CONTRACT LAW

CONTRACT LAWLecturer: Rowin GurusamiSaturday 4th February 2012Contract LawNo formal definition of a contractContract law developed around a form of actionSir Guenter Treitel (The Law of Contract, 2nd ed.):A contract is an agreement giving rise to obligations which are enforced or recognised by law.

The fundamental part of a contract law is based on the agreement between the contracting parties.2Key RequirementsAgreementConsiderationIntention to create legal relations

Also relevant is incapacityVoid/Voidable ContractsLack of Capacity VoidableAbsence of Free Will VoidableIllegality VoidMistake Void/VoidableMisrepresentation Voidable

Void The contract never existed; thus the parties have no rights or obligations under it. Can recover from third party

Voidable One party may decide to set it aside. Cannot recover from third party.

Types of ContractOral ContractDeed (leases, transfer of land...)Writing

Certain contracts have to be in writing (transfer of shares, sale of land, bill of exchange, cheques, contract of guarantee)Leading CaseCarlill v Smoke Ball Company [1893] 1 QB 256

Leading CaseCarlill v Smoke Ball Company [1893]

Medical firm advertised new drug, claiming to cure fluIf not, buyers would receive 100Mrs Carlill used smoke ball regularly, fell ill and claimed the 100Company claimed ad was not a serious, legally binding offerCourt held otherwise.

OfferIndication by one person (the offeror) to another (the offeree) of the offerors willingness to enter into a contract on certain terms without further negotiation

The court in Carlill held that an offer can be made to an individual, a class of persons or to the world at large.OfferUnilateral Contract (Carlill v.s. Smoke Ball Co.)

An invitation to treat is not an offer. It is an indication of a person's willingness to negotiate a contract

Fisher v. Bell (1960) shop window display not an offerPharmaceutical Society of Great Britain v Boots Cash Chemists (1953) customer making offer, not sellerHarvey v. Facey supply of information not an offer

OfferHarris v. Nickerson (1873) Auction ad is not an offer. The bid is the offer, which auctioneer is free to accept or reject Partridge v Crittenden (1968) advertisement offering for sale not an offerTenders

Advertisement only an offer when the other party (the offeree) satisfies the conditionsTermination of OfferOffer can only be accepted while still open.Offer closes when:RejectionCounter-offerLapse of timeRevocation by offerorFailure of a conditionDeath of one of partiesRejection & Counter-OfferOutright or by counter-offer

Hyde v. Wrench (1840) Once original offer rejected, it does not exist anymoreAny change in original terms is a counter-offer: Butler Machine Tool Co. v. Ex-cell-O Corp (England) (1979)

Stevenson v. McLean (1880) Inquiry not a counter-offerRevocationCan revoke an offer at any time before acceptance (Payne v. Cave [1789])Even in cases with time limit (Routledge v. Grant [1828])Revocation not valid until communicated to offeror (time slots important e.g. Byrne v. Van Tienhoven [1880] involving letters)Can be communicated by third party (Dickinson v. Dodds [1876])Exceptions: payment, conditions partly satisfied in unilateral contract

AcceptanceTreitel: final and unqualified expression of assent to the terms of an offerContract comes to effect from moment offeree accepts termsOnce accepted, neither party can withdrawOral, written or by conductRules of AcceptanceAcceptance must be communicated (exceptions)Offer can only be accepted by the offereeIf means of acceptance stated, offer have to be accepted using a means which is no less effectiveSilence is not acceptance (Felthouse v. Bindley [1862])

Communication of AcceptancePostal rule Acceptance complete as soon as letter postedEven if letter delayed (Adams v. Lindsell [1818]) or lost (Household Fire and Carriage Accident Insurance Co. v. Grant [1879])

Exception: Holwell Securities v. Hughes (1974) Acceptance had to be by notice in writing

Intention to Create Legal Relation Presumption for commercial agreements that parties intend to be legally bound

Presumption not to be legally bound for arrangements made in social, domestic and family setting

Balfour v. Balfour (1919) agreement between husband and wife not deemed enforceable

Merritt v. Merritt (1970) parties were already estranged at the time contract was made

Lecturer: Rowin GurusamiIntention to Create Legal Relation Commercial agreements presumed intention unless it is expressly disclaimed or circumstances indicate otherwise

RTS Flexible Systems Ltd v Mokerei Alois Muller GmbH (2010) Court held that unrealistic to consider major works done without a valid contract between parties

Jones v. Vernons Pools Ltd (1938) clause stating contract shall not give rise to any legal relationship

Lecturer: Rowin GurusamiConsideration A promisee cannot enforce a promise unless he has given something in exchange for the promise or unless promisor has obtained something in return

Either some detriment to the promisee or some benefit to the promisor

The detriment and benefit usually the same (e.g payment and delivery)

Lecturer: Rowin GurusamiConsiderationA promised action, or omission of action, that the promisee did not already have a pre-existing duty to abide by

Valuable consideration may consist either in some right, interest, profit or benefit accruing to one party and some forbearance, detriment, loss or responsibility given by the other Currie v. Misa [1875]Both parties to a contract must pass consideration to the another party for there to be a valid contract.

Executed or ExecutoryConsiderationConsideration needs to be sufficient, not adequate

Adequate Consideration Thomas v. Thomas (1842)

Sufficient Consideration Chappell & Co v. Nestle Co (1960)Courts need to be able to put a value on considerationConsiderationPast Consideration Something which has already been done at the time promise is made. No legal Value

Re McArdle (1951) Previous improvements on house is past consideration

ConsiderationPerformance of an existing obligation imposed by statute is no consideration Collins v. Godefroy (1831) appearing in Court enforceable by lawConsideration valid if existing duty is exceeded in Glasbrook Bros v. Glamorgan CC [1925], police performed extra dutyConsiderationIf additional reward is promised for performing existing duties, consideration is not valid - Stilk v Myrick [1809] Recent exception if one party benefits Williams v. Roffrey Bros (1990)

Performing more than existing contractual duty is consideration Hartley v Ponsonby [1857]

ConsiderationWaiver of existing right needs to be supported by consideration Foakes v Beer (1884)

Exceptions:Part payment by third partyAlternative considerationBargain between creditorsPromissory EstoppelContractual Terms Any provision forming part of a contract

Express Term Clearly defined in contract by one or both parties

Implied Term Term deemed to form part of contract even though not expressly included in contract.

Lecturer: Rowin GurusamiExpress Terms Terms must be substantially complete

Terms can be determined at a later day; but parties must provide for it expressly (Scammell v Ouston 1941)

Statements made before the contract is valid can become terms. Courts will consider:If person making statement had special knowledge of the subject; andWhy was the term omitted from the contract

Lecturer: Rowin GurusamiImplied Terms Terms can be implied:

By statute By the courts By customs

Lecturer: Rowin GurusamiPrivity of Contract Contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it

Example: Contract between A and B that A will (for consideration provided by B) confer a benefit to C C cannot enforce As promise C provided no consideration

Lecturer: Rowin GurusamiPrivity of Contract Contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it

Example: Contract between A and B that A will (for consideration provided by B) confer a benefit to C C cannot enforce As promise C provided no consideration

Tweddle v. Atkinson (1861)

Lecturer: Rowin GurusamiContracts (Rights to Third Parties) Act 1999Sets out circumstances in which third party has right to enforce contract term

Test:Whether contract expressly so providesWhere term confers benefit to third party, unless it appears parties did not want to confer rights to third party

NOTE FOR LATER: Common law exception to rule of Privity of Contract Agency LawLecturer: Rowin GurusamiPerformance Brings the contract to an end

Substantial performance can be enough to discharge contract but the injured party can seek damages

Partial performance makes a contract severable; i.e. some obligations performed so far while others are not.

If one party prevents performance, the offer of performance from other party is enough to discharge of obligations and sue for damages for breach of contract (Planche v Colburn 1831)Lecturer: Rowin GurusamiFrustration In cases where impossibility arises after contract made

Usually catered for in escape clauses or force majeure clauses

Contract is discharged by frustration if there is NO other way to perform the obligations under the contract

Destruction of subject matterPerson incapacityGovernment interventionNon-occurrence of an eventLecturer: Rowin GurusamiThe Law Reform (Frustrated Contracts) Act 1943 In the event of a frustrated contract:

Money paid before frustrating event is to be repaid

Sums due for payment cease to be payable

Expenses incurred may be retained/recovered if incurred in the performance of the contract and before frustrating event

If a party has obtained a valuable benefit (other than monetary), it can be ordered to pay to the other party all or part of the value of the benefit - BP Exploration Co (Libya) Ltd v Hunt (No 2) 1982Lecturer: Rowin GurusamiBreach of Contract Legal concept in which a binding agreement is not honoured by one or more of the parties to the contract by non-performance or interference with the other party's performance

Minor breachMaterial breachFundamental breachAnticipatory breach express or implied (injured party can sue as from date of anticipatory breach)

Lecturer: Rowin GurusamiAnticipatory Breach Actual breach where breach occurs on the due date of performanceAnticipatory breach implied or express

Claimant can start action as from day of anticipatory breach, no need to wait for actual breach

Claimant can discharge contract and sue for damages without waiting date of performance, orTreat contract as valid, perform his side and sue for payment from other side White & Carter (Councils) v McGregor (1961)

Lecturer: Rowin GurusamiDamages Common Law remedy for breach intends to restore party who suffered loss to position he would have been in if contract was performed

Can be inserted as a clause in contract (liquidated damages, penalty clause) or determined by court of law

Test:Remoteness of damageMeasure of damages

Lecturer: Rowin GurusamiRemoteness of Damage Defendant not always responsible for all losses suffered by claimantRemoteness is designed as a further limit on a cause of action to ensure that the liability to pay damages is fairly placed on the defendant

Traditional approach defendant liable for all consequent damages (Re Polemis [1921])Nowadays, if defendant could not reasonably have foreseen that someone might be hurt by his actions, then there may be no liability

Lecturer: Rowin GurusamiRemoteness of DamageHadley v Baxendale (1854) sets out rules:Loss must arise naturally from breach, orLoss must arise in a manner which parties may reasonably be supposed to have contemplated

Loss outside natural course of events only compensated if exceptional circumstances are within defendants knowledge when contract made Victoria Laundry v. Newman Industries (1949)

Lecturer: Rowin GurusamiMeasure of Damages How much to compensate for the loss incurred? Awarded for financial and non-financial lossGeneral Principle is to compensate for actual financial loss

Expectation interest: Position party would be in if the contract had been performed Reliance interest: Position party would be in had he not relied on the contract Anglia Television Ltd v. Reed (1972): Speculative contract

Damages not intended that injured party profit from claimLecturer: Rowin GurusamiMeasure of Damages Market Price Rule one party can claim amount required to purchase equivalent goods

Non-Financial Loss Discretion of Court Jarvis v. Swan Tours (1973): damages for distress of holidays Alexander v. Rolls Royce Motor Cars Ltd (1995): Damages for distress, inconvenience and loss of enjoyment not grantedLecturer: Rowin GurusamiMeasure of Damage Mitigation of Loss: Claimant need to have taken any reasonable steps to reduce loss Payzu Ltd v Saunders 1919

Burden of Proof on Defendant to show that Claimant did not mitigate loss

Not required to take risky measures, only reasonable onesLecturer: Rowin GurusamiEquitable Remedies Money cannot solve all problems

Specific Performance: Order of the court directing party in breach to perform his part of contract- usually used to complete a previously established transactionNot applicable if required performance over period of time (e.g. contracts of employment, building contracts, personal service)

Lecturer: Rowin GurusamiEquitable Remedies Injunction: Court Order whereby party in breach is required to do or refrained from doing certain acts (e.g. restraining orders, freezing injunctions)

Mandatory Injunction : directs defendant to take positive steps Prohibitory Injunction: directs defendant to observe a negative promise

- Claimant has to prove likelihood of irreparable harm in the absence of a injunction before such an injunction may be granted

Lecturer: Rowin GurusamiEquitable Principles He who comes to equity must come with clean hands

Delay defeats equity

Equity will not assist a volunteer

Equitable remedies not granted where damages are sufficient

Equitys darling

Lecturer: Rowin GurusamiExclusion Clauses Term in a contract that seeks to restrict the rights of the parties, mainly in cases of breach or negligence

Courts are hostile to exclusion clauses and thus common law will always try to limit their effects

Requirements:Must be incorporated in contractWording interpreted strictly against person who relies on the exclusion

Lecturer: Rowin GurusamiExclusion Clauses - Incorporation By signature LEstrange v Graucob (1934) : if the clause is written on a document which has been signed by all parties, then it is part of the contract

By notice - an exclusion clause will have been incorporated into the contract if the person relying on it took reasonable steps to draw it to the other parties' attention

By previous dealings

Lecturer: Rowin GurusamiUnfair Contract Terms Act(UCTA) 1977 After satisfying common law test, now Statutory Rules

Regulates contracts by restricting the operation and legality of some contract terms, mainly exclusion clauses

Clause exempting liability for death or personal injury due to negligence is voidClause exempting liability for other loss due to negligence is void unless reasonable

Lecturer: Rowin Gurusami