance may be oral, in writing or by conduct (for e.g. sending a cheque by post for some goods) to indicate that you have accepted the offer to buy those goods at the stated price. \(b) Acceptance must be absolute and unconditional i.e. the offeree must accept all the terms of the offer without modification. \(c) The acceptance must conform to the prescribed method. If a particular method of acceptance is prescribed by the offeror, then that method should be followed. - If, however, no particular method of acceptance has been indicated, whatever mode of acceptance which is deemed to be reasonable in that trade would be considered an acceptance. - *[Example]: A offers to sell his Reebok shoes for \$30 and indicates that acceptance should be by phone. B sends his acceptance by leaving a note on A\'s table. Has there been effective acceptance? Why?* - *No, there was no acceptance. B did not accept by the method specified by A.* \(d) Acceptance must be communicated. To accept an offer, the offeree must communicate the acceptance to the offeror. Merely keeping quiet is not enough, as silence is not acceptance. ***[Case law:]*** ***[Felthouse v Bindley \[1862\]]*** ***[Facts]**: P wrote to his nephew D offering to buy his horse for £30 pounds and added "If I do not hear from you, I will consider the horse mine at that price". D did not reply and the horse was not delivered to P. Later there was an auction of D's property and livestock. D told the auctioneer not to sell the horse, but by mistake the horse was sold. P sued the auctioneer for the tort of conversion. P would only succeed against the auctioneer if P could show there was a contract between him and D.* ***[Held]**: There was no contract between P and D. This is because there was no acceptance of P's offer by D. D did not reply, and his silence could not be taken as acceptance.* **[2.3 Intention to Create Legal Relations (3^rd^ element)]** **2.3.1 What is Intention to Create Legal Relations?** Before a contract can be legally enforceable, it must be shown that the parties had [intended] the contract to be legally binding. - If they expressly state that intention, the courts will respect it. - If it is not expressly stated, the courts will apply the following presumptions. **2.3.2 Presumptions** Where it is unclear what the intention of the parties\' was, then the courts make some presumptions: **1. [Commercial and Business Agreements]** The court presumes that the parties **intend** their contract to be legally binding. But the parties to a business agreement can easily get out of this by expressly indicating that the contract is to be binding \"in honour only\",i.e. not enforceable. 2\. **[Domestic and Social Agreements]** **[\ ]** **[2.4. Consideration (4^th^ element)]** **2.4.1 What is Consideration?** **It is some benefit or profit accruing to one party or some detriment or loss suffered or undertaken by the other.** Every agreement involves a promise, either to do something or not to do something. A promise is only legally binding if it is made in return for another promise or an act. This requirement for \"something for something\" is called consideration. The party making the promise must gain some benefit for the promise while the party receiving the promise must suffer some detriment. *[Example]: X agrees to sell Y her laptop for \$500. The consideration for X's promise to deliver the laptop is the \$500 Y promises to pay her for it.* All contracts must be supported by consideration to be legally binding. [An important exception] is **contracts under seal**, or **deeds**. These are very formal contracts which are clearly and carefully worded to be legally binding, where the parties sign their consent and their signatures are witnessed by a third party, usually a lawyer. **2.4.2 Terminology** **Promisor**: The party who makes the promise to do something or not to do something. **Promisee**: The party to whom the promise is made. **2.4.3 Rules on Consideration** **(a) [Consideration must be real]** This means that the consideration given must be of some value, however small. Examples of acts which are **not** consideration: - acts of love and affection, e.g. between parent and child or husband and wife - acts done out of a moral or social duty, e.g. the act of a lifeguard saving a drowning child is not valuable consideration because he is employed to do it **(b) [Consideration need not be adequate]** The general rule is that the parties are free to decide on the terms of their contract. As long as some value is given, it does not matter whether it is proportionate in value to the thing given in return. **(c) [Consideration must move from the promisee ('Privity of contract')]** **Privity of contract** means that only a party to a contract can sue or be sued on that contract. This means that the person to whom the promise is made must furnish the consideration. No third party can derive any benefit or incur any liability on a contract to which he is not a party to. If a person has given nothing, he cannot enforce the promise if it is not kept. ***[Case law]:*** ***[Price v Easton \[1833\] ]*** ***[Facts]**: X owed some money to P but did not have any to pay. P therefore worked out a scheme whereby X would work for D, and in return D would pay P the value of X's salary. X did the work as agreed but D did not pay the money to P. P sued D for breach of contract.* ***[Held]**: There was a contract between X and D, but no contract between P and D. Since there was no contract between P and D, Price was not entitled to sue D for the debt.* [Note]: Remember the tort case of [Donoghue v Stevenson]? Mrs Donoghue could not sue the café owner for breach of contract because it was her friend, and not her, who had paid (i.e. given consideration) for the ginger beer. **As there was no privity of contract between Mrs Donoghue and the café owner, she had to sue under negligence law, and not contract law.** **[Exception to this rule]:** an exception to the 'privity of contract' rule is provided in the **Contract (Rights of Third Parties) Act.** Under the Act a person who is not a party to a contract (referred to in this Act as a third party) may, in his own right, enforce a term of the contract if: - the contract expressly provides that he may; or - the term purports to confer a benefit on him. **This exception will not apply** if it appears that the parties did not intend the term to be enforceable by the third party. **(d) [Consideration must be legal]** For public policy reason, the court will not recognise illegal considerations. *[Example]: David agrees to pay Philip \$50,000 if Philip poisons Charlie\'s coffee. Philip\'s act of poisoning Charlie is illegal. He cannot therefore sue David for the money even if he carried out what he promised to do i.e. Charlie is poisoned.* **(e) [Consideration must not be past]** When a promise is made in exchange for an act which has already taken place in the past, then there is no value for the promise. *[Example]: Andy saves Bill\'s child from drowning in a pool. Bill is very grateful and promises to pay Andy \$500 for his act of saving. Bill later changes his mind and refuses to give Andy the money. Can Andy sue Bill? No. Andy's act of saving the child is **past consideration** and he cannot sue Bill for the \$500 because past consideration is no consideration.* **[\ ]** **[3. Terms and Conditions]** **3.1 Terms** In the course of negotiating a contract, parties would often makes statements which may or may not be intended to be part of the eventual contract. Hence, not all pre-contractual statements will be considered to be part of the contract. Once a contract has been created, one must ascertain what the rights and obligations of each party are which are contained in the **terms** of the contract. **Terms** are statements which **[form part of the agreement]** which set out the duties and rights of each party. These can be oral or written or both. **3.2 Express Terms and Implied Terms** **Express Terms** are terms which are actually communicated to each other by the parties. **Implied Terms** are those which the parties have not communicated to one another but which the law inserts into the contract as a term. The reason why the law inserts these terms is because although the parties themselves did not include the terms, the terms are so obviously necessary to the contract itself that they must have intended such a term. *[Example]: John agrees to sell to Jane a crate of mangoes for \$50, delivery to take place on 1^st^ February. It is agreed the crate will be sealed with a special tape.* *Express terms: Price, date of delivery, sealing of crate with special tape* *Implied Terms: Must have adequate packing material, must be kept refrigerated during delivery (i.e. it is implied that the mangoes will be fresh and undamaged).* **3.3 Conditions, Warranties and Innominate Terms** All terms, whether they are express or implied terms, can be classified as conditions, warranties or innominate terms. **(a) [Conditions]** **A condition is a very important term of a contract,** **one which goes to the root of the contract.** It is so crucial to the contract that if it is breached, the innocent party can treat the contract as being ended, and **can refuse to perform his part** of the contract. **(b) [Warranties]** **A warranty is a term which is not so important to the contract.** If it is breached, the contract is still intact, which means that the **innocent party cannot refuse to perform his part** of the contract. His remedy is to sue the other party for damages. *[Example 1]: Andy, a pop star, signs a contract with Temasek Polytechnic to perform live during TP's orientation program, for which TP will pay him \$5000. Andy fails to turn up on the day. Can TP refuse to pay?* *This is a breach of a condition, because the contract between TP and Andy depended on Andy (and not someone else) performing at TP. TP can therefore treat the contract with Andy as ended and not only refuse to pay Andy the \$5000, but can also engage someone else to perform.* *[Example 2]: Andy, the same pop star, agrees with TP that he will turn up for 3 rehearsals before the orientation week. He appears only for one rehearsal and goes on to perform live as agreed. Can TP refuse to pay Andy?* *The term requiring Andy to rehearse 3 times is only a warranty. It is not so crucial to the contract for TP to refuse to pay Andy. The main purpose of the contract was the live performance. So TP can only sue Andy for damages and cannot treat the contract as ended and engage someone else.* **(c) [Innominate Terms]** (*for reading only*) **Sometimes, the relative importance of a contractual term is debatable and such a term would not fit neatly into the classification of conditions and warranties.** These terms are known as *innominate terms*. Depending on how an innominate term is actually breached, the consequences can be trivial or very serious. Hence, it is not possible to pre-determine whether the parties intended any breach of such a term to be a "condition" or a "warranty" without considering the extent of damages arising from the breach. **The remedy for breach of an innominate term therefore depends on the seriousness of the breach.** - If the innominate term is breached in a **trivial manner**, then the injured party is only entitled to **damages**. - If the innominate term is breached in a **serious way**, then the injured party is entitled to **treat the contract as discharged**. **[Case law]**: [Hongkong Fir Shipping Co Ltd v. Kawasaki Kaisen Kaisha Ltd \[1962\]] **[Facts]**: D chartered P's ship for 2 years. P admitted that the crew were insufficient in number and incompetent and that this breached a term in the charter that the ship was to be "in every way fitted for ordinary cargo service". D repudiated the contract and refused to pay P for the remainder of the charter. Issue: Did the breach of the term entitle D to discharge himself from the contract? **[Held]:** The term by itself could not be classified as a condition or a warranty. Treating the term as an innominate term, the breach itself was not serious enough to deprive D of substantially the whole benefit of the contract. Hence, the extent of the breach was not serious enough to entitle D to repudiate the contract. D was therefore able to only claim damages. **[\ ]** **[4. Void and Voidable contracts]** **4.1 Introduction** **Where all the elements of a contract are present, the contract is a valid contract. Valid contracts are enforceable in the courts by either party if there a breach of contract by the other party.** **However, sometimes even when all the elements of the contract are present, the contract may involve some illegality, duress, mistake, misrepresentation or circumstance of one of the parties entering into it. In this case, the contract will not be a valid contract but is deemed to be void or voidable contract.** **4.2 Contracts which are [void]** **These are contracts which are treated as void [from the start] (i.e. void *ab initio*). Such contracts cannot be enforced by either party. Indeed, they are not even considered to be valid contracts to begin with.** - ***[Example]: Hansel enters into an agreement to supply illegal drugs to Gretel for \$10,000. Gretel pays Hansel the money but he fails to deliver the drugs as agreed. Can Gretel sue Hansel?*** ***No, she cannot. The contract is an illegal contract, and illegal contracts are treated by the courts as void ab initio, and are thus unenforceable.*** **4.3 Contracts which are [voidable]** **Voidable contracts are valid contracts, but one of the parties may have entered into the contract without full knowledge or consent to the contract's terms. For voidable contracts, the innocent party may [elect] to treat the contract as valid or void.** - ***[Example]: Didi, a wealthy businesswoman, recently broke up with her boyfriend Shaun. Shaun is upset at the break up and threatens to put revealing photos of Didi on Facebook unless she agrees to employ him as CEO of her company. Didi feels she has no choice but to enter into the contract. Later Didi regrets doing so. Can she get out of the contract?*** ***Yes, she can. Didi had entered into contract under duress because of Shaun's threats. Contracts entered into under duress are voidable contracts. Didi can choose to either end the contract or continue with it.*** **For voidable contracts, one of the parties (the 'wronged' party) has to take steps to apply for the contract to be void. Whereas for contracts which are void, the law deems such contracts to be void *ab initio* and neither party needs to (or indeed, can) take any steps to make it valid.** **[\ ]** **[5. Exemption clauses]** **5.1 What is an Exemption Clause?** An exemption clause is a type of contractual term which is inserted into contracts for the purpose of **excluding or limiting the liability** of one of the parties to the contract. - *[Example 1]: \"The management shall not be responsible for any damage caused to any vehicle while it is parked in this car park. Owners of vehicles park at their own risk.\"* - *[Example 2]: Jack suffers from severe backache and needs to undergo a spinal operation. He approaches Dr Chop, a surgeon. Before Dr Chop will do the operation, he requires Jack to sign a consent form which contains the following clause: \"\...the hospital or its staff will not be responsible for any loss, damage, pain or suffering that may be result as a direct or indirect consequence of this operation.\" Jack becomes paralysed after the operation. He wants to sue Dr Chop, but Dr Chop says, 'Too bad! I can rely on the exemption clause'. What can Jack do?* **5.2 When can a party rely on an Exemption Clause?** Exemption clauses can be abused, especially in contracts where the terms are dictated by one party, who may have stronger bargaining power, and imposed onto the other party (the 'weaker' party). As a result, the law protects the 'weaker' party to a contract by ensuring that an exemption clause must satisfy certain conditions before a party can rely on it. Where a 'wrongdoing' party (e.g. Dr Chop in the example above) tries to use the exemption clause to protect himself, the innocent party (Jack) can challenge it by asking **3 questions**: **(a) Has the exemption clause been made part of the contract itself?** If an exemption clause is contained in a document **which is signed** by the innocent party, the general rule is that he is bound by **all** the terms in that document, including the exemption clause. Therefore, an exemption clause which is contained in a document given to the innocent party **after** the contract has been concluded cannot be relied on. **[Case law:]** [Chapelton v Barry UDC \[1940\] ] **[Facts]**: P hired 2 deckchairs from D on a beach. P took the chairs, made payment and was given two tickets which he put into his pocket without reading. The tickets contained an exclusion clause excluding liability on D\'s part for any damage arising from the hire of the chairs. The deckchair collapsed when P sat on it and P was injured. He sued D who relied on the exemption clause. Can D use the exemption clause to escape liability for P\'s injuries? **[Held]**: No. The exemption clause on the ticket did not form part of the contract between P and D. The ticket was only a receipt which was given to P **after** the contract was concluded and was therefore too late to form part of the contractual terms. The party relying on the exemption clause **must take reasonable steps** **to bring the exemption clause to the notice of the other party** before or at the time the contract is made. Otherwise, the exemption clause cannot be relied upon. **[Case law:]** [Thornton v Shoe Lane Parking \[1971\] ] **[Facts]**: In the defendant's automated car park, the machine issued a ticket at the point of entry. The ticket referred to conditions which were displayed inside the car park. These conditions included an exemption clause denying liability for personal injury suffered in the car park. Thornton suffered injury because of an accident while collecting his car and the defendant sought to rely on the exemption clause to disclaim liability. **[Held]**: For the exemption clause to be incorporated into the contract, there must be reasonably sufficient notice prior to or at the time the contract is formed. Since the contract was formed when the ticket was issued, the exemption clause cannot be relied upon because notice of the exemption clause was given later when Thornton was inside the car park. **(b) Is the exemption clause void by law?** Even if the exemption clause has been made part of the contract, it can in some cases, be rendered **void** by law. This is to ensure that the relying party cannot escape from every kind of liability for their wrongful actions. A very important statute which has this function is the **Unfair Contract Terms Act ('UCTA')**. Some important provisions in the UCTA: Look at Dr Chop\'s example again (in 5.1 above). In the light of the UCTA, how would you advise Jack? **(c) [Is the exemption clause clear and unambiguous?]** If the first two questions do not prevent the use of the exemption clause, you can ask a third question: are the words of the exemption clause clear and unambiguous? - [**Yes**, words clear and unambiguous] - [**No**, words not clear and unambiguous] **[Case law:]** [Photo Production v Securicor Transport Ltd \[1980\]] **[Facts]**: D, a security company, provided security services for P\'s factory. The contract included an exemption clause, stating that D 'would not be responsible for any injurious act or default by any employee of the company unless such an act or default could have been foreseen and avoided by the exercise of due diligence on the part of D as his employer.' One of D's employees deliberately lit a small fire which got out of control and completely destroyed P\'s factory. P sued D. [Question]: Can D rely on the exemption clause? **[Held]**: Yes. The exemption clause was part of the contract, was not void by law, and the words were clear that the clause would cover deliberate acts as well as negligent acts. D was not responsible for any damage arising from such acts. **[\ ]** **[6. Discharge of contract]** **6.1 Meaning of "Discharge" of a Contract** Discharging a contract means that the parties are no longer required to carry out their obligations under the contract. Contract can be discharged by: \(a) Performance \(b) Agreement, e.g. termination by notice \(c) Acceptance of breach \(d) Frustration **6.2 Discharge by Performance** A contract is performed when **all the parties have carried out their respective promises and obligations** under the contract. *[Example]: A promises to supply a table, chair and cupboard to B\'s home for \$500. A delivers the goods and B pays the \$500. The contract is performed and therefore discharged.* The following conditions apply to discharge by performance: See case of **[Cutter v Powell]** (in lecture slides) **6.3 Discharge by Agreement** A contract is said to be discharged by agreement **if the contract itself contains a term which sets out the method by which the contract is to be discharged.** The contract may terminate [automatically] upon the happening of an event; upon the [expiry] of a fixed time; or if the parties follow a [prescribed procedure]. Parties may also mutually release each other from the contract. *[Example 1: happening of an event]* *If a tenant does not pay rent for 3 months, the tenancy agreement is terminated automatically, if there is a term to that effect in the tenancy agreement.* *[Example 2: expiry of time]* *The tenancy is for a fixed period of 3 years starting 1 Jan 2012. The tenancy ends automatically on 31 Dec 2014.* *[Example 3: prescribed procedure, e.g. termination by giving notice]* *Eg. Tenancy agreements where either the landlord or the tenant can terminate the agreement with 1 month\'s notice.* *Eg. Employment contracts where the employer or the employee can terminate with two months\' notice or pay in lieu of notice.* **6.4 Discharge by Acceptance of Breach** A breach of contract takes place **when a party does not comply with the terms of a contract.** A contract can be discharged when one party breaches the contract, and the other party accepts the breach. **Note that this applies only where the term breached is a [condition]** -- in this case, the **innocent party** can **treat the contract as discharged** and can sue for damages. However, if the term breached is only a **[warranty]**, the **innocent party** is **only** entitled to **sue for damages**. He cannot treat the contract as discharged and must still therefore perform his side of the contract. (Refer to 3.3). Sometimes, a party indicates that he does not intend to go on with the contract **even before his time for performance** has arrived: - *[Example:] Club Puke enters into a contract with Melvin to engage him as a deejay at their annual 'Puke Out' event. The event will be held on New Year's Eve. However, on November 30^th^, Club Puke informs Melvin that they do not need his services anymore. Melvin is furious and wants to sue.* *Here, the breach by Club Puke has taken place before they were due to perform the contract, ie. November 30th. **Such a breach is called an [anticipatory breach].*** **Options** for the innocent party facing an **anticipatory breach** are: ii. **6.5 Discharge by Frustration** A contract becomes **frustrated** when it **becomes [impossible to perform]** due to circumstances beyond the control of the parties. When this happens, the contract is discharged. Note however that contracts are frustrated only when the frustrating event is of such gravity that performing the contract would result in a very different situation from that which the parties had in mind when they entered the contract. **Examples where the contract is frustrated:-** \(a) Where the **subject matter** which is necessary for the contract has been **destroyed**: \(b) Where a person whose **personal services** are crucial to the contract either dies or is **unable to perform** the contract:- \(c) Where the **law** affecting the contract **has changed** so that it becomes impossible to perform the contract: **The following are examples where the contract is [NOT] frustrated:-** \(a) Where the contract is **merely more difficult or expensive** to perform \(b) where the **event which frustrates the contract** was deliberately brought about **by one of the parties** **6.5.1 Effect of Frustration** When a contract is frustrated, the effect it has on the rights and liabilities of the parties would depend on whether Common Law rules apply or whether the Frustrated Contracts Act (Cap 115) applies. a. **[Frustration under the Common Law ]** When a contract is frustrated, the contract is discharged. This means that at Common Law, the parties do not have to perform anything under the contract **after the date of the frustration.** But under Common Law rules, the frustration would not affect anything which takes place **before** the date of the frustration:- *[Example:]* - *Any sum of money paid on the contract before the frustrating event remains paid and cannot be recovered.* - *Any money which was due to be paid before the frustrating event must still be paid.* These Common Law rules were quite harsh and led to the passing of the Frustrated Contracts Act 1959 which has reversed the effect of frustration in most contracts. b. **[Frustration under the Frustrated Contracts Act ('FCA')]** **The effect** of the **FCA** on the frustrated contract is set out in Section 2 of the Act and can be summarised as follows: a. Any money paid under a contract which has become frustrated is now recoverable by the party who paid it. b. Any money which was due to be paid before the frustrating event is now no longer payable. c. If a party has incurred some expense under the contract, that sum can be recovered. d. If one party has partly performed his side of the contract before the frustrating event which gave the other party some valuable benefit, then a reasonable sum must be paid to the first party as compensation. **The FCA applies to all contracts except:** \(a) charterparties (i.e. contracts for the hire of ships) \(b) contracts of insurance \(c) contracts for the sale of goods where the goods have perished For these 3 categories of cases, the common law rules mentioned in para (a) above would apply. **[\ ]** **[7. Remedies for Breach of Contract]** Where one of the parties has breached a term of the contract or fails to perform the contract according to its terms, the other party is deprived of the expected benefits of the contract and may suffer loss. Therefore, the wronged/aggrieved party is entitled to some form of remedy. There are two categories of remedies available. These are: a. **Legal or Common Law remedies** These are remedies given by the courts under common law rules and if the wronged party is able to prove his claim, he can seek the legal remedy **as of right**. The most common type of common law remedy is [damages]. b. **Equitable remedies** In some cases, the legal remedy may not be what the wronged party wants as compensation for the loss he has suffered. In such special cases, the courts may order an equitable remedy (*remedy based on fairness of the circumstances and the more direct needs of the aggrieved party*). Such a remedy however **is not available as of right** but only if the court thinks it is fair to award it. The equitable remedies we will consider are [specific performance], [injunction] and [rescission]. - ***[Example]:** Brad sees a very unique diamond ring in Angie's shop and pays a deposit for it. Angie later refuses to sell the ring to Brad. In this instance, Brad can sue Angie for damages as a compensation for breach of contract. But if Brad can show that what Brad really wants is that unique ring, then the court may, instead of awarding damages, make an order called specific performance, i.e. ordering Angie to perform as she agreed, which is to sell Brad the ring.* **7.1 Legal or Common Law Remedies** The legal remedies we will consider are [damages] and *[quantum meruit]*. 1. **Damages** **Damages** are the monetary compensation awarded to the injured/aggrieved party when there has been a breach of contract. The purpose of awarding damages is to put the injured party in the same financial position he would have been in **as if the contract had been performed**. So, a Plaintiff can recover the profits she lost due to the breach as damages. By the same reasoning, if the Plaintiff has not suffered any loss despite the Defendant breaching the contract, the Plaintiff is awarded only **nominal damages**, i.e. a token small sum. The damage (loss) should **arise naturally from the breach**. However, if it doesn't then the court will allow damages **if both the parties could have [reasonably foreseen]** (**at the time** **they made the contract)** this loss as a probable result of the breach. It is the duty of the injured party to take reasonable steps to **mitigate**[^1^](#fn1){#fnref1.footnote-ref} or minimise his losses. **7.1.1.1 Liquidated Damages** It is possible for parties to agree on a fixed sum of damages before the breach occurs. Sometimes, parties to the contract that **foresee the possibility of a breach**, may **agree beforehand** to fix a **sum as a pre-estimate of the loss** caused by a breach. **This sum is called liquidated damages and will be enforced by the courts.** *The liquidated damages:* - *must be a **genuine pre-estimate of loss**, AND* - ***NOT A PENALTY**,* *i.e. it should NOT be a sum whose intention is to compel the performance of the contract by* *providing something of a punishment if the contract is not performed.* 2. ***Quantum Meruit*** If a party has done some work but not completely fulfilled his own obligations under the contract, he may not be able to sue but he can claim a reasonable amount which is **[proportional]** to the amount of work he has done. This reasonable sum is calculated on a **quantum meruit** basis and **is awarded as an alternative to damages.** ***Quantum meruit* means 'as much as has been earned'.** - *[Example]: Stephen Kling is engaged by Hammer Horror Books to write 12 horror stories, one story to be published each week in their new magazine 'Aaargh!'. After 4 instalments had been published, 'Aaargh!' is discontinued. Stephen has 8 more instalments to write.* *Here, instead of suing for damages since Stephen himself has not completed all 12 instalments, he can claim a sum of money as compensation on a **quantum meruit** basis for the work he had already done under the contract. This amount would be proportionate to the extent of work he had done i.e. 4/12 of the contracted payment.* **7.2 Equitable Remedies** Equitable remedies, unlike legal/common law remedies, are **not granted as of right** to every Plaintiff who has suffered loss. The word 'equity' means 'fairness'. **Equitable remedies are only awarded if the courts think it is fair to grant them.** Thus, even if a Plaintiff can show that the Defendant has breached the contract and has caused some loss to him, the Plaintiff may not necessarily get an equitable remedy. Equitable remedies are granted in **[exceptional cases]** where the **legal/common law remedies of damages/*quantum meruit* are [inadequate]** in the interests of fairness and justice. We will focus on the three most common forms of equitable remedies:- a. Injunction b. Specific Performance c. Rescission 1. **Injunction** **An injunction is a court order to a party who is in breach to stop doing something which he had promised NOT to do in the contract:** - *[Example:] In his employment contract, Park Sae Yo agrees with his employer, Kimchi Computers, not to work for a rival company if he resigns. Park later resigns and joins Bulgogi Technologies, Kimchi's arch rival. Kimchi can apply for an injunction from the court to prevent Park from joining Bulgogi.* *Here again, it must be shown by Kimchi Computers that **damages are inappropriate**.* 2. **Specific Performance** **Specific performance is a court order which orders the party who has breached the contract to perform what he had promised to do.** Failure to do so would amount to contempt of court. This remedy is only awarded if damages are not the best remedy to compensate the loss. Consequently, if a Plaintiff is awarded damages for the breach, he cannot also claim specific performance. The result must be [either] specific performance [OR] damages. Where **damages are sufficient**, **specific performance will not be ordered**. Specific performance must be seen as a last resort where damages alone would not be fair to the aggrieved party. - *[Example]: Donny contracts to buy a piece of land in Sentosa from Marie at \$30 million dollars [ ] He intends to build a condominium, Donnyville, on this land. Donny then enters into contracts with an architect and construction company to build Donnyville. Marie then decides she does not want to sell because she has been advised to wait for the property market to pick up. Donny is now a fix.* *In this case, merely awarding damages to Donny would not be sufficient as it would not solve the difficulties he will face as a result of the loss of the land (i.e. his breach of the contracts with the architect and construction company). Ordering Marie to sell the land to Donny (order of specific performance) would be a fairer decision -- Donny has much more to lose than Marie if he does not acquire the land.* **However, courts are reluctant to make specific performance orders in cases where the contract in question is a [contract of personal service] between the parties.** This is because the courts are reluctant to force people to endure a relationship with each other where one party is forced into rendering a service to another. - *[Example:] Enrique contracts to give singing lessons to Ricky once a week for 15 weeks in order to prepare for a competition. After one lesson, Enrique backs out from the contract because he thinks that Ricky is tone deaf.* *\ Although damages alone would not repair the situation, it would be inappropriate for the court to order Enrique to continue with the singing lessons. The performance of the contract would require Enrique to willingly teach Ricky however, if he was forced to do so, the quality of the teaching may be jeopardised and Ricky may not be getting what he expects from the contract. The better option would be for Ricky to just get another voice coach* 3. **Rescission** **Rescission** **essentially means the cancellation of a contract i.e. the contract is terminated from the start, as if it had never existed.** Rescission takes place when a [voidable] contract is set aside for all purposes so as **to restore, as far as possible, the state of things which existed before the contract**. This means that the contract is 'unmade' i.e. the parties are put back into their original positions before the contract. (One way to understand this is to imagine that you are playing a music CD and half way through, you decide to rewind the CD to the beginning.) **Note: Voidable contracts are valid contracts, but one of the parties may have entered into the contract without full knowledge or consent to the contract's terms. For voidable contracts, the innocent party may [elect] to treat the contract as valid or void. (*refer 4.3*)** - *[Example]: Clark agrees to sell Lois his krypton farm for \$5 million. Clark honestly believes he has title (i.e. ownership) to the property. Later, however, it is discovered that the farm is actually owned by Clark's uncle, Lex, and not by Clark. In this situation, damages would not be appropriate since Clark had honestly believed he owned the farm. Specific performance would also not be possible, since Clark cannot sell something he doesn't own. Rescission would be the proper remedy in this case.* Like all other equitable remedies, it is awarded **at the discretion of the court**; the plaintiff is **not entitled as of right**. \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* \* **Further Reading** Refer to your Study Guide on the LMS ::: {.section.footnotes} ------------------------------------------------------------------------ 1. ::: {#fn1} Meaning "to moderate, to relieve or to soften the blow"[↩](#fnref1){.footnote-back} ::: :::