1. Introduction – What is a Contract?

1.1 Definitions

Not all agreements will be contract enforceable in law - social arrangements, for example, or contracts which
offend against public decency and public policy and those which involve criminal activity.

Treitel

‗A contract is an agreement giving rise to obligations which are enforced or recognised by law. The factor which
distinguishes contractual from other legal obligations is that they are based on the agreement of the contracting
parties.'

Pollock

‗A promise or set of promises which the law will enforce.'

Anson

‗The law of contract may be provisionally described as that branch of the law which determines the
circumstances in which a promise shall be legally binding on the person making it.'

1.2 Why should contracts be enforced?

As a very broad principle, agreement between individuals and between commercial entities is based on a very
high degree of freedom of choice; but, in the modern era with increasing use of statute to regulate behaviour that
may mislead, exclude liability or be oppressive.

1.3 Essentials of a modern contract

Intention to create legal relations

Offer

Acceptance

Written formalities in exceptional cases

Consideration except for contracts under deed

Clear terms

Parties must have capacity to contract

The contract must not be ‗illegal' or contrary to public policy

There must have been genuine consent, not vitiated by:

* Mistake

* Misrepresentation

* Duress

* Undue influence

1.4 Contracts may be void, voidable or unenforceable

In the absence of any of the elements referred to in s1.3 the contract may be void, voidable or unenforceable.

Void ab initio – no legal effect at all.

Voidable – legally binding, but one party has a right to set it aside

Unenforceable – valid in all respects but may not be enforced in a court of law. Money paid under such a contract
cannot usually be recovered.

Limitation Act 1980

Limitation Act 1980

3.1 What is an Offer?

An intimation (viewed from an objective standpoint) by words or conduct of a willingness to enter into a legally
binding contract, specifying the terms of the binding agreement which will be formed should the offer be
accepted by the party to whom it is addressed.

3.1.1 An offer may be made to a specific person, a group of persons or an individual

Carlill v Carbolic Smokeball Co Ltd [1893] 1 QB 256

The Carbolic Smoke Ball Company made a product called the "smoke ball". It claimed to be a cure for influenza
and a number of other diseases.The Company published advertisements in the press claiming that it would pay
£100 to anyone who became sick with influenza after using its product according to the instructions set out in the
advertisement.

£100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing
epidemic influenza colds, or any disease caused by taking cold, after having used the ball three times daily for
two weeks, according to the printed directions supplied with each ball.

£1000 is deposited with the Alliance Bank showing our sincerity in the matter.

Mrs Carlill saw the advertisement, bought one of the balls and used it in accordance with the instructions. l She
contracted the flu She claimed £100 from the Carbolic Smoke Ball Company. Mrs Carlill brought a claim to
court. She contended that the advertisement and her reliance on it was a contract between her and the company,
and so they ought to pay. The company argued it was not a serious contract.

The Court of Appeal rejected the company's arguments and held that there was a fully binding contract for £100
with Mrs Carlill.

Among the reasons given by the three judges were:

(1) that the advert was a unilateral offer to all the world
(2) that satisfying conditions for using the smokeball constituted acceptance of the offer
(3) that purchasing or merely using the smokeball constituted good consideration, because it was a distinct
detriment incurred at the behest of the company and, furthermore, more people buying smokeballs by relying on
the advert was a clear benefit to Carbolic
(4) that the company's claim that £1000 was deposited at the Alliance Bank showed the serious intention to be
legally bound.

. The advert was not " mere puff " as had been alleged by the company, because the deposit of £1000 in the bank
evidenced seriousness.

2. The advertisement was an offer to the world.

3. Communication of acceptance is not necessary for a contract when people's conduct manifests an intention to
contract.

4. That the vagueness of the advert's terms was no insurmountable obstacle.

5. The nature of Mrs Carlill's consideration (what she gave in return for the offer) was good, because there is
both an advantage in additional sales in reaction to the advertisement and a "distinct inconvenience" that people
go to to use a smokeball.

3.1.2 Bilateral and unilateral contracts

Unilateral contracts arise where X promises to do something in return for an ACT by Y, e.g. to pay £100 if he
walks from London to Brighton.

Y is not bound to do the act, but only if he performs the act will he be able to enforce the promise on X's part.

A bilateral contract arises where X promises to do something for Y if Y promises to do something for X in
return. The exchange of such promises normally renders them enforceable.

3.2 Offer Distinguished from Invitation to Treat

If an individual is merely feeling his way towards making an offer or has stated an intention only, this will
amount to an invitation to treat only.

Whether an act is construed as an offer or an invitation to treat is dependant on the intention of the parties.

3.2.1 Shop and self service situations

The display of goods in a shop amounts only to an invitation to treat.

Fisher v Bell [1961] 1 QB 394

Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401

3.2.2 Advertisements and circulars

These are generally classified as invitations to treat.

Partridge v Crittenden [1968] 2 All ER 421

Advert for birds in a magazine was not an offer.

Grainger & Son v Gough [1896] AC 325

Circulation of a wine catalogue was an invitation to treat.

Gibbons v Proctor (1891) 64 LT 594

Advertisements promising rewards for the recovery of lost property are generally construed as offers.

Williams v Cawardine (1833) 5 C & P 566

Walter Carwardine was murdered. The plaintiff, Mrs Williams, gave evidence against two suspects, but did not
say all she knew. The suspects were acquitted. The victim's brother and defendant, Mr Cawardine, published a
handbill, stating there would be a reward for information leading to the discovery of Cawardine's murderer. Mrs
Williams then gave more information which led to the conviction of two men (including a Mr John Williams, the
plaintiff's husband). She claimed the reward. Mr Carwardine refused to pay. At the trial her motives were
examined. It was found that she knew about the reward, but that she did not give information specifically to get
the reward. It was apparent that after the first murder trial, Mrs Williams had been savagely beaten by Mr
Williams.

The Court held, that the plaintiff was entitled to recover the reward. The advertisement amounted to a general
promise or contract to pay the offered reward to any person who performed the condition mentioned in it,
namely, who gave the information - motives were irrelevant.

Littledale J: "If the person knows of the handbill and does the thing, that is quite enough." Patteson J said "We
cannot go into the plaintiff's motives."

The case is also authority for the rule that the offer must be communicated.

In R v Clarke (1927) information was given in connection with a reward, the prime motivation being the
obtaining of a royal pardon. In Williams v Carawrdine the judges were not concerned with the motive. In R v
Clarke the High Court of Australia held that motive was important.

Adverts giving rise to unilateral contracts are generally regarded as offers. It is, however, always a matter of
construction.

Carlill v Carbolic Smokeball Co Ltd [1893] 1 QB 256

3.2.3 Negotiations for the sale of land

Land transactions must now by made in writing under the Law of Property (Miscellaneous Provisions) Act 1989 .
However even cases predating the Act show that clear evidence of an intention to be bound, and the existence of
a certain offer, were needed in cases involving land.

Harvey v Facey [1893] AC 552

P telegraphed ―Will you sell us ‗Bumper Hall Pen'? Telegraph lowest cash price‖ D replied ―Lowest cash
price....£900‖ P telegraphed ―We agree to buy....for £900 asked by you. Please send us title deed.‖

HELD: D's telegram was an invitation to treat not an offer.

Spencer v Harding (1870) LR 5 CP 561

―We are instructed to offer...by sale by tender‖ was held to be an invitation to treat.

Bigg v Boyd Gibbons Ltd [1971] 1 WLR 913

―For a quick sale I would accept £26,000‖ was held to be an offer capable of acceptance.

Clifton v Palumbo [1944] 2 All ER 497

―I am prepared to offer you my estate for £600,000.‖

Because the estate was large and scattered the Court of Appeal held that this was not a definite offer. The price
was but one issue to be settled between the parties.

3.2.4 Tenders and standing offers

An announcement that contracts for the provision of goods or services is open to tender, is an invitation to treat
and not an offer.

Spencer v Harding (1870) LR 5 CP 561

D issued a circular offering for sale certain stock in trade for which tenders were invited.

Harvela Investments v Royal Trust Co of Canada Ltd [1986] 2 AC 207

In cases where the standing offer is in effect a unilateral offer, complying with the rules on certainty and clarity
of intention, it will not be held to be an invitation to treat but can be accepted and create a binding contract.

See: Great Northern Railway v Witham (1873) LR 9 CP 16

***

3.2.5 Auction sales

The call for bids is an invitation to treat. The bid is an offer. The auctioneer may accept or reject such offers.

Payne v Cave (1789) 3 Term Rep 148

Section 57 Sale of Goods Act 1979

57 Auction sales

(1) Where goods are put up for sale by auction in lots, each lot is prima facie deemed to be the subject of a
separate contract of sale.

(2) A sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in
other customary manner; and until the announcement is made any bidder may retract his bid.

(3) A sale by auction may be notified to be subject to a reserve or upset price, and a right to bid may also be
reserved expressly by or on behalf of the seller.

(4) Where a sale by auction is not notified to be subject to a right to bid by or on behalf of the seller, it is not
lawful for the seller to bid himself or to employ any person to bid at the sale, or for the auctioneer knowingly to
take any bid from the seller or any such person.

(5) A sale contravening subsection (4) above may be treated as fraudulent by the buyer.

(6) Where, in respect of a sale by auction, a right to bid is expressly reserved (but not otherwise) the seller or any
one person on his behalf may bid at the auction.

McManus v Fortescue [1907] 2 KB 1

Auctions subject to reserve:

No contract if bids fail to reach advertised/notified reserve.

No contract between owner of property and highest bidder if auctioneer fails to accept highest bid.

Warlow v Harrison (1859) 1 E & E 309

The aggrieved bidder would, in such a case, be able to sue the auctioneer for breach of contract.

An advertisement that an auction is to be held is an invitation to treat, not an offer, and no liability arises in
contract if the auction is later cancelled.

It is not decided whether these rules will require adjustment for electronic auctions aimed at consumers e.g.
Ebay.

***
3.3 Termination of Offer

An offer remains ‗live' that is, capable of being accepted, until terminated. Termination may occur in six ways:

Revocation

Rejection

Lapse of time

Death

Insanity, incapacity, impossibility

Occurrence of a terminating condition.

Revocation

The offeror may revoke his offer at any time up until acceptance

Byrne v Van Tienhoven (1880) 5 CPD 344

On 1 October Van Tienhoven wrote offering tin plates for sale to Byrne, who was in New York . They sent a
letter revoking the offer on the 8th, which did not reach New York until the 20th. Byrne received the first letter
offering plates on the 11th, and sent a telegram back the same day accepting the offer. A letter was then sent on
the 15th again confirming the acceptance of the offer.

Revocation must be communicated and is effective upon receipt.

Offeror promises not to revoke his offer before a specified date

Such promises are unenforceable unless supported by consideration, that is something of value in return.

Routledge v Grant (1828) 4 Bing 653

Offer open for six weeks. Entitled to revoke before expiration of six weeks. Offeree could only insist on six week
period if he had bought an option supported by separate consideration.

Revocation must be communicated

Dickinson v Dodds (1876) 2 Ch D 463

Revocation need not be communicated directly. It is sufficient that Offeror knew of revocation before purported
acceptance.

Revocation of unilateral offers

X promises to pay £1000 to anyone who swims from Dover to Calais. Y starts swimming. Half way across the
Channel X communicates the revocation of the offer to Y.

If the general rule was applied – Y would have no claim. An offer may be withdrawn at any time up until
acceptance.

This is clearly unfair in the case of a unilateral contract where acceptance if the completion of the act required.

The solution lies in the concept of the ‗two contracts'. The first offer is an offer that X will not withdraw his offer
until Y is given a reasonable opportunity of completing the act required. The consideration for this unilateral
offer being the commencement of performance of the act required under the main contract. The second offer –
the main offer – is the offer to pay £100 to the first person to swim from Dover to Calais. X may not withdraw
his offer once Y has begun swimming but is liable to pay the £100 only if Y completes the required task – if Y
reaches Calais.

This idea has been tendered in America (McGovney 27 Harvard Law Review 644).

If the offeree rejects the offer the offer terminates.

If the offeror makes a counter-offer, this is a rejection of the offer. The offeree may not then go back and accept
the offer, because the offer has terminated by rejection.

Hyde v Wrench (1840) 3 Beav 334

D offered farm for £1000. P offered £950 which D refused. P then tried to ‗accept' original £1000 offer. HELD:
original offer rejected by counter-offer. Original offer no longer existed.

Tinn v Hoffman & Co (1873) 29 LT 271

Offer to sell 1200 tons met with a request to purchase 800. This was a counter-offer which rejected the offer.

Gibson v Manchester City Council [1979] 1 All ER 972

An enquiry whether the vendor would sell for a lower price was not a counter-offer, ‗merely exploratory.'

In practice it is often hard to know where the courts will draw the line between a counter-offer (terminating the
offer) and a communication which is merely a request for clarification or further details (which is not a counter-
offer, so does not terminate the offer).

3.3.3 Lapse of time

Ramsgate Victoria Hotel Co v Montefiore (1866) LR 1 Ex Ch 109

M applied for shares in the hotel company. He heard nothing and then after 5 months he received a letter of
acceptance. By this time he had decided that he did not want the shares.

HELD : The lapse of time was so great that the offer to buy the shares had lapsed.

Offers will lapse on the expiration of the time stated for the lapse (if such be stated) or upon the expiration of a
reasonable time. What is reasonable is a question of fact in the circumstances of the case.

3.3.4 Death

Where an offer depends on the continued existence of the offeror, the offer will lapse upon the death of the
offeror.

In other cases the offer will be unaffected by the death of the offeror and may be accepted and bind the estate.

Bradbury v Morgan (1862) 1 H & C 249

3.3.5 Insanity, incapacity, impossibility

Some old cases say companies are not bound by contracts made ultra vires the memorandum of association. In
most cases this is no longer true ( Companies Act 1985 s.35).

3.3.6 Occurrence of a terminating condition

If an offer is made subject to a terminating condition the offer will lapse if the terminating condition arises.

4. Acceptance
An acceptance is an unqualified assent to all the terms of the offer. Assuming the presence of consideration and
an intention on the part of the parties with full capacity to contract to enter into legal relations a contract comes
into being when an offer is accepted.

4.1 What is an Acceptance?

4.1.1 Acceptance may be express or implied

Acceptance may be express, or implied from conduct.

Complying with the terms of a unilateral reward offer is one illustration.

Carlill v Carbolic Smokeball Co Ltd [1893] 1 QB 256

This case was covered in detail in Chapter 3 Offer

Acknowledging an offer would not be sufficient. There must be a clear and unequivocal assent to all the terms of
the offer. If an offer states alternatives the acceptance must clearly indicate which of the alternatives is being
accepted.

In the case of continuing negotiations it is important to look at the overall picture – oral terms, written
documentation and decide whether agreement has been reached.

4.1.2 Acceptance by conduct

An offer may be accepted by conduct provided the offeree did the act regarded as ‗acceptance' with the intention
of accepting the offer.

Brogden v Metropolitan Railway (1877) 2 App Cas 666

In a draft agreement for the supply of coal D made a number of alterations and returned the draft marked
‗approved'. P not expressly agreeing to the alterations accepted deliveries of coal. Accepting the coal amounted
to acceptance of the variation imposed by D.

The House of Lords held that a contract had arisen by conduct and Brogden had been in clear breach, so he must
be liable In Brogden it was clear that P intended to deal with D.

Lattimore v Mott [2005] All ER 415 is a recent illustration of acceptance by conduct.

4.1.3 Acceptance must be an unqualified, unequivocal assent to all the terms of the offer

There must be a correlation in an acceptance with all the terms of the offer.

Tinn v Hoffman & Co (1873) 29 LT 271.

Agreeing to take 200 tons of wheat is not an acceptance of an offer to sell 300. Agreeing to pay £35 is not an
acceptance of an offer to sell at £40. It is a counter offer, the effect of which is to terminate the original offer.

Care has to be taken here to avoid being over zealous in demanding ‗exactness'.

4.1.4 Acceptor must have knowledge of the offer at the moment of acceptance

The parties must agree. The fact that their wishes happen to coincide is irrelevant. There must be a positive act of
acceptance to the offer made.

R v Clarke (1927) 40 CLR 227, 233

A reward was offered for information leading to the arrest of the murderer of two policemen. Clarke, himself
suspected of the crime, gave information because he wished to clear himself and with no intention of claiming
the reward. The claim for the reward failed.

4.1.5 Acceptance in unilateral contracts

A promises to pay £100 to B if B walks from London to Dover. This is a unilateral contract because the promisee
has made no counter promise to perform. A contract only comes into being when the promisee completes the
required act.

The offer may be accepted by complete performance of the terms of the offer.

There is no need to communicate advance notice of acceptance of the offeror

The offer may be withdrawn before acceptance takes place.

(See: Daulia Ltd v Four Millbank Nominees Ltd [1978] 2 All ER 557 - this case was dealt with in detail in
Chapeter 3 )

4.2 The Battle of Forms

Case study

Butler Machine Tool Co Ltd v Ex-Cell-O Corporation (England) Ltd [1979] 1 WLR 401

Sellers offered to supply a machine for a specified sum. The offer included a ‗price escalation' clause. The
Buyers placed an order on their own terms and conditions which differed from the Seller's. No price escalation
clause and other differences. The Buyers' document contained a tear off slip to be signed by the Sellers and
returned to the Buyers stating that the Sellers accepted the order on the terms contained therein. Sellers returned
the tear off slip (duly signed) and stating in the accompanying letter that they were ‗entering' the order ‗in
accordance with' their offer.

HELD : this was an acceptance of the Buyer's counter-offer and that the contract was governed by the Buyer's
terms which did not include a price escalation clause. The seller's reply did not prevail – even though it was ‗the
last shot' in the series of communications.

4.3 Communication of Acceptance

4.3.1 General rule: acceptance must be communicated

In general terms an acceptance has no contractual effect until it is communicated, that is brought to the attention
of the offeror.

Entores Ltd v Miles Far East Corp [1955] 2 Q.B. 327

There is no acceptance if a telephone line goes dead or an oral acceptance ―is drowned by an aircraft flying
overhead‖.

Powell v Lee (1908) 99 LT 284

There is no acceptance if the fact of acceptance is communicated to the offeror through a third party when the
offeree has not given authority for the third party to communicate such acceptance.

Henthorn v Fraser [1892] 2 Ch 27

If the agent of the offeree had full authority to transmit such acceptance the acceptance would be binding.

4.3.2 Exceptions to the general rule

The postal rule

Henthorn v Fraser [1892] 2 Ch 27

The claimant received a note from the defendant with an offer to purchase a certain property within 14 days. The
claimant responded to the offer with an acceptance posted the next day via mail. The defendant withdrew the
offer before receiving the acceptance, but after the acceptance was posted.

Adams v Lindsell (1818) 1 B & Ald 681

In the case of acceptance by post acceptance takes effect when the letter, correctly addressed, is posted or handed
to a post office employee authorised to receive letters for posting.

Case study: Household Insurance v Grant (1879) 4 Ex. D 216

Household Insurance v Grant (1879) 4 Ex. D 216

Grant applied for shares in the Household Fire and Carriage Accident Insurance Company. The company allotted
the shares to the defendant, and addressed to him and posted a letter containing the notice of allotment.Tut the
letter never was received by him. When the company went bankrupt, the liquidator sued Mr Grant for the
outstanding payments on the shares. The question was whether Mr Grant's offer for shares had been validly
accepted, and whether there was a binding contract for him to pay up.

This rule applies even if the letter is never received.

This assumes that the letter was correctly addressed or complied, as to address, with information given by the
offeror (which may have been incorrect).

The postal rule does not apply to instantaneous forms of communication

In the case of telephone, telex and fax, and email communication acceptance is not complete until received.

An offeror may be stopped from denying receipt of an acceptance if he was the cause on non-receipt.

The Entores [1955] 2 QB 327.

Denning LJ found that the regular postal rule did not apply for instantaneous means of communications such as a
telex. Instead, acceptance occurs where the message of acceptance is read.

The same principle will probably apply to email, but the way the time of receipt will be calculated taking into
account the delays caused by multiple servers, spam filters and so on is undecided

Exclusion of the postal rule

It is possible to exclude the operation of the postal rule by express provision in the contract.

Holwell Securities Ltd v Hughes [1974] 1 WLR 155

Revocation of posted acceptance

An offeree, after posting an acceptance, may wish to change his mind and attempt to withdraw the ‗acceptance'
before the letter reaches the offeror. May he do so?

Strictly speaking the letter of acceptance is binding the moment it is posted and a concluded contract is in being
from that point.

There is no English authority on this type of revocation.

See : Hudson 82 L.Q.R. 169

Countess of Dunmore v Alexander (1830) 9 Shaw

If the offeror has not received the posted acceptance what prejudice will he suffer to be told before receipt that
the offeree does not wish to proceed and revokes the posted acceptance?

Carlill v Carbolic Smokeball Co Ltd [1893] 1 QB 256

Communication of acceptance is not usually required in the case of unilateral contracts – e.g. reward cases.

***

4.3.3 Can silence amount to acceptance?

Mere silence or inactivity on the part of an offeree will not amount to acceptance.

Felthouse v Bindley (1862) 11 CB 869

P offered to buy D's horse the letter for which offer stated ― If I hear no more about him, I shall consider the
horse mine‖ No contract. D had not communicated acceptance.

Offer & Acceptance

Letters of Intent

. The Doctrine of Consideration

A gratuitous promise is not enforceable as a contract in English law. An agreement must either be made under
seal or the promisee must have provided consideration.

In most legal systems there exists a mechanism to identify agreements which will be viewed as enforceable
contracts.

The doctrine of consideration provides this function in English Law.

The recipient of a gratuitous promise may in certain especial circumstances have rights and be able to enforce the
promise despite not having provided consideration in the strict sense. ( Infra : The Doctrine of Promissory
Estoppel)

5.1 Definition of Consideration

5.1.1 The traditional definition

Currie v Misa (1875) LR 10 Ex 153

―A valuable consideration in the sense of the law may consist either in some right, interest, profit or benefit
accruing to one party, or some forbearance, detriment, loss or responsibility given suffered or undertaken by the
other.‖

5.2 Valid consideration

Three conditions must be satisfied:

Consideration must be sufficient but need not be adequate.

Consideration must not be past.

Consideration must move from the promisee but need not move to the promisor.

5.2.1 Consideration must be sufficient but need not be adequate

The consideration must have some value

The court is not concerned with the adequacy of the consideration. In the absence of duress or undue influence
the court will uphold a contract even where it appears that the consideration, objectively viewed, is not adequate.

Chappell & Co v Nestle [1960] AC 87

Nestle offered a popular record of the day in return for 1/6d and three wrappers from their chocolate bars. The
House of Lords HELD that the wrappers were a good consideration despite the fact that the wrappers had little
direct value and were in fact thrown away.

Atiyah argues that this case illustrates the deficiency of the benefit/detriment analysis of consideration.

What is “value”?

Treitel argues that the consideration must have some economic value even though the value is not capable of
precise quantification.

The courts have not been consistent in their definition of ―value‖ or benefit. In Stilk v Myrick (1809) 2 Camp
317 the court held that no consideration had been provided despite the factual benefit received by the promisor.

The analysis of cases below illustrates the difficulty and the point.

Natural love and affection

Natural love and affection is not a sufficient consideration.

White v Bluett (1853) 23 LJ Ex 36

A son's promise not to bore his father about the distribution of the father's property was HELD not to be a good
consideration for the father's promise not to sue his son on a debt owing to him by his son.

Pollock CB held there was no consideration for any discharge of the obligation to repay. The son had ‗no right to
complain' anyway. Not complaining was therefore an entirely intangible benefit.

A different view was taken in the American case of Hamer v Sidway (1891) 27 NE 256.
An uncle promised to pay his nephew $5000 if the nephew refrained from ‗drinking liquour, using tobacco,
swearing and playing cards or billiards for money' until he was 21. On the basis that the nephew had a legal right
to engage in the aforementioned activities he provided a valuable consideration by refraining.

It would not have been a valuable consideration if the nephew had had no intention whatsoever in engaging in
any of the prescribed activities.

Arrale v Costain Civil Engineering [1976] 1 Lloyd's Rep 98

A workman who did not know of his rights provided no consideration by accepting compensation under a Dubai
law in satisfaction of his rights in Dubai and at common law.

Forebearance to sue

A promise not to enforce a valid claim is a good consideration.

A promise not to enforce a claim which is known to be bad in law is not a good consideration.

Wade v Simeon (1846) 2 CB 548

A claim bad in law but seen by the promisee to be good raises a very difficult point of illusory consideration.

Cook v Wright (1861) 1B & S 559

Plaintiffs honestly believed that D was under a statutory obligation to reimburse them for expenditure which they
had incurred. D, denying that he was under any such obligation, paid a reduced amount on the sum demanded to
avoid litigation. D discovered that he was not under a statutory obligation to pay and reneged on his promise
arguing that it was not supported by consideration. The court HELD that his promise was supported by
consideration and he had to pay the amount agreed.

Performance of a duty owed by law

Performance of a duty already owed under law is not a valid consideration.

Collins v Godefroy (1831) 1 B & Ad 950

P was subpoenaed to give evidence and alleged that D promised to reimburse her expenses. It was HELD that she
could not enforce this promise as she was required by law to attend and give evidence and had not therefore
provided any consideration for the promise.

Glasbrook Bros v Glamorgan CC [1925] AC 270

Police under a general duty to protect property went beyond their duty in giving specific protection to a coalmine
during a strike and in so doing provided consideration for the remuneration promised.

Ward v Byham : The attack by Lord Denning

Ward v Byham [1956] 1 WLR 496

The father of an illegitimate child promised to pay £1 a week to the mother for the upkeep of the child provided
the child was well looked after and happy. The mother, under a legal duty to look after the child, sued to enforce
the agreement.

Denning LJ (As he then was) held that the mother provided consideration by performing her legal duty. The CA
did not agree and upheld the general principle that the performance of an existing legal duty does not constitute a
good consideration. The CA found consideration in the case by asserting that the mother went beyond her legal
duty to look after the child by keeping the child happy.

See: Denning LJ in Ward v Byham

"I have always thought that a promise to perform an existing duty, or the performance of it, should be regarded as
good consideration, because it is a benefit to the person to whom it is given."

Contrast this with the earlier cases on natural love and affection, White v Bluett et al.

Performance of a duty owed under an existing contract

The performance of an act already required under a prior contract cannot be a good consideration for a later
promise.

Stilk v Myrick (1809) 2 Camp 317

Sailors jumped ship. The Captain promised to divide their wages among the remaining crew if they agreed to
work the ship home short handed. The Captain reneged on his promise. The sailors sued. It was HELD that they
had not provided any consideration and could not enforce the contract.

Lord Ellenborough: I think Harris v. Watson was rightly decided; but I doubt whether the ground of public
policy, upon which Lord Kenyon is stated to have proceeded, be the true principle on which the decision is to be
supported. Here, I say, the agreement is void for want of consideration. There was no consideration for the
ulterior pay promised to the mariners who remained with the ship. Before they sailed from London they had
undertaken to do all that they could under all the emergencies of the voyage. They had sold all their services till
the voyage should be completed. If they had been at liberty to quit the vessel at Cronstadt, the case would have
been quite different; or if the captain had capriciously discharged the two men who were wanting, the others
might not have been compellable to take the whole duty upon themselves, and their agreeing to do so might have
been a sufficient consideration for the promise of an advance of wages. But the desertion of a part of the crew is
to be considered an emergency of the voyage as much as their death; and those who remain are bound by the
terms of their original contract to exert themselves to the utmost to bring the ship in safety to her destined port.
Therefore, without looking to the policy of this agreement, I think it is void for want of consideration, and that
the plaintiff can only recover at the rate of £5 a month.

Hartley v Ponsonby (1857) 7 E & B 872

A ship became so short handed from crew desertion that it was dangerous to sail. The crew were offered
additional wages to sail the ship home. It was HLED that the sailors provided fresh consideration. The original
contract was discharged and a new contract was entered into under these arrangements.

William v Roffey Bros & Nicholls [1989] NLJ 1713

The CA HELD in the case of bonus payments that these will be enforced if the party agreeing to pay the bonus
obtains some new practical benefit or avoided a disadvantage thereby.

Russell LJ : ‗the courts nowadays should be more ready to find [consideration‘s] existence so as to reflect the
intention of the parties to the contract where the bargaining powers are not unequal‘. He noted that Roffey Bros‘
employee, Mr Cottrell had felt the original price to be less than reasonable, and there was a further need to
replace the ‗haphazard method of payment by a more formalised scheme‘ of money per flat. "True it was that the
plaintiff did not undertake to do any work additional to that which he had originally undertaken to do but the
terms upon which he was to carry out the work were varied and, in my judgment, that variation was supported by
consideration which a pragmatic approach to the true relationship between the parties readily demonstrates.‘

Wikipedia note: Glidewell LJ held Williams had provided good consideration even though he was merely
performing a pre-existing duty. Williams got £3,500 (not full expectation damages). He said that the idea of
promissory estoppel was not properly argued and ‗not yet been fully developed'. [ 1 ] The concept of economic
duress provided an answer to Stilk's old problem. The test for understanding whether a contract could
legitimately varied was set out as follows.

 if A has a contract with B for work

 before it is done, A has reason to believe B may not be able to complete
 A promises B more to finish on time
 A ‘obtains in practice a benefit, or obviates a disbenefit' from giving the promise
 there is no economic duress or fraud...

...then the practical benefit constitutes good consideration. On Stilk v Myrick , Glidewell LJ said, "It is not in my
view surprising that a principle enunciated in relation to the rigours of seafaring life during the Napoleonic wars
should be subjected during the succeeding 180 years to a process of refinement and limitation in its application to
the present day."

See also: North Ocean Shipping v Hyundai Construction (The Atlantic Baron ) [1978] 3 All ER 1170

Pao On v Lau Yiu Long [1980] AC 614; [1979] 3 All ER 65

Payment of a smaller sum in satisfaction of a larger sum is no satisfaction of that larger sum
The debtor is already contractually bound to repay the larger sum and provides no consideration by agreeing to
pay a smaller sum without more.

Pinnel's Case (1602) 5 Co Rep 117a

Earlier repayment of the smaller sum or payment on the due date of the smaller sum at a place appointed by the
creditor and different from the place originally required under the obligation would constitute a valuable
consideration.

‗The gift of a horse, hawk or robe etc in satisfaction is good....... ‗ but not 19/6 for a £1.

The rule was upheld by the House of Lords in Foakes v Beer (1884) 9 App Cas 605. B obtained judgment against
F who asked for time to pay. B agreed to take no proceedings on the judgment in consideration of an immediate
payment with the balance payable by instalments. F paid in full. B sued for interest. The House of Lords HELD
that she was entitled to succeed on the claim. F provided no consideration for her promise.

Wikipedia note: Pinnel's Case and the line of authority that flowed from it was distinguished in the decision of
Williams v Roffey Bros , [ 4 ] where the English Court of Appeal held that performing an existing obligation
could be good consideration where it conferred some "practical benefit" above what was originally envisaged. In
that case, it was held the a subcontractor who had asked for additional remuneration to do previously agreed
work was enforceable, as avoid the subcontractor going into bankruptcy (which otherwise would have happened)
constituted a practical benefit. The reasoning in Williams v Roffey Bros has been doubted in subsequent cases,
although it has not been overruled. Please note the decision of the Court of Appeal in Re Selectmove [1995] 1
WLR 474 which made clear that Williams v Roffey cannot be used to subvert the part-payment of a debt
principle accepted by the House of Lords in Foakes v Beer.

Important note: We return to this issue when we consider Promissory Estoppel and examine the criteria for the
application of relief under that doctrine as first laid out in the High Trees case by Denning J (as he then was)

Payment of a smaller sum by a third party

Where a third party makes the smaller payment in satisfaction of the larger sum the creditor may not sue the
original debtor for to allow the creditor to do so would be a fraud on the third party.

Snelling v Snelling [1973] 1 QB 87

Hirachand Punamchand v Temple [1911] 2 KB 330

Gore v Van Der Lann [1967] 2 QB 31

Where a third party agrees to pay a creditor what is due to him, there may also arise a contract between the
creditor and the third party which would prevent the creditor from suing the debtor for the balance under the
Contracts (Rights of Third Parties) Act 1999.

Performance of a duty owed to a third party

While the performance of an existing duty owed to a promisor is not a good consideration (Supra) the
performance of a contractual duty owed to a third party is a good consideration.

Shadwell v Shadwell (1860) 9 CB (NS) 159

P, engaged to EN, was promised £150 per annum by his uncle if he married EN (a pre-existing contractual
obligation). P successfully sued to enforce the promise to pay £150 per annum.

The principle was affirmed by the House of Lords in New Zealand Shipping v Satterthwaite (The Eurymedon )
[1974] 1 All ER 1015
―An agreement to do an act which the promisor is under an existing obligation to a third party to do, may quite
well amount to a valid consideration....the promisee obtains the benefit of a direct obligation.....This proposition
is illustrated by Scotson v Pegg which their Lordships consider to be a good law.‖

per Lord Wilberforce.

Lord Scarman in Pao On v Lau Yiu Long [1980] AC 614; [1979] 3 All ER 65 confirmed the point.

Jones v Waite (1839) 5 Bing NC 341

A promise to do an act (as opposed to the actual performance of the act) did not constitute a good consideration –
the opposite of the holding in Scotson v Pegg and Pao On .

Scotson v Pegg (1861) 6 H & N 295

A agreed to deliver coal to B's order. At B's order A delivered the coal to C who had promised A to unload it. A
successfully sued C on this promise, despite the fact that he was already under a duty to B to deliver the coal.

***

5.2.2 Consideration must not be Past

Rooted in the bargain theory of contract the rule that past consideration is not a good consideration stems from
the fact that there is no reciprocity – the promisee does not give anything in return for the promise of the
promisor.

The Rule

When two parties have entered into a contract and one of them later promises an additional benefit, unsupported
by a fresh consideration, that promise is not binding on the person making it. The original contract and
consideration is in the past.

Roscorla v Thomas (1842) 3 QB 234

D agreed to sell a horse to P. D then warranted the soundness of the horse. P could not enforce this later promise,
the consideration for it, entry into the original contract, was in the past.

Re McArdle [1951] Ch 669

A promise made ‗in consideration of your carrying out' certain work was unenforceable. The work, despite the
wording in the contract suggesting the opposite, had been done and was in the past.

Eastwood v Kenyon (1840) 11 A&E 438

A guardian raised a loan to pay for a girl's education. After the marriage the husband promised to pay off the loan
taken out by the guardian. The guardian could not enforce the promise. Past consideration is no consideration.

Mitigation of the rule

Lampleigh v Braithwaite (1615) Hob 105 D, under sentence of death, asked P to obtain a pardon from King
James I. P did so. D promised to pay P £1000. It was held that P could recover the £1000.

Where an act of the promisee was requested by the promisor any later promise by the promisor to pay for the act
may be referred back to the original request and treated as done in response to it.

The Privy Council imposed limits to the rule in Pao On v Lau Yiu Long [1980] AC 614; [1979] 3 All ER 65
1. The promisee must have performed the original act at the request of the promisor.

2. That it must have been understood that the act would be paid for.

3. The eventual promise to pay must have been one capable of enforcement had it been made just prior to
performance of the act.

Consideration must move from the Promisee but need not move to the Promisor

While it is essential that the promisee provides consideration personally (by conferring a benefit or sustaining a
detriment in the traditional analysis, the consideration need not move to the promisor – indeed, in the case of
sustaining a detriment, nothing moves to the promisor.

De La Bere v Pearson [1908] 1 KB 280

D, owners of a newspaper, solicited letters about financial matters to allow financial advice by way of reply to be
published in the newspaper. P's letter was published. P followed the advice, suffered financial loss and sued. D
argued that the advice was given gratuitously that no consideration had moved from the promisee and that they
were not liable.

It was HELD that P had given consideration (by writing a letter)

Thomas v Thomas (1842) 11 LJ QB 104

A promise to pay £1 ground rent per annum was good consideration for a promise by a testator who wished to
give his wife a house.

Under Contracts (Rights of Third Parties Act) 1999 a third party can enforce a contract made for his benefit
under certain circumstances. This is not a real exception to the rule.

***

Contracts (Rights of Third Parties) Act 1999

1999 CHAPTER 31

An Act to make provision for the enforcement of contractual terms by third parties.

[11th November 1999]

Be it enacted by the Queen's most Excellent Majesty, by and with the advice and consent of the Lords Spiritual
and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as
follows:—

1 Right of third party to enforce contractual term

(1) Subject to the provisions of this Act, a person who is not a party to a contract (a ―third party‖) may in his own
right enforce a term of the contract if—

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not
intend the term to be enforceable by the third party.
(3) The third party must be expressly identified in the contract by name, as a member of a class or as answering a
particular description but need not be in existence when the contract is entered into.

(4) This section does not confer a right on a third party to enforce a term of a contract otherwise than subject to
and in accordance with any other relevant terms of the contract.

(5) For the purpose of exercising his right to enforce a term of the contract, there shall be available to the third
party any remedy that would have been available to him in an action for breach of contract if he had been a party
to the contract (and the rules relating to damages, injunctions, specific performance and other relief shall apply
accordingly).

(6) Where a term of a contract excludes or limits liability in relation to any matter references in this Act to the
third party enforcing the term shall be construed as references to his availing himself of the exclusion or
limitation.

(7) In this Act, in relation to a term of a contract which is enforceable by a third party—

 ―the promisor‖ means the party to the contract against whom the term is enforceable by the third party,
and
 ―the promisee‖ means the party to the contract by whom the term is enforceable against the promisor.

2 Variation and rescission of contract

(1) Subject to the provisions of this section, where a third party has a right under section 1 to enforce a term of
the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to
extinguish or alter his entitlement under that right, without his consent if—

(a) the third party has communicated his assent to the term to the promisor,

(b) the promisor is aware that the third party has relied on the term, or

(c) the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the
third party has in fact relied on it.

(2) The assent referred to in subsection (1)(a)—

(a) may be by words or conduct, and

(b) if sent to the promisor by post or other means, shall not be regarded as communicated to the promisor until
received by him.

(3) Subsection (1) is subject to any express term of the contract under which—

(a) the parties to the contract may by agreement rescind or vary the contract without the consent of the third
party, or

(b) the consent of the third party is required in circumstances specified in the contract instead of those set out in
subsection (1)(a) to (c).

(4) Where the consent of a third party is required under subsection (1) or (3), the court or arbitral tribunal may,
on the application of the parties to the contract, dispense with his consent if satisfied—

(a) that his consent cannot be obtained because his whereabouts cannot reasonably be ascertained, or

(b) that he is mentally incapable of giving his consent.

(5) The court or arbitral tribunal may, on the application of the parties to a contract, dispense with any consent
that may be required under subsection (1)(c) if satisfied that it cannot reasonably be ascertained whether or not
the third party has in fact relied on the term.

(6) If the court or arbitral tribunal dispenses with a third party's consent, it may impose such conditions as it
thinks fit, including a condition requiring the payment of compensation to the third party.

(7) The jurisdiction conferred on the court by subsections (4) to (6) is exercisable by both the High Court and a
county court.

3 Defences etc. available to promisor

(1) Subsections (2) to (5) apply where, in reliance on section 1, proceedings for the enforcement of a term of a
contract are brought by a third party.

(2) The promisor shall have available to him by way of defence or set-off any matter that—

(a) arises from or in connection with the contract and is relevant to the term, and

(b) would have been available to him by way of defence or set-off if the proceedings had been brought by the
promisee.

(3) The promisor shall also have available to him by way of defence or set-off any matter if—

(a) an express term of the contract provides for it to be available to him in proceedings brought by the third party,
and

(b) it would have been available to him by way of defence or set-off if the proceedings had been brought by the
promisee.

(4) The promisor shall also have available to him—

(a) by way of defence or set-off any matter, and

(b) by way of counterclaim any matter not arising from the contract,

that would have been available to him by way of defence or set-off or, as the case may be, by way of
counterclaim against the third party if the third party had been a party to the contract.

(5) Subsections (2) and (4) are subject to any express term of the contract as to the matters that are not to be
available to the promisor by way of defence, set-off or counterclaim.

(6) Where in any proceedings brought against him a third party seeks in reliance on section 1 to enforce a term of
a contract (including, in particular, a term purporting to exclude or limit liability), he may not do so if he could
not have done so (whether by reason of any particular circumstances relating to him or otherwise) had he been a
party to the contract.

4 Enforcement of contract by promisee

Section 1 does not affect any right of the promisee to enforce any term of the contract.

5 Protection of promisor from double liability

Where under section 1 a term of a contract is enforceable by a third party, and the promisee has recovered from
the promisor a sum in respect of—

(a) the third party's loss in respect of the term, or

(b) the expense to the promisee of making good to the third party the default of the promisor,

then, in any proceedings brought in reliance on that section by the third party, the court or arbitral tribunal shall
reduce any award to the third party to such extent as it thinks appropriate to take account of the sum recovered by
the promisee.

6 Exceptions

(1) Section 1 confers no rights on a third party in the case of a contract on a bill of exchange, promissory note or
other negotiable instrument.

(2) Section 1 confers no rights on a third party in the case of any contract binding on a company and its members
under section 14 of the [1985 c. 6.] Companies Act 1985.

(3) Section 1 confers no right on a third party to enforce—

(a) any term of a contract of employment against an employee,

(b) any term of a worker's contract against a worker (including a home worker), or

(c) any term of a relevant contract against an agency worker.

(4) In subsection (3)—

(a) ―contract of employment‖, ―employee‖, ―worker's contract‖, and ―worker‖ have the meaning given by section
54 of the [1998 c. 39.] National Minimum Wage Act 1998,

(b) ―home worker‖ has the meaning given by section 35(2) of that Act,

(c) ―agency worker‖ has the same meaning as in section 34(1) of that Act, and

(d) ―relevant contract‖ means a contract entered into, in a case where section 34 of that Act applies, by the
agency worker as respects work falling within subsection (1)(a) of that section.

(5) Section 1 confers no rights on a third party in the case of—

(a) a contract for the carriage of goods by sea, or

(b) a contract for the carriage of goods by rail or road, or for the carriage of cargo by air, which is subject to the
rules of the appropriate international transport convention,

except that a third party may in reliance on that section avail himself of an exclusion or limitation of liability in
such a contract.

(6) In subsection (5) ―contract for the carriage of goods by sea‖ means a contract of carriage—

(a) contained in or evidenced by a bill of lading, sea waybill or a corresponding electronic transaction, or

(b) under or for the purposes of which there is given an undertaking which is contained in a ship's delivery order
or a corresponding electronic transaction.

(7) For the purposes of subsection (6)—

(a) ―bill of lading‖, ―sea waybill‖ and ―ship's delivery order‖ have the same meaning as in the [1992 c. 50.]
Carriage of Goods by Sea Act 1992, and
(b) a corresponding electronic transaction is a transaction within section 1(5) of that Act which corresponds to
the issue, indorsement, delivery or transfer of a bill of lading, sea waybill or ship's delivery order.

(8) In subsection (5) ―the appropriate international transport convention‖ means—

(a) in relation to a contract for the carriage of goods by rail, the Convention which has the force of law in the
United Kingdom under section 1 of the [1983 c. 14.] International Transport Conventions Act 1983,

(b) in relation to a contract for the carriage of goods by road, the Convention which has the force of law in the
United Kingdom under section 1 of the [1965 c. 37.] Carriage of Goods by Road Act 1965, and

(c) in relation to a contract for the carriage of cargo by air—

(i) the Convention which has the force of law in the United Kingdom under section 1 of the [1961 c. 27.]
Carriage by Air Act 1961, or

(ii) the Convention which has the force of law under section 1 of the [1962 c. 43.] Carriage by Air
(Supplementary Provisions) Act 1962, or

(iii) either of the amended Conventions set out in Part B of Schedule 2 or 3 to the [S.I. 1967/480.] Carriage by
Air Acts (Application of Provisions) Order 1967.

7 Supplementary provisions relating to third party

(1) Section 1 does not affect any right or remedy of a third party that exists or is available apart from this Act.

(2) Section 2(2) of the [1977 c. 50.] Unfair Contract Terms Act 1977 (restriction on exclusion etc. of liability for
negligence) shall not apply where the negligence consists of the breach of an obligation arising from a term of a
contract and the person seeking to enforce it is a third party acting in reliance on section 1.

(3) In sections 5 and 8 of the [1980 c. 58.] Limitation Act 1980 the references to an action founded on a simple
contract and an action upon a specialty shall respectively include references to an action brought in reliance on
section 1 relating to a simple contract and an action brought in reliance on that section relating to a specialty.

(4) A third party shall not, by virtue of section 1(5) or 3(4) or (6), be treated as a party to the contract for the
purposes of any other Act (or any instrument made under any other Act).

8 Arbitration provisions

(1) Where—

(a) a right under section 1 to enforce a term (―the substantive term‖) is subject to a term providing for the
submission of disputes to arbitration (―the arbitration agreement‖), and

(b) the arbitration agreement is an agreement in writing for the purposes of Part I of the [1996 c. 23.] Arbitration
Act 1996,

the third party shall be treated for the purposes of that Act as a party to the arbitration agreement as regards
disputes between himself and the promisor relating to the enforcement of the substantive term by the third party.

(2) Where—

(a) a third party has a right under section 1 to enforce a term providing for one or more descriptions of dispute
between the third party and the promisor to be submitted to arbitration (―the arbitration agreement‖),

(b) the arbitration agreement is an agreement in writing for the purposes of Part I of the Arbitration Act 1996,
and
(c) the third party does not fall to be treated under subsection (1) as a party to the arbitration agreement,

the third party shall, if he exercises the right, be treated for the purposes of that Act as a party to the arbitration
agreement in relation to the matter with respect to which the right is exercised, and be treated as having been so
immediately before the exercise of the right.

9 Northern Ireland

(1) In its application to Northern Ireland, this Act has effect with the modifications specified in subsections (2)
and (3).

(2) In section 6(2), for ―section 14 of the [1985 c. 6.] Companies Act 1985‖ there is substituted ―Article 25 of the
[S.I. 1986/1032 (N.I. 6).] Companies (Northern Ireland) Order 1986‖.

(3) In section 7, for subsection (3) there is substituted—

― (3) In Articles 4(a) and 15 of the [S.I. 1989/1339 (N.I. 11).] Limitation (Northern Ireland) Order 1989, the
references to an action founded on a simple contract and an action upon an instrument under seal shall
respectively include references to an action brought in reliance on section 1 relating to a simple contract and an
action brought in reliance on that section relating to a contract under seal. ‖ .

(4) In the [1964 c. 23 (N.I.).] Law Reform (Husband and Wife) (Northern Ireland) Act 1964, the following
provisions are hereby repealed—

(a) section 5, and

(b) in section 6, in subsection (1)(a), the words ―in the case of section 4‖ and ―and in the case of section 5 the
contracting party‖ and, in subsection (3), the words ―or section 5‖.

10 Short title, commencement and extent

(1) This Act may be cited as the Contracts (Rights of Third Parties) Act 1999.

(2) This Act comes into force on the day on which it is passed but, subject to subsection (3), does not apply in
relation to a contract entered into before the end of the period of six months beginning with that day.

(3) The restriction in subsection (2) does not apply in relation to a contract which—

(a) is entered into on or after the day on which this Act is passed, and

(b) expressly provides for the application of this Act.

(4) This Act extends as follows—

(a) section 9 extends to Northern Ireland only;

(b) the remaining provisions extend to England and Wales and Northern Ireland only.

Question & Answer

Analyses in Contract & Sale of Goods

Consideration

Drafted 13th August 2009

Mike Semple Piggot
2. Ambassador Ltd v Carpetbagger Ltd

This is a contract for labour and materials priced at £100,000 which has been varied to a price of £120,000
because of the difficulties faced by Carpetbagger Ltd in securing supplies and labour; raising the issue of
consideration to support the variation.

3. The Law

3.1 While the leading theory of consideration over 100 years ago turned on the concept of bargain, the giving of
benefit and the sustaining of detriment (Currie v Misa (1875) per Lush J); modern theory appears to be the more
simplified exchange of promises with scant attention being paid by the courts to the adequacy of consideration,
consistent with the court's reluctance to interefere in the right of the contracting parties to set the terms of their
bargain or contract. (See Consideration must be sufficient but need not be adequate - Chappel v Nestle [1960] et
al])

3.2 The main issue lies in the issue of whether the variation from £100,000 to a contract price of £120,000 is
supported by fresh consideration. If it is, Ambassador will be liable for the full varied contract price of £120,000.

3.3 The starting point is the principle that the performance of an act already required under a prior contract
cannot be a good consideration for a later promise. The leading case on this proposition is the 1809 case of Stilk v
Myrick.

Stilk v Myrick (1809) 2 Camp 317

Sailors jumped ship. The Captain promised to divide their wages among the remaining crew if they agreed to
work the ship home short handed. The Captain reneged on his promise. The sailors sued. It was HELD that they
had not provided any consideration and could not enforce the contract.

William v Roffey Bros & Nicholls [1989] NLJ 1713

The CA HELD in the case of bonus payments that these will be enforced if the party agreeing to pay the bonus
obtains some new practical benefit or avoided a disadvantage thereby.

3. 5 In Williams v Roffey [1991] Glidewell LJ said of Stilk v Myrick "It is not in my view surprising that a
principle enunciated in relation to the rigours of seafaring life during the Napoleonic wars should be subjected
during the succeeding 180 years to a process of refinement and limitation in its application to the present day."

Legal historians have suggested that the courts were more prepared to find a genuine fresh consideration
provided by sailors faced with doing more than they were contracted to do originally because of the more stable
political situation which pertained at the time when Hartley v Ponsonby was decided. Be that as it may, the
decision in William v Roffey Bros & Nicholls [1989] NLJ 1713 certainly clarifies the law on contract variation
when the party appears to be doing no more than contractually bound to do and may, if taken to a logical extent,
revolutionise the law relating to consideration to the extent of rendering it a totemic or token requirement.

4. The case of William v Roffey Bros & Nicholls [1989] NLJ 1713, on facts similar to those in issue here,
reveals the pragmatic approach of the Court of Appeal. In Willams v Roffey the court found that that the
defendants had obtained a practical benefit by virtue of the claimants promise to complete the work on time and I
can see no reason in the present case why a court would not take a similar line, given the similarity of the factual
matrix.

Glidewell LJ's judgement is of most value on this issue:

Accordingly, following the view of the majority in Ward v. Byham and of the whole court in Williams v. Williams
and that of the Privy Council in Pao On the present state of the law on this subject can be expressed in the
following proposition:
(i) if A has entered into a contract with B to do work for, or to supply goods or services to, B in return for
payment by B; and

(ii) at some stage before A has completely performed his obligations under the contract B has reason to doubt
whether A will, or will be able to, complete his side of the bargain; and

(iii) B thereupon promises A an additional payment in return for A's promise to perform his contractual
obligations on time; and

(iv) as a result of giving his promise, B obtains in practice a benefit, or obviates a disbenefit; and

(v) B's promise is not given as a result of economic duress or fraud on the part of A; then

(vi) the benefit to B is capable of being consideration for B's promise, so that the promise will be legally binding.

5. Professor McKendrick in his Contract Law Text 8th ed at p77 , Palgrave Macmillan Law Masters stresses the
importance of anaylsing two points: "The first is: what exactly was the practical benefit the defendants obtained?
The Second is: how can this conclusion be reconciled with Stilk v Myrick?

5.1 Applying the reasoning in Williams v Roffey to the present facts, Ambassador oibtained a practical benefit in
having Carpetbagger complete the work on time and therefore did not breach their contract with HappyatWork
and did not have to go to the trouble and expense of securing an alternative contractor to complete the work -
possibly at a higher fee given the time consraints. There is an attractive logic in this but can it really be said that
the practical benefit was any more 'practical' when Carpetbagger declared later on variation of the contract that
they would still perofrm their contract than it was when they made the original promise? Arguably, the certainty
of performance was made more clear after the variation and therein, arguably, lies the consideration for the
variation.

5.2 Purchas LJ in Williams v Roffey noted: "That although in 'normal circumstances the suggestion that a
contracting party can rely on his own breach to establish consideration is distinctly 'unattractive' on the facts of
the case the claimant had given up his right to 'cut his losses' by deliberately breaching the contract with the
defendants.

Ambassador Ltd v HappyAtWork PLC

1. This is a contract for labour and materials under which Ambassador Ltd was contracted by HappyatWork PLC
to paint and carpet the business park operated by HappyAtWork PLC to contract specification for a fixed and
agreed pirce of £250,000. HappyatWork, claiming financial difficulties, sought a reduction in the price to
£200,000 to which Ambassasdor reluctantly agreed fearing possible great loss if HappyatWork went into
liquidation.

2. Ambassador now seeks to recover the balance of £50,000 in circumstances where it is clear that
HappyAtWork PLC has succeeed in letting all the units at the business park.

3. The Law

3.1 The issue turns on the long established principle of law that payment of a smaller sum in satisfaction of a
larger sum is not, at common law, a satisfaction of that larger sum and does not discharge the contract inter
partes by performance. This principle goes back to Pinnel's Case (1602) 5 Co Rep 117a and was re-affirmed by
the House of Lords in Foakes v Beer (1884) 9 App Cas 605.

3.2 The decision of the Court of Appeal in Re Selectmove [1995] 1 WLR 474 made clear that William v Roffey
Bros & Nicholls [1989] NLJ 1713 cannot be used to subvert the part-payment of a debt principle accepted by the
House of Lords in Foakes v Beer.

Terms of the Contract

There are few formalities in terms of the formation of simple contracts. A contract may be made under deed, in
writing, The old requirement of a seal has been abolished. Land Law requires, for example, that leases for more
than three years must be made by deed. S 52 Law of Property Act 1925. Company Law requires that contracts be
in writing for the transfer of certain shares and the Consumer Credit lays down quite rigorous formalities for
regulated credit agreements.

6.1 Express Terms of the Contract

The express terms of the contract, the obligations entered into by the parties, may be oral or set out in writing.

In addition, certain terms will be imposed upon the parties, most notably by statute under the Sale of Goods Act
1979 , The Sale of Goods (Implied Terms) Act 1973 and The Supply of Goods and Services Act 1982 The Sale
and Supply of Goods to Consumers Regulations 2002 or by custom or by necessity. These terms are called
‗Implied Terms'.

***

6.1.1 The Parol Evidence Rule

Oral evidence may not be adduced to add to, contradict or controvert a written document. The rule is part the law
of evidence and applies not only to contracts but all kinds of documents. The rule grew up in the context of
arguments about when parties would be allowed to place oral evidence before a jury. Much of the early case law
involves wills.

Wikipedia note on Parol Evidence

Goss v Lord Nugent (1833) 5 B & Ad 58

―Verbal evidence is not allowed to be given...so as to add to or subtract from, or in any manner to vary or qualify
the written contract.‖

Rabin v Gerson Berger Association Ltd [1986] 1 WLR 526

The reasoning behind this is straightforward. Those who have bound themselves by a contract in writing should
be bound by the written terms alone.

Hawkrish v Bank of Montreal (1969) 2 DLR (Rd) 600

***

6.1.2 Exceptions to the Parol Evidence rule

Evidence extrinsic to the document is admitted in a number of situations.

Validity

Evidence may be adduced to prove that the contract is not enforceable for some invalidating cause. Roe v R.A.
Naylor Ltd (1918) 87 LJKB 958 (Non est factum)

Operation of the contract

Pym v Campbell (1856) 6 E&B 370

In a case involving the sale of a patent, oral evidence was adduced to demonstrate that a contract should not
become operative until a third party approved of the invention.

To show the capacity in which the parties contracted

Evidence was adduced in Newell v Radford (1867) LR 3 CP to show who was buyer and who was seller

To prove the existence of oral warranties

Evidence may be adduced to establish the existence of oral warranties.

Where the written agreement is not the whole agreement

Allen v Pink (1838) 4 M & W 140

In circumstances where the parties did not intend that the written document would encapsulate all the terms of
the contract oral evidence may be given to prove the remainder of the contract.

To establish implied terms

The parol evidence rule does not prevent evidence being given to establish a right under an implied terms – to
show reliance on the skill and judgment of the seller for example to establish a right under s.14(3) SOGA 1979.

Gillespie Bros v Cheney, Eggar & Co [1896] 2 QB 59

To prove custom

As a defence to an action for specific performance

To identify the subject matter

To establish the existence of a collateral contract

While extrinsic evidence may not be adduced to add to, vary or contradict a written document it may be possible
to adduce the evidence to show that the parties had in fact entered into two related contracts one of which was
written, the other, oral.

Mann v Nunn (1874) 30 LT 526

A written agreement failed to refer to the earlier oral promise. The oral promise was enforced.

―The parol agreement neither alters nor adds to the written one, but is an independent agreement.‖

City of Westminster Properties v Mudd [1959] 129

A lease, containing a covenant, that the premises would be used for business purposes only did not reflect the
point that the tenant only agreed to sign the lease by the oral assurance of the landlord that the tenant could
continue to sleep on the premises

Harman J: There was a collateral contract that he could stay even if it contradicted the written agreement's
express terms. He said there was no need to look at the question of estoppel, because there was a clear assurance
preceeding the contract.

The oral evidence which was admitted was for a collateral contract which contradicted the written document. It is
hard to distinguish this case from earlier authorities Angell v Duke (1875) 32 LT and Henderson v Arthur [1907]
1 KB 10 where the court took the view that the oral evidence, contradicting the written document, was
inadmissible. If City of Westminster v Mudd is correct, it undermines the parol evidence rule.
To inform the court about the “factual matrix”

Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896

Lord Hoffmann summarised principles of construction of contracts, and suggested there had been a move away
from the old cannons of construction. In particular he referred to the admissibility of evidence to show the court
the ―factual matrix‖ in which the contract was formed. The case builds on a ‗common sense' approach to
construction developed in Prenn v Simmonds [1971] 1 WLR 1381; Reardon Smith v Hanson-Tangen [1976] 1
WLR 989; and Mannai Investment Co v Eagle Star Life Assurance [1977] AC 749.

***

6.1.3 The distinction between ‗mere puffs', representations and terms

Statements made in the pre-contractual phase of negotiations fall into three categories – mere puffs, mere
representations and contractual terms. Statements made after the conclusion of a contract have no contractual
force unless supported by a separate and valid consideration. (They are not incorporated into the contract and –
past consideration is no consideration.)

(a) Mere Puff

The licence the law permits a salesman without attracting contractual liability.

Simplex commendatio non obligat.

(b) Representation and terms – Distinguishing criterion

* The time the statement was made

* The intention behind the making of the statement

* Whether the statement induced a contract

* The status of the maker of the statement

* Whether the statement was reduced to writing

* The importance of the statement

A number of cases illustrate the point:

Routledge v McKay [1954] 1 All ER 855

A written contract signed a week after oral negotiations failed to note the date of the model (1942) The lapse of
time between the making of the statement and the signing of the contract was a factor against construing the
statement as a contractual.

Sir Raymond Evershed MR:

The classic exposition of the law in regard to warranties is to be found in the Speech of Lord. Moulton in the case
of Heilbut, Symons & Co. -v- Buckleton, and the passage most often quoted la at page 47 of the report in 1913
Appeal Cases. Though it has been many times cited I may perhaps be forgiven for citing once again some of the
language which the noble Lord used. "It is evident", said he, "both on principle and on authority, that there may
be a contract the consideration for which is the making of some other contract. 'If you will make such and such a
contract I will give you one hundred pounds', is in every sense of the word a complete legal contract. It is
collateral to the main contract, but each has an independent existence, and they do not differ in respect of their
possessing to the full the character and status of a contract. But such collateral contracts must from their very
nature be rare". Than, after a sentence which I can pass ever, "Such (collateral contracts) ...... must be proved
strictly. Not only the terms of such contracts but the existence of an animus contrabendi on the part of all the
parties to them must be clearly shown. Any laxity On these points would enable parties to escape from the full
performance of the obligations of contracts unquestionably entered into by them and more especially would have
the effect of lessening the authority of written contracts by making it possible to vary thorn by suggesting the
existence of verbal collateral agreements relating to the same subject-matter.

Then, after dealing with the particular facts in the Hailbut, Symons case and after referring to certain cases on the
Chancery side, Lord Moulton said, at page 49, "On the Common law side of the Court the attempts to make a
person liable for an iinnocent misrepresentation have usually taken the form of attempts to extend the doctrine of
warranty beyond its just limits and to find that a warranty existed in cases where there was nothing more than an
innocent misrepresentation .... But in respect of the question of the existence of a warranty the Courts have had
the advantage, of an admirable enunciation of the true principle of law which was made in very early days by
Lord Chief Justice Holt with respect to the contract of sale. He says 'An affirmation at the time of the sale is a
warranty, provided it appear on evidence to be so intended'". Then he says, a little later, "One often sees quoted
the dictum of Mr Justice Bayley in Cave -v- Coleman where, in respect of a representation made verbally during
the sale of a horse, he says that 'being wade in the course of dealing, and before the bargain was complete* it
amounted to a warranty' - a proposition that la far too sweeping and cannot be supported".

Finally, after reference to and disapproval of the language of this Court in De Lassalle -v- Guildford, Lord
Moulton at page 51 says: "It is, my Lords, of the greatest importance, is my opinion, that this House should
maintain in its full integrity the principle that a parson is not liable in damages for an innocent misrepresentation,
no matter in what way or under what form the attack is made".

Note that Innocent misrepresentation is now covered by s.2(2) Misrepresentation Act 1967 (Infra Chapter 10)

Bannerman v White (1861) 10 CB NS 844

The statement that sulphur had not been used in the growth of crops was contemporaneous and was held to be a
condition of the contract. (The buyer would not have contracted if the assurance had not been given)

Couchman v Hill [1947] KB 554

B asked for and receive an assurance that a heifer had not been served. Despite the fact that the printed
conditions stated that no warranties were given and the oral evidence controverted a written document the Court
of Appeal held that the statement was a contract condition and, in the alternative, amounted to a collateral
contract.

Often a contract will be concluded and further statements will be made regarding the goods. These latter
statements are not incorporated into the contract and, in the absence of separate and valid supporting
consideration, will not be enforced.

Roscorla v Thomas (1842) 3 QB 234

D agreed to sell a horse to P. D then warranted the soundness of the horse. P could not enforce this later promise,
the consideration for it, entry into the original contract, was in the past.

Dick Bentley Productions Ltd v Harold Smith Motors Ltd [1965] 1 WLR 623
A statement by a dealer that a car had done 20,000 miles since being fitted with a replacement engine and
gearbox was untrue. The court held that the dealer was in a position to know the true facts and that the statement
amounted to a contractual term.

Compare : Oscar Chess v Williams [1957] 1 WLR 370 and consider especially the dissenting judgment of
Morris LJ.

Schawel v Reade [1913] 1 Ir Rep 81

A statement that a horse was perfectly sound induced a contract three weeks later. It would appear that the status
of the person making the statement – the owner, who had special knowledge – was a decisive factor in the case.

All the factors have to be considered, none on their own are conclusive
Heilbut Symons & Co v Buckleton [1913] AC 30

“They cannot be said to furnish decisive tests...the intention of the parties can only be decided from the totality of
the evidence.”

per Lord Moulton

***

6.1.4 Conditions

A condition, in the narrow and technical sense of the word, is the most important category of contractual term.
The remedy for breach of condition at common law is repudiation (in the sense that the victim is allowed to treat
the contract as having been repudiated) and damages.

Condition precedent and subsequent

Conditions must first be distinguished from conditions precedent and subsequent.

(a) Condition precedent

Pym v Campbell (1856) 6 E&B 370

In a case involving the sale of a patent, oral evidence was adduced to demonstrate that a contract should not
become operative until a third party approved of the invention.

(b) Condition subsequent

Head v Tatersall (1871) LR 7 Ex 7

A horse was sold by description in circumstances allowing the buyer to return the horse if it did not meet the
description. It did not. The buyer was allowed to return the horse on grounds that the contract had come to end on
the fulfillment of the condition subsequent.

Vital promise: 19th Century

A promise requiring complete performance such that the other party may treat the contract as discharged if it is
not performed.

(a) The modern view

A condition goes to the root of the contract.

The breach of a condition allows the innocent party to treat the contract as repudiated, treat the contract as at an
end and treat himself as discharged from performance. If the parties to the contract agree that that shall be the
effect of the term it will be classified as a condition.

Photo Production Ltd v Securicor Ltd [1980] AC 827

LORD Diplock:

Much has been written about the Suisse Atlantique. Each speech has been
subjected to various degrees of analysis and criticism, much of it constructive. Speaking for myself I am
conscious of imperfections of terminology, though sometimes in good company. But I do not think that I should
be conducing to the clarity of the law by adding to what was already too ample a discussion a further analysis
which in turn would have to be interpreted. I have no second thoughts as to the main proposition that the question
whether, and to what extent, an exclusion clause is to be applied to a fundamental breach, or a breach of a
fundamental term, or indeed to any breach of contract, is a matter of construction of the contract. Many difficult
questions arise and will continue to arise in the infinitely varied situations in which contracts come to be
breached —by repudiatory breaches, accepted or not, anticipatory breaches, by breaches of conditions or of
various terms and whether by negligent, or deliberate action or otherwise. But there are ample resources in the
normal rules of contract Law
for dealing with these without the superimposition of a judicially invented rule of law. I am content to leave the
matter there with some supplementary observations.

1. The doctrine of "fundamental breach" in spite of its imperfections and

doubtful parentage has served a useful purpose. There was a large number of problems, productive of injustice, in
which it was worse than unsatisfactory
to leave exception clauses to operate. Lord Reid referred to these in the Suisse Atlantique (p.406), pointing out at
the same time that the doctrine of fundamental breach was a dubious specific. But since then Parliament has
taken a hand: it has passed the Unfair Contract Terms Act 1977. This Act applies to consumer contracts and
those based on standard terms and enables exception clauses to be applied with regard to what is just and
reasonable. It is significant that Parliament refrained from legislating over the whole field of contract. After this
Act, in commercial matters generally, when the parties are not of unequalbargaining power, and when risks are
normally borne by insurance, not only is the case for judicial intervention undemonstrated, but there is
everything to be said, and this seems to have been Parliament's intention, for leaving the parties free to apportion
the risks as they think fit and for respecting their decisions.

At the stage of negotiation as to the consequences of a breach, there is everything to be said for allowing the
parties to estimate their respective claims according to the contractual provisions they have themselves made,
rather th for facing them with a legal complex so uncertain as the doctrine of fundamental breach must be. What,
for example, would have been the position of the respondents' factory if instead of being destroyed it had been
damaged, slightly or moderately or severely? At what point does the doctrine (with what logical justification I
have not understood) decide, ex post facto, that the breach was (factually) fundamental before going on to ask
whether legally it is to be regarded as fundamental? How is the date of "termination" to be fixed? Is it the date of
the incident causing the damage, or the date of the innocent party's election, or some other date? All these
difficulties arise from the doctrine and are left unsolved by it.

At the judicial stage there is still more to be said for leaving cases to be
decided straightforwardly on what the parties have bargained for rather than
upon analysis, which becomes progressively more refined, of decisions in other cases leading to inevitable
appeals. The learned judge was able to decide this case on normal principles of contractual law with minimal
citation of authority. I am sure that most commercial judges have wished to be able to do the same (cf. Trade &
Transport Inc. v. lino Kaiun Kaisha Ltd. [1973] 1 W.L.R. 210, 232 per Kerr J.). In my opinion they can and
should.

2. The case of Harbutt must clearly be overruled. It would be enough to

put that upon its radical inconsistency with the Suisse Atlantique. But even if
the matter were res Integra I would find the decision to be based upon un-
satisfactory reasoning as to the "termination" of the contract and the effect of "termination" on the plaintiffs'
claim for damage. I have, indeed, been unable to understand how the doctrine can be reconciled with the well
accepted principle of law, stated by the highest modern authority, that when in the context of a breach of contract
one speaks of "termination", what is meant is no more than that the innocent party or, in some cases, both parties,
are excused from further performance. Damages, in such cases, are then claimed under the contract, so what
reason in principle can there be for disregarding what the contract itself says about damages—whether it
"liquidates" them, or limits them, or excludes them? These difficulties arise in part from uncertain or inconsistent
terminology. A vast number of expressions are used to describe situations where a breach has been committed by
one party of such a character as to entitle the other party to refuse further performance: discharge, rescission,
termination, the contract is at an end, or dead, or displaced; clauses cannot survive, or simply go. I have come to
think that some of these difficulties can be avoided; in particular the use of "rescission", even if distinguished
from rescission ab initio, as an equivalent for discharge, though justifiable in some contexts (see Johnson v.
Agnew [1979] 1 All E.P. 883) may lead to confusion in
others. To plead for complete uniformity may be to cry for the moon. But what can and ought to be avoided is to
make use of these confusions in order to produce a concealed and unreasoned legal innovation: to pass, for
example, from saying that a party, victim of a breach of contract, is entitled to refuse further performance, to
saying that he may treat the contract as at an end, or as rescinded, and to draw from this the proposition, which is
not analytical but one of policy, that all or (arbitrarily) some of the clauses of the contract lose, automatically,
their force, regardless of intention.

Section 11(3) Sale of Goods Act 1979

―Whether a stipulation in a contract of sale is a condition, the breach of which may give rise to a right to treat the
contract as repudiated, or a warranty, the breach of which may give rise to a claim for damages but not to a right
to reject the goods and treat the contract as repudiated, depends in each case on the construction of the contract;
and a stipulation may be a condition, though called a warranty in the contract.‖

(b) Two older cases

Poussard v Spiers and Pond [1876] 1 QBD 410

An actress fell ill and was unable to appear in a play on a particular date. Her late arrival went to the root of the
contract.

Bettini v Gye [1876] 1 QB 183

A singer contracted to perform from march to July was required to attend six days before performances were due
to start for rehearsals. The missing of a few days of rehearsals was not a breach of condition. There was no right
to treat the contract as having been repudiated. Damages were the only remedy available in this instance.

Distinguishing between terms and conditions

Traditionally the courts would examine the intention of the parties as evidenced in their oral and written
statements and by their conduct.

Bannerman v White (1861) 10 CB NS 844

The assurance that sulphur had not been used in the cultivation of hops was a condition. It was clear that the
parties regarded this as an important term. The seller would not have contracted if the assurance had not been
given.

Practice Point: Defining rights by express provision

Precedent

It is clear the courts will give effect to precedent.

If previous case law classifies an obligation as a condition the courts will apply stare decisis – terms as to time of
delivery, for example, are always treated as conditions.

Bowes v Shand (1877) 2 App Cas 455

Intention of the parties

The parties may avoid ambiguity by classifying obligations as conditions.

Cehave v Bremer Handelsgessellschaft m.b.H (The Hansa Nord) [1976] QB 44

It is important to note that if in drafting the clause flexibility of performance is allowed or the drafting of the
obligation itself is ambiguous the court may hold that the term has not been broken. The courts will give effect to
the intention of the parties. Ina contract drafted by lawyers the use terms such as ‗condition' and ‗warranty' is
usually decisive evidence of the intention of the parties.
Case Study:
Drafting contract terms as conditions

Lombard North Central PLC v Butterworth [1987] QB 527

Mustill LJ:

1. Where a breach goes to the root of the contract, the injured party may elect to put an end to the contract.
Thereupon both sides are relieved from those obligations which remain unperformed.

2. If he does so elect, the injured party is entitled to compensation for (a) any breaches which occurred before the
contract was terminated, and (b) the loss of his opportunity to receive performance of the promisor's outstanding
obligations.

3. Certain categories of obligation, often called conditions, have the property that any breach of them is treated as
going to the root of the contract. Upon the occurrence of any breach of condition, the injured party can elect to
terminate and claim damages, whatever the gravity of the breach.

4. It is possible by express provision in the contract to make a term a condition, even if it would not be so in the
absence of such a provision.

5. A stipulation that time is of the essence, in relation to a particular contractual term, denotes that timely
performance is a condition of the contract. The consequence is that delay in performance is treated as going to
the root of the contract, without regard to the magnitude of the breach.

6. It follows that where a promisor fails to give timely performance of an obligation in respect of which time is
expressly stated to be of the essence, the injured party may elect to terminate and recover damages in respect of
the promisor's outstanding obligations, without regard to the magnitude of the breach.

7. A term of the contract prescribing what damages are to be recoverable when a contract is terminated for a
breach of condition is open to being struck down as a penalty, if it is not a genuine covenanted pre-estimate of
the damage, in the same way as a clause which prescribes the measure for any other type of breach. Ho doubt the
position is the same where the clause is ranked as a condition by virtue of an express provision in the contract,

8. A clause expressly assigning a particular obligation to the category of condition is not a clause which purports
to fix the damages for breaches of the obligation, and is not subject to the law governing penalty clauses.

9. Thus, although in the present case clause 6 is to be struck down as a penalty, clause 2(a)(i) remains
enforceable. The plaintiffs were entitled to terminate the contract independently of clause 5, and to recover
damages for loss of the future instalments. This loss was correctly computed by the Master.

These bare propositions call for comment. The first three are uncontroversial. The fourth was not, I believe,
challenged before us, but I would in any event regard it as indisputable. That there exists a category of term, in
respect of which any breach whether large or small entitles the promisee to treat himself as discharged, has never
been doubted in modern times, and the fact that a term may be assigned to this category by express agreement
has been taken for granted for at least a century: see, by way of example only, Bettini v. Gye (1876) 1 Queen's
Bench Division, 183, 187; Hong Kong Fir Shipping Company v. Kawasaki Kisen Kaisha (1962) 2 Queen's
Bench 26, 70; Financings v. Baldock (1963) 2 Queen's Bench 104; Photo Productions v. Securicor (1980) AC
827, 84-9E; Bunge v. Tradax (1981) 1 WLR 711 , 715,719 (H.L); Cheshire & Fifoot, Law of Contracts, 10th
Edition, 137.

The fifth proposition is a matter of terminology, and has been more taken for granted than discussed. That
making time of the essence is the same as making timely performance a condition was, however, expressly stated
by Megaw L.J and Browne L.J in Bunge Corporation v. Tradax Export at (1980) 1 Lloyd's Reports, 294, at pages
305, 307, 309 and 310, and the same proposition is implicit in the leading speeches of Lords Wilberforce and
Roskill in the House of Lords.
The sixth proposition is a combination of the first five. There appears to be no direct authority for it, and it is
right to say that most of the cases on the significance of time being of the essence have been concerned with the
right of the injured party to be discharged, rather than the principles upon which his damages are to be computed.
Nevertheless, it is axiomatic that a person who establishes a breach of condition can terminate and claim
damages for loss of the bargain, and I know of no authority which suggests that the position is any different
where late performance is made into a breach of condition by a stipulation that time is of the essence.

In this connection, it is useful to refer to Bunge v. Tradax supra. An f.o.b contract for the sale of goods required
the buyers to give notice of the probable readiness of the ships on which the goods were to be carried. The notice
was given four days too late. The sellers declared the buyers in default and claimed damages for default on the
basis that the term as to notice was a condition. The damages claimed were the difference between the contract
price and the market price, the classical measure for wrongful non-acceptance, by which the seller recovers on
the basis that the buyer's repudiation has cost him the benefit of the buyer's future obligation to pay the price. The
sellers did not contend that, if the term was not a condition, the delay of four days amounted to a repudiation (
(1980) 1 Lloyd's Reports, at page 303). Most of the attention given to the dispute, in its passage through two
levels of arbitration and three hearings in the courts, was devoted to consideration of whether the term was a
condition. There was, however, a subsidiary question whether the damages should be computed in accordance
with a particular contractual term (which the House of Lords held that they should not), and if not, whether at
common law they should be computed on the basis of the contract quantity. If the defendant's argument in the
present case is right, the whole of this discussion was misconceived. Yet it was never suggested by counsel or by
any of the arbitrators and judges who heard the case that the comparative triviality of the breach made any
difference to the seller's right, if the term was properly to be regarded as a condition, to recover damages in
respect of the buyer's unperformed obligations. If they were right in making this assumption, in a case where
time was of the essence by implication, how much more should this be so where the parties have made an
express stipulation to this effect.

I return to the propositions stated above. The seventh is uncontroversial, and I would add only the rider that when
deciding upon the penal nature of a clause which prescribes a measure of recovery for damages resulting from a
termination founded upon a breach of condition, the comparison should be with the common law measure:
namely, with the loss to the promisee resulting from the loss of his bargain. If the contract permits him to treat
the contract as repudiated,, the fact that the breach is comparatively minor should in my view play no part in the
equation.

I believe that the real controversy in the present case centres upon the eighth proposition. I will repeat it: A
clause expressly assigning a particular obligation to the category of conditions is not a clause which purports to
fix the damages for breach of the obligation, and is not subject to the law governing penalty clauses. I
acknowledge, of course, that by promoting a term into the category where all breaches are ranked as breaches of
condition, the parties indirectly bring about a situation where, for breaches which are relatively small, the injured
party is enabled to recover damages as on the loss of the bargain, whereas without the stipulation his measure of
recovery would be different. But I am unable to accept that this permits the court to strike down as a penalty the
clause which brings about this promotion. To do so would be to reverse the current of more than one hundred
years' doctrine, which permits the parties to treat as a condition something which would not otherwise be so. I am
not prepared to take this step.

It remains to mention two reported cases. The first is Steedman v. Dunkle (1916) AC 275. Land in Canada was
purchased under an agreement, whereby the price was payable by one initial payment followed by annual
instalments. The agreement stipulated that if the purchaser should make default in any of the payments, the
vendor should be at liberty to cancel the agreement and to retain, as liquidated damages, the payments already
made. It was also provided that time was to be considered as of the essence of the contract. The first deferred
payment was not made on the due date. The vendor gave notice cancelling the agreement. Three weeks after the
due date the purchaser tendered the amount due, which was refused. He thereupon brought an action claiming
specific performance and relief from forfeiture of the amount already paid. The Judicial Committee of the Privy
Council upheld the decision of the Canadian Court, that the stipulation as to the retention of the sums already
paid was a penalty. But the Board declined to grant specific performance. Viscount Haldane said:

"Courts of Equity, which look at the substance as distinguished from the letter of agreements, no doubt exercise
an extensive jurisdiction which enables them to decree specific performance where justice requires it, even
though literal terms as to stipulation as to time have not been observed. But they never exercise this jurisdiction
where the parties have expressly intimated in their agreement that it is not to apply by providing that time is to be
of the essence of the bargain".

This authority would, of course, have been decisive of the present case if the vendor had gone on to claim
damages for loss of the contract. He did not do so. Nevertheless, it does, in my view, show quite clearly that a
clause making time of the essence, and hence making prompt performance a condition, is not to be struck down
merely because a breach of the obligation is not sufficient on its own to constitute a repudiation.

Secondly, there is Photo Production v.Securieor, supra. This case is of great importance, for giving the quietus to
the doctrine of fundamental breach. Its significance in the present instance lies in a passage from the speech of
Lord Diplock. In order to place this in context, I must first quote from that part of the speech in which Lord
Diplock develops a system of primary and secondary obligations, foreshadowed in earlier pronouncements:

"Every failure to perform a primary obligation is a breach of contract. The secondary obligation on the part of the
contract breaker to which it gives rise by implication of the common law is to pay monetary compensation to the
other party for the loss sustained by him in consequence of the breach; but, with two exceptions, the primary
obligations of both parties so far as they have not yet been fully performed remain unchanged. This secondary
obligation to pay compensation (damages) for non-performance of primary obligations I will call the 'general
secondary obligation'. It applies in the cases of the two exceptions as well.

The exceptions are: (1) Where the event resulting from the failure by one party to perform a primary obligation
has the effect of depriving the other party of substantially the whole benefit which it was the intention of the
parties that he should obtain from the contract, the party not in default may elect to put an end to all primary
obligations of both parties remaining unperformed. (If the expression 'fundamental breach' is to be retained, it
should, in the interests of clarity, be confined to this exception). (2) Where the contracting parties have agreed,
whether by express words or by implication of law, that any failure by one party to perform a particular primary
obligation ('condition' in the nomenclature of the Sale of Goods Act 1893), irrespective of the gravity of the event
that has in fact resulted from the breach, shall entitle the other party to elect to put an end to all primary
obligations of both parties remaining unperformed. (In the interests of clarity, the nomenclature of the Sale of
Goods Act 1893, 'breach of condition', should be reserved for this exception).

Where such an election is made (a) there is substituted by implication of law for the primary obligations of the
party in default which remain unperformed a secondary obligation to pay monetary compensation to the other
party for the loss sustained by him in consequence of their non-performance in the future and (b) the
unperformed primary obligations of that other party are discharged. This secondary obligation is additional to the
general secondary obligation; I will call it the anticipatory secondary obligation'".

A little later comes the passage relied upon:

"Parties are free to agree to whatever exclusion or modification of all types of obligations as they please within
the limits that the agreement must retain the legal characteristics of a contract; and must not offend against the
equitable rule against penalties; that is to say, it must not impose upon the breaker of a primary obligation a
general secondary obligation to pay to the other party a sum of money that is manifestly intended to he in excess
of the amount which would fully compensate the other party for the loss sustained by him in consequence of the
breach of the primary obligation".

I do not read this passage as being concerned with anything other than penalty clauses in their ordinary sense;
viz. clauses which purport to fix the damages recoverable for breach of a primary obligation in a manner which
does not reflect those which would be recovered at common law. The reference is to clauses which, in the
terminology established by Lord Diplock, fix the extent of the general secondary obligation (not, it may be noted,
the 'anticipatory secondary obligation') to pay damages for breach of the primary obligation. I cannot see
anything to suggest that Lord Diplock was putting in question the right of the parties to decide on the character of
the primary obligation. Put in language perhaps more familiar, Lord Diplock was speaking of clauses which
restrict the rights of the parties to recover the appropriate measure of damages; he was not concerned with the
right of the parties to decide that all breaches of contract should be treated as breaches of condition. Nor am I
able to accept that the learned Lord, who had been concerned for nearly twenty years with explaining the
consequences of a breach of contract, should at this very late stage introduce the law of penalties so as to produce
a result quite different from anything which he had said before.

In a contract where time of payment was expressed to be of the essence, the Court of Appeal held that the parties
must be free to determine the status of the terms in their contracts.

“Where breaches go to the root of the contract the victim may elect to accept the repudiation and sue for
damages.”

per Mustill LJ

6.1.5 Innominate Term

Where the parties fail to classify the status of the obligations in the contract the court will hold that they are
‗innominate' and apply the ex post ‗consequences of the breach test'. The remedy given will depend on the
gravity of the breach.

Hong Kong Fir Shipping v Kawasaki Kaisen Kaisha [1962] 2 QB 26

Defendants chartered the ship ‗Hong Kong Fir' for two years on terms that the ship be ‗fitted in every way for
ordinary cargo service'. The vessel was unseaworthy, the crew incompetent. The defendants repudiated the
charter party alleging that the seaworthiness provision was a condition. The charter party still had time to run its
course and the question before the court was whether the seaworthiness provision was a condition or a warranty.

“There are....many contractual undertakings....which cannot be categorised as being “conditions” or

“warranties”...Of such undertakings all that can be said is that some breaches will and others will not give rise
to an event which will deprive the party not in default of substantially the whole benefit which it was intended he
should obtain from the contract; and the legal consequences of a breach of such undertaking, unless provided for
expressly in the contract, depend upon the nature of the event to which the breach gives rise and do not follow
automatically from a prior classification of the undertaking as a condition or warranty.”

per Diplock LJ

Reardon Smith v Hansen-Tangen [1976] 1 WLR 989 HL

esp. Lord Wilberforce where he was critical that many decisions on Sale of Goods contracts were ‗excessively
technical'

Cehave v Bremer Handelsgessellschaft m.b.H (The Hansa Nord) [1976] QB 44

Lord Denning showed a reluctance to allow rejection under the Sale of Goods Act for what he considered to be a
fairly minor breach in relation to damaged goods and held the goods merchantable under s.14 but not in good
condition a breach of the express term to that effect – an intermediate stipulation for which breach damages was
the appropriate remedy.

It is interesting to note that under the Supply of Goods and Services Act 1982 the implied terms are ‗terms' not
‗conditions' as in the Sale of Goods Act 1979 .

Bunge Corporation v Tradax [1981] 1 WLR 711

There Lord Roskill said that there were ―many cases...where terms the breaches of which do not deprive the
innocent party of substantially the whole benefit which he was intended to receive from the contract were
nonetheless held to be conditions any breach of which entitled the innocent party to rescind.‖
The courts are concerned to restrict the right of rescission, rejection or repudiation to only serious breaches and
save for situations where the parties or the law provides that a particular term will be a condition the right to
reject or repudiate the contract will depend upon the gravity of the breach.

Tradax Internacional SA v Goldschmidt SA [1976] QB 44

―...in the absence of any clear agreement or prior decision that this was to be a condition, the court should lean in
favour of construing this provision (―four per cent foreign matter') as to impurities as an intermediate term, only a
serious or substantial breach of which entitled rejection.‖

per Slynn J

6.1.6 Remedy for breach of an innominate/intermediate stipulation

If the consequences are serious the breach will be treated as if it was a breach of condition and the victim will
enjoy the election to affirm and claim damages or treat the contract as at an end and claim damages. If the breach
is not serious, the victim will only obtain damages.

6.1.7 Warranty

The warranty has not been satisfactorily defined.

A less serious obligation, perhaps ancillary to the contract.

Remedy for breach of warranty: Damages only.

***

6.2 Implied Terms: Sale of Goods Act 1979

Terms may be implied in fact or by law.

Treitel treats terms implied by custom as a distinct third category.

A term implied in fact is usually a term which the court assumes the parties would have agreed, had they thought
about it.

A term implied by law is not necessarily ‗implicit' in the contract at all, but is imposed on the parties by the
court, regardless of whether they would have agreed to it or not. Some terms are implied by common law, some
by statute.

Every term implied by law belongs to a particular class of contracts, for example, consumer contract have their
own set of implied terms; and employment contracts have their own implied terms.

English law uses terms implied by statute as one of the tools to enforce consumer protection. This is a
particularly important subset of terms implied by law, and will be treated first.

6.2.1 Section 12 SOGA 1979 – Title

There is an implied condition that the seller has the right to sell the goods.

S.12 Sale of Goods Act 1979

(1) In a contract of sale, other than one to which subsection (3) below applies, there is an implied [ F1 term ] on
the part of the seller that in the case of a sale he has a right to sell the goods, and in the case of an agreement to
sell he will have such a right at the time when the property is to pass.
As regards England and Wales and Northern Ireland, the term implied by subsection (1) above is a condition and
the terms implied by subsections (2), (4) and (5) above are warranties. ]

―Right to sell‖ is wider than ownership.

Niblett v Confectioner's Materials Co Ltd [1921] 3 KB 387

Rowland v Divall [1923] 2 KB 500

The seller sold a car to B1 who sold it on to B2. S did not own the goods. B2 rejected the car to B1 who then
sued S. It was held ―that the buyer had received no part of that which he contracted to receive namely ownership
and possession (de jure) and that being so there had been a total failure of consideration‖. The doctrine of
acceptance (ss.11(4) was not applicable) and B1 was able to reject, get his money back and sue for damages.

The implied condition as to title can never be excluded, s.6 Unfair Contract Terms Act 1977.

6.2.2 S.13 SOGA 1979 – Description

S. 13 (1)

―Where there is a contract for the sale of goods by description, there is an implied condition that the goods will
correspond with the description.―

S. 13 (2)

―If the sale is by sample as well as by description, it is not sufficient that the bulk of the goods corresponds with
the sample if the goods do not also correspond with the description.‖

S. 13 (3)

―A sale of goods is not prevented from being a sale by description by reason only that, being exposed for sale or
hire, they are selected by the buyer.‖

Application of S.13

To all contracts – business or private sales.

Varley v Whipp [1900] 1 QB 513

Cf. S.14 Sale of Goods Act 1979

Relationship between s.13 and the common law distinction between representations and contractual terms

Does a „description' have to have contractual status?

(i) Beale v Taylor [1967] 1 WLR 1193

(ii) The Court of Appeal came very close to saying that a description did not need to be classified as a contractual
term.

Atiyah – if a description had to be a contract term s. 13 ‗redundant' for ―there would be an implied term that the
seller had to comply with the ‗express' terms of the contract ―

(ii) Taylor v Combined Buyers [1924] NZLR 627 per Salmond J

Reardon Smith Lines v Hansen Tangen [1976] 1 WLR 989

‗Description has to be a substantial ingredient in the identity of the thing sold.'

Harlingdon and Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd (1990) 1 All ER 737

The meaning of „description'

Words of description

* Misrepresentation:

Oscar Chess v Williams [1957] 1 WLR 370

* Warranties:

Harrison v Knowles and Foster [1917] 2 KB 606

* Qualitative statements:

As a general rule ‗qualitative statements' are not regarded as descriptions. Goods can clearly be of satisfactory
quality yet not be compliant with description – and vice versa. Quality can however relate to composition and,
thereby, form part of the description.

Toepfer v Warinco A.G. [1978] 2 Lloyd's Rep 569

The words ‗fine ground' were part of the description.

It is a question of degree, construction and precision.

* Identification:

Reardon Smith v Hansen-Tangen [1976] 1 WLR 989 HL

―The ‗description' by which unascertained goods are sold is ...... confined to those words in the contract which
were intended by the parties to identify the goods which were to be supplied. ...

.... Ultimately the test is whether the buyer could fairly and reasonably refuse to accept the physical goods
proferred to him on the ground that their failure to correspond with that part of what was said about them in the
contract makes them goods of a different kind from those he had agreed to buy. The key to section 13 is
identification.‖

per Lord Diplock

The Constructional Analysis of S.13

Where the buyer receives goods which are not those he agreed to buy, because they do not comply with the
description, he can reject them. The section applies to all situations where there has been a failure to comply with
the specification given to the goods under the contract. The same is true where there is a complete failure to
deliver the goods contracted for – for example, the seller delivers and iPod instead of a television.

Beale v Taylor [1967] 1 WLR 1193

Arcos v Ronaasen & Son [1933] AC 470 HL

Rapalli v KL Take [1958] 2 Lloyd's Rep 469

Re Moore & Co Ltd v Landauer & Co Ltd [1921] 2 KB 519

Law Commission Working Paper No.85 – ‗Sale and Supply of Goods'

Sales by description

1. Sales of unascertained goods

2. Sales of most future goods

3. Sales of specific goods not seen at the time of contract

4. Sales of goods selected by the buyer – S.13 (3)

Sale not by description

Specific goods sold with no description ....buyer buys goods ‗as they are' or ‗as seen'.

Trade Custom

Grenfell v Meyrowitz Ltd [1936] 1 All ER 1313

Peter Darlington v Gosho Ltd [1964] 1 Lloyd's Rep 149

Trade Name

Lemy v Watson [1915] 3 KB 731

Purpose statements will generally not be considered as descriptions but will be covered under s.14(3).

Ashington Piggeries v Christopher Hill Ltd [1969] 3 All ER 1496

Harlingdon and Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd (1990) 1 All ER 737

Sale by Description and Sample – S.13(2)

Nichol v Godts (1854) 10 Exch. 191

The status of description – condition or warranty

The older cases accepted the possibility of breaches of description being classified as breaches of warranty.

Harrison v and Foster [1918] 1 KB 608 (CA)

The modern view seems to be that if a description is a ‗substantial ingredient in the identity of the thing sold' any
breach will be a breach of condition.

Couchman v Hill [1947] KB 554

Reardon Smith v Hansen-Tangen [1976] 1 WLR 989

(Lord Wilberforce attempting to restrict the definition of condition.)

Breach of section 13
With the exception of microscopic deviation, the slightest deviation from contract specification will be viewed as
a breach of description.

Arcos v Ronaasen & Son [1933] AC 470 HL

Re Moore & Co Ltd v v Landauer & Co Ltd [1921] 2 KB 519

Microscopic deviation:

Moralice (London) Ltd v E.D. & F. Man [1954] 2 Lloyd's Rep 526 – 4997/5000 bags a breach. See also: s.30.

Remedies for Breach of section 13

The remedies of the buyer will be subject to acceptance under the doctrine of acceptance – ss.34. 35 and 11(4)
(Infra)

If the buyer has not accepted

The buyer may be entitled to the following remedies depending on the circumstances. These matters are
considered in greater detail later.

1. Rejection

2. Return of price

3. Damages for non-delivery

4. Damages for breach of warranty

5. Damages for special loss

If the buyer has accepted

The buyer may be entitled to the following remedies depending on the circumstances. These matters are
considered in greater detail later.

1. Damages for breach of warranty

2. Damages for special loss

***

6.2.3 S.14 SOGA 1979 – Satisfactory Quality and Fitness

S.14 (1)

There are no implied terms as to Quality and Fitness for particular purpose save in so far as provided by ss.
14(2)(3)

S. 14 (2) (as amended)

―(2) Where the seller sells goods in the course of a business, there is an implied term that the goods supplied
under the contract are of satisfactory quality.

(2A) For the purposes of this Act, goods are of satisfactory quality if they meet the standard that a reasonable
person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all
the other relevant circumstances.
(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following
(among others) are in appropriate cases aspects of the quality of goods:

(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,

(b) appearance and finish,

(c) freedom from minor defects,

(d) safety, and

(e) durability.

(2C) The term implied by subsection (2) above does not extend to any matter making the quality of goods
unsatisfactory:

(a) which is specifically drawn to the buyer's attention before the contract is made,

(b) where the buyer examines the goods before the contract is made, which that examination ought to reveal, or

(c) in the case of a contract for sale by sample, which would have been apparent on a reasonable examination of
the sample.‖

Caveat Emptor: S.14(1)

While s.14(2)(3) goes on to provide that the goods must be satisfactory and fit for their particular purpose,
s.14(1) does prevent the courts from imposing terms as to merchantability and fitness other than those set out in
the subsections.

Cehave v Bremer Handelsgessellschaft m.b.H (The Hansa Nord) [1976] QB 44

Since the requirement of merchantability has been replaced in s.14(2) by a requirement of satisfactory quality,
the section now has the effect of rendering all the pre-Act case law on merchantability obsolete, except as a
source of guidance about what might constitute satisfactory quality.

Course of a business

Christopher Hill v Ashington Piggeries [1972] AC 441, [1969] 3 All ER 1496

It would seem that the occasional sale of an item by one in business (but not in the business of selling those
items) would not be caught by the section. (Benjamin, Sale of Goods, 6th Edition, 11-030.)

Examination of the goods

Thornett & Fehr v Beers & Son [1919] 1 KB 486

Satisfactory Quality

Before SOGA was amended in 1994, there was an implied term under s.14(2) requiring goods to be of
merchantable quality. Merchantability was a common law concept which SOGA gave statutory authority. It was
a difficult concept to define precisely. The courts consistently gave themselves flexibility in applying it, and the
importance of that flexibility was recognized when the wording of the statute was amended by the Supply of
Goods and Services Act 1994 to replace the requirement of merchantable quality in SOGA s.14(2) to a
requirement of satisfactory quality.

Deciding what is satisfactory quality is a matter of common sense. The same is true when deciding whether there
has been a breach of the implied term in Supply of Goods and Services Act 1982 s.13, which requires the supplier
of a services acting in the course of business to supply the service with reasonable care and skill. However, the
older cases on what amounted to merchantability still provide guidance, though not binding authority, about the
way in which the courts will approach the question of deciding what is satisfactory quality.

Wikipedia note:
Satisfactory quality, s14(2) [ 9 ] The quality of the goods sold must be satisfactory (prior to 1994 , this provision
required 'merchantable' quality; this requirement has been retained in most Commonwealth versions of the Act).
The Act provides an objective test to determine satisfactory quality; the standard that a reasonable person would
regard as satisfactory, taking into account the price, description and any other relevant factors. [ 10 ] The courts
have identified certain factors that may raise or lower the expectation of satisfaction . Second hand goods , per
Bernstien v. Pamsons Motors Ltd. [ 11 ] , will attract a lower expectation. On the other hand goods of a reputable
brand may attract a higher expectation, the judge in Bernstien used the example of a small ping on a Rolls-Royce
being unsatisfactory . 'Other relevant factors' may include advertising in the case of consumer contracts . [ 12 ]

(i) Acceptability test rejected

The acceptability test put forward by Farwell LJ in Bristol Tramways v Fiat Motors was rejected in favour of the
‗relevance of the price' test tendered by Dixon J in

Australian Knitting Mills v Grant adopted by the House of Lords in Kendall v Lillico :

―The condition that goods are of merchantable quality requires that they should be in such an actual state that a
buyer fully acquainted with the facts and, therefore, knowing what hidden defects exist, and not being limited to
their apparent condition would buy them without abatement in the price....and without special terms.‖

(ii) The other formulations

Sumner Permain & Co v Webb & Co [1922] 1 KB 55

Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 – ‗abatement of price' test

Grant v Australian Knitting Mills [1936] AC 100 – ‗fit for use' test

Cammell Laird v Manganese Bronze [1934] AC 402 – ‗Of no use' test

Bartlett v Sydney Marcus [1965] 1 WLR 1013

Cehave v Bremer Handelsgessellschaft m.b.H (The Hansa Nord) [1976] QB 44 – Lord Denning MR –
‗Commercial Man' Test

Aswan Engineering Ltd v Lupdine Ltd (Thurgar Bolle Ltd third party) [1987] 1 All ER 135

(iii) SOGA 1979: The statutory test

See s.14 2(b)

(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following
(among others) are in appropriate cases aspects of the quality of goods—

(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,

(b) appearance and finish,

(c) freedom from minor defects,

(d) safety, and

(e) durability.

The old test: ―Goods of any kind are of merchantable quality...if they are as fit for the purpose or purposes for
which goods of that kind are commonly bought as it is reasonable to expect having regard to any description
applied to them, the price (if relevant) and all the other relevant circumstances.‖

Keeley v Guy McD onald Ltd [1984] NLJ 134

A secondhand Rolls Royce (1969 Model) £7950 but had to make repairs costing £6460 after delivery. Claimed
for repairs under s.14(2). Held [S] in breach. All bearings worn, crankshafts scored etc. Cars mechanical
condition so bad as to make it unmerchantable. Damages awarded under s.53(3) SOGA 1979.

Rogers v Parish [1987] QB 933

Mustill LJ referred to the ―appropriate degree of comfort, ease of handling, reliability and pride in the vehicle's
outward and interior appearance‖ as factors relevant in a new car.

6.2.4 s.14 (3) SOGA 1979 – Fitness for particular purpose

S. 14 (3)

―Where the seller sells goods in the course of a business and the buyer expressly or by implication makes known
to the seller......any particular purpose for which the goods are being bought, there is an implied condition that the
goods supplied under the contract, are reasonably fit for that purpose whether or not that is a purpose for which
such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it
is unreasonable for him to rely, on the skill and judgment of the seller.......‖

Grant v Australian Knitting Mills [1936] AC 100

Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31

Tehran – Europe Corporation v ST Belton Ltd [1968]

Dixon Kerby Ltd v Robinson, [1965] 2 Lloyd's Rep 404

Griffiths v Peter Conway Ltd [1939] 1 All ER 685

Geddling v Marsh [1920] 1 KB 668

Wilson v Rickett Cockerell & Co Ltd [1954] 1 QB 598

Vacwell Engineering v BDH Chemicals [1969] 3 All ER 1681

Aswan Engineering Ltd v Lupdine Ltd (Thurgar Bolle Ltd third party) [1 987] 1 All ER 135

***

6.2.5 S.15 SOGA 1979 – Sale by Sample

S. 15 (1)

―A contract of sale is a contract for sale by sample where there is an express or implied term to that effect in the
contract.‖

Drummond v Van Ingen (1887) 12 App Cas 284 per Lord MacNaghten

S. 15(2)
―In the case of a contract for sale by sample there is an implied condition that:

(a) the bulk will correspond with the sample in quality:

(b) the buyer will have a reasonable opportunity of comparing the bulk with the sample.‖

E & S Ruben Ltd v Faire Bros Ltd [1949] 1 KB 254

Hookway & Co v Alfred Isaacs [1954] 1 Lloyd's Rep 491

6.3 SS 34, 35 & 11(4) SOGA 1979 – Acceptance

S. 34 (2) (as amended)

―Unless otherwise agreed, when the seller tenders delivery of the goods to the buyer, he is bound on request to
afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they
are in conformity with the contract and, in the case of a contract for sale by sample, of comparing the bulk with
the sample.‖

6.3.1 What is a reasonable time is a question of fact in the circumstances of the case

Castle v Sworder (1860) 5 H&N 281 per Bramwell J

Severable/Instalment sales:

Maple Flock Co Ltd v Universal Furniture Products [1934] 1 KB 148

Munro v Mayer [1930] 2 KB 312

Hardy & Co v Hillerns & Fowler [1923] 2 KB 490

S.4 Misrepresentation Act 1967 – s. 34 governing section.

6.3.2 Acts of acceptance

Important note: In JH Ritchie v Lloyds Ltd [2007] 1 WLR 670 the House of Lords held that a customer returning
defective goods to be repaired enters into a fresh contract containing an implied term that the supplier will inform
the customer of the nature of the defect.

s. 34 Buyer's right of examining the goods

 Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound on request to
afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether
they are in conformity with the contract [ F2 and, in the case of a contract for sale by sample, of
comparing the bulk with the sample. ].

s.35 Acceptance

(1) The buyer is deemed to have accepted the goods [ F1 subject to subsection (2) below—

(a) when he intimates to the seller that he has accepted them, or

(b) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with
the ownership of the seller.
(2) Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have
accepted them under subsection (1) above until he has had a reasonable opportunity of examining them for the
purpose—

(a) of ascertaining whether they are in conformity with the contract, and

(b) in the case of a contract for sale by sample, of comparing the bulk with the sample.

(3) Where the buyer deals as consumer or (in Scotland) the contract of sale is a consumer contract, the buyer
cannot lose his right to rely on subsection (2) above by agreement, waiver or otherwise.

(4) The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains the
goods without intimating to the seller that he has rejected them.

(5) The questions that are material in determining for the purposes of subsection (4) above whether a reasonable
time has elapsed include whether the buyer has had a reasonable opportunity of examining the goods for the
purpose mentioned in subsection (2) above.

(6) The buyer is not by virtue of this section deemed to have accepted the goods merely because—

(a) he asks for, or agrees to, their repair by or under an arrangement with the seller, or

(b) the goods are delivered to another under a sub-sale or other disposition.

(7) Where the contract is for the sale of goods making one or more commercial units, a buyer accepting any
goods included in a unit is deemed to have accepted all the goods making the unit; and in this subsection
―commercial unit‖ means a unit division of which would materially impair the value of the goods or the character
of the unit.

The case of J & H Ritchie v Lloyd Ltd [ 2007] UKHL 9

A buyer purchased defective machinery. The seller agreed to take them back for repair, stated they were repaired
to factory gate standard but would not state what the defefcts were. The buyer himself discovered the nature of
the defect and, concerned when he used the goods the defects would damage the machinery. He sought to reject
the goods.

The question was whether rejecting the equipment was permissible under s 35(6)(a) of the Sale of Goods Act
1979 . This provides,

“ (6) The buyer is not by virtue of this section deemed to have accepted the goods merely because—

(a) he asks for, or agrees to, their repair by or under an arrangement with the seller...

The House of Lords all agreed that Mr Ritchie was entitled to reject the equipment, even though it had in fact
been repaired.

Lord Hope

“ 12 The issue which lies at the heart of this case, as Lord Philip observed, is the effect of section 35(6)(a) of
the Sale of Goods Act 1979, as amended, on the buyer's right to reject goods which, on delivery, are
materially disconform to the contract... Prior to the introduction of that provision into the 1979 Act it was
open to question whether asking the seller to have defects in the goods remedied might amount to an
implied intimation of acceptance by the buyer or to an inconsistent act which would prevent him from
rejecting the goods. This problem was considered by the Law Commission and the Scottish Law Commission.
In a joint report on Sale and Supply of Goods (May 1987, Law Com No 160; Scot Law Com No 104) the
 Commissions said that they had decided not to recommend giving the seller a right to cure the goods: para
5.28. Instead they recommended that the 1979 Act should be amended so as to provide that if the buyer
asks for or agrees to attempts being made to repair the goods (whether by the seller or under an
arrangement with him), then this does not of itself amount to acceptance of the goods by the buyer: para
5.29:

In essensce, because thseller failed to specify the nature of the defects he fixed, sdespite repeated requests from
the buyer, the buyer cannot be said to have accepted the repaired goods, even after a lapse of time, because he
was not fully informed and therefore could not accept the goods within the statute while not knowing of the
nature of the defect repaired.

Buyer has had reasonable opportunity to examine goods

Perkins v Bell [1893] 1 QB 193

Buyer has not had reasonable opportunity of examining goods

Molling v Dean (1902) 18 TLR 217

Rules on place of delivery

Kwei Tek Chao v British Traders & Shippers [1954] 2 QB 459

Acceptance of part of the goods

Not unless contract severable.

cf. s.30 delivery of wrong quantity

S. 36 – Buyer not bound to return rejected goods

For seller to collect – Buyer only has to intimate rejection.

S.11 (4) If [B] accepts goods (ss.34/35) he loses right to reject can only claim damages. (s. 53 SOGA 1979)

6.4 Remedies for Breach of Implied Terms

The buyer's remedies will depend on whether he has accepted the goods or not.

6.4.1 Buyer not lost right to reject

1. Rejection (s.36: seller to collect goods)

2. Recovery of Price (Action in quasi-contract/Restitution)

3. Damages for non-delivery (s.51)

4. Consequential loss recoverable as special loss (2nd Limb Hadley v Baxendale : s.54)

5. Possible claim in damages for Breach of warranty (s.53(4))

6.4.2 Buyer has lost right to reject

1. Damages only (s.53 SOGA 1979)

2. Special loss recoverable.

6.5 Outline Analyses of Statues Relevant to the Analysis of Terms

6.5.1 Misrepresentation Act 1967

Two criteria to plead misrepresentation:

(1) Must be a statement of existing fact – not opinion, law or future intention.

(2) The misrepresentation must induce the contract

Misrepresentation renders the contract voidable

Remedies for Misrepresentation

Fraudulent – Rescission and damages

Negligent (s.2(1)) – Rescission and damages

Innocent (s.2(2)) – Rescission OR damages

6.5.2 The Unfair Contract Terms Act 1977

Incorporation:

By notice, signature or course of dealing

Construction:

Photo Production Ltd v Securicor Ltd [1980] AC 827

Validity:

s.1(3) – Business Liability

s.2 – Negligence – contract, tort, occupier

Exclusion of death/ p.i. and property damage

s.3 – Exclusion of express terms

s.6 – Exclusion of implied terms

s.8 – Exclusion of misrepresentation

s.11 – Reasonableness test

s.12 – Definition of consumer/non-consumer

s.13 – Types of exclusion clause

Sched 2 Paras (a) – (e) Guidelines for reasonableness

6.5.3 Supply of Goods and Services Act 1982

s.13 – Reasonable care in performance of contract

6.5.4 The Consumer Protection Act 1987

This statute is considered in detail in Product Liability (Infra).

6.6 Implied Terms not dependent on statute

Terms may be implied by common law (i.e. not by statute) into contracts in two circumstances, first where the
contract is silent but the parties must have intended the matter to be covered (terms implied in fact); and secondly
where although the contract is silent the contract creates a relationship where such a term will be implied (terms
implied at law).

However, when dealing with non-statutory implied terms, the dividing line between terms implied in fact and
terms implied at law is sometimes blurred, particularly in older cases like The Moorcock (see below), decided
before the distinction was fully developed.

6.6.1 Terms implied in fact

To decide whether the court will imply a term in fact, ask whether it satisfies the ‗officious bystander test', and /
or whether it satisfies the ‗business efficacy test'. The courts use both expressions, and they are probably just two
ways of expressing the same idea.

6.6.1.1 The Doctrine of The Moorcock the officious bystander formulation

The Moorcock (1889) 14 PD 64

A ship was damaged when the water level at a wharf fell and grounded the ship. A term was implied that the
wharf should be safe.

The test is called the „officious bystander' test.

The concept being that if the parties to the contract were to be told by a third party that they should remember a
particular term they would turn to the third party and ‗testily suppress him with a common ―oh, of course‖‗.

Shirlaw v Southern Foundries [1939] 2 KB 206 HL

―...an implied warranty, or as it is called, a covenant in law, as distinguished from an express contract or express
warranty, really is in all cases founded upon the presumed intention of the parties and upon reason. The
implication which the law draws from what must obviously have been the intention of the parties, the law draws
with the object of giving efficiency to the transaction and preventing such a failure of consideration as cannot
have been within the contemplation of either side; and I believe if one were to take all the cases, and there are
many, of implied warranties or covenants in law, it will be found that in all of them the law is raising an
implication from the presumed intention of the parties with the object of giving to the transaction such efficiency
as both parties must have intended that at all events it shall have.‖

6.6.1.2 The business efficacy test

Luxor (Eastbourne) Ltd v Cooper [1941] AC 108

P, acting as agent, found buyers for two cinemas. The cinema owners refused to go through with the sale.
Therefore the agent lost out on his commission. He argued that there was an implied term that if the vendor did
something to prevent a sale, and thereby make him lose his commission, they would pay damages. The House of
Lords held there was no such implied term.

At 137 Lord Wright said, ―it is well recognized that there may be cases where obviously some term must be
implied if the intention of the parties is not to be defeated, some term of which it can be predicated that ―it goes
without saying,‖ some term not expressed but necessary to give to the transaction such business efficacy as the
parties must have intended‖.
6.6.1.3 Reasonableness is not enough

The courts are more likely to accept an argument for an implied term if that term is reasonable, but will not imply
terms into a contract simply because it would be reasonable to do so.

This can be important in practice. A party who has foolishly made a very disadvantageous contract will argue
that there was some implied term which, if it existed, would make the contract fair. That is not a good enough
reason to imply a term. A leading case where the court refused to do so was Scruttons v Midland Silicones
[1962] AC 446.

6.6.2 Terms implied from the relationship of the parties: terms implied by law

Except where required by statute, the courts are very reluctant to imply terms into contracts and have tended to
limit implication to established contractual relationships.

Liverpool City Council v Irwin [1977] AC 236 HL

The classic example involved the implication of a term for a landlord to take reasonable care in keeping the
common parts to a building in a reasonable state of repair.

See also: Lister v Romford Ice and Cold Storage Co [1957] AC 555

Harvela Investments v Royal Trust Co of Canada Ltd [1986] 2 AC 207

Malik v BCCI [1998] AC 20

An employer-employee relationship is now recognized as entailing a duty that the employer and employee will
not damage the relationship of trust and confidence between one another. The doctrine that there is an implied
term imposing this duty on the employer received House of Lords authority in Malik.

There are several situations where legal duties can be analysed as depending on implied terms, but may also, and
more clearly, analysed in other ways. These include the duty of utmost good faith in insurance contracts; and the
fiduciary duties which solicitors and certain other professionals owe to their clients not to do anything which may
conflict with the clients' interests.

See: MEDITERRANEAN SALVAGE & TOWAGE LIMITED v SEAMAR TRADING & COMMERCE INC
[2009] EWCA Civ 531

The Court of Appeal considered the modern law of implying terms into contracts: review the Insite Law casenote
here.

6.6.3 Terms implied by Custom

To be implied under custom the custom must be invariable and certain.

British Crane Hire Corporations v Ipswich Plant Hire [1975] QB 303

Terms usual in the business were implied into a contract. The decision was hardly surprising for the hirers of the
crane admitted that when they hired plant and machinery out they used the same provisions.

The Sale and Supply of Goods to Consumers Regulations 2002

The Sale and Supply of Goods to Consumers Regulations 2002

Department of Trade and Industry
Consumer and Competition Policy Directorate
The Sale and Supply of Goods to Consumers Regulations 2002
A Brief Introduction – Full Version

A minimum set of common consumer rights on faulty goods in each EU country is provided for by Directive
1999/44/EC on the Sale of Consumer Goods (―the Directive‖). One aim of the Directive is to encourage people
to shop across borders, knowing they have protection if anything is wrong with the products they buy. Existing
UK law has been retained but slightly amended, mainly to give effect to specific remedies which, although they
have been in use for many years, have not previously been part of the law. These amendments are contained in
the Sale and Supply of Goods to Consumers Regulations (―the Regulations‖), in force from 31 March 2003. This
Guide is to explain the operation of the law in the UK.

The Regulations apply to a range of transactions between businesses and consumers, including the sale and
supply of goods, hire and hire-purchase. ―Consumers‖ are defined as people who are buying for purposes not
related to their trade, business or profession. The Regulations do not apply to services in general (but see
―installation‖ and ―goods to be manufactured‖ below) nor do they apply to second hand goods sold at auctions
that the consumer has the opportunity of attending in person.

When goods are faulty, a consumer can generally only obtain a legal remedy against the retailer. Consumers are
generally not able to claim directly against the manufacturer. Consumers may have additional rights under any
guarantees (see below) supplied with the goods or against a credit card company or finance house if the goods
are purchased by means of credit and have a price of over £100.

A Simple Summary (see flow chart below)

Consumers are entitled to goods of satisfactory quality, taking account of any description, the price and other
relevant circumstances. If an item has a fault that is present at the time of sale (sometimes referred to in this
guidance as a ―latent‖ or ―inherent‖ fault), the consumer can complain once it is discovered.

Consumers cannot expect a legal remedy in respect of:

• fair wear and tear;
• misuse or accidental damage; or
• if they decide they no longer want the item.

Similarly, consumers cannot expect a legal remedy where goods have faults that they knew about before the sale
or that should have been evident on reasonable inspection.

Remedies
If a product that was faulty at the time of sale is returned to the retailer, the consumer is legally entitled to:
• a full refund, if this is within a reasonable time of the sale (―reasonable time‖ is not defined in law but is often
quite short); or
• a reasonable amount of compensation (or ―damages‖) for up to six years from the date of sale (five years after
discovery of the problem in Scotland).

This does not mean all goods have to last six years! It is the limit for making a claim in respect of a fault that was
present at the time of sale. It is not equivalent to a guarantee. These are long-established rights and they remain
available to the consumer after the Regulations come into force on 31 March 2003.

Under the Regulations, consumers can choose to request instead:

• a repair or replacement.
The retailer can decline either of these if he can show that they are disproportionately costly in comparison with
the alternative. However, any remedy must also be completed without significant inconvenience to the consumer.
If neither repair nor replacement is realistically possible, consumers can request instead:
• a partial or full refund, depending on what is reasonable in the circumstances.
It may be the case that a full refund is not the reasonable option because the consumer will have enjoyed some
benefit from the goods before the problem appeared. This needs to be taken into account before a reasonable
partial refund can be assessed.
As illustrated in the flow chart on page 4, consumers can switch between certain remedies if they find they are
getting nowhere down the route originally selected. However, they would have to give a retailer a reasonable
time to honour a request before they tried to switch, and they could never pursue two remedies at the same time.
Proving the fault

Generally, the consumer needs to demonstrate the goods were faulty at the time of sale. This is so if the
consumer chooses to request an immediate refund or compensation (damages). It is also the case for any product
returned more than six months after the date of the sale.

There is one exception. This is when a consumer returns goods in the first six months from the date of the sale,
and requests a repair or replacement or, thereafter, a partial or full refund. In that case, the consumer does not
have to prove the goods were faulty at the time of the sale. It is assumed that they were. If the retailer does not
agree, it is for him to prove that the goods were satisfactory at the time of sale.

Other situations covered

The remedies of repair, replacement, partial refund and full refund are also available to consumers:

• where installation by the retailer is not satisfactory;

• where installation instructions have serious shortcomings;
• generally where a good does not match the public statements made about it by the retailer, manufacturer,
importer or producer; and
• where a specially commissioned product has relevant failings.

These are greatly simplified explanations and they are expanded on below.
Alternative dispute resolution

Although consumers do sometimes take court action, in day-to-day practice this is a rare event. In the vast
majority of cases, the consumer and retailer are able to reach a satisfactory solution without any need to consider
going to court. Where this is not possible, use of an alternative dispute resolution procedure or trade association
scheme can be considered. Details may be sought from the retailer, the Community Legal Service or a Citizens
Advice Bureau.

The examples given below to highlight points should not be considered legally authoritative and legal advice
should always be sought.

Consumers can obtain free advice from their local Citizens Advice Bureau ; their local council's Trading
Standards Department ; the OFT‘s Shoppers Guide publication ; the Community Legal Service ; the Which?
Online/Which? Legal Service and solicitors (who may charge). The DTI is not able to intervene in individual
disputes.

Sale of Consumer Goods Regulations (in force from 31 March 2003)

Conforming to Contract (The Implied Terms)

When consumers complain about goods they frequently say that they are ―faulty‖. What this means, in legal
terms, is that the goods do not conform to contract, although this is not the language that the typical consumer
uses.

Goods would not conform to contract (would be faulty) if they failed to work immediately from the time of sale.
Indeed, goods might not conform to contract if they failed to work later, even after a number of years, due to an
inherent fault – i.e. one that could be said to exist at the time of sale. Goods also do not conform to contract if
they do not comply with any description given by the retailer prior to sale.

The Sale of Goods Act 1979

Conforming to contract

The Sale of Goods Act, which governs whether there is a lack of conformity with the contract, says that:

• Goods should match any description given to them.

• Goods should be of satisfactory quality i.e. they should meet the standard a reasonable person would regard as
satisfactory, taking account of any description of the goods, the price (if relevant) and all other relevant
circumstances.

• The quality of goods includes their state and condition and the following (among others) are, in appropriate
cases, aspects of the quality of goods -
(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,
(b) appearance and finish,
(c) freedom from minor defects,
(d) safety, and
(e) durability.

• Goods should be reasonably fit for any particular purpose that was made known to the retailer (unless the
retailer disputed their appropriateness for that purpose at the time).

If a consumer was told that a record player could play 33, 45 and 78 rpm discs but it did this erratically because it
was not manufactured properly, or because of poor design, then it would not conform to contract.

If a consumer was told that a dish was ovenproof but it was not and it shattered when used under the normal
conditions for making a casserole it would be misdescribed and so would not conform to contract.

Satisfactory quality
To be of satisfactory quality, goods must be of a standard that a reasonable person would regard as satisfactory at
the time of sale (having regard to any description applied to them, the price and all other relevant circumstances).

Someone buying a new pair of shoes would clearly not expect the soles to come away from the uppers after
wearing them in normal conditions for a few days.

On the other hand, someone buying a 10-year-old car from a dealer could not reasonably expect it to perform like
a new car, although he could expect it to give the kind of service that the average car of that mileage and model
would give.

Particular purpose
If a customer says - or when it should be obvious to the retailer - that the goods are wanted for a particular
purpose, even if that is a purpose for which those goods are not usually supplied, and the retailer agrees that the
goods will meet the requirement, then they have to be reasonably fit for that purpose. If the retailer is not
confident that the goods will meet the customer's particular requirements, he should make this clear, perhaps on
the receipt, to protect himself against future claims.

If a consumer was told that certain software generally used on Apple computers was compatible with a PC and it
was not, it would not conform to contract. If no mention had been made about the PC and the software was
bought on the assumption that it was compatible then the consumer would not be likely to have grounds for
complaint.
The Sale and Supply of Goods to Consumers Regulations 2002

These Regulations, in force from 31 March 2003, have introduced some additional requirements for any
consumer sales.

Public statements
The Regulations say that any public statements made by manufacturers, importers or producers (in addition to
retailers) about the specific characteristics of the goods, particularly in advertising or on labelling, have to be
factually correct – and form part of the retailer‘s contract with the consumer. However, the retailer is not
responsible for the statement, and the consumer is not entitled to redress, if the retailer shows:

• that for good reasons he was not aware of the statement;

• that it had been corrected in public before the conclusion of the sale; or
• that the consumer could not have been influenced by the statement.

If a manufacturer ran UK advertising that a particular jet ski could run on unleaded fuel but it could not, the
consumer could require redress from the retailer.

However, if a retailer could show that he was, for good reason, ignorant of the manufacturer's claims then the
consumer would not be able to seek redress from the retailer over the specific characteristic. An example could
be erroneous claims made in a manufacturer's foreign, or regional, advertising campaign that the retailer could
not reasonably be expected to have come across.

If the retailer argued that the claim had been corrected but the only evidence was a notice in an obscure trade
magazine, then this would probably not prove convincing. More effective publicity would be needed to alert
consumers.

Fair wear and tear

Goods cannot always be expected to work fault-free. They can break down through normal use. Consumers
cannot, therefore, expect to hold the seller responsible for fair wear and tear. There needs to be a fault that was
present on the day of sale even though it only became apparent later on, or a misdescription of the goods, or a
lack of durability that suggests the goods were not of satisfactory quality to start with.
If a central heating system stopped working – because of its pump failing - four years after the sale, having had
average usage, then it might not be due to an inherent fault (latently there on the day of the sale) but due to it
expiring at the end of its normally accepted working life. This is especially so if the relevant trade association
had advice that such pumps only worked for an average of four years. If, however, the pump had only lasted half
the expected life, having been subject to average usage, then the consumer would, no doubt, wish to seek an
opinion as to whether the item had contained a latent fault or been constructed with sub-standard raw materials
that made it not durable enough to pass the satisfactory quality test of our Sale of Goods legislation.

Durability
Durability can be a difficult concept, but, as indicated in the Fair wear and tear example above it is something
that can be considered when evaluating whether goods conform to contract. Everything has a finite life, and this
needs to be borne in mind when considering durability. Factors that could be considered might include:

• the price (a £200 tyre might be expected to last longer than a £50 one);
• inappropriate use (a small engine mower used to service a 10-acre garden); or
• where an expensive product had been made with substituted inferior parts, as a crisis cost-cutting exercise, then
it could well fail the durability test.

Remedies (see flow chart above)

The consumer now has a number of remedies. These comprise the two previous, long established, legal remedies
and the four additional ones in the Regulations. All six are now outlined:

Rejection of Goods
Consumers can reject the goods and require their money back provided they complain within ―a reasonable time‖
(usually a short period).

The Sale of Goods Act does not define what amounts to a ―reasonable time‖ but consumers have to be given a
reasonable time to examine the goods to see if they were satisfactory. In practice courts decide this case by case.
A court is able to take into account all the relevant factors in coming to a fair view such as whether the consumer
had been hospitalised immediately after the sale, so that he could not check the goods.

Where a consumer is entitled to reject the goods, he must tell the retailer immediately. He is not obliged to send
them back but must make them available for collection. However, most consumers would return goods they had
themselves taken away to assist them convince the retailer their claim was legitimate and so speed things up.

Claim for Compensation

The other long standing remedy provides that consumers can claim compensation known as ―damages‖, if they
are not entitled to reject the goods or choose not to request this.

Compensation by way of damages is designed to compensate for actual losses and so normally amounts to the
cost of repair or replacement (with goods of a similar age). Any direct and predictable expense arising as a result
of being supplied with faulty goods can also be claimed by the customer (see Consequential Loss below). This
could include the cost of returning the goods, for example. In some instances the customer could get the defect
remedied by someone else and claim the cost from the retailer as compensation for breach of contract. However,
this is not advised as it might make it difficult to prove the problem dated from the time of the sale. Of course, a
claim on any guarantee given with the goods is often the easiest way forward.

For a broken four-year-old clock with an inherent fault, a consumer‘s claim would typically be for the amount
necessary to have it repaired or to purchase a similar four-year-old model (but in working order, of course).

Repair and Replacement

For many years retailers have voluntarily offered a repair or replacement of faulty goods. These remedies are
given a legal status under the Regulations. In other words the consumer can cite the Regulations, in force from 31
March 2003, in specifically requesting a repair or a replacement for purchases that do not conform to contract.

Confronted with a five-year-old piano with an inherent fault, the consumer can request that it be repaired rather
than pursuing compensation to pay for a repair that he then has to arrange himself. Alternatively, he could
request a replacement five- year-old piano of the same/similar specification, assuming that finding one was
practicable (perhaps only so for a dealer of both new and second-hand products).

“Reasonable time” and “significant inconvenience”

Repair and replacement have to be carried out within a reasonable time and without significant inconvenience for
the consumer (if this is not possible the consumer should select an alternative remedy). The retailer has to bear
any costs such as transporting the goods. Complaints have to be judged on a case-by-case basis and take account
of all the circumstances including:

• the nature of the goods;

• the purpose for which they were bought; and
• their importance to that particular customer.

It is difficult to define "reasonable time" here just as it is to specify the "reasonable time" for rejecting a good.
In the case of a wedding dress, there is clearly a crucial date in relation to which the number of days involved
may become critical and that may be the main deciding factor. Repair might then not be feasible but a
replacement might be appropriate.

In the case of an electric drill the number of days may be less critical than with a wedding dress. The possibility
of using a hand drill needs to be considered.
With a fridge, the lack of an alternative would weigh heavily in the analysis of this crucial household item but the
provision of a loaned item might prove part of a successful remedy and so avoid ―significant inconvenience‖.

“Disproportionate cost”
A retailer can decline the repair remedy if the cost would be disproportionately higher than the cost of
replacement – or vice versa. A decision on the cost being disproportionate should take account of the value of the
goods if they were to conform to contract; the significance of the lack of conformity and whether the alternative
remedy could be completed without significant inconvenience to the consumer.

If a four-year-old table was only worth £50 and a repair would cost £75 then the retailer could decline such a
request and offer a replacement, assuming he had a similar four-year-old model in stock or had prompt access to
one. If he had neither of the latter, then he could refuse both repair and replacement and would move onto the
partial refund remedy.

If the stitching had gone on a pair of trousers the customer would not be entitled to a replacement if the inherent
fault could be repaired within a reasonable time and at little inconvenience.

Partial and Full Refund

If repair or replacement are not practicable options, the Regulations provide for the alternative remedies of
partial, or full, reduction in the price (a refund, in other words). In considering whether a full, or partial, refund is
to be given, account needs to be taken of the benefit provided by the good to the consumer, just as it is when
determining compensation.
If a spin dryer had cost £99 four years before and was two thirds of the way through its average length of
life - when an inherent fault showed itself - then the retailer might offer around £33 as an adequate reduction in
price bearing in mind that the consumer was being deprived of one third of the typical period for which he should
have enjoyed the good. Account might also need to be taken of the fact that goods tend to depreciate more
quickly in the early years of their life-span.

If a consumer had had constant problems with a product, from the time of the sale, to such an extent that he had
never enjoyed any normal benefit from the product then the retailer might be expected to offer him a full refund
of his money.

Non-Consumer Claims
―Consumers‖ are ―people who are buying for purposes not related to their trade, business or profession‖ and the
four remedies in the Regulations (repair, replacement, partial and full refund) are not open to non-consumers.

If a stairlift was purchased for use in a business environment, such as a café or nursing home, it would not be
possible for a repair or replacement claim to be made - citing the Regulations - by masquerading as a consumer
when approaching the retailer. Such claims could immediately be rejected. They should be properly pursued as
normal business-to-business sale of goods contract disputes and legal advice sought.

Suspending the Right to Reject

It is important to note that, within the reasonable period after the sale (see above), the consumer does not lose
their right to reject the goods/require their money back merely by agreeing to let the retailer try to repair them.
This is made clear by s.35(6) of the Sale of Goods Act.

If the consumer returns the goods, as not conforming to contract, and asks for his money back within a
reasonable time, he may decide/be persuaded, to let the retailer make an attempt at repair. After he had given the
retailer a reasonable time to complete this, with no success, he could fall back on requiring the return of the price
paid. This might be because the repair was not carried out promptly enough or because it was not repaired to an
adequate standard.

Sales Receipts
In providing redress to a consumer, a retailer is entitled to satisfy himself that the product was purchased at his
store and on the date claimed. A sales receipt is a good way of providing such proof (as is a well detailed credit
card statement). Although sales receipts are not a legal requirement, consumers are advised to request them
where they might later be needed and to keep them safe.

Credit Notes
Consumers do not have to accept credit notes if goods do not conform to the contract. However, they may be
offered where the consumer has no legal right to any redress but the retailer wishes to be helpful e.g when the
consumer has a change of mind.
The essential point is that credit notes are voluntary items. Retailers do not have to offer them and consumers do
not have to accept them but it is sometimes beneficial for both parties to use them. The particular Terms and
Conditions will explain the detail of how they are to operate.

Time Limit - Six Years Maximum to Bring a Claim or Complaint

Complaints can be brought to court up to six years after a sale in England, Wales and Northern Ireland (and five
years after the time of the discovery of the problem in Scotland). After that time, the Limitation Act 1980
generally prevents court cases being brought. This does not mean that goods have to last six years; it is not a
durability requirement.

A consumer could bring a case against a retailer, alleging non-conformity of contract, for up to six years after the
sale. However, he would find a court unsympathetic in the latter years for low cost items that it was reasonable to
expect to last only a short period (a £5 watch might not last many years but a £500 one should) or for
consumables like oil filters which have a specified limited lifespan. Similarly, when a watch stops because a
battery has come to the end of its life – assuming it had lasted a reasonable time - there are no grounds for
complaint that the watch is not conforming to contract.
The Two-Year Guarantee Myth (see also Free Guarantees below)
The Regulations do not provide a two-year guarantee. This was a myth that seemed to grow out of a mention in
the Directive that Member States had to give their consumers a two-year limitation period.

The limitation periods in the UK are the periods within which this type of legal proceedings must be
commenced: namely six years in England, Wales and Northern Ireland; and five years from discovery in
Scotland. These are, therefore, already longer than the Directive‘s two years and are quite different from a
guarantee period.

This does mean that throughout the EU there is a requirement that all retailers will honour the four stages of
remedy that have been outlined above (repair, replacement, partial refund or full refund) for at least two years.
However, as this does not cover fair wear and tear, and since the consumer has to prove the lack of conformity
for most of the period, this cannot be called a ―guarantee‖.

The Burden of Proof and the First Six Months

In any dispute, it is usually for the consumer to prove that the goods do not conform to contract. This is the case
where consumers wish to pursue their long established right to reject goods, within a reasonable period, or seek
compensation.

“Reversed burden of proof”

However, the Regulations, in force from 31 March 2003, say that when a consumer seeks the remedies of repair,
replacement, partial refund or full refund, in the first six months after the sale, it is for the retailer to prove that
the goods conformed with the contract in disputed cases. This has been called the ―reversed burden of proof‖.
After six months, however, it is for the consumer to prove that the lack of conformity existed at the time of the
sale.

In the first six months a consumer could claim that a fault was present at the time of the sale and hence argue that
the good was not of satisfactory quality and so seek redress. If the retailer rejected this view, the consumer could
take the matter to court where the judge would look to the retailer to refute the presumption of unsatisfactory
quality with reasonable evidence. The retailer might attempt this by, for example, expertly analysing the good to
show it was damaged by the consumer e.g. where leather shoes had not been cleaned, so causing the leather to
crack.

For faults that become apparent after six months, it is for the consumer to provide evidence that the item did not
conform to contract at the time of the sale. Often the consumer and retailer are able to negotiate an acceptable
solution but, ultimately, if the retailer believed that the good had conformed to contract at the time of sale, then
the consumer would need to present enough evidence in a court to substantiate his own claims. One way to do
this, particularly in a high-value claim, might be to obtain the views of an expert that suggested the item was
poorly manufactured or designed, such that it contained a fault that was likely or certain to make the product
break down at some future date. Other factors would also need to be considered e.g. the price and nature of the
goods.

If the consumer reported a fault after the first six months, the onus would be on them to prove that the fault
exhibited itself within the six months if they wanted to enjoy the six months reversed burden of proof. Since
proving the date of discovery of a fault is a difficult and unwanted hurdle for the consumer, the simple solution is
to report faults as soon as they become known – indeed, consumers may lose out if they do not do so (see next
section).

Minimising Losses
Consumers should act reasonably when seeking redress and not add unnecessary costs. This means they should:

(i) Report faults as soon as possible. If they do not:

• it becomes more difficult for them, as time goes by, to prove that the goods were inherently faulty at the time of
sale; and
• it is possible that the goods can deteriorate more than otherwise, especially if attempts are made to repair or to
continue using them. The retailer would not be responsible for correcting this aspect.

(ii) Make sure that they service the goods as appropriate, follow any user instructions and look after them, so as
not to undermine their claim by contributing to any problem.
Consumers cannot expect retailers to provide redress where they have:

• accidentally damaged the goods;

• misused them and caused a fault, perhaps through the use of incompatible accessories; or
• tried their own repair, or had someone else attempt a repair, which has damaged the goods.

Consequential Loss
When a consumer suffers loss as a direct consequence of a faulty product, the consumer may be able to claim
damages. In extreme cases, consumers might suffer injury or damage to other property which is directly
attributable to the faulty product, and these losses might be recoverable as consequential losses. In less serious
situations, the consumer might find that he incurs extra expense as a direct result of buying faulty goods. Claims
for consequential loss do not normally cover distress, inconvenience or disappointment.

A specialist outdoor tank might be purchased to recycle spent water to help the environment and reduce metered
water charges. If it began leaking or stopped working in some other way (because of a fault present at the time of
sale), the higher water charges levied thereafter until repair could be claimed. Also, any phone costs involved in
trying to fix the problem, e.g. via technical lines provided, could be claimed.
In claiming any consequential costs the consumer would be expected to have acted reasonably with regard to
how they were accrued e.g. the retailer should be approached for substitutes, rather than merely hiring an
alternative from elsewhere.

Free Guarantees/Warranties (see also Guarantees Myth above)

In addition to having their legal rights a consumer may be offered a guarantee (e.g. by a manufacturer or retailer)
on a voluntary basis. Guarantees - sometimes called warranties - do not have to be offered but if they are, under
the Regulations, in force from 31 March 2003, those given free of charge with the product:

• will be legally binding on the person offering the guarantee;

• will have to be written in English and in plain intelligible words;
• must be available for viewing by consumers before purchase, e.g. by advising where they may be seen such as
on the internet for those with access; and
• state that they do not affect the consumer‘s legal rights.

If a manufacturer reneged on a free guarantee then the consumer could enforce it in a small claims court. The
retailer would not be involved.

If the consumer wishes to inspect a free guarantee, to help make a purchasing decision, then the person offering it
has to make it available – if they cannot do so immediately, they should follow up promptly with a copy which is
posted or sent via email etc.

Translation of free guarantees

Where those offering free guarantees do not translate them into English, or habitually refuse to make them
available for viewing, the OFT and Trading Standards have the power to seek an injunction requiring them to
comply.

Duration of free guarantees

It is up to the company offering free guarantees to decide on their duration. Many products come with a free one-
year guarantee; some have two or three years while others have none. This is entirely legal.

Retailers and their “Returns” Policies

Some retailers offer ―returns‖ policies (also known as "satisfaction" guarantees) such as promising the full
money back for undamaged goods, for up to a set number of weeks, for whatever reason. These are useful
additional rights to those the consumer has under the law. The terms and conditions would spell out exactly how
these were to work.
Second-hand Goods
The consumer has exactly the same rights with second-hand goods as he does with new. However, with older
goods, it is increasingly difficult for the consumer to prove that a fault was inherent at the time of the sale. The
conformity criteria also allow second-hand goods to be judged less rigorously than new, where reasonable.

In judging whether a recently bought seven-year-old car conformed to contract it would be reasonable to take
account of the price paid. This could be far less than for a new vehicle and so expectations should be lower. It
would also be reasonable to assume that the performance might not be as good and the quality of the finish could
fall far short of A1 condition. However, it would still need to conform to any express description given to it and
should be judged in accordance with the standard/ performance that was reasonable to expect in a similar car of
that age.

Auctions
It has long been the case that goods sold at auction can be exempted (subject to a reasonableness test) from the
requirements (implied terms) in the Sale of Goods Act as to description, quality and fitness. Notices can be put
up excluding these specified sale of goods rights, subject to any exclusions satisfying a reasonableness test. This
is covered by the Unfair Contract Terms Act 1977.

This possibility continues for buyers other than consumers (business buyers, companies) but new goods bought
at auction by consumers will now always be covered by the implied terms in the Sale of Goods Act. In addition
the four remedies of repair, replacement, partial refund and full refund provided by the Regulations will be
available for such goods. Second-hand goods will be covered by the four remedies when sold at auctions that
consumers cannot attend in person. This will include internet auctions where consumers make purchases from
trade sellers. It would also extend to auctions that barred consumers from attending but accepted their telephone
bids.

However, the four remedies provided for by the Directive will not apply for second- hand goods sold at auctions
where consumers "have the opportunity of attending in person".

The remedies of repair, replacement, partial refund and full refund will not apply for second-hand items at
auctions where consumers have the opportunity to attend in person. In this situation, unless the auction house put
up clear signage indicating that these rights had been excluded, the buyer would enjoy the long established Sale
of Goods Act rights to initially reject the goods or to request compensation.

If the auction house stopped consumers attending in person then the redress rights provided by the Regulations of
repair, replacement, partial refund and full refund would be available to them. However, it is difficult for
consumers to secure goods from auctions they cannot attend although this might be possible via a telephone bid
or an internet auction.
Installation and Installation Instructions

The Regulations, in force from 31 March 2003, state that where the retailer agrees installation for a consumer by
himself or his agent, as part of the sale contract, the consumer can call on the redress rights provided by the
Regulations (repair, replacement, partial refund and full refund) where a lack of conformity arises. Any losses
suffered as a result of the lack of conformity can be claimed as consequential losses. A consumer can
alternatively seek a full refund of the money paid or adequate compensation and any consequential losses.
Naturally, there are practical considerations as to what is possible in terms of repair and replacement with some
installations.

If a new kitchen was installed and the cupboard doors all opened the wrong way (contrary to the agreed plans), it
would be possible alternatively to seek a repair, replacement etc, rather than pursue cash compensation.

Retailers are liable for claims where they have been paid for both the goods and the installation regardless
of whether their own workers or their sub-contractors installed the goods. They are not responsible for the
installation aspect if a third party, arranged and paid for by the consumer, installed the goods.

If the purchase of a carpet included installation by the retailer (or his sub-contractors) then he would have to offer
all the remedies (repair, replacement etc.) regardless of whether it was the product or the installation that was
faulty. If, however, the consumer had paid a separate third party to install the carpet then the retailer would not
have to offer any remedy for problems arising from the installation work. The consumer would pursue the
installer for suitable redress.

It has always been open to purchasers of goods sold with inadequate self-installation/self-assembly instructions
to pursue a claim that they had been sold in breach of section 14 of the Sale of Goods Act, which deals with
conformity with quality and fitness. This right continues.

Where the installation or assembly instructions were written with shortcomings, that resulted in a consumer not
being able to use them adequately, then he could point out that the goods sold were not fit for purpose and hence
claim the full redress rights of the Regulations and the Sale of Goods Act.

Goods to be Manufactured or Produced

The Supply of Goods and Services Act 1982 has been amended as a result of Article 1(4) of the Directive that
classifies as "contracts of sale" certain contracts for work and materials. Where such work results in a lack of
conformity the consumer is able to call on the full redress rights (repair, replacement, partial refund and full
refund) provided by the Regulations.

When an item of furniture is commissioned but turns out not to conform to contract then the consumer can claim
the full redress rights of the Directive. However, if the lack of conformity is due to any materials, or designs,
provided by the consumer then the redress sought would need to be curtailed suitably or declined outright.

Services
The Regulations do not extend to services in general but only to installation, in certain limited circumstances (see
Installation), and in contracts for the supply of consumer goods to be manufactured or produced (immediately
above).

The Supply of Goods and Services Act 1982 requires a service to be provided with reasonable care and skill,
within a reasonable time and, where no price is agreed, cost no more than a reasonable charge in England, Wales
and Northern Ireland. The Act does not apply to certain sectors which are governed by specific statutes (eg the
carriage of passengers and goods). The Act does not extend to Scotland, but common law there has similar effect,
and suppliers of services or their customers should obtain legal advice.
Attempts to Curtail Consumers' Rights

Consumers cannot have their legal rights removed in sale of goods contracts. It is also illegal to mislead
consumers about their legal rights and to try to exclude them. To do so could result in a criminal prosecution.
Notices such as "We do not give refunds" are similarly illegal, and enforcement is undertaken by local Trading
Standards Departments.
Exclusion Clauses in Service Contracts

Unfair Contract Terms Act 1977

In other areas, the Unfair Contract Terms Act 1977 says that a trader cannot exclude or limit his liability for
death or personal injury arising from negligence. He can exclude or restrict his liability for other loss or damage
resulting from negligence only if the exclusion clause meets the 'test of reasonableness' (see below).

A trader dealing with a consumer, or dealing on his own written standard terms of business, cannot exclude or
restrict his liability for breach of contract or allow himself to provide an inadequate service unless he can show
that the clause satisfies the 'test of reasonableness' (see below). Nor can he require a consumer to indemnify him
against any loss the consumer may incur through negligence or breach of contract unless he can show that the
clause satisfies the same test. 'Negligence' includes breach of any contractual or common law duty to take
reasonable care or exercise reasonable skill.

These provisions generally extend to contracts for the supply of services as well as to contracts for the sale or
other supply of goods. They are, however, subject to certain exceptions (for example, where the right to limit
liability is given by statute, as in the case of innkeepers and carriers).
Test of reasonableness
The 1977 Act provides that an exclusion clause is valid only if the trader can show that it is fair and reasonable.
This is called the 'test of reasonableness'. In deciding whether a clause meets this test a court would consider:

• the circumstances that were (or ought reasonably to have been) known to the parties when the contract was
made, paying particular attention to such matters as the relative bargaining strength of the parties;
• whether the customer received any special inducement to accept the exclusion clause (such as a special
discount);
• whether the goods or suitable alternatives could be obtained elsewhere without the exclusion clause;
• whether the customer knew or ought reasonably to have known of the clause; and
• whether the goods were made to the customer's specification.

Where a trader seeks to limit his liability, under an exclusion clause, to a specified sum of money, the courts are
required to have regard to the resources which he could expect to be available to him to meet such liability and
how far it was open to him to cover himself by insurance. The 'test of reasonableness' requires the trader to prove
that the clause was reasonable; the customer is not required to prove that it was unreasonable.

Unfair Terms in Consumer Contracts Regulations 1999

The Unfair Terms in Consumer Contracts Regulations 1999 also apply to most terms which have not been
individually negotiated in contracts with consumers. Terms which create a significant imbalance in the rights and
obligations of the parties to the detriment of the consumer are regarded as unfair. Unfair terms are not binding on
the consumer.

Redress up the Supply Chain

The Directive says that any public statements made by manufacturers, importers or producers (in addition to
retailers) on the specific characteristics of the goods, particularly in advertising or on labelling, have to be
truthful. We have seen above that (i) if the retailer could show that he was reasonably not aware of the statement,
or (ii) that it had been corrected by the conclusion of the sale, or (iii) that the consumer could not have been
influenced by the statement then it can be disregarded.

***

CASE STUDY ANALYSIS

Analyses in Contract & Sale of Goods

Implied Terms

Facts

Sam sold Bert an AC Mamba to the "Manufacturer specification" the specification covering engine capacity,
power, weight, among other matters. The car delivered was heavier than the manufacturer specification. The car
did not perform to the to the level Bert expected in weekend kit car racing meets. The power to weight ratio of
the car delivered resulted in a loss of 2.5 seconds per lap at Brands Hatch.

Bert phoned Sam two weeks later after testing the car thoroughly to say that he was not happy with the car as
delivered and that he was rejecting the car. Sam offered to take car back and reduce the weight to manufacturer
specification, arguing that the weight specification in the manufacturerer specification was not part of the
description and the car was of satisfactory quality and fit for the purpose. Bert rejected this idea as impractical.

Bert seeks your advice as to whether he may reject the car and claim damages for breach of contract, including a
claim that he had a reasonable prospect of a podium finish in a race which he had to miss because the car
delevered was not competitive as a result of the increased weight.
1. This is a contract for the sale of goods between Sam ("The Seller") and Bert ("The Buyer") with an express
term that the AC Mamba ("The Car") complied with the manufacturer specification. The contract is governed by
the Sale of Goods Act 1979 and, in particular, the implied terms provision as to compliance with description (s.
13(1) and, satisfactory quality and fitness for purpose (s.14) The buyer's remedy of rejection and a claim in
damages will depend on whether he is held to have accepted the goods after three works under ss 34 and 25; the
doctrine of acceptance.

The Express Term

2. The car was sold to "Manufacturer specifications" which included the weight provisions; a term which has
clearly been broken in the car as delivered.There can be no doubt in the present case that the 'manufacturer
specification' is incorporated as a term of the contract. It is not immediately apparent that such a term goes
necessarily to the root of the contract, sufficient to be defined as a condition of the contract, breach entitling the
buyer subject to affirmation to accept the repudiatory breach, terminate the contract and claim damages. (Photo
Production Ltd v Securicor Ltd [1980] AC 827 ) It seems clear that the parties did not define such an obligation,
as is their right in law, as a condition. (Lombard North Central PLC v Butterworth [1987] QB 527 ) It is likely,
therefore, that the court will treat this term as innominate and assess the effect of the breach in determing
remedy. If the court regards the breach as serious they will allow the buyer to repudiate subject to affirmation
(below) and claim damages (Infra) . If the breach is regarded as minor the buyer will not be able to reject and
will be limited to a claim in damges.

3. There is some risk here that a court would regard the weight specification breach as not going to the root of the
contract, given compliance with the remaining parts of the manufacturer's specification, and the buyer would be
better advised to pursue remedy under the Sale of Goods Act 1979 rather than run this risk at common law with
an unfavourable application of the law on innominate terms - the court classifying the breach as entitling the
buyer only to a claim in damages. For that reason, I do not propose to consider this remedy further.

The Implied Terms

4. The first issue is whether the car as delivered complied with s.13 Sale of Goods Act 1979.

Sale by description

(1) Where there is a contract for the sale of goods by description, there is an implied that the goods will
correspond with the description.

(1A) As regards England and Wales and Northern Ireland, the term implied by subsection (1) above is a
condition.

The first issue is whether s. 13 has any effect on the traditional common law distinction between representations
and terms. Atiyah notes (Sale of Goods 11th edition at p149) that 'at first blush it might seem that s.13 does away
with this distinction in the case of sale by description since the section states that there is an implied term (s.13
(1A) a condition) that the goods shall correspond with the decsription. Aityah continues by observing that if the
section applied only to those parts of the description which amounted to contractual terms in any event, it would
seem to be performing the somewhat odd (and redundant) function of declaring that it is an implied term that the
seller must comply with the express terms of the contract.

5. The seller will seek to argue that 'manufacturer specification' does not form part of the description of the goods
- for an AC Mamba is, in practical terms, defined by the specification. It is unlikely, therefore, in the present case
that the court would regard 'manufacturer specification' as a representation and therefore the 'manufacturer
specification' will be part of the description of the car in that it goes to the identity of the car sold. In a sports car
the power to weight ratio will be a significant factor in the very nature of the car being sold and not peripheral to
the identity or nature of the goods sold. For that reason Oscar Chess v Williams [1957] and Harlingdon &
Leinster Enterprises v Christopher Hull Fine Art Ltd [1991] are unlikely to persuade a court here that the weight
issue was merely a representation. In any event, the case of Beale v Taylor [1967] indicates the preparedness of
courts to come very close ignoring the distinction between representations and contractual terms and if this
argument holds it is likely that 'manufactuer specification'will be a description and failure to comply will be a
breach of s.13, as here.

6. While Lord Diplock and Lord Wilberforce expressed dissatisfaction with the 'excessive technicality' of of
some of the cases under s.13 such as Re Moore & Co v Landauer [1921] it is clear from Arcos v Ronaasen &
Son [1933] AC 470 and now s. 13(1A) of The Sale of Goods Act 1979, defining the implied term as a condition,
that compliance with description is strict.

Lord Atkin observed in Arcos:

" It was contended that in all commercial contracts the question was whether there was a 'substantial' compliance
with the contract: there must always be some margin: and it is for the tribunal of fact to determine whether the
margin is exceeded or not. I cannot agree. If the written contract specifies conditions of weight, measurement and
the like, those conditions must be complied with. A ton does not mean about a ton, a yard about a yard. Still less
when you descend to minute measurements does half an inch mean about half an inch. If the seller wants a
margin he must and in my experience does stipulate for it..."

7. It is likely that the court will permit rejection of the goods, subject to acceptance (infra) and a claim in damges.
I take some comfort for this view from the recent judgment of Lady Justice Hale in Clegg v Olle Andersson T/A
Nordic Marine [2003] EWCA Civ 32 where she said, expressing some criticism of the way the case was argued,
"I agree and would only add that at times the argument before us seemed to lose sight of the real issues in the
English law of sale of goods. These are not whether either party has behaved reasonably. The defendant may well
feel that he and the manufacturers Malo did their best to put right what had gone wrong and that the claimant
purchaser should have taken up one of the options which they advised. If it is established that the seller is in
breach of a condition of the contract, however, the choice does not lie with him." In the light of the seller's
argument that he offered to reduce the weight of the car, this statement will lend support for what follows in
relation to acceptance and remedy.

8. Turning to the issue of breach of S.14 of The Sale of Goods Act 1979: the claim that the goods are not of
satisfactory quality or fit for the purpose, which may not need to be argued if the claim under s.13 is sustained,
the law is as complex and problematic in application.

s. 14 Satisfactory quality

Implied terms about quality or fitness

(1) Except as provided by this section and section 15 below and subject to any other enactment, there is no
implied [ F1 term ] about the quality or fitness for any particular purpose of goods supplied under a contract of
sale.

(2) Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under
the contract are of satisfactory quality.

(2A) For the purposes of this Act, goods are of satisfactory quality if they meet the standard that a reasonable
person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all
the other relevant circumstances.

(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following
(among others) are in appropriate cases aspects of the quality of goods—

(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,

(b) appearance and finish,

(c) freedom from minor defects,

(d) safety, and

(e) durability.

(2C) The term implied by subsection (2) above does not extend to any matter making the quality of goods
unsatisfactory—

(a) which is specifically drawn to the buyer's attention before the contract is made,

(b) where the buyer examines the goods before the contract is made, which that examination ought to reveal, or

(c) in the case of a contract for sale by sample, which would have been apparent on a reasonable examination of
the sample.

It is clear from Arcos v Ronaasen & Son [1933] AC 470 that goods may be of satisfactory quality and fit for their
purpose, yet not correspond with the description.

9. Atiyah expresses the view 'that the implied term that goods be of satisfactory quality ...is in many respects the
most important part of the law of sale of goods. It is here that the seller's obligations as to the quality of the goods
supplied must be found, and this is the very heart of the law of sale. So it is not surprising that there has been a
great deal of caselaw on this subject, and that there have been several attempt to reform the law culminating in
the 1994 act.'

10. The original 'merchantable quality' provision in the 1893 act and carried through to the 1979 act comntained
no definition of 'merchantable quality' - now 'satisfactory quality' Atiyah notes that concepts of merchantability
were probably well know to the judges of the time - a rather wry remark given the very substantial caselaw which
developed and, for reasons of the sheer scale of types of goods within sale, no single judicial definition
developed. Despite calls for a definition - which many believe to be a hopeless quest - we are unlikely ever to get
a single definition of satisfactory quality and must work within ther 'zone of uncertainty' as best we can by
having regard to the factors to determine satisfactory quality in the section. (Supra) The Court of Appeal in
Aswan Engineering Establishment Co v Lupdine Ltd [1987] 1 WLR 1 analysed the cases at length and then
proceed to the statutory definition and, as Atiyah notes, clearly thought this was the apprpriate procedure.

11. In Rogers v Parish (Scarborough) Ltd [1987] QB 933 another panel of the Court of Appeal insisted that the
then recent definition of merchantability set out in s.14(6) of the Sale of Goods Act 1979 was in "simple
language which could easi;y be applied to a variety of cirumstances without difficulty... they deprecated the
practice of looking at the old caselaw, and insisted that the new definition should be applied without reference to
the prior law" (Atiyah). The 1994 act reflects the Law Commission view that it was possible to lay down a
statutory test of 'acceptable' quality (changed to 'satisfactory' quality in the act) and Atiyah argues that some
recourse to old caselaw will still be necessary and notes the relaxation of the rule prohibiting the courts from
referring to parliamentary material 'as an aid to statutory construction which is the result of the House of Lords
decision in Pepper (Inspector of Taxes) v Hart [119] 1 All ER 42.

12. Examing the facts in the present case, delivering a car which is significantly heavier than contracted for in the
manufacturer specification is, clearly unacceptable to the buyer but will it fall within s.14 (2) of The Sale of
Goods Act to provide him with a remedy for breach? It would appear that thre buyer is likely to persuade the
court that there has been a breach of s.14(2) in delivering a car significantly heavier than contracted for,
especially given the standard that a reasonable person would expect having regard to desceription, freedom from
minor defects, foitness for the purpose which goods of this type are commonly supplied and there may well (we
have no evidence on the facts) be an issue as to safety. A car significantly heavier than manufacturer
spcifications and tolerances may well render the care defective and if this is proved it will put the matter beyond
doubt. On the bare facts there is a reasonably strong case to be put that the car is defective and not of satisfactory
quality by being heavier than specified and on that premise I am of the view that there is a good prospect of a
claim under s.14(2) being sustained.

13. S.14 (3) where the buyer expressly or impliedly makes known to the seller the purtpose for which the goods
are being bought may be more difficult to sustain. One could argue that by buying an AC Mamba to
manufacturer specification that the buyer is impliedly making known his particular prupose in buying a high
performance car and the seller in deleivering a car substantially heavier than the manufacturer specification for
an AC Mamaba is not delivering goods fit for the buyer's particular prupose. Whether this argument could be
sustained to the further issue that the buyer impliedly made known (for there appears to be no express notice) that
he wanted to buy a car fit for the particular prupose of racing is more problematic on the facts. If the arguments
above in relation to s.13 and s. 14(2) are right then s.14(3) will not need to be in issue at trial.

The doctrine of Acceptance

14. Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound on request to
afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they
are in conformity with the contract - s. 34 Sale of Goods Act 1979 The buyer has the right to examine the car on
delivery to ascertain whether it is in conformity with the contract.

15. Given the breaches of s.13 and s. 14(2) (Supra) the issue of remedy turns on whether he has or has not lost
the right to reject. The buyer will, in any event, have a right to claim damages in contract for loss sustained,
provided that it is not too remote.

s. 35 Sale of Goods Act

Acceptance

(1) The buyer is deemed to have accepted the goods [ F1 subject to subsection (2) below—

(a) when he intimates to the seller that he has accepted them, or

(b) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with
the ownership of the seller.

(2) Where goods are delivered to the buyer, and he has not previously examined them, he is not deemed to have
accepted them under subsection (1) above until he has had a reasonable opportunity of examining them for the
purpose—

(a) of ascertaining whether they are in conformity with the contract, and

(b) in the case of a contract for sale by sample, of comparing the bulk with the sample.

(3) Where the buyer deals as consumer or (in Scotland) the contract of sale is a consumer contract, the buyer
cannot lose his right to rely on subsection (2) above by agreement, waiver or otherwise.

(4) The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains the
goods without intimating to the seller that he has rejected them.

(5) The questions that are material in determining for the purposes of subsection (4) above whether a reasonable
time has elapsed include whether the buyer has had a reasonable opportunity of examining the goods for the
purpose mentioned in subsection (2) above.

(6) The buyer is not by virtue of this section deemed to have accepted the goods merely because—

(a) he asks for, or agrees to, their repair by or under an arrangement with the seller, or

(b) the goods are delivered to another under a sub-sale or other disposition.

16. Where, as here, the buyer has not previously examined the goods he must enjoy a reasonable opportunity of
examining them for the purpose of ascertaining whether they arein conformity with the contract. A reasonable
time is a question of fact in the circumstances of the case.
17. The seller may seek to argue that he offered to repair the car and, thereby, the buyer cannot reject, but we
have seen from Lady Justice Arden's judgment in Hale in Clegg v Olle Andersson T/A Nordic Marine [2003]
EWCA Civ 32 that a buyer cannot be compelled to accept repair. Lady Justice Hale stated:

"I agree and would only add that at times the argument before us seemed to lose sight of the real issues in the
English law of sale of goods. These are not whether either party has behaved reasonably. The defendant may well
feel that he and the manufacturers Malo did their best to put right what had gone wrong and that the claimant
purchaser should have taken up one of the options which they advised. If it is established that the seller is in
breach of a condition of the contract, however, the choice does not lie with him."

18. The issue is whether the buyer has performed any act of acceptance within s.35 of the Sale of Goods Act
1979. The buyer has not intimated that he will accept the goods; quite the opposite, he told the seller that he
wished to reject the goods. s. 35(4) provides that "The buyer is also deemed to have accepted the goods when
after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected
them." The issue of reasonable time will depend on the nature of the goods but in the present case it will be
necessary for the buyer to drive the car and get the feel of it. It could be argued, not unreasonably, that the buyer
would not immediately become aware of the power and handling being less than anticipated and that two weeks
to discover that the car was significantly heavier than manufacturer specification connotes that some specialised
inspection was needed. it is doubtful that a court, in the circumstances, would regard two weeks as being
excessive and if that is th case the buyer will not lose his right to reject the goods.

s. 36 Buyer not bound to return rejected goods

Unless otherwise agreed, where goods are delivered to the buyer, and he refuses to accept them, having the right
to do so, he is not bound to return them to the seller, but it is sufficient if he intimates to the seller that he refuses
to accept them.

19. Where, as here, the buyer rejects the goods and repudiates the contract, having the right to do so for breach,
he can of course refuse to pay the price or, if he has paid it, he can recover it. In adddition he may maintain an
action for damages, for if the buyer acts within his rights in rejecting the foods tendered, he can normally hold
the sller lianle in non-delivery under s.51 Sale of Goods Act 1979 (Atiyah) (Millar's Machiner Co Ltd v David
Way & Son 91934) 40 Com Cas 204)

20. Damages fall to be assessed under s.51 Sale of Goods Act 1979

Damages for non-delivery

(1) Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may maintain an
action against the seller for damages for non-delivery.

(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of
events, from the seller's breach of contract.

(3) Where there is an available market for the goods in question the measure of damages is prima facie to be
ascertained by the difference between the contract price and the market or current price of the goods at the time
or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver.

21. As to the issue of the loss of an opportunity to get a podium finish, this may be too remote as not being
within the contemplation of both parties as likely to arise in the event of breach.

See Hadley v Baxendale (1854) 9 Exch 341 at 354 | Victoria Laundry v Newman Industries Ltd [1949] 2 KB
528. | The Heron II [1969] 1 AC 350, et al

Aliter, if the buyer told the seller that he was buying the car with a view to racing and had a good prospect of
success.
Discussion Questions – Terms of the Contract

1. Henry v Ian

Henry, a bus conductor, makes furniture in his spare time. After seeing them advertised in
a magazine, he ordered one of Ian's ―Handyman‖ portable workbenches. Soon afterwards
Henry received a letter thanking him for the order and saying that delivery would be
―subject to our usual conditions‖. Two weeks later the workbench was delivered together
with a sales note setting out Ian's ‗Conditions of Sale'.

The first time Henry used it, the workbench collapsed. Henry fell and suffered serious
injuries; an inflammable liquid he was using was spilled and a fire started which caused
extensive damage to his house. Ian's Conditions of Sale state that all conditions and
warranties are expressly excluded and that Ian is not to be liable for any loss or damage
however caused.

Advise Henry. Would your advice be different if Henry sold the furniture he makes at a
stall in the town's market?

Analysis

Issues

To advise Henry – No express Terms; No Misrepresentation – Implied Terms s.14(2)(3)

SOGA 1979 – Exclusion Clause – Remedies.

Law and Application of Law to facts

Exclusion Clause

Incorporation

Advertisement for workbench = invitation to treat Partridge v Crittenden ;

Henry's Order = Offer; Ian's 1st letter = counter offer – new term (standard conditions of
business) Although Henry does not formally accept counter offer, knew of standard term,
used bench; new term incorporated by notice. Butler Machine Tool Co Ltd v Ex-Cell-O
Corporation (England) Ltd [1979] 1 WLR 401.

Brogden v Metropolitan Railway (1877) 2 App Cas 666. Not a clear cut case; probably
incorporated.

Construction

Exclusion clause typical blanket form clause (S.13 UCTA 1977) ‗Canons of Construction'

Suisse Atlantique

Photo Production Ltd v Securicor Ltd

‗Howsoever caused' construed to include negligence liability Joseph Travers & Sons Ltd v
Cooper .
Validity

Primary Liability for breach (workbench) will turn on s.14(2)(3) Sale of Goods Act 1979
(Satisfactory quality and fitness for a particular purpose) Attempts to exclude implied
terms governed by s.6 Unfair Contract Terms Act 1977 depend on status of buyer:
‗Consumer or Non-Consumer' (s.12 UCTA 1977).

*[1] If Henry is a consumer (not for use in Town Hall Market business)

S.6 UCTA 1977 cannot exclude implied terms at all – exclusion clause invalid

*[2] If Henry is a non consumer (bought it for use in ‗town hall market business')

Implied Terms ss 13, 14 & 15 SOGA 1979 can be excluded if reasonable – s.11 / Schedule
2 Paras (a) – (e) Unfair Contract Terms Act 1977

Almost certainly unreasonable – ‗Question of Balance Test' George Mitchell (Chesterhall)

Ltd v Finney Lock Seeds [1983] 2 AC 803 per Lord Bridge

Secondary Liability for breach (Workbench) will turn on the Tort of Negligence. S.2
UCTA 1977 cannot exclude liability arising out of negligence causing injuries; other loss
or damage can be excluded if reasonable. In any event (Supra) Exclusion clause
unreasonable. Not valid.

Liability for Breach s.14(2)(3) Sale of Goods Act 1979

Clear breach of s.14(2)(3) SOGA 79 as amended (above) , Cehave v Bremer

Handelsgessellschaft m.b.H (The Hansa Nord ) [1976] QB 44

Remedy

(1) Rejection – ss. 34/35 & 11(4)SOGA 79.

(2) Money Back – Quasi Ct./Restitution

(3) Damages for Non-Delivery s.51 SOGA 79

(4) Damages for Breach of Warranty s.53 SOGA 79 damage suffered (injuries)
Actionable. Damage caused by fire from spillage of inflammable liquid probably too
remote.

Liability in Negligence

Probably breach of duty of care. Damage suffered (Injuries) Actionable. Damage caused
by fire from spillage of inflammable liquid probably too remote. The Wagon Mound et al.

Consumer Protection Act 1987

A further head of Liability and Remedy will fall to be determined under the

2. Comfybo, Acrid, and Cyril

Comfybo Ltd manufacture portable gas radiators. Part of their advertising literature
describes the radiators as ‗Summer all the year round – let our warmth burst upon you.'
Acrid Ltd, dealers in household goods, order 10 of these radiators from Comfybo Ltd at
£90 each.

When the radiators are delivered, the manager of Acrid Ltd signs the invoice which states
that Comfybo ―accept no responsibility for any loss or damage which may result from our
radiators – all conditions, warranties, express and otherwise are hereby excluded. The
radiators are placed on display by Acrid Ltd along with the original advertising literature.

Mildred sees the radiators and, having read the description, purchases one for £120. The
same day another radiator is purchased by Cyril. When Mildred finally gets her radiator to
work, it bursts and she is badly scalded. As a result Mildred spends two weeks in hospital
and is unable to take part in a beauty contest, which she stood a fair chance of winning.
The first prize was £1000.

Cyril, a sales representative and also something of a miser, lives in one large room whose
measurements he fully described to the manager of Acrid Ltd who assured Cyril that the
radiator would be perfect for his requirements and was designed to cope with temperatures
reaching –40ºC. Due to a heavy fall of snow and very cold weather, Cyril finds that the
radiator will not heat his room sufficiently.

[An independent heating engineer's report has revealed that the radiator was designed to
cope with temperatures in the range –2ºC to 30ºC and was not suitable for fitting in a room
the size of Cyril's.] Due to this Cyril catches a bad cold and is off work for three weeks,
losing some £700 in Commission.

Both Mildred and Cyril are demanding damages. Acrid Ltd, in a poor way financially,
would like to be able to return all the radiators to Comfybo Ltd.

Advise the parties as to their legal position.

***

Tutorial – Terms of the Contract

1. (a) Under what circumstances are terms implied into a contract.

(b) Tony has taken a lease of a flat on the sixth floor of a block of flats owned by Len. The
flat itself is perfectly satisfactory but Tony is inconvenienced by the fact that the lift is
frequently out of order and that the lights on the stairway are rarely functioning because of
vandalism. Despite numerous complaints to Len, nothing is done to remedy matters and
Tony finds that the lease is silent as to responsibility for maintenance of lifts and lights
and other common parts of the property.

Advise Tony.

2. (a) Explain and distinguish between:

* condition

* warranty

* intermediate term.

(b) An agency contract between Apex Ltd and prince Ltd included the following:

(1) It shall be a condition of this contract that no less than 70 representatives of Apex Ltd
will be actively engaged at any one time in promoting the sale of products of Prince Ltd
 (2) ....

Prince Ltd noted that sales of their products in the territory covered by Apex Ltd had
dropped by about 20% below the previous year's figure. They investigated the matter and
on finding that Apex Ltd had during the year engaged only 60 representatives for a period
of some three months in selling their products although for the rest of the year 70
representatives were so engaged, they purported to terminate the agency contract under
clause (1).

Advise Apex Ltd.

3. A contract between a seller, Sam, and a buyer, Basil, for the sale of wheat described as
95% pure was performed by the delivery of a product which was found on analysis to
contain only 94.5% pure wheat. Basil consequently rejected the whole consignment.

Advise Sam who believes that the real reason for the rejection is a sharp fall in the price of
wheat.

Analyses in Contract & Sale of Goods

Express & Implied Terms

Drafted 16th August 2009

Mike Semple Piggot

Comfybo Ltd manufacture portable gas radiators. Part of their advertising literature describes the radiators as
‗Summer all the year round – let our warmth burst upon you.' Acrid Ltd, dealers in household goods, order 10 of
these radiators from Comfybo Ltd at £90 each.

When the radiators are delivered, the manager of Acrid Ltd signs the invoice which states that Comfybo ―accept
no responsibility for any loss or damage which may result from our radiators – all conditions, warranties, express
and otherwise are hereby excluded. The radiators are placed on display by Acrid Ltd along with the original
advertising literature.

Mildred sees the radiators and, having read the description, purchases one for £120. The same day another
radiator is purchased by Cyril. When Mildred finally gets her radiator to work, it bursts and she is badly scalded.
As a result Mildred spends two weeks in hospital and is unable to take part in a beauty contest, which she stood a
fair chance of winning. The first prize was £1000.

Cyril, a sales representative and also something of a miser, lives in one large room whose measurements he fully
described to the manager of Acrid Ltd who assured Cyril that the radiator would be perfect for his requirements
and was designed to cope with temperatures reaching –40ºC. Due to a heavy fall of snow and very cold weather,
Cyril finds that the radiator will not heat his room sufficiently.

[An independent heating engineer's report has revealed that the radiator was designed to cope with temperatures
in the range –2ºC to 30ºC and was not suitable for fitting in a room the size of Cyril's.] Due to this Cyril catches a
bad cold and is off work for three weeks, losing some £700 in Commission.

Both Mildred and Cyril are demanding damages. Acrid Ltd, in a poor way financially, would like to be able to
return all the radiators to Comfybo Ltd.

You are asked to advise Comfybo Ltd as to their legal position.

1. Comfybo Ltd has entered into a contract for the sale of goods governed by common law and the Sale of Goods
Act 1979 as amended: (1) With Acrid Ltd for the sale of 10 radiators raising issues of satisfactory quality and
exclusion and the right of Acrid Ltd to reject. Comybo Ltd's liability will turn on on Acrid Ltd's liability for the
contracts they made with (a) Mildred and (b) Cyril, so I will deal with the issues raised in those contracts first.

Mildred v Acrid Ltd

2. This is a contract for the sale of a radiator ('The Goods) raising issues as to express terms of the contract at
common law and the implied condition as to satisfactory quality under s.14(2) Sale of Goods Act 1979 and the
The Sale and Supply of Goods to Consumers Regulations 2002 . In addition, there may be liability issues under
The Consumer Protection Act 1987.

Liability in relation to the advertising literature accompanying the radiator.

3. The radiator was sold to Mildred with the accompanying literature: „Summer all the year round – let our
warmth burst upon you.' It is important, first, to distinguish between mere puffs and contractual terms. There is
no specificity explicit or implicit in the statement, nothing upon which to hang an obligation and subsequent
liability. The statement is an advertising or 'mere' puff - the licence the law permits a salesman without attracting
contractual liability. Simplex commendatio non obligat. There is no liability in contract arising from the
advertising statement.

s. 14(2) sale of Goods Act 1979

4. In the absence of any express terms, liability falls to be determined for breach of s.14(2) Sale of Goods Act
1979 which provides that all goods sold must be of a satisfactory quality. On the assumption that Midlred
installed it correctly in accordance with the instructions, she will have a claim under s.14(2)

S.14 (1)

There are no implied terms as to Quality and Fitness for particular purpose save in so far as provided by ss.
14(2)(3)

S. 14 (2) (as amended)

―(2) Where the seller sells goods in the course of a business, there is an implied term that the goods supplied
under the contract are of satisfactory quality.

(2A) For the purposes of this Act, goods are of satisfactory quality if they meet the standard that a reasonable
person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all
the other relevant circumstances.

(2B) For the purposes of this Act, the quality of goods includes their state and condition and the following
(among others) are in appropriate cases aspects of the quality of goods:

(a) fitness for all the purposes for which goods of the kind in question are commonly supplied,

(b) appearance and finish,

(c) freedom from minor defects,

(d) safety, and

(e) durability.

(2C) The term implied by subsection (2) above does not extend to any matter making the quality of goods
unsatisfactory:
(a) which is specifically drawn to the buyer's attention before the contract is made,

(b) where the buyer examines the goods before the contract is made, which that examination ought to reveal, or

(c) in the case of a contract for sale by sample, which would have been apparent on a reasonable examination of
the sample.‖

Caveat Emptor: S.14(1)

5. While s.14(2)(3) goes on to provide that the goods must be satisfactory and fit for their particular purpose,
s.14(1) does prevent the courts from imposing terms as to merchantability and fitness other than those set out in
the subsections. Before SOGA was amended in 1994, there was an implied term under s.14(2) requiring goods to
be of merchantable quality. Merchantability was a common law concept which SOGA gave statutory authority. It
was a difficult concept to define precisely. The courts consistently gave themselves flexibility in applying it, and
the importance of that flexibility was recognized when the wording of the statute was amended by the Supply of
Goods and Services Act 1994 to replace the requirement of merchantable quality in SOGA s.14(2) to a
requirement of satisfactory quality.

6. Deciding what is satisfactory quality is a matter of common sense. The same is true when deciding whether
there has been a breach of the implied term in Supply of Goods and Services Act 1982 s.13, which requires the
supplier of a services acting in the course of business to supply the service with reasonable care and skill.
However, the older cases on what amounted to merchantability still provide guidance, though not binding
authority, about the way in which the courts will approach the question of deciding what is satisfactory quality.

7. It is unlikely the court would need to refer to the old cases on merchantability in this instance. Mildred did not
examine the goods fully installed and working before the contract was made, nor was she told the radiator was
defective. She is therefore entiteld to the protection of s.14(2) and liability will be determined by the court under
the statutory test guidelines set out in s.14(2B). The radiator is, clearly, not free from minor defects, nor is the
radiator safe. There has been a breach of s.14(2) as to satisfactory quality.

8. Mildred has not accepted the goods within the meaning of ss 34 and 35. Acrid will not be able to argue that
time has lapsed because Mildred was hospitalised by the accident caused by the radiator being faulty. Mildred
will therefore be entitled to reject the goods, claim damages for non-delivery under s.51 Sale of Goods Act 1979
- being the difference between the contract price and the parket price, assuming an available market and claim
damages for breach of warranty under s.53 for her injuries and loss of an opportunity to appear in a beauty
contest. (See Hadley v Baxendale (1854) 9 Exch 341 at 354, Victoria Laundry v Newman Industries Ltd [1949] 2
KB 528., The Heron II [1969] 1 AC 350 and, more recently: Transfield Shipping Inc v Mercator Shipping Inc
[2008] UKHL 48

The House of Lords reviewed the law relating to remoteness of damage in Contract, narrowing the approach to
be taken in connection with the recovery off damages. Professor McKendrick notes in his Contract Law 3ed
Chapter 23, 889 'although the precise ambit of the decision is unclear' and goes on to state:

"It is, however, clear that it is no longer sufficient simply to show that the loss which has been suffered is a
reasonably forseeable consequence of the breach. In decsiding whether or not the loss is recoverable, it may be
important to ask whether or not the defendant accepted responsibility for the loss in respect of which the claim
has been brought. The expectation of the market would also appear to be an important factor to take into
account when deciding whether the defendant should be held responsible for the loss which has been suffered."

9. I can see no difficulty in holding Acrid Ltd liable in damages (a) for her injuries nor for the loss of a chance to
compete in the beauty contest. Subject to Mildred's duty to mitigate her loss ( ) the court will assess her damages
on the basis of putting her in the position she would have been in had the contract been performed. In Hayes v
Dodd [1990] 2 All ER 815, at 825, Purchas LJ said:

―The measure of damages is that figure which, so far as is practical in the circumstances, achieves the maximum
restitutio in integrum.‖
10. Detailed discussion of damages is not included in this analysis as this will be covered in detail in later
analyses. Briefly: Mildred will be able to claim damages for her injuries, claiming in tort (Negligence: Donoghue
v Stevenson et al) and contract to compensate her, the injuries being entirely foreseeable. In respect of the loss of
the opportunity to compete in the beauty contest - these may not have been in the contemplation of the parties as
likely to result (Heron II, Victoria Laundry v newman Industries et al) and are unlikely to be recoverable unless
Mildred made it clear that she was planning to enter a beauty contest - in which case sthe measure will be
assessed under the Chaplin v Hicks principle (See Chapter 9 Remedies) There may also be a product Liability
issue but this is not considered here. Mildred will also be able to reject the radiator, given that she has not
accepted within s34, 35 Sale of Goods Act 1979 - her time in hospital unlikely to count for the purpose of
determing lapse of a reasonable time.

Cyril v Acrid Ltd

11. Cyril has entered into a contract for the sale of goods with Acrid Ltd on terms that the specification of the
radiator could meet his particular needs; the measurements of his room and, moreover the salesman stated clearly
that the radiator was designed to cope with temepreatures down to -40C.

12. The measurements and the temperature specification are terms of the contract, the temperature specification
clearly going to the root of the contract and the measurements of the room also - making both these statement
conditions of the contract and are clearly incorporated into the contract. A condition goes to the root of the
contract. The breach of a condition allows the innocent party to treat the contract as repudiated, treat the contract
as at an end and treat himself as discharged from performance. If the parties to the contract agree that that shall
be the effect of the term it will be classified as a condition. Photo Production Ltd v Securicor Ltd [1980] AC 827.

13. It may be argued that as neither party classified the statements as conditions the appropriate test is the
innominate term test. The court is more likely than not going to regard the breaches here as going to the root of
the contract and entitle Cyril, subject to affirmation to accept the repudiatory breach, treat himself as discharged
from further performance, reject the radiator and claim damages for loss sustained.

14. Where the parties fail to classify the status of the obligations in the contract the court will hold that they are
‗innominate' and apply the ex post ‗consequences of the breach test'. The remedy given will depend on the
gravity of the breach.

Hong Kong Fir Shipping v Kawasaki Kaisen Kaisha [1962] 2 QB 26

Defendants chartered the ship ‗Hong Kong Fir' for two years on terms that the ship be ‗fitted in every way for
ordinary cargo service'. The vessel was unseaworthy, the crew incompetent. The defendants repudiated the
charter party alleging that the seaworthiness provision was a condition. The charter party still had time to run its
course and the question before the court was whether the seaworthiness provision was a condition or a warranty.

“There are....many contractual undertakings....which cannot be categorised as being “conditions” or

“warranties”...Of such undertakings all that can be said is that some breaches will and others will not give rise
to an event which will deprive the party not in default of substantially the whole benefit which it was intended he
should obtain from the contract; and the legal consequences of a breach of such undertaking, unless provided for
expressly in the contract, depend upon the nature of the event to which the breach gives rise and do not follow
automatically from a prior classification of the undertaking as a condition or warranty.”

per Diplock LJ

Sale of Goods Act 1979

15. Cyril will also be able to bring a claim under s. 14(3) of the Sale of Goods Act 1979. While goods can be of
satisfactory quality they may not be fit for the particular prupose under s.14(3) (The radiator is clearly
satisfactory as a radiator in terms of being a radiator - although there is an arguable case for saying it is not under
s.14(2) having regard to the description applied to it of being able to cope with temperatures down to -40C and
clearly did not heat the room ) it would be more appropriate to bring a claim under s. 14(3) sale of Goods Act
1979.

16. S. 14 (3) Sale of Goods Act 1979

―Where the seller sells goods in the course of a business and the buyer expressly or by implication makes known
to the seller......any particular purpose for which the goods are being bought, there is an implied condition that the
goods supplied under the contract, are reasonably fit for that purpose whether or not that is a purpose for which
such goods are commonly supplied, except where the circumstances show that the buyer does not rely, or that it
is unreasonable for him to rely, on the skill and judgment of the seller.......‖

Grant v Australian Knitting Mills [1936] AC 100; Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2
AC 31 et al

An independent heating engineer's report has revealed that the radiator was designed to cope with temperatures
in the range –2ºC to 30ºC and was not suitable for fitting in a room the size of Cyril's.

The radiator is clearly not fit for Cyril's particular prupose and there is a breach of s.14(3)

17. I do not propose to deal with the damages issue in detail here as this is fully discussed in Chapter 9 Remedies
and there will be case analyses on the remedy of damages. briefly, the issue is as to whether the loss is too remote
or not. Cyril caught a cold. This would seem to be an event arising in the ordinary course, provided there can be
proven a causal link between the failure of the radiator and Cyril catching a cold: medical evidence will need to
be adduced to support this claim. As to the lost commission, this may not be too remote, falling within the second
limb of Hadley v baxendale.

16. The rule in Hadley v Baxendale

The rule governing remoteness of damage, as stated in: Hadley v Baxendale (1854) 9 Exch 341 at 354: This case
involved a claim for loss of profit for failure to deliver a mill shaft on time. The loss of profit was held to have
been too remote for the plaintiffs to recover. Loss of profit did not arise naturally from the failure to deliver on
time, since the plaintiffs might have had a spare shaft available. As to the second part of the rule in Hadley v
Baxendale , the plaintiffs could not recover lost profit under this rule since they had not made it clear that loss of
profit would result from any delay.

“Where two parties have made a contract which one of them has broken, the damages which the other party
ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered
either arising naturally, according to the usual course of things from such breach of contract, or such as may
reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as
the probable result of the breach of it.”

per Alderson B.

There are therefore two limbs of recovery under Hadley v Baxendale :

1. Damages which may ‗fairly and reasonably be considered either arising naturally according to the usual course
of things...

2. Damages which ‗may reasonably be supposed to have been in the contemplation of both parties, at the time of
the contract, as the probable result of the breach.

Victoria Laundry v Newman Industries

Damages were awarded for loss of profit in:

Victoria Laundry v Newman Industries Ltd [1949] 2 KB 528.
It was clear to D, who were to sell and deliver to P a boiler, that it was needed for immediate use, and that profits
would be lost if it was not delivered on time.

However, although the claim for the normal profits which the plaintiffs would have earned was allowed, the
claim which the plaintiffs made for loss of exceptional profits which would have been earned in special dyeing
contracts was disallowed, and profits at the normal rate were awarded for these contracts. This may be seen as an
application of the second part of the rule in Hadley v Baxendale .

Asquith LJ re-stated the principles

(1) “It is well settled that the governing purpose of damages is to put the party whose rights have been violated
in the same position, so far as money can do so, as if his rights have been observed. This purpose, if relentlessly
pursued, would provide him with a complete indemnity for all loss de facto arising from a particular breach,
however improbable, however unpredictable. This in contract at least is recognised as too harsh a rule, hence:

(2) In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually
resulting as was, at the time of the contract, reasonably foreseeable as liable to result from the breach.

(3) What was at the time reasonably foreseeable, depends on the knowledge then possessed by the parties or, at
all events, by the party who later commits the breach.

(4) For this purpose knowledge ―possessed‖ is of two kinds – one imputed, the other actual. Everyone, as a
reasonable person, is taken to know ―the ordinary course of things‖ and consequently what loss is liable to result
from a breach of that ordinary course. This is the subject matter of the ―first rule‖ in Hadley v Baxendale , but to
this knowledge, which the contract breaker is assumed to possess, whether he actually possesses it or not, there
may have to be added in a particular case knowledge which he actually possesses of special circumstances
outside ―the ordinary course of things‖, of such a kind that a breach in those special circumstances would be
liable to cause more loss. Such a case attracts the operation of the ―second rule‖ so as to make the additional loss
recoverable.

(5) In order to make the contract breaker liable under either rule it is not necessary that he should actually have
asked himself, ―What loss is liable to result from the breach?‖ As has often been pointed out, parties at the time
of contracting contemplate, not the breach of the contract, but its performance. It suffices that, if he had
considered the question, he would as a reasonable man, have concluded that the loss in question was liable to
result.

(6) Nor, finally, to make a particular loss recoverable, need it be proved that on a given state of knowledge, the
defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough if he
could foresee that it was likely to so result.

Refinement of the rule: The Heron II

The Heron II [1969] 1 AC 350,

Damages were awarded for loss of profits, on the basis that although the appellant, a ship owner, did not know
that the respondent intended to sell a cargo of sugar immediately on its arrival, nevertheless the appellant knew
that the respondent was a sugar merchant, and should have contemplated some financial loss as a result of a
shipment of sugar arriving nine days later. This is an example of the first part of the rule in Hadley v Baxendale .

See also: H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791.

The members of the Judicial Committee of the House of Lords in this case came to no general consensus on
remoteness, indicating a reticence to use the word ‗foreseeable' but forward a number of formulations.

“It is clear that on the one hand the test of foreseeability as laid down in the case of tort is not the test for breach
of contract; nor on the other hand must the loser establish that the loss was a near certainty or odds-on
probability. I am content to adopt as the test a „real danger' or a „serious possibility'. There may be a shade of
difference between these two phrases, but the assessment of damages is not an exact science and what to one
judge or jury will appear a real danger may appear to another judge or jury as a serious possibility.”

per Lord Upjohn.

Lord Morris ‗Not unlikely to occur' or ‗liable to result', Lord Hodson ‗liable to result', Lord Reid ‗not unlikely'

Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48

House of Lords

The House of Lords reviewed the law relating to remoteness of damage in Contract, narrowing the approach to
be taken in connection with the recovery off damages. Professor McKendrick notes in his Contract Law 3ed
Chapter 23, 889 'although the precise ambit of the decision is unclear' and goes on to state:

"It is, however, clear that it is no longer sufficient simply to show that the loss which has been suffered is a
reasonably forseeable consequence of the breach. In decsiding whether or not the loss is recoverable, it may be
important to ask whether or not the defendant accepted responsibility for the loss in respect of which the claim
has been brought. The expectation of the market would also appear to be an important factor to take into
account when deciding whether the defendant should be held responsible for the loss which has been suffered."

The facts are relatively straightforward: A charted vessel was redelivered late, resulting in the owners having to
reduce the hire rate for the follow-on time charter. The claimed a daily loss rate of $8800 for 191 - a claim of
$1,364,584 in damages. The House of Lords held that liability was confined to $158,301 - the difference between
the market and the charter rates of hire for the nine days during which the owners were deprived of the use of
their ship.

Professor Mckendrick notes : "While they agreed in the result, the reasoning of their Lordships differed in
significant respects so that it is no easy task to identify the ratio of the case."

Analysis: Lord Hoffman focuses on the issue of whether the defenadant has assumed responsibility, objectively
judged, for the loss in question and was attracted by importing the South Australia Asset Management Corp
principles into the law of contract. For Lord Hoffman the key question is .... is the loss for which damages can be
given of a type or kind which the person breaking the contract ought to be taken to have accepted responsibility?
He held that contracting parties in this market would not have considered the losses arising out of a follow on
fixture to be of a type or kind which the charter was taking responsibility for.

Lord Hope also focused on the assumption of responsibility issue. Lord Rodger was not troubled by the South
Australia Assett Management issue and McKendrick notes " In his view, the loss suffered by the owners was not
the „ordinary consequence‟ of the breach of contract. The loss arose as a result of the „extremely volatile market
conditions‟ which could not have been reasonably foreseen as being likely to arise out of the delay. The difficulty
with this approach is that what was not foreseen was the extent of the loss, rather than its nature"

Baroness Hale was not attracted by the idea of importing South Australia Assett Management principles into
contract and decided the case on the decided the case the basis that the ‗parties would not have had this particular
type of loss within their contemplation.‘ In her judgment, the parties would have expected that the owner would
be able to find a use for the ship even if it was returned late and that ‗it was only because of the unusual volatility
of the market at that particular time that this particular loss was suffered.‘

17. Subject to Cyril's duty to mitigate his loss, it is likely, in the light of the foregoing, that he will be able to
claim damages for his lost commission and reject the radiator.

Acrid Ltd v Comfybo Ltd

18. Acrid into a contract for the sale of goods with Comfybo for 10 radiators priced at £90 each and on delivery
of the radiators signed an invoice which stated: (Comfybo) ―accept no responsibility for any loss or damage
which may result from our radiators – all conditions, warranties, express and otherwise are hereby excluded.
The Exclusion Clause

19. If the exclusion clause was not drawn to Acrid Ltd's attention before the contract for the radiators was
concluded, as seems apparent on the facts, it will not be binding on Arid because it is not incorporated into the
contract and there can be no suggestion of a new contract, including the exclusion clause supported by fresh
consideration arising here. No statements, oral or written, including exclusion clauses, may become a term of the
contract unless made before the contract was concluded. Any statement made after the conclusion of a valid
contract will not be a part of it, will not be supported by valid consideration and will not be binding or
enforceable. Roscorla v Thomas (1842) 3 QB 234;Olley v Marlborough Court Hotel [1949] 1 KB 532A notice
on the back of the room door disclaiming liability was not enforceable. The disclaimer or exclusion clause should
have been drawn to the attention of the husband and wife when they checked in and before the contract for the
hire of the room had thereby been concluded.

20. Briefly, to consider the alternative factual possibility that an exclusion cluase was drawn to Acrid's attention
before the contract was concluded - and, thereby, is incorporated in the contract, the exclusion clause would be
governed by The Unfair Contract terms Act 19977 and be subject to the test of reasonableness. Acrid Ltd is not a
consumer, so any exclusion of liability for breach of description (s.13 SOGA 1979) or s. 14(2) satisfactory would
be subject to the test of reasonableness set out in s. 11 and the Schedule guidelines. It is unlikely that a blanket
exclusion clause of this nature would find favour with the court and be enforceable.

Contractual liability and rigghts

21. While Cyril's claim against Acrid will be successful, the radiator is of satisfactory quality and the only matter
to be determined is the radiator rejected by Mildred which is clearly not of satisfactory quality, assuming that
Mildred installed it correctly in accordance with the instructions.

2. Acrid will not be able to reject the radiators because he had accepted them within the meaning of s.35 Sale of
Goods Acxt by selling towo radiators on and through lapse of time. He will, therefore, be limited to a claim in
damages for breach of warranty under s.53 and be able to claim damages for all foresseable loss, including the
injuries sustained by Midlred which he will be able to pass through to Comfybo Ltd.

8. Remedies for Breach of Contract

While it may be possible to treat a contract as at an end, or reject the goods in the case of sale of goods contract,
the primary remedy for breach of contract is damages - to put the victim of breach into the position they would
have been in had the contract been performed. The purpose of damages is to compensate for loss caused by the
breach.

In Payless Travel v Baba Krupa Holidays [2004] All ER (D)503

Lord Justice Rix:

"I come, therefore, to the final narrow point which is that legal causation has not been established. It is true that
the judgment of the recorder does not deal specifically with the way in which the breach led to damages. She
clearly took it for granted that if 34 passengers were going to turn up for a flight which they thought they were
booked on the damages in question ensued from any breach involved in the failure to give them warning of the
cancellation of their tickets or any breach involved in the failure to ensure that any improper cancellation had
been put aside. I am therefore not surprised that there is not an express discussion of the sole legal issue raised on
this appeal which is whether the recorder was entitled to find causation of loss under the doctrine of common
sense for which the decision in this court of Galoo v Bright Grahame Murray [1994] 1 WLR 1363 (see especially
at 1374G-1375A) is a well-known modern authority. In my judgment, it is plainly a matter of common sense
which the judge was entitled, in effect, to take for granted, that the two breaches of duty which she found and
identified would lead to the kind of damages which Baba Krupa were claiming."
Transfield Shipping Inc v Mercator Shipping Inc [House of Lords] [2009]
Damages - Contract - Breach - Time charter - Late redelivery - Whether charterers liable for owners' loss of
profit under new charter - Whether loss arising naturally from breach of contract

***

8.1 Introduction

8.1.1 Discharge of the contract

A breach of contract does not, of itself, discharge the contract. A breach of warranty gives rise to a claim in
damages only. A breach of condition gives rise to an election on the part of the victim to either affirm the
contract and sue in damages or to treat the contract as having been repudiated by the other party, accept the
repudiation, treat the contract as at an end and claim for losses (if any) in damages.

The victim will be able to claim that he is discharged from further performance for breach of an innominate term
where the breach is serious and the Court treats the breach as it were a breach a condition.

8.1.2 The victim does not have to accept the repudiation

The victim has an election. he may affirm the contract or accept the repudiatory breach and treat the contract as
at an end.

For contracts other than sale of goods contracts, a victim, with full knowledge of the breach, is said to affirm the
contract where he elects to go on with it. The right to repudiate in such a case is then lost. The victim may, of
course, still bring an action in damages for the breach and repudiate the contract for all future breaches.

See also: Waiver – Charles Rickards v Oppenheim [1950] 1 KB 616

(In the case of sale of goods contracts governed by the Sale of Goods Act 1979 the rule is rather stricter and a
victim may be deemed to have accepted the goods and, thereby, have lost his right to treat the contract as having
been repudiated and reject the goods. See: ss 34-36 Sale of Goods Act 1979 ).

Fercometal SARL v MSC Mediterranean Shipping Co SA [1989] AC 788

Where the contract is not discharged by the breach both parties remain liable to perform the contract.

8.1.3 Where the victim does choose to terminate

Where the victim accepts a repudiatory breach the contract comes to an end, both parties are released from their
future obligations. Extant obligations remain binding and damages are payable by either party in respect of
breach arising before termination.

Vitol SA v Norelf Ltd [1996] AC 800.

Normally the victim must unequivocally indicate that he intends to terminate. If the victim affirms the contract it
remains in force. If the victim fails to rescind the contract, it also remains in force. However, sometimes mere
inactivity is enough to demonstrate that the victim has accepted a repudiatory breach:

8.1.4 Anticipatory repudiatory breach

A party to the contract may indicate before performance is due that he will not perform his part of the contract.
This is known as an anticipatory breach, repudiatory in the case of a breach of a condition.

The victim in such a case may elect to accept the anticipatory breach and sue for damages or wait until the time
fixed for performance to see if the contract will be performed at that time and sue for damages if the contract is
then not performed.
Avery v Bowden (1855) 5 E&B 714

There is a risk in such cases than a supervening event could frustrate the contract or render it illegal.

8.1.5 Remedies for breach

There are a number of remedies for breach – the common law remedies of an action for the price, self help
remedies, an action upon a liquidated sum, the common law remedy of damages and the equitable remedies of
specific performance, restitution and the quasi-contractual remedies including quantum meruit.

Payless Travel Ltd v Baba Krupa Holidays [2004]ll ER illustrates the rule in contract cases that the breach must,
generally, be the cause of the loss.

This section deals with damages.

8.1.6 Who can sue? privity and third parties

Traditionally in English law, only a party to the contract can sue on the contract. This is known as the doctrine of
privity.

Alfred McAlpine v Panatown [2001] 1 AC 518.

The parties contracted for building work, which was a disaster. The problem for the claimants, Panatown, was
that they did not own the land where the building work was conducted. It was owned by a sister company.
Panatown (rather than the owner of the land) contracted with McAlpine as a way of minimizing VAT. However
when things went wrong, Panatown sued the builder. They recovered nothing because, not being the owner of the
land, they had suffered no loss. (The case was somewhat complicated by the fact that there was a deed under
which the owner of the land could have sued). This is just one of example of a problem which has frequently
given the courts a problem.

The courts have developed a number of exceptions to the privity rule to soften its impact, for example in Linden
Gardens Trust v Lenesta Sludge Disposals Ltd [1994] 1 AC 85.

However, since the enactment of Contracts (Rights of Third Parties) Act 1999 (which was not in force at the
relevant time in Panatown) these problems have largely been solved.

Under s.1 it is been possible for a third party who is expressly identified in a contract to sue for breach of a term
which purports to confer a benefit on him.

Section 3 allows the defendant to a claim by the third party to rely on set-off our counter-claim either against the
other contracting party or against that third party, unless the possibility of set-off against the third party is
expressly excluded by the contract.

Another situation where privity has been a problem for potential claimants arises with manufactures' guarantees.
Where a consumer buys goods from a retailer or distributor, and not direct from the manufacturer, there is no
privity between the manufacturer and the customer.

Shanklin Pier Ltd v Detel Products Ltd [1951] 2KB 854

The manufacturer of paint persuaded the pier owners to use that paint on the basis of statements as to its quality.
It proved unsatisfactory. The pier owners had bought the paint from a distributor, so there was no privity between
them and the manufacturers. The court found there was a collateral contract between the pier owners and the
manufacturers, so the ‗guarantee' of the paint was a binding term. This case, using the ‗collateral contract'
technique developed in land law, is much quoted in textbooks, but is rarely if ever followed in practice.

McNair J:

― This case raises an interesting and comparatively novel question whether or not an enforceable warranty can
 arise as between parties other than parties to the main contract or the sale of the article in respect of which the
warranty is alleged to have been given.... I am satisfied that, if a direct contract of purchase and sale of [the
paint] had then been made between the plaintiffs and the defendants, the correct conclusion on the facts
would have been that the defendants gave to the plaintiffs the warranties substantially in the form alleged in
the statement of claim. In reaching this conclusion, I adopt the principles stated by Holt CJ in Crosse v
Gardner and Medina v Staughton that an affirmation at the time of sale is a warranty provided it appear on
evidence to have been so intended.

If, as is elementary, the consideration for the warranty in the usual case is the entering into of the main
contract in relation to which the warranty is given, I see no reason why there may not be an enforceable
warranty between A and B supported by the consideration that B should cause C to enter into a contract with
A or that B should do some other act for the benefit of A.

However, in the case of guarantees offered to consumers, these do now have contractual force under the Sale and
Supply of Goods to Consumers Regulations 2002 .

***

8.2 Damages for Breach of Contract – General principles

The general principles applicable to damages claims can be summarised as follows:

1. Breaches of contract are actionable per se

2. The object of damages is to compensate

3. There is a requirement to mitigate loss

4. Damages can be recovered only for loss sustained

5. The loss must be caused by the breach.

8.2.1 The basic principle of assessment

The object of damages

The object of damages in contract is to compensate the victim of the breach for losses arising as a result of the
breach. Damages in a commercial contract would therefore normally include loss of profit.

The basic principle

The basic principle, and the starting point for the assessment of damages for breach of contract, is that stated by
Lord Blackburn in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25 at 29:

“... you should as nearly as possible get at that sum of money which will put the party who has been injured, or
who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is
now getting his compensation or reparation.”

This principle is still quoted with approval in most cases concerning damages for breach of contract today: see
for example Hayes v Dodd [1990] 2 All ER 815, at 818, per Staughton LJ. Nevertheless, the difficulty lies in the
application of the principle.

See also: Johnson (A.P.) (Original Appellant and Cross-Respondent) v. Gore Wood & Co. (A Firm) (Original
Respondents and Cross-Appellants) [2000] HL
8.2.2 Different Methods of Application of the Basic Principle

The two approaches

If a contract is broken, or a term of it is broken, it could be argued that in the award of damages the party not in
breach should be placed in the position in which he would have been if the contract had been successfully carried
out without any breach of contract.

But in some cases it may also be argued that the better approach in cases of breach of contract is to restore the
party not in breach to the same position as if there had been no contract at all.

In this section the two approaches will be described respectively as:

THE ‗SUCCESSFUL-TRANSACTION METHOD'

and

THE ‗NO-TRANSACTION METHOD'

although other expressions have from time to time been used in judgments:

– ―expectation loss‖

– ―reliance loss‖

The difference between the two approaches

The difference between the two methods of assessment was clearly marked in the case of:

Wikipedia note: Royscott Trust Ltd v Rogerson [1991] 3 All ER 294

Royscott Trust v Rogerson (BAILII: [1991] EWCA Civ 12 ) [1991] 2 QB 297, [1991] 3 All ER 294
A car dealer (the second defendant) misrepresented to a finance company (the plaintiff) the amount paid by way
of deposit for the purchase of a car by the first defendant. On the strength of this representation the finance
company lent £6,400 to the first defendant who later sold the car without it having been paid for in full.

The misrepresentation was that the deposit was £1,600 in relation to a purchase price of £8,000, whereas it was in
fact £1,200 in relation to a purchase price of £7,600.

The plaintiff sued for damages, and the issue was how damages against the second defendant should be assessed.
The second defendant argued that damages should be assessed as nil. The argument was that (applying the
―successful-transaction‖ method) the resulting transaction would have been the same whether or not the amount
of the deposit had been correctly stated. In either case, it was argued, the finance company would have lent the
purchase price less the deposit, which in either case was £6,400.

The County Court applied a different variant of the same principle, finding that on a ―successful-transaction‖
basis, the finance company would normally only have lent 4 times the amount of the deposit, i.e. £4,800. On this
basis the County Court judge awarded £1,600 to the plaintiff, ie. £6,400 actually lent, less £4,800 which would
have been lent had no misrepresentation been made.

On appeal to the Court of Appeal, damages were re-assessed as £3,625.24. In arriving at this sum the Court of
Appeal applied the ―no-transaction‖ method. Thus the plaintiff was awarded damages on the basis that no money
would have been lent to the first defendant but for the misrepresentation. The sum awarded was therefore £6,400
less £2,774.76 received from the first defendant by way of payment.

Clearly there is a difference between the different methods of assessment. How did the Court of Appeal decide to
apply one method rather than the other? In this particular case it was held that although the misrepresentation was
innocent, the second defendant failed to prove that it was made in the belief up to the time when the contract was
made that the facts represented were true. When this occurs, Section 2(1) of the Misrepresentation Act 1967
applies, and damages are awarded as if the misrepresentation had been fraudulent. This is treated, on a tort basis,
with the result that all loss to the plaintiff must be made good. Thus the ―no-transaction‖ method is appropriate.

8.2.3 Further principles

Some further principles may now be outlined:

(a) The tort principle is to assess damages by restoring, so far as is possible, the position of the injured party to
the position before the damage occurred. If this is applied to a contractual situation, it will approximate to the
―no-transaction‖ principle. The number of instances where the tort principle will apply are relatively few, and are
most likely to arise under statute, such as the Misrepresentation Act 1967.

(b) A contract may require care and skill in advising a person in relation to a transaction which that person is
about to enter into. This is the case, for example, when solicitors act for a person purchasing property.

In such a case, it will be permissible for a court to assess damages for breach of the contractual duty to take care
and to use reasonable skill on the basis that but for the breach of this contract, the person about to make the
purchase of property would not in fact have made that purchase.

Hayes v Dodd [1990] 2 All ER 815

Damages for failure to use reasonable skill and care in relation to a purchase of property were assessed on the
―no-transaction‖ basis, because if the plaintiffs had been properly advised that there was no right of way to reach
the rear of the property, they would not have bought it.

(c) Cases which usually come within the “successful-transaction” method of assessment include cases of non-
acceptance of goods, under s.50 of the Sale of Goods Act 1979, cases of non-delivery of goods, under s.51 of the
Sale of Goods Act 1979, damages for breach of warranty under s.53 of the Sale of Goods Act 1979 , as well as
cases involving loss of profit, loss of a bargain, and loss of opportunity. In each of these cases the court is
measuring the expectations of the innocent party under the contract, and compensating that party for the
difference between what he/she might have expected to receive, and what in fact was received.

Chaplin v Hicks [1911] 2 KB 786

P sued the D for failure to give her a reasonable opportunity to attend an interview, at which, had she been
successful, she might have been selected for employment as an actress. The agreement that she would attend the
interview was of a contractual nature, and it was held that by failing to give the plaintiff a reasonable opportunity
to attend, the defendant was in breach of contract. Damages of £100 were awarded on the basis that an
opportunity to compete is something of value, and the damages were to compensate for that advantage being
taken away.

Lord Justice Fletcher-Moulton:

"Where by contract a man has a right to belong to a limited class of competitors, he is possessed of something of
value, and it is the duty of the jury to estimate the pecuniary value of that advantage if it is taken from him. The
present case is a typical one. From a body of six thousand, who sent in their photographs, a smaller body of fifty
was formed, of which the plaintiff was one, and among that smaller body twelve prizes were allotted for
distribution; by reason of the defendant's breach of contract she has lost all the advantage of being in the limited
competition, and she is entitled to have her.loss estimated. I cannot lay down any rule as to the measure of
damages in such a case; this must be left to the good sense of the jury. They must of course give effect to the
consideration that the plaintiff's chance is only one out of four and that they cannot tell whether she would have
ultimately proved to be the winner. But having considered all this they may well think that it is of considerable
pecuniary value to have got into so small a class, and they must assess the damages accordingly."

Contrast Anglia Television Ltd v Reed [1972] 1 QB 60

A film had to be abandoned because of repudiation by actor. Profit not claimed, as would have been speculative.
Successful claim was for money spent on actors, script-writers, locations etc.
(d) It is possible that some cases of breach of contract could yield the same result whether the damages were
assessed by the ―no-transaction‖ method, or whether they were assessed by the ―successful-transaction‖ method.

See the example given by Staughton LJ, in Hayes v Dodd [1990] 2 All ER 815 at p.819.

(e) The issue as to which method of assessment of damages to use does not arise if the damages for a
particular breach of contract are stipulated in advance by a provision for liquidated damages. Liquidated damages
provisions are, however, subject to the rule against ―penalties‖, which will be dealt with later.

(f) Common sense in cases where breach has no adverse effect:

In Ruxley Electronics v Forsyth [1996] AC 344

D contracted to construct a swimming pool on P's land. The contract specification required that the deep end of
the pool should be 7 feet 6 inches deep. The pool was constructed, but the deep end was only 6 feet deep. P
claimed damages in the sum required to reconstruct the pool to the specified depth, viz. £21,560. The trial judge
rejected that claim, but awarded the plaintiff damages in the sum of £2,500 for loss of amenity.

The Court of Appeal allowed the plaintiff's appeal from that decision, and awarded him the full sum claimed by
him. The House of Lords allowed the defendants' appeal from the decision of the Court of Appeal, on the ground
that the expenditure required to reconstruct the pool to the specified depth was out of all proportion to the benefit
to be obtained, and restored the judgment of the trial judge (summary quoted from McA lpine v Panatown ).
Although courts are not concerned with the way the successful claimant spends his award, common sense will be
invoked to prevent the claimant from receiving a ―windfall.‖

(g) Restitutionary damages? The Blake case.

AG v Blake [2001] 1 AC 268

Blake employed by the British security services. He spied for the enemy and was convicted and imprisoned. He
escaped to Moscow and contracted with a publisher to publish a book about his spying. He planned to publish
material which was no longer secret. However, publication would still be a breach of his contract of employment.
The Attorney General sued him for an account of profits from the book. The Crown would not lose anything by
the publication, but it seemed wrong for a spy to benefit from his treachery. Applying the compensatory
principle, the Crown could not recover damages because it had no losses. The House of Lords held by a majority
that there was a discretionary power to order an account of profits received as a result of breach of contract,
instead of compensatory damages.

The case was decided in a political atmosphere where the idea that Blake would profit from his treachery caused
public outrage. The chance of the courts applying the Blake principle in a commercial case is very small.

Wikipedia note:Lord Nicholls , Lord Goff of Chieveley , Lord Browne-Wilkinson and Lord Steyn held that in
exceptional cases, when the normal remedy is inadequate to compensate for breach of contract, the court can
order the defendant to account for all profits. This was an exceptional case. Blake had harmed the public interest.
Publication was a further breach of his undertaking of confidentiality. Disclosure of non-confidential information
was also a criminal offence under the Official Secrets Act 1911 . An absolute rule against disclosure was
necessary to ensure that the secret service was able to deal in complete confidence. It was in the Crown's
legitimate interest to ensure Blake did not benefit from revealing state information. The normal contractual
remedies of damages, specific performance or injunction were not enough, and the publishers should pay any
money owing to Blake to the Crown.

Lord Hobhouse dissented. He would have held that since the information was no longer confidential, there could
be no misuse of confidential information.

The Blake principle was applied in Esso v Niad Ltd [2001] All ER (D) 324. It was then rejected in AB
Corporation v CD Company [2002] 1 Loyds Rep 805

In Experience Hendrix v PPX Enterprises Inc [2003] EWCA Civ 323 a recovery of profits arising on a breach of
breach of contract was not awarded. The Court of Appeal took a broader approach and held that the defendants
should pay a reasonable sum based on what the claimants would have demanded had they agreed to the use of the
recordings.

Exercise on this important case

WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment Inc
[2006] EWHC 184 (CH)

On what basis the Court award damages? This is a fascinating case and the judgment of
Mr Justice Peter Smith provides and excellent analysis and discussion of damages.

Important note:

When it is either not possible or desirable to award damages measured in that way, a court may award money
damages designed to restore the injured party to the economic position that he or she had occupied at the time the
contract was entered (known as the "reliance measure"), or designed to prevent the breaching party from being
unjustly enriched (" restitution ").

 Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191

 J & H Ritchie Ltd v Lloyd Ltd [2007] UKHL 9

***

8.3 Remoteness of Damage

Remoteness of Damage

Transfield Shipping Inc v Mercator Shipping Inc [2008] UKHL 48

House of Lords

The House of Lords reviewed the law relating to remoteness of damage in Contract, narrowing the approach to
be taken in connection with the recovery off damages. Professor McKendrick notes in his Contract Law 3ed
Chapter 23, 889 'although the precise ambit of the decision is unclear' and goes on to state:

"It is, however, clear that it is no longer sufficient simply to show that the loss which has been suffered is a
reasonably forseeable consequence of the breach. In decsiding whether or not the loss is recoverable, it may be
important to ask whether or not the defendant accepted responsibility for the loss in respect of which the claim
has been brought. The expectation of the market would also appear to be an im[portant factor to take into
account when deciding whether the defendant should be held responsible for the loss which has been suffered."

The facts are relatively straightforward: A charted vessel was redelivered late, resulting in the owners having to
reduce the hire rate for the follow-on time charter. The claimed a daily loss rate of $8800 for 191 - a claim of
$1,364,584 in damages. The House of Lords held that liability was confined to $158,301 - the difference between
the market and the charter rates of hire for the nine days during which the owners were deprived of the use of
their ship.

Professor Mckendrick notes : "While they agreed in the result, the reasoning of their Lordships differed in
significant respects so that it is no easy task to identify the ratio of the case."
Analysis: Lord Hoffman focuses on the issue of whether the defenadant has assumed responsibility, objectively
judged, for the loss in question and was attracted by importing the South Australia Asset Management Corp
principles into the law of contract. For Lord Hoffman the key question is .... is the loss for which damages can be
given of a type or kind which the person breaking the contract ought to be taken to have accepted responsibility?
He held that contracting parties in this market would not have considered the losses arising out of a follow on
fixture to be of a type or kind which the charter was taking responsibility for.

Lord Hope also focused on the assumption of responsibility issue. Lord Rodger was not troubled by the South
Australia Assett Management issue and McKendrick notes " In his view, the loss suffered by the owners was not
the „ordinary consequence‟ of the breach of contract. The loss arose as a result of the „extremely volatile market
conditions‟ which could not have been reasonably foreseen as being likely to arise out of the delay. The difficulty
with this approach is that what was not foreseen was the extent of the loss, rather than its nature"

Baroness Hale was not attracted by the idea of importing South Australia Assett Management principles into
contract and decided the case on the decided the case the basis that the ‗parties would not have had this particular
type of loss within their contemplation.‘ In her judgment, the parties would have expected that the owner would
be able to find a use for the ship even if it was returned late and that ‗it was only because of the unusual volatility
of the market at that particular time that this particular loss was suffered.‘

***

8.3.1 What heads of damages may be awarded? Principles of remoteness of damage

Remoteness of damage

The Argentino (1888) LR PD 191, 195,

“This rule (the measurement of compensation) does not come into play with regard to any claimed head of
damage until it has been determined by the rule as to remoteness whether that head of damage can be brought
into consideration at all.”

per Lord Esher MR.

Some kinds of damage are appropriate for compensation. Others are not, and are said to be too ―remote‖.

What can you recover for?

Assuming that I deliver to you defective goods, under a contract between us, I am liable to you in damages,
usually on the basis of the sum needed to put you in the position in which you would have been if I had delivered
the item contracted for in good condition. But the question of remoteness deals with what items can be taken into
account. Can you, for example, recover for loss of profit or of productivity?

Can you recover any interest charges which you have incurred as a result of my breach?

Can you recover any items of expenditure which you may have incurred as a result of the breach?

Can you recover for loss of enjoyment, or for any form of mental distress?

8.3.2 Remoteness: the rule stated

The rule in Hadley v Baxendale

The rule governing remoteness of damage, as stated in: Hadley v Baxendale (1854) 9 Exch 341 at 354: This case
involved a claim for loss of profit for failure to deliver a mill shaft on time. The loss of profit was held to have
been too remote for the plaintiffs to recover. Loss of profit did not arise naturally from the failure to deliver on
time, since the plaintiffs might have had a spare shaft available. As to the second part of the rule in Hadley v
Baxendale , the plaintiffs could not recover lost profit under this rule since they had not made it clear that loss of
profit would result from any delay.

“Where two parties have made a contract which one of them has broken, the damages which the other party
ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered
either arising naturally, according to the usual course of things from such breach of contract, or such as may
reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as
the probable result of the breach of it.”

per Alderson B.

There are therefore two limbs of recovery under Hadley v Baxendale :

1. Damages which may ‗fairly and reasonably be considered either arising naturally according to the usual course
of things...

2. Damages which ‗may reasonably be supposed to have been in the contemplation of both parties, at the time of
the contract, as the probable result of the breach.

Victoria Laundry v Newman Industries

Damages were awarded for loss of profit in:

Victoria Laundry v Newman Industries Ltd [1949] 2 KB 528.

It was clear to D, who were to sell and deliver to P a boiler, that it was needed for immediate use, and that profits
would be lost if it was not delivered on time.

However, although the claim for the normal profits which the plaintiffs would have earned was allowed, the
claim which the plaintiffs made for loss of exceptional profits which would have been earned in special dyeing
contracts was disallowed, and profits at the normal rate were awarded for these contracts. This may be seen as an
application of the second part of the rule in Hadley v Baxendale .

Asquith LJ re-stated the principles

(1) “It is well settled that the governing purpose of damages is to put the party whose rights have been violated
in the same position, so far as money can do so, as if his rights have been observed. This purpose, if relentlessly
pursued, would provide him with a complete indemnity for all loss de facto arising from a particular breach,
however improbable, however unpredictable. This in contract at least is recognised as too harsh a rule, hence:

(2) In cases of breach of contract the aggrieved party is only entitled to recover such part of the loss actually
resulting as was, at the time of the contract, reasonably foreseeable as liable to result from the breach.

(3) What was at the time reasonably foreseeable, depends on the knowledge then possessed by the parties or, at
all events, by the party who later commits the breach.

(4) For this purpose knowledge ―possessed‖ is of two kinds – one imputed, the other actual. Everyone, as a
reasonable person, is taken to know ―the ordinary course of things‖ and consequently what loss is liable to result
from a breach of that ordinary course. This is the subject matter of the ―first rule‖ in Hadley v Baxendale , but to
this knowledge, which the contract breaker is assumed to possess, whether he actually possesses it or not, there
may have to be added in a particular case knowledge which he actually possesses of special circumstances
outside ―the ordinary course of things‖, of such a kind that a breach in those special circumstances would be
liable to cause more loss. Such a case attracts the operation of the ―second rule‖ so as to make the additional loss
recoverable.
(5) In order to make the contract breaker liable under either rule it is not necessary that he should actually have
asked himself, ―What loss is liable to result from the breach?‖ As has often been pointed out, parties at the time
of contracting contemplate, not the breach of the contract, but its performance. It suffices that, if he had
considered the question, he would as a reasonable man, have concluded that the loss in question was liable to
result.

(6) Nor, finally, to make a particular loss recoverable, need it be proved that on a given state of knowledge, the
defendant could, as a reasonable man, foresee that a breach must necessarily result in that loss. It is enough if he
could foresee that it was likely to so result.

8.3.3 Refinement of the rule: The Heron II

The Heron II [1969] 1 AC 350,

Damages were awarded for loss of profits, on the basis that although the appellant, a ship owner, did not know
that the respondent intended to sell a cargo of sugar immediately on its arrival, nevertheless the appellant knew
that the respondent was a sugar merchant, and should have contemplated some financial loss as a result of a
shipment of sugar arriving nine days later. This is an example of the first part of the rule in Hadley v Baxendale .

See also: H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791.

The members of the Judicial Committee of the House of Lords in this case came to no general consensus on
remoteness, indicating a reticence to use the word ‗foreseeable' but forward a number of formulations.

“It is clear that on the one hand the test of foreseeability as laid down in the case of tort is not the test for breach
of contract; nor on the other hand must the loser establish that the loss was a near certainty or odds-on
probability. I am content to adopt as the test a „real danger' or a „serious possibility'. There may be a shade of
difference between these two phrases, but the assessment of damages is not an exact science and what to one
judge or jury will appear a real danger may appear to another judge or jury as a serious possibility.”

per Lord Upjohn.

Lord Morris ‗Not unlikely to occur' or ‗liable to result'

Lord Hodson ‗liable to result'

Lord Reid ‗not unlikely'

8.3.4 Hadley v Baxendale applied

It would seem, from Heron II, that a higher degree of foreseeability is required to satisfy the test of remoteness in
contract than in tort.

The rule requires the type of damage sustained to be foreseeable. If the type is foreseen the defendant is liable for
all damage of that type, even though it may be far greater in extent than was envisaged – subject always, to the
duty to mitigate, which may lessen the loss sustained. (Infra)

H Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791

D supplied a pig food storage hopper to the P, failing, in breach of contract, to provide adequate ventilation
resulting in the food going mouldy and the pigs thereby dying from a rare intestinal disease. D were held liable
for the loss of the pigs.

All the members of the Court of Appeal upheld the trial judge's order that the damages should be assessed for the
value of the pigs that had died, the plaintiffs expenses in dealing with the infection and ―loss of sales and
turnover‖. Lord Denning M.R. considered that the higher degree of foreseeability set out in Heron II only applied
when the plaintiff's claim was for financial loss, where his claim was for physical damage the test of remoteness
was the same in contract as in tort. Orr and Scarman LJJ took the view that “there neither was nor should be any
distinction between financial loss and physical damage for the purpose of remoteness. Their decision in favour of
the plaintiffs was based on the view that the test of remoteness laid down in The Heron II was satisfied as the
defendants could have contemplated a „serious possibility' that the pigs might have become ill as a result of the
defect in the hopper”.(Treitel, The Law of Contract)

Wikipedia note: Court of Appeal all held that the loss was not too remote. But the majority, Scarman LJ and Orr
LJ held that the type of loss rather than the actual loss is relevant when applying the contract remoteness test.
Scarman LJ agreed that it would be absurd if the test generally was different in contract or tort – just because of
the cause of action.

Lord Denning MR (dissenting on the reasoning) would have held that a distinction should be drawn in contract
between loss of profit and physical damage. He relied on Hart and Honore to say that a distinction between
economic loss and physical damage is ‗emerging' in contract, like in tort. For economic losses, it should have
been foreseen as a ‗serious possibility'. For physical damage, there should be compensation if there is only a
‗slight possibility'.

A contract breaker is liable if the loss occurs in the ordinary course of events as defined by Heron II

Treitel observes that on this ground a person:

―who agrees to supply or repair an obviously profit-earning thing is liable for loss of profits resulting from delay
(1) that a seller of poisonous cattle food is liable for the loss of the cattle to which it is fed (2) that a merchant
who sells defective seed to a farmer is liable for the loss of the expected crop (3), that a supplier of defective
components to a manufacturer is liable for loss of business suffered by the latter when customers dissatisfied
with the end product do not replace repeat orders (4)......‖

(1) Fletcher v Tayleur (1855) 17 CB 21

(2) Pinnock Bros v Lewis & Peat Ltd [1923] 1 KB 690

(3) George Mitchell (Chesterhall) Ltd v Finney Lock Seeds [1983] 2 AC 803

(4) GKN Centrax Gears Ltd v Matbro Ltd [1976] 2 Lloyd's Rep 555

Treitel, Law of Contract

A contract breaker is not liable for loss caused by special circumstances simply because he knows about it.

Liability depends on some knowledge and acceptance by one party of the purpose and intention of the other in
entering the contract, although that acceptance does not need to be explicit.

See the discussion of Horne v Midland Railway (1873) in Treitel Law of Contract

8.3.5 The ‗Reasonable Contemplation' test is a test for remoteness not of quantification

The test establishes whether a contract breaker is liable for the loss. It does not determine the extent of that
liability. The measure of damages is considered below.

8.3.6 Interest

Interest and financing charges may be awarded as damages under the principles arising from Hadley v
Baxendale. As long as the possibility that the plaintiff would incur such charges as a result of the breach of
contract was within the contemplation of the parties, damages may be awarded under this heading.

Bacon v Cooper (Metals) Ltd [1982] 1 All ER 397

D sold and delivered to the plaintiff a quantity of scrap metal. The metal was intended to be reduced to
fragmentised scrap steel by the plaintiff, who used a machine called a fragmentiser for this purpose. Some of the
metal sold was not of the quality contracted for, and it seriously damaged the fragmentiser, which required
repairs. The plaintiff sued for:

£47,259 for the cost of the repairs;

and,

£21,911 for loss of profit during the period

when the machine could not be used.

Of the above two heads of claim, the £47,259 included £2,149 in respect of finance charges which the defendant
disputed liability to pay. Cantley J stated:

―What was the plaintiff's situation? He needed to have some money under the existing hire-purchase agreement
for the fragmentiser ... I hold that the plaintiff acted entirely reasonably in entering into the new hire-purchase
agreement and that the sum of £2,149 is recoverable as damages.‖

Hayes v Dodd [1990] 2 All ER 815

Interest on a sum borrowed from a bank to finance a purchase of property was one of a number of heads of
damage allowed by the court, in awarding damages for breach of contract. The heads of damages will be set out
after a brief summary of the facts of the case, and it will be clear that interest as a head of claim for damages are
of course a different thing from interest upon damages.

The plaintiffs, Mr and Mrs Hayes, wished to expand their motor repair business, and to buy a property in
Tenterden, consisting of a leasehold workshop and yard, and a freehold maisonette. The maisonette had to be
included in the sale. Access to the workshop was by a tunnel from the main street, which was narrow and
inconvenient, and by a rear access. The rear access depended upon a right of way which the defendants, solicitors
acting in the purchase for the plaintiffs, stated was secure. Shortly after completion, the right of way was blocked
by an adjoining owner, and was not in fact a right of way at all. The defendants had apparently received copies of
letters before the sale took place, showing that the right of way was asserted by the owners of the land at the rear
not to exist.

The plaintiffs had to give up trying to run the business, and made various endeavours to sell the property.

Hirst J awarded damages for expenditure thrown away in the purchase of the business, including capital
expenditure and interest; he also awarded other items of expenditure thrown away, and damages for anguish and
vexation, or ―mental distress‖.

In the appeal against the quantum of damages, the table of damages, as re-assessed by the Court of Appeal, read
as follows:

Damages Interest

££

1. Lease of workshop and yard 5,000 3,000

2. Rent 14,875 3,832

3. Rates 2,200 1,100

4. Insurance 1,125 440

5. Bank Interest 32,000 –

6. Redundancy 329.81 200

7. Goodwill 5,000 3,000

8. Travel 1,400 750

9. Loss on disposal of plant 7,561 –

10. Conveyancing costs 4,040 2,400

11. Life Insurance 500 150

12. Various other items 9,360 4,185

The total of damages awarded was £83,390.81, together with a total of £19,057 as interest on those damages.
From this was deducted the sum of £10,400, which represented 80% of the increase in the value of the
maisonette when it was eventually sold by the plaintiffs. (The reason why deduction of 80% of the gain to the
plaintiffs was made, rather than the full amount of the gain, was that the court had only allowed the plaintiffs to
recover 80% of the plaintiff's claim for the interest they had paid on their borrowings from the bank to finance
the purchase. The reason for only allowing 80% was that the judge, Hirst J, had accepted the defendant's
argument that the plaintiffs had paid too much for the property in the first place. The Court of Appeal agreed
with this approach).

Several items which had originally been awarded by Hirst J were disallowed by the Court of Appeal:

(a) Although the plaintiffs made a gain on the sale of the maisonette, they made a loss on disposal of ―plant‖, i.e.
workshop fittings. Hirst J had awarded the sum of £7,561 in this respect, together with interest on this sum. The
Court of Appeal disallowed the interest on this sum, on the ground that that was already covered by the award of
interest on the bank loan. To award it again would be double counting.

(b) Hirst J had awarded £1,500 to each of the plaintiffs for mental distress. This was disallowed by the Court of
Appeal. This issue was one of remoteness of damage, and Staughton LJ approached it with caution, since he felt
that important principles were involved. Indeed he felt that the position might need clarification by the House of
Lords or by the Law Commission.

See: Raphael Wiseman v Virgin Atlantic Airways Ltd [2006] EWHC 1566 (QB) for an example of the difference
between remoteness and causation.

***

8.3.7 Type of loss recoverable

Compensation not punishment

Addis v Gramophone Co Ltd [1909] AC 488

“I have always understood that damages for breach of contract were in the nature of compensation, not
punishment.”

per Lord Atkinson.

Exemplary or punitive damages, which are sometimes available in tort cases, are not available in contract cases.
See however the discussion of AG v Blake [2001] 1 AC 268 above, where the damages were arguably awarded
to punish rather than to compensate.

As a matter of policy certain heads of damage in contract are not recoverable:

Damages to reputation are provided for in tort and cannot usually be claimed in contract. Hurst v Picture
Theatres Ltd [1915] 1 KB 1 – although injury to commercial reputation is recoverable in contract. Anglo-
Continental Holidays v Typaldos Lines [1967] 2 Lloyd's Rep 61

Injury to feelings is not usually recoverable in contract. Addis v Gramophone Co Ltd [1909] AC 488

Mental Distress

Staughton LJ, in Hayes v Dodd [1990] 2 All WR 815 stated that the foreseeability test might not be the correct
test to apply to claims for damages under this head. Instead, he took the view that the issue was one of policy, i.e.
it was for the courts to determine as a matter of policy the classes of case in which damages for mental distress
may be awarded. He noted that in some states of the USA, damages may be awarded for the distress caused by
wrongfully defending an action, but stated that ―there is no such remedy in this country so far as I am aware.‖

Note was taken of Perry v Sidney Phillips & Son [1982] 3 All ER 705, in which the Court of Appeal had
awarded damages for distress, inconvenience and trouble due to defects in a house, which had been overlooked
by a surveyor. However, although Lord Denning MR had awarded damages on the wider grounds of
foreseeability, Kerr LJ had awarded them on the narrower ground of the physical consequences of the damage.
This narrower ground was emphasised by Staughton LJ in Hayes v Dodd .

Staughton LJ also referred to a classification made by Dillon LJ in Bliss v South East Thames Regional Health
Authority (1987) ICR 700, of cases ―...where the contract which has been broken was itself a contract to provide
peace of mind or freedom from distress ...‖ but Staughton LJ added that ―it may be that the class is somewhat
wider than that.‖

Watts v Morrow [1991] 1 WLR 1421

The Court of Appeal reduced a claim for damages for distress in a case of surveyors' negligence.

In Watts v Morrow [1991] 1 W.L.R. 1421, 1445, Bingham L.J. (as he then was) said -

"A contract-breaker is not in general liable for any distress, frustration, anxiety, displeasure, vexation,
tension or aggravation which his breach of contract may cause to the innocent party. This rule is not, I
think, founded on the assumption that such reactions are not foreseeable, which they surely are or may be,
but on considerations of policy."

Contrast Farley v Skinner [2001] UKHL 49; [2002] 2 AC 737

The House of Lords, reversing the Court of Appeal, reinstated an award against a surveyor who had negligently
failed to advise buyers of a property that it was affected by aircraft noise. It was central to the case that the
buyers had specifically asked the surveyor to investigate the property's exposure to aircraft noise.

Wikipedia note

Lord Scott held that if Mr Farley had known about the aircraft noise he would not have bought the property. He
could either claim for being deprived of the contractual benefit ( Ruxley Electronics Ltd v Forsyth ), or he could
claim as having consequential loss on breach of contract ( Watts v Morrow ). He added that if there had been an
appreciable reduction in the house's market value, he could not recover both, which would have been double
recovery. Although £10,000 was ‗on the high side', the value was within the right range.

‗If the cause is no more than disappointment that the contractual obligation has been broken, damages are not
recoverable even if the disappointment has led to a complete mental breakdown. But, if the cause of the
inconvenience or discomfort is a sensory (sight, touch, hearing, smell et) experience, damages can, subject to the
remoteness rules, be recovered.'

Lord Clyde said it was ‗the specific provision relating to peacefulness of the property in respect of the aircraft
noise which makes the present case out of the ordinary'. The predominant object test was dispensed with, so it
was enough that the term broken was known by both parties to have been important (it did not matter whether the
purpose of the contract was to provide peace of mind). So it seems surveyors will not ordinarily be liable when a
house is defective and it causes distress.

See also: Jarvis v Swans Tours Ltd (1973) 1 QB 233

The plaintiff suffered distress and disappointment when a holiday fell well below the expected standard.

See also: Jackson v Horizon Holidays [1975] 1 WLR 1468

***

8.4 The Measure of Damages

8.4.1 The measurement of damages: restitutio in integrum

The principle

In Hayes v Dodd [1990] 2 All ER 815, at 825, Purchas LJ said:

―The measure of damages is that figure which, so far as is practical in the circumstances, achieves the maximum
restitutio in integrum.‖

Harbutt's Plasticine Ltd v Wayne Tank and Pump Co Ltd [1970] 1 All ER 225
P's factory had been destroyed by fire caused by a defective heating system installed by the defendant. In the
claim for damages for breach of contract, it was held that since the P had no option but to rebuild the factory, the
measure of damages was the cost of reinstating the factory. Further, since P had merely replaced the destroyed
building (albeit with a better design), and had not added extra facilities, no credit had to be given for betterment.

See: Measure of Damages. © Daniel Atkinson 2007 29 April 2007

Bacon v Cooper (Metals) Ltd [1982] 1 All ER 397

The supply of metal of the wrong kind to P caused the destruction of the rotor of his fragmentiser. The High
Court awarded the full cost of purchasing a new rotor to P, (as well as interest and other heads of damages
already discussed).

D in this case argued that plaintiff should be made to give credit for the fact that the damaged rotor was almost
halfway through its working life, while it would be replaced with a new one which would last a full 7 years.

Cantley J did not accept this argument, and said that it was not the fault of the plaintiff that he had suddenly to
buy a new rotor: it was entirely the fault of D, and furthermore, P could not have bought a replacement which
was half-used: it had to be a new one.

Both Harbutt's Plasticine Ltd v Wayne Tank & Pump Co Ltd , and Bacon v Cooper (Metals) Ltd , were followed
by the Court of Appeal in:

Dominian Mosaics & Title Co Ltd v Trafalgar Trucking Co Ltd 1989, The Times, March 3.
This case was an action in tort, since there was no contract between the plaintiff and the defendants, but the same
principle of restitutio in integrum was applied, and the plaintiff was entitled, inter alia, to the full cost of
replacing premises and equipment damaged by a fire caused by the defendants. It had been argued that the
correct figure in respect of the equipment was £13,500 which was the acquisition cost, whereas the court
accepted the replacement cost which was £65,000.
A difference between the assessment of damages in this case and that in Hayes v Dodd , is that in Hayes v Dodd ,
the plaintiffs had to give credit for part of the gain made on subsequent sale of the maisonette, whereas in this
case, Dominian did not have to bring later dealings into account, although by selling the premises which it had
acquired to replace the damaged premises, a gain of around £240,000 had been made.

(Readers are invited to consider the difference between the two cases, and why a distinction should be made).

Cost of Cure

For a good illustration of a cost of cure measure being applied see Sunrock Aircraft Corporation Ltd v
Scandinavian Air Systems [2007] EWCA CIV 882

Important note:

When it is either not possible or desirable to award damages measured in that way, a court may award money
damages designed to restore the injured party to the economic position that he or she had occupied at the time the
contract was entered (known as the "reliance measure"), or designed to prevent the breaching party from being
unjustly enriched (" restitution ").

 Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191

 J & H Ritchie Ltd v Lloyd Ltd [2007] UKHL 9

Time for assessing damages

Golden Strait Corporation v Nippon Yusen Kubishika Kaisha [2007] UKHL

Courts generally award damages assessed as at the date the claimant could have mitigated after the breach of
contract

***

8.4.2 The Sale of Goods Act 1979

Overview

Sale of Goods Act 1979

Three sections of this Act may be singled out for particular attention: sections 50, 51 and 53, dealing respectively
with: damages for non-acceptance, damages for non-delivery, and damages for breach of warranty. In each case
the Act states that the measure of damages is the estimated loss directly and naturally resulting in the ordinary
course of events from the breach of contract. (Section 54 of the Act preserves the law as to special damages by
stating that ―Nothing in this Act affects the right of the buyer or the seller to recover interest or special damages
in any case where by law interest or special damages may be recoverable ...).

Sections 50 and 51 contain a rule for measuring damages for non-acceptance and for non-delivery where there is
an ―available market‖ for the goods. The measure is ―prima facie to be ascertained by the difference between the
contract price and the market or current price at the time when the goods ought to have been accepted or
delivered, in the case of non-delivery or if no such time was fixed, at the time of the refusal to accept or deliver.

The measure is ―prima facie‖, so it is possible for the courts to adopt different methods of measurement where
the circumstances require. See for example Thompson v Robinson (1955) 1 All ER 154: lost profit recovered for
non-acceptance of a car.

See also: Shearson Lehman v Maclaine Watson (No 2) [1990] 3 All ER 723:

Damages for non-acceptance of 8,000 tonnes of tin; problem as to what was the market price, since this would
probably be affected by the size of the re-sale. Held: re-sale could be spread over a few days to avoid distortion.
Section 53 of The Sale of Goods Act 1979

The general rule for assessing damages is under s.53(2): the estimated loss directly and naturally resulting in the
ordinary course of events from the breach of warranty. The detailed measure of such damages, under s.53(3) is
prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they
would have had if they had fulfilled the warranty.

The rule under s.53(3) is only prima facie: see Naughton v O'Callaghan [1990] 3 All ER 191. Racehorse
misdescribed as to pedigree. Sold for 26,000 gns. If all facts had been known at time of delivery to the buyer, the
horse would have fetched 23,500 gns. So applying s.53(3), damages would have been 2,500 gns. But the rule is
prima facie, and the High Court in fact awarded damages on the basis of the difference between the sale price
and the value of the horse after the facts about it were discovered, by which time it had run badly and was worth
only £1,500.

( NB This case was also decided on the basis of misrepresentation, which gave the same result, the measure
being simply the actual loss resulting.)

8.4.3 The seller's action for the price

The seller may sue for the price where the property in the goods has passed (s.49(1) SOGA 1979, where the price
is payable on a day certain irrespective of whether the property in the goods has passed or not (s.49(2) SOGA
1979) or where there is an express provision in the contract allowing the seller to sue for the price where the
property in the goods has not passed.

S. 49(1)(2) SOGA 1979

―(1) Where under a contract of sale, the property in the goods has passed to the buyer, and he wrongfully neglects
or refuses to pay for the goods according to the terms of the contract, the seller may maintain an action against
him for the price of the goods.

(2) Where, under a contract of sale, the price is payable on a day certain irrespective of delivery and the buyer
wrongfully neglects or refuses to pay the price, the seller may maintain an action for the price, although the
property in the goods has not passed, and the goods have not been appropriated to the contract.‖

8.4.4 The action for damages for non-acceptance of the goods

S. 50 (1)(2)(3) SOGA 1979

―(1) Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an
action against him for damages for non-acceptance.

(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of
events, from the buyer's breach of contract.

(3) Where there is an available market for the goods in question the measure of damages is prima facie to be
ascertained by the difference between the contract price and the market or current price at the time or times when
the goods ought to have been accepted or (if no time was fixed for acceptance) at the time of the refusal to
accept.‖

(a) General principles: The general principles applicable to damages claims can be summarised as follows:

1. Breaches of contract are actionable per se

2. The object of damages is to compensate

3. There is a requirement to mitigate loss

4. Damages can be recovered only for loss sustained

5. The loss must be caused by the breach.

(b) Mitigation: The distinction between breach and anticipatory breach is fundamental.

Even where there is no available market, damages will be assessed on the basis that the seller should have acted
reasonably to mitigate his loss.

Assessing damages in case of anticipatory breach may be more difficult, because the rule that damages should be
assessed at time of ‗refusal to accept' may not apply. The mitigation rule still applies.

„The seller cannot advance the relevant date for ascertaining the market price merely by exercising his option to
accept the anticipatory breach: a lower market price at the time of repudiation should not increase the
damages... But the doctrine of mitigation may over-ride this rule. If the seller does accept the buyer's
anticipatory repudiation, his damages will be assessed on the basis that he took reasonable steps to mitigate his
loss.'

Benjamin, Sale of Goods , 6th Edition, 16-077

See also: Gebruder Metelman v NBR [1984] 1 Lloyd's Rep 614

(c) Calculation of damages: is laid down in s.50(3)(2)

s. 50(3) Meaning of „available market'.

A place where goods can be sold

Dunkirk Colliery v Lever (1878) 9 Ch D 20

Thompson v Robinson Gunmakers Ltd [1955] Ch 177

Charter v Sullivan [1957] 1 All ER 809

Jenkins LJ considered that since there was a distinction between contract price and market price there was only
an available market where the market price was regulated by supply and demand. This would exclude markets
where the goods were sold by reference to a fixed price in which case the available market rule is inappropriate
and the question becomes one simply of the amount of lost profit made on the lost sale. Where there is no
available market the measure will generally be the difference between the sale price and the value of the goods to
the seller at the time of breach.

Harlow & Jones v Panex International [1967] 2 Lloyd's Rep 509

The measure under s.50(3) is only a prima facie measure.

The seller plays the market, takes the risk and sells at a higher price than the market price.

The duty to mitigate precludes the situation where the seller delays re-selling after breach and attempts to claim
damages based on the market price fall subsequently.

The converse is more interesting. What is the position if the seller does not sell, holds onto the goods and sells at
a higher than market price at a later stage. In the circumstance it is submitted that the seller will still be able to
claim the difference between the contract price and the market price at the date of breach – and retain any gain he
made as a result of taking the risk of market fluctuation.

Campbell Mostyn Ltd v Barnett Trading Co [1954] 1 Lloyd's Rep 65.

(d) No available market: the seller must claim under s. 50(2). The seller's loss is the difference between the
contract price and the value of the goods to the seller at the date of breach.

The principles of remoteness of damage are well known and are not rehearsed

The Heron II [1969] 1 AC 350

(e) Special Loss: If the seller sustains consequential loss this may recovered under the two limbs in Hadley v
Baxendale. This is provided for in s. 54.

***

8.4.5 Remedies of the buyer

Express terms

(a) Condition

The buyer enjoys the election to affirm the contract and claim damages or accept the repudiatory breach, treat the
contract as at an end and claim damages.

(b) Innominate Term

Ex Post Consequences of Breach Test

If the breach is serious the court will treat the breach as a breach of condition. If the breach is not serious the
court will treat the breach as a breach of warranty.

(c) Warranty

The remedy for breach of warranty is damages.

Breach of Implied Term

Buyer has Not Accepted Goods (ss.34/35 11(4))

1. Rejection (See s.36)

2. Money Back [Q/Ct; Restitution] s.54

3. Damages: Non Delivery s.51

4. Damages for breach of Warranty s.53

5. Damages for special loss

Buyer has Accepted Goods (s.11(4))

1. Cannot Reject (s.11(4))

2. Damages: for breach of Warranty s.53

The buyer may bring action for Specific Performance s.52

Misrepresentation
Fraudulent – Rescission & Damages

Negligent – Rescission & Damages

Innocent – Rescission OR Damages

Negligence

Donoghue v Stevenson

Junior Books v The Veitchi Co Ltd [1983] 1 AC 520

Simaan General Contracting Co v Pilkington Glass Ltd (No. 2) [1988] 2 WLR 761

***

8.4.5 Damages for non-delivery

s. 51, (1)(2)(3) SOGA 1979

―(1) Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may maintain an
action against the seller for damages for non-delivery.

(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of
events, from the seller's breach of contract.

(3) Where there is an available market for the goods in question the measure of damages is prima facie to be
ascertained by the difference between the contract price and the market or current price of the goods at the time
or times when they ought to have been delivered or (if no time was fixed) then at the time of the refusal to
deliver.‖

Similar points as arose in connection with the seller's claim under s.50 apply in the context of the buyer's remedy
under s.51. These are not rehearsed here.

Loss of profits may be claimed under the rule in Hall v Pim where the buyer is able to prove that the seller knew
at the time of contracting that the buyer definitely intended to resell – (the identical items (?) is this the point of
distinction between Hall v Pim and Williams v Agius [1914] AC 510?) While there is no provision in the statute
regarding delay in delivery the measure of damages, if the buyer accepts late delivery will be the difference
between the contract price and the value of the goods at the time of late delivery. The buyer will, of course, have
to pay the price.

***

8.4.6 Damages for breach of warranty

s. 53

―(1) Where there is a breach of warranty by the seller, or where the buyer elects (or is compelled) to treat any
breach of condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such
breach of warranty entitled to reject the goods but he may – (a) set up against the seller the breach of warranty in
diminution or extinction of the price, or (b) maintain an action against the seller for damages for breach of
warranty.

(2) The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the
ordinary course of events, from the breach of warranty.
(3) In the case of breach of warranty of quality such loss is prima facie the difference between the value of the
goods at the time of delivery to the buyer and the value they would have had if they had fulfilled the warranty.

(4) The fact that the buyer has set up the breach of warranty in diminution or extinction of the price does not
prevent him from maintaining an action for the same breach of warranty if he has suffered further damage.‖

***

8.4.7 Anticipatory breach and its effect upon the measure of damages

Basically ss.50 and 51 of the Sale of Goods Act 1979 apply to cases of anticipatory breach as they do to other
breaches amounting to non-acceptance or non-delivery. But there are differences, since the innocent party has a
choice as to whether to accept the repudiation of the other party, and to sue for damages immediately, or to refuse
to accept the repudiation, and to continue to treat the other party as being bound by the contract. If the former
course of action is chosen, the duty to mitigate arises, whereas if the latter is chosen, the duty to mitigate does not
arise until after the due date for delivery. Where the duty to mitigate does arise, it overrides the prima facie rules
of ss.50 and 51.

Tai Hing Cotton Mill Ltd v Kamsing Knitting Factory (1979) AC 91

If no fixed delivery date, and delivery is to be within a reasonable time, then section 51(3) does not apply to
cases of anticipatory breach by the seller, and damages are to be assessed in accordance with section 51(2).

8.4.8 The ―breach date‖ rule: assessment as at the time of the breach

Damages for breach of contract have usually been assessed as at the time when the contract was broken. So if the
contract was broken in 1970, and, as happened, in the next few years the value of sterling changed, the change in
value after the accrual of the cause of action would be ignored.

In Miliangos v George Frank (Textiles) Ltd (1976) AC 443, the House of Lords held that where appropriate,
judgment could be given in a foreign currency. In this case a Swiss citizen sold a quantity of polyester yarn to an
English company, and the contract price was stipulated in Swiss francs. The contract also provided for payment
in Switzerland, and for the contract to be governed by Swiss law. After delivery, the buyer defaulted as to
payment, and an action for the price was brought in England. Between the date when payment was due, and the
date of the hearing, three years later, sterling had devalued against the Swiss franc, and the plaintiff sought
judgment in Swiss francs. In sterling terms the contract price was £42,000, but by the time of the hearing, the
sum of £60,000 would have been required to give the same value in Swiss francs. The House of Lords held that
judgment for the plaintiff could be entered in Swiss francs or the sterling equivalent at the time of payment.

It will be noted that this was an action for the price, rather than a claim for damages.

However, courts have subsequently been prepared to award damages in a foreign currency, and moreover, this
has been done even in cases governed by English law: Jean Kraut AG v Albany Fabrics Ltd [1977] QB 182;

George Veflings Rederi A/S v President of India [1978] 1 WLR 982

***

8.5 The Duty to Mitigate Loss

The duty is well known. In Harbutt's Plasticine Ltd v Wayne Tank and Pump Co Ltd [1970] 1 All ER 225, at
240, Widgery LJ stated:

―In my opinion each case depends upon its own facts, it being remembered, first, that the purpose of the award of
damages is to restore the plaintiff to his position before the loss occurred, and secondly, that the plaintiff must act
reasonably to mitigate his loss.‖
The duty to mitigate is only a duty to act reasonably to keep losses from becoming higher than is necessary.
Modern interpretation of the rule does not impose a strict duty to take whichever steps are calculated to cause the
minimum amount of loss.

Banco De Portugal v Waterlow & Sons Ltd (1932) AC 452,

―The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has
acted reasonably in the adoption of remedial measures, and he will not be disentitled to recover the cost of such
measures merely because the party in breach can suggest that other measures less burdensome to him might have
been taken‖.

per Lord Macmillan at 506:

The above was applied in: Bacon v Cooper (Metals) Ltd [1982] 1 All ER 397.

Hire purchase charges for the purchase of a new rotor, to replace a damaged rotor, were high, perhaps, compared
to others, but the plaintiff had not acted unreasonably in the circumstances in incurring these charges.

See also Hayes v Dodd (1990): plaintiffs had some delay in selling the properties, because they tried
unsuccessfully to sell both properties together. Only later did they sell them separately. This meant that the figure
for rent was higher than it might have been. However, it was held that all the rent was recoverable as damages by
the plaintiffs, as they had acted reasonably.

See also James Finlay & Co Ltd v Kwik Hoo Tong (1929) 1 KB 400.

8.5.1 Contributory negligence and damages for breach of contract

This raises questions of great difficulty, and courts have sometimes stated that the defence of contributory
negligence is not available when a claim is made for damages for breach of contract.

See Basildon District Council v JE Lesser (Properties) Ltd (1985) QB 839

The matter turns upon the interpretation of the Law Reform (Contributory Negligence) Act 1945 , and the
question of whether or not the ―fault‖ referred to in that act is exclusively tortious. It has been held that the
defence of contributory negligence can be raised where the defendant's liability is in tort as well as in contract:
Forsikringsaktieselskapet Vesta v Butcher [1988] 2 All ER 43.

There are also other possible approaches to the issue: see Lexmead v Lewis (1982) AC 225.

8.6 The Effect of Provisions for Liquidated Damages in Contracts

Genuine pre-estimates of loss are permissible in contracts; penalties are not.

Kemble v Farren (1829) 6 Bing 141

Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79

The House of Lords summarised the rules for guidance as to the distinction between a penalty and a provision for
liquidated damages:

1. A sum is a penalty if it is excessive in comparison with the greatest loss which could flow from the breach.

2. A clause providing for payment of a greater sum, on failure to pay a certain sum is a penalty.

(However, later cases have shown that clauses providing for interest on sums due are acceptable; clauses
providing for damages for breach of contract on failure to pay sums due may be acceptable or may fall into the
category of penalties, depending upon drafting techniques: Lombard North Central PLC v Butterworth [1987]
QB 527.)

3. If the sum stipulated is payable on a single event, it is liquidated damages, subject to rules 1 and 2 above. If it
is payable on several events of different types, or where the damage is of different degrees, there is a
presumption that it is a penalty.

The fact that the expression ―liquidated damages‖ has been used, or indeed the word ―penalty‖, is not conclusive,
although it must be regarded as an indication of the intentions of the parties.

Liquidated damages clauses are used in most standard form building and engineering contracts today. See JCT; I
Mech.E; IEE; ICE, I Chem E, GC Works.

The test is one of presumed intention of the parties at the time of making the contract: see Lord Diplock in Photo
Production Ltd v Securicor Ltd [1980] AC 827:

―Parties are free to agree to whatever exclusion or modification of all types of obligations as they please within
the limits that the agreement must retain the legal characteristics of a contract and must not offend against the
equitable rule against penalties; that is to say it must not impose upon the breaker of a primary obligation a
general secondary obligation to pay to the other party a sum of money which is manifestly intended to be in
excess of the amount which would fully compensate the other party for the loss sustained by him in consequence
of the breach of the primary obligation.‖

8.7 Contractual Terms Limiting Liability

Contractual terms limiting liability are subject to rules governing the precise construction of those terms, and to
the Unfair Contract Terms Act 1977 .

P Monetary limits upon liability:

George Mitchell (Chesterhall) Ltd v Finney Lock Seeds [1983] 2 AC 803

P Time limits upon liability for breach of contract:

RW Green Ltd v Cade Bros Farm [1978] Lloyd's Rep 602

Rees-Hough Ltd v Redland Reinforced Plastics Ltd (1983)

P Clauses purporting to exclude particular types of loss or damages which would otherwise be payable in respect
of breach of contract.

Clauses in contracts may exclude the liability of one of the parties for ―indirect‖ or ―consequential‖ loss or
damage. Where the expression is not defined by the contract, the dividing line between the liability which is
excluded, and the liability which is not, is often difficult to draw.

Croudace Construction Ltd v Cawoods Concrete Products Ltd (1978) 2 Lloyd's Rep 55 Court of Appeal HELD
that the word ―consequential‖ in a clause in a particular contract excluding liability for ―any consequential loss or
damage caused or arising from late supply fault or failure or defect ...‖ did not cover (and therefore did not
effectively exclude liability for) any loss which directly and naturally resulted in the ordinary course of events
from late delivery.

However, it is clear from the judgment of Megaw LJ in this case that the word ―consequential‖ may bear
different meanings, and that much depends upon the way that the particular terms of the contract are drafted.

8.8 The Effect of Tax Liability Upon Damages

British Transport Commission v Gourley [1956] AC 185:

In assessing damages, account may have to be taken of the plaintiff's liability to taxation, for example in
assessing damages for loss of earnings or income or profits. The above case was a tort case, but the same
principle has been applied to claims in contract: Beach v Reed Corrugated Cases Ltd [1956] 1 WLR 807:
wrongful dismissal.

Much depends upon the extent to which the damages would be taxable in the hands of the plaintiff: double
taxation to be avoided. However, the system is inexact: see Beach v Reed Corrugated Cases : method of taking
into account liability to higher rates of tax.

8.9 Remedies provided by legislation

Many pieces of consumer legislation include remedies, in some cases refunds and/or specified sums in
compensation, in specific contracts. Many of these implement EU legislation. Examples include the employment
legislation, Consumer Protection Act 1974, Consumer Protection Act 1987, Fair Trading Act 1973, Package
Travel Regulations 1992, Consumer Protection (Cancellation of Contracts Concluded away from Business
Premises) Regulations 1987, Electronic Regulations 2002, Denied Boarding Compensation Regulation 2004.

8.10 Valuation of property on breach

Platform Funding Ltd v Bank of Scotland plc (formerly Halifax plc) [Court of Appeal] [2009] Contract - Breach
- Valuation of property - obligation on valuer that of reasonable professional - clear language were required to
impose an obligation stricter than that of reasonable care in a particular case

9. Vitiating Factors / Misrepresentation

Misrepresentation Act 1967

9.1 Vitiating Factors

9.1.1 Introduction

Even where it is established that the essential elements of a legally binding contract are present, and the terms
can clearly be identified, the agreement may not be legally enforceable because of the presence of some vitiating
factor. Thus, where fraud is present or a fundamental mistake as to the contract has been made by one or both
parties, the contract may be either totally void or voidable at the option of the innocent party.

The main vitiating factors which we will examine are Misrepresentation, Duress and Undue Influence, Mistake
and Illegality (with particular reference to Restraints of Trade).

***

9.2 Misrepresentation

9.2.1 Introduction

Introductory note

The law of misrepresentation is an amalgam of common law and statute. Before the Misrepresentation Act 1967
the law was already complex because Equity provided the remedy of rescission for ‗innocent' misrepresentation
(in effect, any misrepresentation). Courts of Law (as distinct from Courts of Equity) provided for damages and in
some cases rescission for fraudulent misrepresentation. The law was adjusted by the Misrepresentation Act 1967
.

A further complicating factor is that an action for damages for fraudulent misrepresentation, is part of the law of
tort, where it is also called ‗deceit', and cases where the fraudulent misrepresentation has induced a contract can
be regarded as a specialized subset of the tort of fraudulent misrepresentation. In some cases negligent
misrepresentation inducing a contract will also amount to the tort of negligent mis-statement.
There is a clear exposition of the structure of the law in the chapter on Misrepresentation in Chitty on Contract ,
29th edition (for which edition the relevant chapter was completely rewritten).

Definition

An action for misrepresentation is the remedy for a party who has entered into a contract in reliance on a false
statement (representation) of fact by the other party but the statement has not become incorporated in the contract
as a term, i.e. the statement is not part of the bargain that the parties have made. Where the statement has become
a term the remedy will be an action for breach of contract.

Example

X, wishing to buy a used car privately, enters into negotiations with Y who has advertised his car for sale. The
odometer of the vehicle in question is turned back to nought. In the course of negotiations Y makes a number of
statements including a (false) statement that the car has a very low mileage. A few days later X returns and
agrees to buy the car. The written note of the transactions makes no statement as to the mileage of the car.

The remedy in this instance will be an action for misrepresentation and not an action for breach of contract.

Where there is an actionable misrepresentation it renders the contract voidable, i.e. valid until avoided at the
instance of the innocent party.

We shall deal first with the distinction between representations and terms, then the concept of actionable
misrepresentation and the remedies available, and conclude by looking at clauses which purport to exclude
liability for misrepresentation.

9.2.2 Representations and terms

A reminder

Statements made by the parties in the course of negotiations leading up to the formation of a contract are
classified as either representations or terms.

Whether a statement is a representation or a term is primarily a question of intention. If the parties have indicated
that a statement is to be regarded as a term, the court will implement their intention. In other cases, the following
guidelines may be applied:

Manner and timing of statement

A statement is not likely to be a term if the person making the statement asks the other party to check or verify it,
as where the seller of a boat stated that it was sound but asked the buyer to have it surveyed; Ecay v Godfrey
(1947) 80LL LR 286. If the statement is made with the intention of preventing the other party from finding a
defect, and succeeds in this, the court may consider it to be a term. Thus in Schawel v Reade (1913) 2 IR 64, the
vendor of a horse said to the buyer, ―you need not look for anything, the horse is perfectly sound‖ and the House
of Lords held that the statement was a term.

Where there is a distinct interval of time between the making of the statement and the conclusion of the contract,
this may indicate that the parties do not intend the statement to be a term; Routledge v McKay [1954] 1 WLR
615.

Importance of statement

A statement is likely to be a term if it is such that the injured party would not have entered the contract had it not
been made.

Bannerman v White (1861) 10 CB NS 844

A prospective purchaser of hops asked whether they had been treated with sulphur, adding that if they had, he
would not even trouble to ask the price. The seller's (erroneous) statement that sulphur had not been used was
held to be a term.

Special knowledge and skill

Where one of the parties possesses superior knowledge and skill relating to the subject matter, the court may
conclude that any statement made by such a party is a term.

Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623,
A car dealer gave a false statement as to the mileage of a Bentley. The Court of Appeal held the dealer's
statement to be a term, thus distinguishing Oscar Chess Ltd v Williams [1957] 1 WLR 370 where, on a part-
exchange deal, a private car owner falsely (but honestly) stated the age of the car to the dealer. The statement was
held to be a representation; the dealer was in at least as strong a position to verify the truth of the statement.

See: The Judgment of Lord Justice Denning (as he then was) in Oscar Chess v Williams

The crucial question is: was it a binding promise or only an innocent misrepresentation? The technical distinction
between a "condition" and a "warranty" is quite immaterial in the case, because it is far too late for the buyer to
reject the car. He can at best only claim damages. The material distinction here is between a statement which is a
term of the contract and a statement which is only an innocent misrepresentation. This distinction is beet
expressed by the ruling of Lord Holt, "Was it intended as a warranty or not?", using the word warranty there in
its ordinary English meaning: because it gives the exact shade of meaning that is required. It is something to
which a man must be taken to bind himself.

In applying Lord Holt's test, however, some misunderstanding has arisen by the use of the word "intended". It is
sums times supposed that the tribunal must look into the minds of tae parties to see what they themselves
intended. That is a mistake.

Lord Moulton made it quite clear that "The intention of the parties can only be deduced from the totality of the
evidence". The question whether a warranty was intended depends on the conduct of the parties, on their words
and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty
was intended, that will suffice. And this, when the facts are not in dispute, is a question of law. That is shown by
Heilbut v. Buckleton itself, where the House of Lords upset the finding by a jury of a warranty.

It is instructive to take some recent instances to show how the Courts have approached this question. When the
seller states a fact which is or should be within his own knowledge and of which the buyer is ignorant, intending
that the buyer should act on it and he does so, it is easy to infer a warranty. See Couchman v. Hill (1947 King's
Bench, page 554) where the farmer stated that the heifer was unserved and Harling v. Eddy (1951, Volume 2,
King's Bench, page 739) where he stated that there was nothing wrong with her. So also if he makes a promise
about something which is or should be within his own control. See Birch v. Paramount Estates Ltd. decided on
2nd. October 1956 in this Court, where the seller stated that the house would be as good as the show house. But
if the seller, when he states a fact, makes it clear that he has no knowledge of his own but has got his information
elsewhere, and is merely passing it on, it is not so easy to imply a warranty. Such a case was Routledge v.
McKay (1954, Volume 1, Weekly Law Reports at page 636) where the seller "stated that it was a 1942 model
and pointed to the corroboration found in the boon", and it was held that there was no warranty.

Turning now to the present case, much depends on the precise words that were used. If the seller says "I believe
it is a 1948 Morris. Here is the registration book to prove it," there is clearly no warranty. It is a statement of
belief, not a contractual promise. But if the seller says "I guarantee that it is a 1948 Morris. This is borne out by
the registration book, but you need not rely solely on that. I give you my own guarantee that it is," there is clearly
a warranty. The seller is making himself contractually responsible, even though the registration book is wrong.

In this case much reliance was placed by the Judge on the fact that the buyer looked up Glass's Guide and paid
£290 on the footing that it was a 1948 model: but that fact seems to me to be neutral. Both sides believed the car
to have been made in 1948 and in that belief the buyer paid £290. That belief can be just as firmly based on the
buyer's own inspection of the log book as on a contractual warranty by the seller.
Once that fact is put on one side, I ask myself: What is the proper inference from the known facts? It must have
been obvious to both that the seller had himself no personal knowledge of the year when the car was made. He
only became owner after a great number of changes. He must have been relying on the registration book. It is
unlikely that such a person would warrant the year of manufacture. The most he would do would be to state his
belief, and then produce the registration book in verification of it. In these circumstances the intelligent bystander
would, I suggest, say that the seller did not intend to bind himself so as to warrant that it was a 1948 model. If the
seller was asked to pledge himself to it, he would at once have said "I cannot do that. I have only the log-book to
go by, the same as you".

The Judge seems to have thought that there was a difference between written contracts and oral contracts. He
thought that the reason why the buyer failed in Heilbut Symons and Routledge v. McKay was because the sales
were afterwards recorded in writing, and the written contracts contained no reference to the representation. I
agree that was an important factor in those cases. If an oral representation is afterwards recorded in writing, it is
good evidence that it was intended as a warranty.

If it is not put into writing, it is evidence against a warranty being intended. But it is by no means decisive. There
have been many cases where the Courts have found an oral warranty collateral to a written contract such as Birch
v. Paramount Estates. But when the purchase is not recorded in writing at all, it must not be supposed that every
representation made in the course of the dealing is to be treated as a warranty. The question then is still: Was it
intended as a warranty? In the leading case of Chandelor v. Lopus in 1603 a man by word of mouth sold a
precious stone for gold affirming it to be a bezoar stone whereas it was not. The declaration averred that the
seller affirmed it to be a bezoar stone, but did not aver that he warranted it to be so. The declaration was held to
be ill because "the bare affirmation that it was a bezoar stone, without warranting it to be so, is no cause of
action." That has been the law from that day to this and it was emphatically re-affirmed by the House of Lords in
Heilbut Symons v. Buckleton (1913 Appeal Cases at pages 36 and 50)

Statement reduced to writing

Where the agreement has been reduced to a written document, statements appearing in the written contract will
normally be regarded as terms. Subject to the matters discussed above, statements excluded from the written
contract are likely to be regarded as representations. Nevertheless, the court will look to the intention of the
parties to see whether they intended a contract partly written and partly oral; J Evans and Son (Portsmouth) Ltd v
Andrea Merzario Ltd [1976] WLR 1078.

***

9.3 Actionable Misrepresentation

9.3.1 Definition

An actionable misrepresentation is a false statement of fact made during pre-contractual negotiations by one
party which induces the other party to enter into a contract.

False statement of fact

To be actionable, the statement must be one of some specific existing fact or past event. Thus the vendor who
states that ―the drains are in good working order‖ or ―the car's engine has been re-conditioned‖ is clearly making
a false statement of fact which would be actionable if manifestly false.

However, the position is rarely so straightforward and it is necessary to distinguish between statements of fact,
which are actionable if false, and statements of opinion or belief; statements of future conduct or intention;
statements of law and cases of silence or non-disclosure which are not in general actionable.

(i) Statements of opinion or belief

Such statements, if false, do not constitute actionable misrepresentation.

Bisset v Wilkinson [1927] AC 177
The owner of a farm, which had never been used as a sheep farm stated that he believed it would support a
certain number of sheep. The court held the statement to be one of opinion not fact.

Of course, very often, the makers of such statements are dealers or agents who have special knowledge or skill in
relation to the subject-matter, or are in a stronger position to know the truth. Here the court may infer an implied
representation of fact; see, for example Smith v Land and House Property Corporation (1884) 28 Ch D 7 where
the plaintiff put his hotel up for sale declaring that it was let to a ‗most desirable tenant'. The tenant was not
desirable, he was bankrupt! The defendant refused to complete and was sued. The Court of Appeal held that the
plaintiff's statement was a statement of fact, not a mere opinion.

See also Esso Petroleum Co Ltd v Mardon (1976) QB 801. A petrol company offering an inaccurate sales
forecast were liable in damages to thetenant who contracted in reliance on the forecast.

Brown v Raphael [1958] Ch 636 CA

Clearly, many (but not necessarily all) statements made by advertisers are classed as ―mere puff‖ and are not
actionable because they have no factual basis (e.g. ―we take the drama out of a crisis‖).

(ii) Statements of future conduct or intention

A statement by a person as to what he will do in the future is not a statement of fact, e.g. ―over the next five
years, our investment plans amount to five million pounds‖. But even here a person who wilfully lies about his
intentions may be guilty of a (fraudulent) misrepresentation of fact, as illustrated by the following case.

Edgington v Fitzmaurice (1885) 29 Ch D 459

A company raised money from the public by saying that the money would be invested in the expansion of the
business. In fact, the directors' real intention was to use the money to pay off the company's debts. The statement
was held to be a fraudulent misrepresentation of fact. Bowen L J, in a famous judicial pronouncement said:

―There must be a mis-statement of an existing fact; but the state of a man's mind is as much a fact as the state of
his digestion. It is true that it is very difficult to prove what the state of a man's mind at a particular time is, but if
it can be ascertained, it is as much a fact as anything else. A misrepresentation as to the state of a man's mind is,
therefore, a misstatement of fact.‖

The same principle would also apply to a dishonest statement of opinion or belief; see (i) above.

(iii) Statements of law

A false statement as to what the law is, is not an actionable misrepresentation, e.g. ―a valid contract of hire
purchase does not need to be in writing.‖ However, in practice, such bold statements are rarely made and
statements containing legal propositions may be related to the subject matter in such a way that they are really
statements of fact. For example, in Solle v Butcher (1950) 1 KB 671 a statement that a flat was ―new‖ and
therefore not subject to the Rent Acts was held to be fact.

Besides, this principle may have to be called into question since the House of Lords declared, in Kleinwort
Benson v Liverpool City Council [1999] 1 AC 953 that a mistake of law could render a contract void for mistake,
contrary to the traditional view that it could not. A mistake, and misunderstanding induced by misrepresentation,
are similar, so the doctrines of mistake (discussed in a later chapter) and misrepresentation are related.

(iv) Silence or non-disclosure

The general rule here is that to remain silent does not amount to misrepresentation. Thus a commercial traveller
who kept quiet, at a job interview, the fact that he had serious motoring convictions was not guilty of
misrepresentation; Hands v Simpson Fawcett (1928) 44 TLR 295. Obviously, if he had been directly asked
whether he had such convictions and had denied it, he would have been liable.
However, as was stated by Lord Campbell L C in Walkers v Morgan (1861) 3 D F & J 718, although simple
reticence does not amount to a legal wrong ... a single word or a nod or a wink or a shake of the head or a smile
from one party might amount to misrepresentation. And of course it is also possible to have a misrepresentation
by conduct.

Thus to deliberately physically conceal dry rot in a building may amount to misrepresentation.

R v Barnard (1837) 7 C & P 784D, in Oxford, wore a cap and gown in order to persuade shopkeepers to let him
have goods on credit. The fact of appearing so dressed was held to amount to a false pretence; this was a criminal
case but there is no reason to suppose that the same principles would not apply to civil liability.

In Sykes v Taylor-Rose [2004] EWCA Civ 299 the seller who was asked if there was anything the buyer had a
right to know was held not liable in misrepresentation despite the fact that a murder had occurred several years
before. To some extaent - caveat emptor or 'let the buyer beware' still operates.

The rule about silence not being misrepresentation is subject to four exceptions:

1. Statement a half truth

Clearly, a statement that is partial, i.e. fails to present the whole truth, can constitute misrepresentation; Tapp v
Lee (1803) B & P 367. Thus a vendor of property who states that the property has planning permission for
business purposes but fails to add that the permission is a temporary one and is shortly due to expire would be
guilty of misrepresentation.

2. Change of circumstances

A duty of disclosure may arise where the circumstances have changed, i.e. a statement which was true when
made has become false by the time it is acted upon. An example is the following case:

With v O'Flanagan (1936) Ch D 575

A doctor, negotiating the sale of his practice, correctly stated that it produced an income of £2,000 per annum.
However, by the time the contract was signed four months later the practice had declined so that it was worth no
more than £5 per week. It was held that the failure of the vendor to disclose this state of affairs was an actionable
misrepresentation.

3. Contracts uberrimae fidei (of the utmost good faith)

These are a type of contract which require full disclosure of all material facts. The most important example of
such contracts are contracts of insurance.

Norwich Union Insurance Ltd v Meisels [2006] exemplifies the principle.

4. Parties in a fiduciary relationship

Where the parties are in a relationship based on good faith (e.g. principal and agent, solicitor and client, doctor
and patient) a duty of disclosure will arise.

See: Conlon and Another v Simms [2006] EWHC 401 CH

Inducement
To amount to an actionable misrepresentation, a false statement of fact must be material in the sense that it
induces the misrepresentee to enter the contract. If the misrepresentee relies on his own judgment or
investigations, there will be no liability on the part of the misrepresentor, as in the following case:

Attwood v Small (1838) 6 Ch & Fin 232

The vendors of a mine made exaggerated statements as to its earning potential and the purchaser instructed a firm
of expert surveyors to check the veracity of the statements. The surveyors reported that the vendor's statements
were correct. It was held that the vendors were not liable – the purchasers had been induced to enter the contract
by the expert's report and not by the vendors. (The purchasers in such a situation would, of course, have an action
against the surveyors).

A complication to the above principle is introduced by the following case:

Redgrave v Hurd (1881) Ch D 1

P, a solicitor, wished to take a partner and negotiated with Hurd. P told Hurd that the income of the practice was
£300-£400 per annum and Hurd was shown papers purporting to prove this. If Hurd had carefully read these
documents he would have seen that the practice was virtually worthless. He did not read them but the court
nevertheless held the misrepresentation to be actionable, and the plaintiff's action for breach of contract failed. It
made no difference that a prudent purchaser would have discovered the true position.

Obviously, if the plaintiff is unaware of the misrepresentation at the time of the contract there can be no liability (
Horsfall v Thomas (1862) 1 H & C 90) and the position is the same if he is aware of it but it is proved that it
cannot possibly have affected his judgment; Smith v Chadwick (1884) 9 AC 187.

The misrepresentation does not have to be the sole inducing factor.

See: Peekay Internmark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA CIV 386 stated that
the principle in Redgrave v Hurd required actual knowledge and not constructive knowledge.

9.4 Types of Misrepresentation

In the modern law, misrepresentation is classed as fraudulent, negligent or wholly innocent. These are considered
below.

9.4.1 Fraudulent misrepresentation

Definition

―Fraudulent‖ in this sense was defined by Lord Herschell in Derry v Peek (1889) 14 App Cas 337 as a false
statement that is ―made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless as to whether it
be true of false.‖ The essence of fraud is the absence of honest belief; in Derry v Peek , a share prospectus falsely
stated that the company had the right to use mechanical power to draw trams, without explaining that
governmental consent was required for this. In fact, the directors honestly believed that obtaining consent was a
pure formality, although it was ultimately refused. The House of Lords held that there had been no fraudulent
misrepresentation.

Lord Herschell however did point out that though unreasonableness of the grounds of belief is not deceitful, it is
evidence from which deceit may be inferred. There are many cases,

"where the fact that an alleged belief was destitute of all reasonable foundation would suffice of itself to
convince the court that it was not really entertained, and that the representation was a fraudulent one."

On the other hand, there need be no intention to defraud. An intention to deceive (with no intention to cause the
claimant loss) is sufficient.

9.4.2 Negligent misrepresentation

Negligent mis-statement at common law

Until 1963, damages could only be claimed for misrepresentation where it was fraudulent. All non-fraudulent
misrepresentations were classed as ―innocent‖ and damages were not available for such innocent
misrepresentations. In 1963, the House of Lords stated, obiter, in Hedley Byrne Co Ltd v Heller Partners Ltd
[1964] AC 465 that in certain circumstances damages may be recoverable in tort for negligent mis-statement
causing financial loss. The liability depends on a duty of care arising from a ―special relationship‖ between the
parties. It is now clear that a party can claim damages under the principle in Hedley Byrne where a negligent
mis-statement has induced him to enter a contract; Esso Petroleum Co Ltd v Mardon (1976) QB 801. Broadly
speaking, the special relationship will only arise where the maker of the statement possesses knowledge or skill
relevant to the subject matter of the contract and can reasonably foresee that the other party will rely on the
statement.

Negligent misrepresentation under the Misrepresentation Act 1967

Section 2(1) of the Act of 1967 introduced, for the first time, a statutory claim for damages for non-fraudulent
misrepresentation. Section 2(1) provides that where a person has entered a contract after a misrepresentation has
been made to him by another part thereto and a result thereof he has suffered loss, then, if the person making the
misrepresentation would be liable to damages in respect thereof had the misrepresentation been made
fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently,
unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made
that the facts represented were true.

It should be noted that the sub-section assumes all non-fraudulent statements to be negligent and puts the burden
on the maker of the statement to disprove negligence.

Wholly innocent misrepresentation

We have seen that before 1963, the word ―innocent‖ was used to describe all misrepresentations that were not
fraudulent.

In the light of Hedley Byrne and s.2(1) of the Act of 1967, the word innocent may now be used to refer to a
statement made by a person who has reasonable grounds for believing in its truth. To avoid confusion, ―wholly
innocent‖ is a better description.

9.5 Remedies for Misrepresentation

Once it has been established that an actionable misrepresentation has occurred, it is necessary to consider the
remedies available to the injured party. These are:

9.5.1 Rescission

9.5.2 Damages for misrepresentation

9.5.3 Damages in lieu of rescission

9.5.1 Rescission

Rescission means setting aside the contract. This may be done by the injured party applying to the court for an
order rescinding the contract, or the injured party may rescind by notifying the other party or by any other act
indicating repudiation of liability, e.g. notifying the police or a Justice of the Peace.

Rescission is available whether the misrepresentation is fraudulent, negligent or innocent. The effect of rescission
is to terminate the contract ―ab initio‖, i.e. the parties are put back in the position they would have been in had
the contract never been made. In order to achieve this position, an order of rescission may be accompanied by the
court ordering an indemnity. This is a money payment by the misrepresentor which is designed to restore the
parties to their position had the contract not been made. It is limited to payments in respect of obligations
necessarily created by the contract and is to be distinguished from damages.

The distinction is illustrated by the following case:

Whittington v Seale Hayne (1900) 82 LT 49
Poultry breeders took a lease of premises as a result of an innocent misrepresentation that the premises were
sanitary. They were not and the contract was rescinded. It was held that an indemnity could be recovered in
respect of rent, rates and repairs as these were obligations necessarily created by taking the lease. The indemnity
would not however cover loss of business profits, loss of stock and medical expenses etc as these were losses
related to the plaintiffs' business and the plaintiffs were not obliged to carry on a business under the terms of the
contract. Such items, had they been awarded, would have amounted to damages.

An indemnity may still be awarded after the Misrepresentation Act 1967 although it will not be appropriate
where damages are in fact awarded either under that Act or at common law. This means that the remedy remains
particularly significant where the contract is rescinded for a wholly innocent misrepresentation.

There are certain ―bars‖ to rescission, i.e. situations in which a party may lose the right to rescind. These are:

(i) Affirmation

Long v Lloyd (1958)1 WLR 753

Affirmation will occur where the injured party, with full knowledge of the misrepresentation, states (expressly or
impliedly) that he intends to continue with the contract. Thus if X, having bought a vehicle from Y as a result of
a misrepresentation as to its condition, subsequently agrees to share with Y the cost of necessary repairs and
continues to use it, he may be said to have affirmed the contract;

Lapse of time in seeking a remedy may be evidence of affirmation. In the case of non-fraudulent
misrepresentation, rescission may be barred where, even though there is no delay in seeking a remedy once the
plaintiff is aware of the misrepresentation, a period of time has elapsed since the contract.

Leaf v International Galleries [1950] 2 KB 86

P bought a picture as a result of an innocent misrepresentation that it was a Constable. Some five years later he
discovered it was not genuine and the Court of Appeal held that rescission was barred.

(ii) Impossibility of restitution

The injured party will lose the right to rescind if the parties cannot be restored to their original position:

Clarke v Dickson (1858) E B & E 148

The plaintiff invested money in a partnership to exploit a lead mine as a result of a misrepresentation by the
defendants. Later the partnership was in financial difficulty and with the plaintiff's consent it was converted into
a limited company and the partnership capital was converted into shares. On discovery the falsity of the
representations, the plaintiff sought rescission of the contract. It was held that rescission could not be granted
because the partnership was no longer in existence, having been replaced by the company, and it was not possible
to restore the parties to their original positions.

In the above case the property had totally changed in nature but where the property has merely deteriorated the
court may rescind with a cash adjustment; Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218.

(iii) Third party rights

Rescission is not available where an innocent third party has acquired rights to the subject-matter of the contract.
This bar to rescission also operated in Clarke v Dickson above as creditors had acquired rights over the company.

It should be noted that two further bars to rescission were abolished by s.1 Misrepresentation Act 1967 , i.e.
where the misrepresentation had become incorporated as a contractual term, and where, after a non-fraudulent
misrepresentation, the contract had been executed. This should be borne in mind when looking at some of the
older cases.
9.5.2 Damages for misrepresentation

Damages for misrepresentation may be claimed or, as the case may be, awarded under the following heads:

(i) Damages for fraudulent misrepresentation

This is essentially a claim for compensation in the tort of deceit. The object is to restore the plaintiff to the
position he would have been in had there been no misrepresentation, i.e. the amount by which he is out of pocket
by entering the contract. Thus in McC onnel v Wright (1903) 1 Ch 546, the plaintiff was induced to buy shares
by a fraudulent misrepresentation. He recovered the difference between the purchase price and the actual value of
the shares, assessed at the time of the contract.

Damages for breach of contract, on the other hand, are normally on the ―loss of bargain‖ basis i.e. the injured
party is put in the position he would have been in if the contract had not been broken. Thus if in McConnel
(above), the shares had been warranted as having a certain value, then the plaintiff could recover (in an action for
breach of contract) that value. In practice the difference can be striking.

By way of example, suppose the vendor of a business makes certain misrepresentations which, if true, would
mean the business was worth £100,000. The purchaser puts down a deposit of £50,000, the balance to be paid at
a later date. In fact the business is really worth £25,000. Damages on the tortious basis (i.e. for
misrepresentation) would amount to £25,000; on the contractual basis to £75,000.

(ii) Damages for negligent misrepresentation

The plaintiff may elect to claim damages under Hedley Byrne provided the ingredients of the tort are established.
The measure of damages here will be on the same basis as deceit (i.e. the ―out of pocket‖ rule discussed above),
however the remoteness test will be one of reasonable foreseeability.

As an alternative the plaintiff may base claim for damages on s.2(1) of the Misrepresentation Act 1967 . As
explained later, where the plaintiff has entered into a contract, s.2(1) will be the normal remedy, not Hedley
Byrne.

Under s.2(1), the maker of the statement is deemed to have been negligent and bears the burden of disproving
negligence. The wording of the subsection (which is not a model of clarity) appears to introduce what has been
called a ―fiction of fraud‖. This apparently requires the plaintiff to establish that the defendant would have been
liable in damages if the statement had been made fraudulently. The main consequence is that the measure of
damages under s.2(1) is on the same basis as damages for deceit, i.e. the out of pocket rule. Similarly, the
remoteness test will be the same as that laid down in Doyle v Olby (above). This was affirmed by the Court of
Appeal in Royscott Trust Ltd v Rogerson [1991] 3 All ER 294. Despite earlier cases (e.g. Watts v Spence (1976)
Ch 165) placing damages under s.2(1) on the contractual basis, it would now seem to be established, as a result
of Sharneyford Supplies Ltd v Edge (1987) Ch 305 that damages under s.2(1) are indeed on the same basis as the
tort of deceit.

The following case, which repays careful study, is the leading decision on s.2(1):

Howard Marine and Dredging Co Ltd v Ogden and Sons [1978] QB 574
There took place negotiations for the hire of certain sea-going barges and the owner's negotiator misrepresented
their capacity. He relied on Lloyd's Register which was in fact incorrect – the correct information was on file at
the owner's head office. The Court of Appeal held that there was liability under s.2(1); the presumption of
negligence had not been rebutted in this case and so the burden on the misrepresentor is a heavy one. It is clear
that the reasonable grounds of belief must continue up to the time when the contract was made and so the statute
imposes an absolute obligation on the representor not to state facts which he cannot prove he had reasonable
grounds to believe. (Such an obligation does not necessarily exist under Hedley Byrne).

(iii) Remoteness

Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158,

HELD : in a fraudulent misrepresentation action the plaintiff may recover for all the direct loss incurred as a
result of the misrepresentation, regardless of foreseeability. This is therefore a more generous basis than either
contract (reasonable contemplation) or negligence (reasonable foreseeability) and can, in practice, bring the
damages up to the contractual level or even exceed it, as happened in the Doyle case.

Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254
Affirmed that foreseeability is irrelevant in a claim for fraudulent misrepresentation, and cannot ordinarily be
used to limit damages. However, in that case, the House of Lords threw doubt on whether this principle applies
also to claims under Misrepresentation Act s.2(1). In such cases, foreseeability may be relevant to identifying
which damages are recoverable, just as it is relevant in tort cases under Hedley Byrne.

(iv) Hedley Byrne and s. 2(1) compared

Given that there are two possible actions for negligent misrepresentation, it may be useful at this point to
consider the relative advantages and disadvantages of each:

1. Section 2(1) only applies ―where a person has entered into a contract‖, thus if there is an operative mistake
(see later) and the contract is void, no action for damages under s.2(1) would be possible since there is no
contract.

2. Under Hedley Byrne you don't have to prove that a misrepresentation as such has been made, i.e. it could be a
statement of opinion or law.

3. An action may be brought under Hedley Byrne where the misrepresentation was made by a third party to the
contract.

4. Hedley Byrne may be applicable where negotiations do not result in a contract between the plaintiff and
defendant but the plaintiff nevertheless suffers loss in reliance on the misrepresentation.

5. The great advantage, however of s.2(1) is the fact that it provides the plaintiff with an assumption of
negligence on the part of the defendant – under Hedley Byrne there is a far greater burden of proof.

Nevertheless, in all cases where the plaintiff has entered into a contract as a result of negligent misrepresentation,
an action under s.2(1) will be the normal remedy.

(v) Contributory negligence no defence to fraudulent misrepresentation

In an action for negligent mis-statement under Hedley Byrne the Law Reform (Contributory Negligence) Act
1945 will apply, so that damages may be reduced to take account of contributory negligence.

Standard Chartered Bank v Pakistan National Shipping Co [2000] 1 Lloyd's Rep 218 (HC)

HELD: contributory negligence was not relevant in a claim for fraudulent misrepresentation. The decision was
upheld by a majority of the Court of Appeal in Standard Chartered Bank v Pakistan National Shipping Co [2000]
EWCA Civ 230.

(vi) In fraud cases agents are personally liable

Standard Chartered Bank v Pakistan National Shipping Co [2002] UKHL 43; [2003] 1 All ER 273

When the same case reached the House of Lords, the only live question was whether the agent who made the
misrepresentation was personally liable. Mr Mehra apparently had some money. ‗His' company, on whose behalf
(and therefore acting as agent) he told the lie, did not. The House of Lords rejected his argument that he was not
personally liable. They found that as agent he was personally liable for any fraudulent misrepresentation; and so
long as he acted within his authority, the principal would also be liable.

9.5.3 Damages in lieu of rescission

Prior to the 1967 Act damages could not be claimed for a wholly innocent misrepresentation, i.e. one that is
neither fraudulent or negligent. The remedy for wholly innocent misrepresentation was rescission, accompanied
by an indemnity.

However, s.2(2) of the Misrepresentation Act 1967 gives the court a discretion, where the injured party would be
entitled to rescind, to award damages in lieu of rescission. Note that damages under s.2(2) cannot be claimed as
such, they can only be awarded by the court. The power of the court under the subsection can only be used in the
case of non-fraudulent misrepresentation (i.e. negligent and wholly innocent misrepresentation) and cannot be
used where one of the bars to rescission exist.

Where damages are awarded under s.2(1) the court must (by virtue of s.2(3)) take into account any damages
awarded in lieu of rescission under s.2(2).

See: UCB Corporate Services Ltd v Thomason [2005] EWCA CIV 225 discretion to refuse recission was
exercised and no substantial damages were awarded in lieu of the rescission denied.

9.6 Exclusion of Liability for Misrepresentation

9.6.1 Concept

Attempts to exclude liability for misrepresentation are not uncommon, e.g. by estate agents. The law on this is to
be found in s.3 of the Misrepresentation Act 1967 which provides:

―If a contract contains a term which would exclude or restrict –

(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him
before the contract was made; or

(b) any remedy available to another party to the contract by reason of such a misrepresentation,

that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in s.11(1)
of the Unfair Contract Terms Act 1977 ; and it is for those claiming that the term satisfies that requirement to
show that it does.‖

A couple of points in connection with s.3 should be noted. It is clear that it cannot be evaded by the contract term
in question deeming that statements of fact are not representations; Cremdean Properties Ltd v Nash (1977) 244
EG 547. But a term which stated that an auctioneer had no authority to make any representation was held to fall
outside s.3 as it was not an exclusion clause at all but a limitation on the apparent authority of the auctioneer;
Overbrooke Estate Ltd v Glencombe Properties Ltd (1974) 3 All ER 511.

The Unfair Terms in Consumer Contracts Regulations 1999 are unlikely to add anything to s.3 as amended by
UCTA s.11(1). However UTCCR may be useful against a term where there is some doubt about whether the kind
of liability excluded is or is not a misrepresentation within the meaning of s.3.

9.7 How to Approach Problems on Misrepresentation

Misrepresentation is one of the most difficult topics in the law of contract involving as it does a mixture of
common law, equity and statutory rules. If you are faced with a problem involving pre-contractual negotiations it
is suggested you follow the following ―action guide‖:

1. Are the statements terms or representations: It there's any chance that they are the latter, proceed to:-

2. Is there any actionable misrepresentation? If so then:-

3. What type of misrepresentation is it? Is it fraudulent, negligent or innocent? On the facts this may be a difficult
question to decide.
4. What are the remedies available?

5. Deal with any clause purporting to exclude liability for misrepresentation.

Legal Research Exercise – Misrepresentation

1. It has been said that after 1967, the distinction between representations and terms is no
longer of such great significance. Do you agree?

2. What are the ingredients of actionable misrepresentation?

3. What are the exceptions to the rule that silence is not misrepresentation?

4. In the context of misrepresentation distinguish between fraudulent, negligent and

innocent.

5. Distinguish between damages and indemnity. When is an indemnity payable?

6. What are the bars to rescission?

7. On what basis are damages awarded for:

(i) fraudulent misrepresentation, and

(ii) negligent misrepresentation under s2(1) Misrepresentation Act 1967 ?

How does the award of damages for breach of contract differ from the above?

8. What were Lord Denning's reasons for dissenting from the majority of the Court of
Appeal in Howard Marine v Ogden? Do you agree with them?

9. In what situations is Hedley Byrne likely to be used instead of s.2(1)?

Tutorial – Misrepresentation

1. Dick, a wealthy car enthusiast, decided to look for a pre-owned Bentley. He went to
Harold's showroom.

Dick was examining a smart looking Bentley which had the mileometer turned back to
nought when he was approached by Harold, who said, ―No need to examine that one, she's
a great little bus. Don't take my word for it, look at the engineer's report in my office. I
think I'm right in saying she's done about 20,000 miles or so.‖

Dick declined the invitation to look at the engineer's report. If he had done so he would
have seen that the bodywork, although appearing sound on a superficial examination, was
very badly rusted in certain places.

Also, the report stated that the car had done 20,000 since the engine had been overhauled.
Prior to that, the vehicle's mileage was 100,000 miles.

Three days later Dick called at Harold's showroom to buy the car. The written contract
made no reference to the statements made during negotiations, but contained a term that
the dealers were not to be held liable for any false statements made in the course of
negotiations.
 Some months after delivery, Dick discovers the true position as to the engine. The
bodywork is now so badly rusted that the car has fallen completely apart.

Advise Dick as to his civil remedies.

2. Neil owned a comer shop where he ran a newsagent's and tobacconist's business. Neil
advertised the business and premises for sale in the local paper, stating that planning
permission had been obtained for the development of an off-licence extension to the
business.

Having seen the advertisement, Jane visited the premises and was told by Neil that the
profits were £40,000 per annum, and that he would anticipate an increase of at least 15%
in the next year. Neil said, ―If you don't believe me, look at these accounts.‖ Jane declined
to do so, but had she done so she would have discovered that the profits had never
exceeded £25,000 and were on a downward trend.

Shortly after this conversation Neil was notified by the local authority that the street on
which the premises were situated would become a traffic-free zone in the near future. Neil
didn't communicate this information to Jane.

Having entered into a written contract to purchase the premises which made no mention of
the above statements, Jane discovers that Neil's statement as to planning permission was
incorrect and that the profits position is not what she thought it to be. Furthermore, the
local authority has now closed the street, causing a drastic fall-off in passing trade.

Advise Jane .

7. Exclusion Clauses

The Unfair Contract Terms Act 1977

 Unfair Terms in Consumer Contracts Regulations 1999

 Electronic Commerce Regulations 2002
 Office of Fair Trading v Abbey National and Others (2008) - Bank charges test case
 Britvic Soft Drinks Ltd v Messer UK Ltd [2002] EWCA Civ 548
 Office of Fair Trading v Abbey National plc and others [Court of Appeal] [2009] Fair trading - Contract -
Unfair terms - Banks charging personal current account customers when making payments from accounts
containing insufficient funds - exempt from fairness? - Unfair Terms in Consumer Contracts Regulations
1999

Office of Fair Trading v Foxtons Ltd [2009] EWCA Civ 288; [2009] WLR (D) 128
CA: Waller, Arden and Moore-Bick LJJ: 2 April 2009

CONTRACT — Consumer contract — Unfair terms — Office of Fair Trading seeking injunction against estate
agents in relation to fairness of its standard terms — Estate agent applying to strike out parts of relief sought —
Judge striking out words which otherwise would prevent estate agent enforcing terms in current contracts —
Whether court having power to grant injunction and/or declaration— Whether injunction capable of extending to
use of unfair terms in existing contract — Unfair Terms in Consumer Contracts Regulations 1999, reg 12(1)(4)
— Council Directive 93/13/ECC, art 7

See also: Insite Law Sale of Goods exclusion clauses

The Unfair Contract Terms Act 1977 has had a major impact on the use of exclusion clauses. Before examining
the detail of UCTA 1977 it is worth setting the context with some extracts from George Mitchell v Finney Lock
Seeds [1983]

George Mitchell v Finney Lock Seeds [1983] 2 AC 803

Finney Lock Seeds agreed to supply George Mitchell (Chesterhall) ltd with 30 lbs of Dutch winter cabbage seed
for £192. An invoice sent with the delivery was considered part of the contract and limited liability to replacing
‗any seeds or plants sold' if it were defective (clause 1), and excluding all liability for loss or damage or
consequential loss or damage from use of the seed (clause 2). 63 acres of crops failed, and £61,513 was claimed
for loss of production.

The issues:
- whether the limitation clause should be interpreted to cover the seeds actually sold, given that the seeds were
wholly defective and did not do a seed's job at all;
- whether under the Unfair Contract Terms Act 1977 , s 2(2) the limitation was reasonable (s 11).

Court of Appeal: Lord Denning MR argued the clause did apply to limit liability for the seeds sold, even if the
seeds were defective. Oliver LJ and Kerr LJ held the limitation clause did not apply because, like Parker J, they
held that what was sold was not seed. All agreed that the clause was invalid under the Supply of Goods (Implied
Terms) Act 1973 (see now s 55 SGA 1979 and UCTA 1977 ) because it was unreasonable.

In a memorable passage, and his last ever judgment, Lord Denning MR outlined the problem of the case in this
way.

― The heyday of freedom of contract

None of you nowadays will remember the trouble we had - when I was called to the Bar - with exemption
clauses. They were printed in small print on the back of tickets and order forms and invoices. They were
contained in catalogues or timetables. They were held to be binding on any person who took them without
objection. No one ever did object. He never read them or knew what was in them. No matter how
unreasonable they were, he was bound. All this was done in the name of "freedom of contract." But the
freedom was all on the side of the big concern which had the use of the printing press. No freedom for the
little man who took the ticket or order form or invoice. The big concern said, "Take it or leave it." The
little man had no option but to take it. The big concern could and did exempt itself from liability in its own
interest without regard to the little man. It got away with it time after time. When the courts said to the big
concern, "You must put it in clear words," the big concern had no hesitation in doing so. It knew well that
the little man would never read the exemption clauses or understand them.

It was a bleak winter for our law of contract. It is illustrated by two cases, Thompson v London, Midland
and Scottish Railway Co [1930] 1 KB 41 (in which there was exemption from liability, not on the ticket,
but only in small print at the back of the timetable, and the company were held not liable) and L'Estrange
v F Graucob Ltd [1934] 2 KB 394 (in which there was complete exemption in small print at the bottom of
the order form, and the company were held not liable).

The secret weapon

Faced with this abuse of power - by the strong against the weak - by the use of the small print of the
conditions - the judges did what they could to put a curb upon it. They still had before them the idol,
"freedom of contract." They still knelt down and worshipped it, but they concealed under their cloaks a
secret weapon. They used it to stab the idol in the back. This weapon was called "the true construction of
the contract." They used it with great skill and ingenuity. They used it so as to depart from the natural
meaning of the words of the exemption clause and to put upon them a strained and unnatural construction.
In case after case, they said that the words were not strong enough to give the big concern exemption from
liability; or that in the circumstances the big concern was not entitled to rely on the exemption clause. If a
ship deviated from the contractual voyage, the owner could not rely on the exemption clause. If a
warehouseman stored the goods in the wrong warehouse, he could not pray in aid the limitation clause. If
the seller supplied goods different in kind from those contracted for, he could not rely on any exemption ‖
 from liability. If a shipowner delivered goods to a person without production of the bill of lading, he could
not escape responsibility by reference to an exemption clause. In short, whenever the wide words - in their
natural meaning - would give rise to an unreasonable result, the judges either rejected them as repugnant
to the main purpose of the contract, or else cut them down to size in order to produce a reasonable result.
This is illustrated by these cases in the House of Lords: Glynn v Margetson & Co [1893] AC 351 ; London
and North Western Railway Co v Neilson [1922] 2 AC 263; Cunard Steamship Co. Ltd. v Buerger [1927]
AC 1 ; and by Canada Steamship Lines Ltd v The King [1952] AC 192 and Sze Hai Tong Bank Ltd v
Rambler Cycle Co Ltd [1959] AC 576 in the Privy Council; and innumerable cases in the Court of Appeal,
culminating in Levison v Patent Steam Carpet Cleaning Co Ltd [1978] QB 69. But when the clause was
itself reasonable and gave rise to a reasonable result, the judges upheld it; at any rate, when the clause did
not exclude liability entirely but only limited it to a reasonable amount. So where goods were deposited in
a cloakroom or sent to a laundry for cleaning, it was quite reasonable for the company to limit their
liability to a reasonable amount, having regard to the small charge made for the service. These are
illustrated by Gibaud v Great Eastern Railway Co [1921] 2 KB 426; Alderslade v Hendon Laundry Ltd.
[1945] KB 189 and Gillespie Bros & Co Ltd v Roy Bowles Transport Ltd [1973] QB 400.

House of Lords

Lord Bridge gave the leading judgment. He agreed with Lord Denning MR that clause 2 applied to the seeds in
question, and that it was a "strained construction" (following Lord Diplock's dicta in Photo Production Ltd v
Securicor Transport Ltd [1980] AC 827) to say otherwise. At 810 he said,

― the passing of... the Unfair Contract Terms Act 1977 , had removed from judges the temptation to resort to
the device of ascribing to words appearing in exemption clauses a tortured meaning so as to avoid giving
effect to an exclusion or limitation of liability when the judge thought that in the circumstances to do so
would be unfair. ‖

On the question of the term's fairness, Lord Bridge held,

― the court must entertain a whole range of considerations, put them in the scales on one side or the other, and
decide at the end of the day on which side the balance comes down. There will sometimes be room for a
legitimate difference of judicial opinion as to what the answer should be, where it will be impossible to say
that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that, when
asked to review such a decision on appeal, the appellate court should treat the original decision with the
utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous
principle or was plainly and obviously wrong.

***

7.1 Introduction

A clause which seeks to exclude or restrict liability for breach of contract, breach of implied terms or
misrepresentation.

7.1.1 Three hurdles

A contracting party who wishes to include an exclusion clause in a contract and rely upon it must overcome three
hurdles before he can do so.

He must show:

(i) that it is incorporated in the contract

(ii) That, as a matter of construction, it applies to cover the events which have arisen
(iii) That it is valid under the Unfair Contract Terms Act 1977.

All these are considered in detail below.

7.1.1 The nature of an exclusion clause

On one view an exclusion clause simply defines the obligations of the parties (see Coote Exception Clauses; and
Yates Exclusion Clauses and Unfair Contract Terms).

The traditional view is that an exclusion clause functions as a defence to an action for breach of contract. This
view can only be justified by ignoring the exclusion clause when defining the obligations of the parties. But what
justification is there for such an analysis of exclusion clause? We shall see that this view of exclusion clauses
creates considerable difficulties when applying the law.

7.2 Exclusion Clauses: The Common Law

7.2.1 The incorporation of exclusion clauses

As with other contractual terms the first stage which must be overcome is to show that the exclusion clause has
been incorporated into the contract. The rules are the same as those which apply to incorporation of all express
terms.

No statements, oral or written, including exclusion clauses, may become a term of the contract unless made
before the contract was concluded. Any statement made after the conclusion of a valid contract will not be a part
of it, will not be supported by valid consideration and will not be binding or enforceable.

Roscorla v Thomas (1842) 3 QB 234

Olley v Marlborough Court Hotel [1949] 1 KB 532

A notice on the back of the room door disclaiming liability was not enforceable. The disclaimer or exclusion
clause should have been drawn to the attention of the husband and wife when they checked in and before the
contract for the hire of the room had thereby been concluded.

The only other point in the case is whether the hotel company are protected by the notice which they put in the
bedrooms, "The proprietors will not hold themselves responsible for articles lost or stolen, unless handed to the
manageress for safe custody." The first question is whether that notice formed part of the contract. Now people
who rely on a contract to exempt themselves from their common law liability must prove that contract strictly.
Not only must the terms of the contract be clearly proved, but also the intention to create legal relations - the
intention to be legally bound - must also be clearly proved. The best way of proving it is by a written document
signed by the party to be bound. Another way is by handing him before or at the time of the contract a written
notice specifying its terms and making it clear to him that the contract is on those terms. A prominent public
notice which is plain for him to see when he makes the contract or an express oral stipulation would, no doubt,
have the same effect. But nothing short of one of these three ways will suffice. It has been held that mere notices
put on receipts for money do not make a contract. (See Chapelton v. Barry Urban District Council ) So, also, in
my opinion, notices put up in bedrooms do not of themselves make a contract. As a rule, the guest does not see
them until after he has been accepted as a guest. The hotel company no doubt hope that the guest will be held
bound by them, but the hope is vain unless they clearly show that he agreed to be bound by them, which is rarely
the case.

Assuming, however, that Mrs. Olley did agree to be bound by the terms of this notice, there remains the question
whether on its true interpretation it exempted the hotel company from liability for their own negligence. It is said,
and, indeed, with some support from the authorities, that this depends on whether the hotel was a common inn
with the liability at common law of an insurer, or a private hotel with liability only for negligence. I confess that I
do not think it should depend on that question. It should depend on the words of the contract. In order to exempt
a person from liability for negligence, the exemption should be clear on the face of the contract. It should not
depend on what view the courts may ultimately take on the question of whether the house is a common inn or a
private hotel. In cases where it is clearly a common inn or, indeed, where it is uncertain whether it is a common
inn or a private hotel, I am of opinion that a notice in these terms would not exempt the hotel company from
liability for negligence but only from any liability as insurers. Indeed, even if it were clearly not a common inn
but only a private hotel, I should be of the same opinion. Ample content can be given to the notice by construing
it as a warning that the hotel company is not liable, in the absence of negligence. As such it serves a useful
purpose. It is a warning to the guest that he must do his part to take care of his things himself, and, if need be,
insure them. It is unnecessary to go further and to construe the notice as a contractual exemption of the hotel
company from their common law liability for negligence. I agree that the appeal should be dismissed.

7.2.2 There are three ways in which an exclusion (or other contractual term) may be incorporated

1. By signature to a written contractual document

2. By notice

3. By course of dealing.

1. Incorporation by signature to a written contractual document

The easiest way to incorporate an exclusion clause is to ensure that the other party signs the contract containing
the exclusion clause

L'Estrange v F Graucob [1934] 2 KB 394

The contracting party had signed an instalment payment contract for a vending machine. The contract contained
an exclusion clause. She was bound by the clause having signed the agreement.

“In cases in which the contract is contained in a railway ticket or other unsigned document, it is necessary to
prove that an alleged party was aware, or ought to have been aware, of its terms and conditions. These cases
have no application when the document has been signed. When a document containing contractual terms is
signed, then, in the absence of fraud, or I will add, misrepresentation, the party signing it is bound, and it wholly
immaterial if he has read the document or not.”

Per Scrutton LJ.

Maugham LJ concurred, though expressing his regret at the result. He held he was bound to do so.

― There can be no dispute as to the soundness in law of the statement of Mellish LJ in Parker v South Eastern
Ry Co , which has been read by my learned brother, to the effect that where a party has signed a written
agreement it is immaterial to the question of his liability under it that he has not read it and does not know its
contents. That is true in any case in which the agreement is held to be an agreement in writing.

Not bound in certain cases:

Scrutton LJ observed that a party will not be so bound if the contract was induced by misrepresentation.

Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB 805

An exemption clause in a signed contract could not be relied upon because the effect of the exemption clause was
misrepresented.

Fraud, a plea of non est factum and independent oral undertakings, (for example in the form of a collateral
contract) would undermine the ability of a party to rely on an exclusion clause.

The document must be contractual

To be bound by signature to a document under the principle enunciated in L'Estrange v Graucob the document
must be contractual.
See (Infra):

Parker v SE Railway (1877) 2 CPD

Chapleton v Barry UDC [1940] 1 KB 532

***

2. Incorporation by notice

An exclusion clause can be incorporated into the contract by the giving of reasonable notice.

The notice must be given at or before the time of concluding the contract, the terms must be contained or referred
to in a document which was intended to have contractual effect and reasonable steps must be taken to bring the
terms to the attention of the other party.

A party who seeks to incorporate into a contract a term which is particularly onerous or unusual must prove that
the term has been fairly and reasonably drawn to the attention of the other party.

Interfoto Picture Library Ltd v Stiletto Visual Programmes [1989] QB 433; [1988] 2 WLR 615
The defendants ordered photographic transparencies from the plaintiffs, not having dealt with them before. The
plaintiffs duly sent them 47 transparencies, together with a delivery note which contained a number of
conditions. Condition 2 stated that a holding fee of £5 per day was payable for every day that the transparencies
were kept in excess of 14 days. The defendants failed to return them on time and were sent an invoice for
£3,783.50, which they refused to pay. In an action by the plaintiffs to recover the £3,783.50 the Court of Appeal
held that condition 2 was not incorporated into the contract because, on the basis of the test outlined above,
insufficient notice had been given to the defendants of its terms.

Bingham LJ argued that cases on sufficiency of notice are concerned with the question ―whether it would in all
the circumstances be fair (or reasonable) to hold a party bound by any conditions . . . of an unusual and stringent
nature.‖

But were the defendants not capable of reading the conditions of the delivery note? And could the objection that
condition 2 was particularly onerous not have been met by holding that condition 2 was invalid on the ground
that it was a penalty clause (an argument which Bingham LJ suggested could have succeeded, and see also
Ariston SRL v Charly Records Ltd (1990) The Independent April 13th).

See also:

― The Duty to Give Notice of Unusual Contract Terms ‖ [1988] Journal of Business Law 375.

Spurling v Bradshaw [1956] 2 ALL ER 121 and Thornton v Shoe Lane Parking [1971] 2 QB 163

Notice given in a document

Where notice is given in a document rather than by a notice care must be taken to ensure that the document is a
contractual document.

A document containing an exclusion clause given to a party after the contract had been concluded will not be
incorporated into the contract and will not therefore by binding or enforceable.

Even where a document is proffered before a contract is concluded it must be a ‗contractual' document in the
sense that it is a type of document which a reasonable man would expect to contain ‗terms and conditions'.
Chapleton v Barry UDC [1940] 1 KB 532
A notice board beside a stack of deck chairs required users of the deck chairs to obtain a ticket and retain the
ticket for inspection. The receipt contained an exclusion clause. HELD: the exclusion clause in the receipt could
not be relied on for it could not reasonably be expected that such a receipt was anything other than a receipt and
would contain exclusion clauses and, as important, because the contract had already been concluded, the taking
of the deck chair being an acceptance of the unilateral offer in the notice. The giving of a notice containing an
exclusion clause after a contract has been concluded is too late for it to be incorporated in the contract.

Slesser LJ:

As I read the learned county court judge's judgment (and we have had the advantage of a note taken by Mr.
Carey Evans in addition to the summary reasons which the learned county court judge gives for his decision), he
said that the plaintiff had sufficient notice of the special contract printed on the ticket and was, accordingly,
bound thereby - that is to say, as I understand it, that the learned county court judge has treated this case as a case
similar to the many cases which have been tried in reference to conditions printed on tickets, and more
particularly, on railway tickets - and he came to the conclusion that the local authority made an offer to hire out
this chair to Mr. Chapelton only on certain conditions, which appear on the ticket, namely, that they, the council,
would not be responsible for any accident which arose from the use of the chair, and they say that Mr. Chapelton
hired the chair on the basis that that was one of the terms of the contract between him and themselves, the local
authority.

Questions of this sort are always questions of difficulty and are very often largely questions of fact. In the class
of case where it is said that there is a term in the contract freeing railway companies, or other providers of
facilities, from liabilities which they would otherwise incur at common law, it is a question as to how far that
condition has been made a term of the contract and whether it has been sufficiently brought to the notice of the
person entering into the contract with the railway company, or other body, and there is a large number of
authorities on that point. In my view, however, the present case does not come within that category at all. I think
that the contract here, as appears from a consideration of all the circumstances, was this: The local authority
offered to hire chairs to persons to sit upon on the beach, and there was a pile of chairs there standing ready for
use by any one who wished to use them, and the conditions on which they offered persons the use of those chairs
were stated in the notice which was put up by the pile of chairs, namely, that the sum charged for the hire of a
chair was 2d. per session of three hours. I think that was the whole of the offer which the local authority made in
this case. They said, in effect: "We offer to provide you with a chair, and if you accept that offer and sit in the
chair, you will have to pay for that privilege 2d. per session of three hours."

I think that Mr. Chapelton, in common with other persons who used these chairs, when he took the chair from the
pile (which happened to be handed to him by an attendant, but which, I suppose, he might have taken from the
pile of chairs himself if the attendant had been going on his rounds collecting money, or was otherwise away)
simply thought that he was liable to pay 2d. for the use of the chair. No suggestion of any restriction of the
council's liability appeared in the notice which was near the pile of chairs. That, I think, is the proper view to take
of the nature of the contract in this case. Then the notice contained these further words: "The public are
respectfully requested to obtain tickets properly issued from the automatic punch in their presence from the Chair
Attendants." The very language of that "respectful request" shows clearly, to my mind, that for the convenience
of the local authority the public were asked to obtain from the chair attendants tickets, which were mere vouchers
or receipts showing how long a person hiring a chair is entitled to use that chair. It is wrong, I think, to look at
the circumstance that the plaintiff obtained his receipt at the same time as he took his chair as being in any way a
modification of the contract which I have indicated. This was a general offer to the general public, and I think it
is right to say that one must take into account here that there was no reason why anybody taking one of these
chairs should necessarily obtain a receipt at the moment he took his chair - and, indeed, the notice is inconsistent
with that, because it "respectfully requests" the public to obtain receipts for their money. It may be that
somebody might sit in one of these chairs for one hour, or two hours, or, if the holiday resort was a very popular
one, for a longer time, before the attendant came round for his money, or it may be that the attendant would not
come to him at all for payment for the chair, in which case I take it there would be an obligation upon the person
who used the chair to search out the attendant, like a debtor searching for his creditor, in order to pay him the
sum of 2d. for the use of the chair and to obtain a receipt for the 2d. paid.

I think the learned county court judge has misunderstood the nature of this agreement. I do not think that the
notice excluding liability was a term of the contract at all, and I find it unnecessary to refer to the different
authorities which were cited to us, save that I would mention a passage in the judgment of Mellish L.J. in Parker
v. South Eastern Ry. Co. , [ 1 ] where he points out that it may be that a receipt or ticket may not contain terms of
the contract at all, but may be a mere voucher, where he says: "For instance, if a person driving through a
turnpike-gate received a ticket upon paying the toll, he might reasonably assume that the object of the ticket was
that by producing it he might be free from paying toll at some other turnpike-gate, and might put it in his pocket
unread." I think the object of the giving and the taking of this ticket was that the person taking it might have
evidence at hand by which he could show that the obligation he was under to pay 2d. for the use of the chair for
three hours had been duly discharged, and I think it is altogether inconsistent, in the absence of any qualification
of liability in the notice put up near the pile of chairs, to attempt to read into it the qualification contended for. In
my opinion, this ticket is no more than a receipt, and is quite different from a railway ticket which contains upon
it the terms upon which a railway company agrees to carry the passenger. This, therefore, is not, I think, as Mr.
Ryder Richardson has argued, a question of fact for the learned county court judge. I think the learned county
court judge as a matter of law has misconstrued this contract, and looking at all the circumstances of the case, has
assumed that this condition on the ticket, or the terms upon which the ticket was issued, has disentitled the
plaintiff to recover. The class of case which Sankey L.J. dealt with in Thompson v. London, Midland and Scottish
Ry. Co. , [ 2 ] which seems to have influenced the learned county court judge in his decision, is entirely different
from that which we have to consider in the present appeal.

This appeal should be allowed.

***

3. Incorporation by a course of dealing

An exclusion may be incorporated into a contract by a course of dealing.

It is always extremely risky to place reliance upon this method of incorporation. A course of dealing must be
both regular and consistent. It may be particularly difficult to establish a course of dealing as against a consumer
( Hollier v Ramble Motors (AMC) Ltd [1972] 2 QB 71 where three to four dealings over a period of five years
could not be held to amount to a course of dealing), but the position is likely to be different where the contracting
parties are commercial parties of equal bargaining power.

British Crane Hire Corporations v Ipswich Plant Hire [1975] QB 303

There was a common understanding in this case – the parties were in the same line of business, they were both
familiar with the industry standard terms and therefore assumed that any contract would be on the industry
standard terms of business.

Lord Denning MR

In support of the course of dealing, the Plaintiffs relied on two previous transactions in which the Defendants had
hired cranes from the Plaintiffs. One was 20th February, 1969; and the other 6th October, 1969. Each was on a
printed form which set out the hiring of a crane, the price, the site, and so forth; and also setting out the
conditions the same as those here. There were thus only two transactions many months before and they were not
known to the Defendants' manager who ordered this crane. In the circumstances I doubt whether those two would
be sufficient to show a course of dealing.

In Hollier v. Rambler Motors .(1972) 2 Q.B., page 76, Lord Justice Salmon said he knew of no case "in which it
has been decided or even argued that a term could be implied into an oral contract on the strength of a course of
dealing (if it can be so called) which consisted at the most of three or four transactions over a period of five
years". That was a case of a private individual who had had his car repaired by the defendants and had signed
forms with conditions on three or four occasions. The plaintiff there was not of equal bargaining power with the
garage company which repaired the car. The conditions were not incorporated.

But here the parties were both in the trade and were of equal bargaining power. Each was a firm of plant hirers
who hired out plant. The Defendants themselves knew that firms in the plant-hiring trade always imposed
conditions in regard to the hiring of plant: and that their conditions were on much the same lines. The
Defendants' manager, Mr Turner (who knew the crane), was asked about it. He agreed that he had seen these
conditions or similar ones in regard to the hiring of plant. He said that most of them were, to one extent or
another, variations of a form which he called "the Contractors' Plant Association form". The Defendants
themselves (when they let out cranes) used the conditions of that form. The conditions on the Plaintiffs' form
were in rather different words, but nevertheless to much the same effect. He was asked one or two further
questions which I would like to read:-

"(Q) If it was a matter of urgency, you would hire that machine out, and the conditions of hire would no doubt
follow? (A) They would. (Q) Is it right that, by the very nature of your business, this is not something that
happens just once a year, nor does it happen every day either, but it happens fairly regularly? (A) It does. (Q)
You are well aware of the condition that it is the hirer's responsibility to make sure that soft ground is suitable for
a vehicle or machine? (A) It is; it is also the owner's responsibility to see that the machine is operated
competently".

Then the Judge asked:

"But it is the hirer's job to see what in relation to the ground? (A) That suitable timber was supplied for the
machine to operate on in relation to soft ground".

Then Counsel asked:

"And in fact it is the hirer's job to recover the crane from the soft ground, if it should go into it? (A) If the crane
sank overnight of its own accord, I dare say it would be".

From that evidence it is clear that both parties knew quite well that conditions were habitually imposed by the
supplier of these machines: and both parties knew the substance of those conditions. In particular that, if the
crane sank in soft ground, it was the hirer's job to recover it: and that there was an indemnity clause. In these
circumstances, I think the conditions on the form should be regarded as Incorporated into the contract. I would
not put it so much on the course of dealing, but rather on the common understanding which is to be derived from
the conduct of the parties, namely, that the hiring was to be on the terms of the Plaintiffs' usual conditions.

As Lord Reid said in McCutcheon's case, in 1964 1 Weekly Law Reports, page 128, quoting from the Scottish
textbook Gloag on Contract:-

"The judicial task is not to discover the actual intentions of each party; it is to decide what each was reasonably
entitled to conclude from the attitude of the other".

It seems to me that, in view of the relationship of the parties, when the Defendants requested this crane urgently
and it was supplied at once - before the usual form was received - the Plaintiffs were entitled to conclude that the
Defendants were accepting it on the terms of the Plaintiffs' own printed conditions - which would follow in a day
or two. It is just as if the Plaintiffs had said:

"We will supply it on our usual conditions",

and the Defendants said

"Of course, that is quite understood".

Applying the conditions, it is quite clear that Nos. 6 and 8 cover the second mishap. The Defendants are liable for
the cost of recovering the crane from the soft ground.

But, so far as the first mishap is concerned, neither Condition 6 nor Condition 8 (the indemnity clause) is wide
enough to cover it: because that mishap was due to the negligence of their own driver. It requires very clear
words to exempt a person from responsibility for his own negligence: see Gillespie's case, (1973) 1 Q.B., at page
415. There are no such words here.

Even though the Judge did not find that the conditions were incorporated, he held that there was an implied term
that the hirer should return the chattel to the owner at the end of the hiring. Mr McCowan pointed out that that
implied term was not distinctly pleaded or relied upon. But, nevertheless, there is much to be said for it. When a
machine is let out on hire for use on marshy land, and both parties know that it may sink into a marsh, then it
seems to me that, if it sinks into the marsh, it is the hirer's job to recover it, so as to restore it to the owner at the
end of the hiring. Take a motor-car which is let out on hire, and by reason of a gale, or an icy road, it goes off the
road into a ditch. It is the hirer's job to get it back on to the road and restore it at the end of the hiring. Just as
when he takes it on a long journey and falls ill a long distance away. It still is his duty to get it back and restore it
to the owner at the end of the hiring. Of course, if it is lost or damaged and he can prove that it was not due to
any fault on his part, he would not be liable. A bailee is not liable for loss or damage which he can prove
occurred without any default on his part: but the return of the vehicle is different. It is the duty of the hirer to
return the vehicle at the end of the hiring to the owner, and to pay the cost of doing so. Although he is not liable
for loss or damage occurring without his fault, nevertheless he is liable to do what is reasonable to restore the
property to the owner.

So, apart from the express conditions, it may well be, if it had been pleaded, that the Plaintiffs could have
recovered for the second mishap on an implied term. But, as it was not distinctly pleaded, I prefer to decide the
case on the ground that Conditions 6 and 8 formed part of the contract of hiring: and under them the Plaintiffs are
entitled to succeed in regard to mishap No. 2. I would affirm the decision of the Judge, but on a different ground.

***

7.3 The Rules of Construction of Exclusion Clauses

7.3.1 The contra proferentem rule

The general rule which the courts apply to the interpretation of exclusion clauses is the contra proferentem rule.

For this purpose it would appear that the ―proferens‖ is simply the person relying upon the exclusion clause; it
does not imply that the person seeking to rely on the exclusion clause has ―imposed‖ it upon the other party to
the contract.

Scottish Special Housing Association v Wimpey Construction UK Ltd [1986] 2 All ER 957.

7.3.2 Important to draft precisely

It is therefore extremely important to draft an exclusion clause in clear and precise terms; the slightest ambiguity
may be seized upon by a court to hold the exclusion clause inapplicable.

Suisse Atlantique Societe d'Armament Maritime v Rotterdamsche Kolen Centrale [1967] 1 AC 361 HL

There is, however, some evidence of a more relaxed and realistic approach to the interpretation of exclusion
clauses.

In Photo Production Ltd v Securicor Ltd [1980] AC 827 Lord Diplock said that ―the reports are full of cases in
which what would appear to be very strained constructions have been placed upon exclusion clauses‖. He noted
that many of these cases involved consumer contracts and continued ―any need for this kind of judicial distortion
of the English language has been banished by Parliament's having made these kinds of contract subject to the
Unfair Contract Terms Act 1977 ‖.

7.3.3 Construe according to the natural meaning

This process of construing exclusion clauses according to their ‗natural and ordinary meaning' has been taken
further by the High Court of Australia in Darlington Futures Ltd v Delco Australia Pty Ltd (1987) 61 ALJR 76.

The principles in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896 will
apply to construing exclusion clauses.

7.3.4 A more relaxed approach being taken with limitation clauses

Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR
The House of Lords held that the contra proferentem rule did not operate with the same rigour in the case of
limitation clauses, as in exclusion clauses.

There may be little intellectual justification for such a distinction (see Palmer ‗Limiting Liability for Negligence'
(1982) 45 Modern Law Review 322) but it does suggest that a limitation clause may be more effective than an
exclusion clause (see too UCTA).

7.3.5 Particular care must be taken when excluding liability for negligence

Particular care must be taken if it is sought to exclude liability for negligence.

The courts have evolved three specific rules of construction which find their origin in the speech of Lord Morton
of Henryton in:

Canada Steamship Lines v The King [1952] AC 192.

The first rule is that, if a clause contains language which expressly exempts the party relying on the exclusion
clause from the consequences of his own negligence, then effect must be given to the clause.

Secondly, if the first test is not satisfied, the court must consider whether the words are wide enough in their
ordinary meaning to cover negligence on the part of the party relying on the exclusion clause.

Once the second test has been satisfied the court must consider whether the exclusion clause may cover some
kind of damage other than negligence (The Raphael [1982] 2 Lloyd's Rep 42, If that other head of liability is
fanciful or remote then the exclusion clause may still cover negligence, but where the alternative source of
liability is not remote then it may be the case that the clause will generally be interpreted as not excluding
liability for negligence. The safest course is always to use the word negligence expressly.

But there appear to be certain cases where a party can exclude liability for negligence without actually using the
word negligence and the court will not invoke the Canada Steamship rules.

A good example of this process is the decision of the House of Lords in Scottish Special Housing Association v
Wimpey Construction UK Ltd [1986] 2 All ER 957. The defenders were employed by the pursuers to modernise
houses which were owned by the pursuers. While carrying out the work the houses were badly damaged by fire
caused by the alleged negligence of the defenders.

The pursuers sought to recover damages in respect of the loss occasioned by the fire. The defenders relied upon
the terms of the contract as a defence to the pursuers' action. Clause 18(2) of the contract between the parties
(Standard Form of Building Contract, Local Authorities Edition with Quantities, 1963 end (July 1977 revision
with Scottish Supplement)) stated that the defenders were liable for any damage to the property caused by their
negligence ―except for such loss or damage as is at the risk of the employer under Clause 20(C)‖ of the contract.
Clause 20(C) stated that the existing structures together with all contents thereof ... shall be at the sole risk of the
Employer as regards loss or damage by fire ... and the Employer shall maintain adequate insurance against these
risks‖.

The House of Lords held that the risk of damage to the property by fire (including fire caused by the negligence
of the defenders) had been allocated to the pursuers and that therefore the defenders were not liable for the
damage caused. The effect of this clause was to enable the defenders to exclude liability for their own
negligence, but the House of Lords did not discuss the Canada Steamship rules, nor did they discuss the
application of the Unfair Contract Terms Act 1977 to this clause. Instead the clause was simply subjected to the
ordinary processes of interpretation.

Scottish Special Housing Association v Wimpey Construction UK Ltd [1986] 2 All ER 957 was applied by the
Court of Appeal in Norwich City Council v Harvey [1989] 1 All ER 1180, where it was held that Clause 20(C)
could be invoked as a defence by a sub-contractor who negligently damaged the property of the building owner,
even though the sub-contractor was not party to the contract with the building owner (clause 20(C) being in the
contract between the building owner and the main contractor). Clause 20(C) enabled the Court of Appeal to
conclude that the building owner's negligence action must fail because it was not just and reasonable to impose a
duty of care upon the defendant.

BIFFA WASTE SERVICES LTD V MASCHINENFABRIK ERNST HESE GmBH [2008] EWHC 6 TCC
High Court
Mr Justice Ramsay summarised the law relating to exclusion or limitation of liability in negligence

Questions

1. How can Norwich City Council be reconciled

with the doctrine of privity, in particular the line of
decisions represented by Midland Silicones v
Scrutton [1962] AC 446 and The Eurymedon
[1975] AC 154?

2. How, if at all, does the Unfair Contract Terms

Act 1977 apply to exclusion clauses of the type
recognised to exist in Norwich City Council (i.e.
between two parties not in a contractual
relationship)?

Looked at practically, the courts are likely to uphold a clause excluding liability for negligence if the purpose of
that clause seems to be to decide which party should bear the cost of buying insurance. The insurance context
was important in construing the relevant clause in, for example, Co-Operative Retail Services Limited v Taylor
Young Partnership [2002] UKHL 17.

7.3.6 Fundamental breach of contract

Great care must be taken if it is sought to exclude liability for a serious breach of contract. However the doctrine
of fundamental breach simply exists as a rule of construction under which the more serious the breach, or the
consequences of the breach, the less likely it is that the court will interpret the exclusion clause as applying to the
breach Photo Production Ltd v Securicor Ltd [1980] AC 827.

Suisse Atlantique Societe d'Armament Maritime v Rotterdamsche Kolen Centrale [1967] 1 AC 361 HL

7.3.7 Excluding liability for fraudulent misrepresentation: the film insurance litigation

HIH Casualty and General v Chase Manhattan Bank [2003] UKHL 6.

During the 1990s an entrepreneurial insurance broker offered insurance to help companies making movies. If the
film was a box office failure, the bank who .lent money to the film company to finance the film could recover its
losses from the insurer. The broker who sold this insurance to the banks persuaded the insurance companies to
sign contracts saying that the contract would remain valid even if they had been given insufficient disclosure, or
false information, by the broker.

Many of the movies did flop. In litigation in London and New York the insurers tried to escape covering the
banks' losses. A key argument was that the clause excluding liability for misrepresentation was void or
unenforceable if the misrepresentation was fraudulent – so that if the insurers had been told outright lies (as was
alleged) the contract was void or voidable.
The House of Lords (but not the New York courts) HELD that a clause excluding liability for the insured's
misrepresentation could never exclude liability for fraudulent representation, as a matter of public policy.

In this case it was alleged that the lies were told by the broker, and that the insured banks who sought to benefit
from the exclusion were themselves innocent. The House of Lords further HELD that that an exclusion clause
could only exclude liability for fraudulent misrepresentation by the insured's agent (the broker) by very clear
words.

7.3.8 Lord Denning's last judgment

George Mitchell (Chesterhall) Ltd v Finney Lock Seeds [1983] 2 AC 803 Court of Appeal

“Faced with this abuse of power, by the strong against the weak, by the use o the small print of the conditions,
the judges did what they could to put a curb on it. They still had before them the idol, “freedom of contract”.
They still knelt down and worshipped it, but they concealed under their cloaks a secret weapon. They used it to
stab the idol in the back. This weapon was called „the true construction of the contract'. They used it with great
skill and ingenuity. They used it to depart from the natural meaning of the words of the exemption clause and to
put on them a strained and unnatural construction. In case after case, they said that the words were not strong
enough to give the big concern exemption from liability, so that in the circumstances the big concern was not
entitled to rely on the exemption clause..........But when the clause was itself reasonable and gave rise to a
reasonable result, the judges upheld it.”

***

7.4 Legislative control on exclusion clauses

The most important controls upon exclusion clauses are now contained in the Unfair Contract Terms Act 1977
(UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR). Although there are certain
common law controls, such as misrepresentation ( Curtis v Chemical Cleaning and Dyeing Co Ltd [1951] 1 KB
805) and the exclusion clause may be overridden by an express inconsistent undertaking given at or before the
time of contracting ( Couchman v Hill [1947] KB 554), these controls are likely to become practically
insignificant.

The overlap between these two sets of provisions makes this area of law complex and untidy. The Law
Commission and Scottish Law Commission in February 2005 produced a report and draft bill designed to
consolidate, clarify, and improve this area of law. For detailed coverage of the law as it stands, see the Law
Commissions Consultation paper [2002] EWLC 166.

That paper summarises the difference between UCTA and UCCR as follows:

2.18 UCTA:

(1) applies to both consumer and business-to-business contracts, and also to terms and notices excluding certain
liabilities in tort or delict;

(2) applies only to exclusion and limitation of liability clauses (and indemnity clauses in consumer contracts);

(3) makes certain exclusions or restrictions of no effect at all;

(4) subjects others to a reasonableness test;

(5) contains guidelines for the application of the reasonableness test;

(6) puts the burden of proving that a term within its scope is reasonable on the party seeking to rely on the clause;
(7) applies for the most part whether the terms were negotiated or were in a ―standard form‖;

(8) does not apply to certain types of contract, even when they are consumer contracts;

(9) has effect only between the immediate parties; and

(10) has separate provisions for Scotland.

2.19 In contrast, UTCCR: (1) apply only to consumer contracts;

(2) apply to any kind of term other than the definition of the main subject matter of the contract and the price;

(3) do not make any particular type of term of no effect at all;

(4) subject the terms to a ―fairness‖ test;

(5) do not contain detailed guidelines as to how that test should be applied, but contain a so-called ―grey‖ list of
terms which ―may be regarded‖ as unfair;

(6) leave the burden of proof that the clause is unfair on the consumer;

(7) apply only to ―non-negotiated‖ terms;

(8) apply to consumer contracts of all kinds;

(9) are not only effective between the parties but empower various bodies to take action to prevent the use of
unfair terms; and

(10) apply to the UK as a whole.

7.4.1 The Unfair Contract Terms Act 1977

The Unfair Contract Terms Act covers notices and contract terms which purport to exclude or restrict liability in
contract and tort. The liability arising must be a business liability (s.1(3) UCTA 1977).

As noted in the above quotation from the Law Commission paper, the Act does not apply to certain types of
contract. In particular it does not apply to:

(i) the liability of people not acting within the course of business (save for s.6)

(ii) certain parts of land contracts

(iii) insurance contracts

(iv) International supply contracts

(v) save for s 2(1)(2) to marine salvage towage, charter parties in relation to ships or hover craft and contracts for
the carriage of goods by ships or hover craft.

7.4.1.1 Section 2 and Negligence Claims

Section 2 provides:

(1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular
persons exclude or restrict his liability for death or personal injury resulting from negligence.
(2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in
so far as the term or notice satisfied the requirement of reasonableness.

(3) Where a contract term or notice purports to exclude or restrict liability for negligence a person's agreement to
or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk.

The first point to note is whether s.2 of the Act applies to contract terms or notices which seek to define the
obligations of the parties. In answering this question it is necessary to have regard to two particular provisions of
the Act and the interpretation which has been placed upon them by the courts.

The first provision is the definition of negligence in s.1(1) as “the breach:

(a) of any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise
reasonable skill in the performance of the contract;

(b) of any common law duty to take reasonable care or exercise reasonable skill (but not any stricter duty);

(c) of the common duty of care imposed by the Occupiers' Liability Act 1957 or the Occupiers' Liability Act
(Northern Ireland) 1957.‖

The second provision is s.13(1) which states that:

―To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents –

(a) making the liability or its enforcement subject to restrictive or onerous conditions;

(b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice
in consequence of his pursuing any such right or remedy;

(c) excluding or restricting rules of evidence or procedure;

and (to that extent) sections 2 and 5 to 7 also prevent excluding or restricting liability by reference to terms and
notices which exclude or restrict the relevant obligation or duty‖ (emphasis added).

The proper interpretation of these provisions was considered by the court of appeal in the cases of Phillips
Products Ltd v Hyland and Hamstead Plant Hire Co Ltd [1987] 2 All ER 620 and Thompson v T Lohan (Plant
Hire) Ltd [1987] 2 All ER 631. The clause which was at issue in both cases was essentially the same. The
condition read:

―When a Driver or Operator is supplied by the Owner to work the Plant, he shall be under the direction and
control of the Hirer. Such Drivers or Operators shall for all purposes in connection with their employment in the
working of the plant be regarded as the servants or agents of the Hirer who alone shall be responsible for all
claims arising in connection with the operation of the plant by the said drivers or operators. The Hirer shall not
allow any other person to operate such Plant without the Owner's previous consent to be confirmed in writing‖.

In Phillips the Court of Appeal rejected the argument that condition 8 fell outside the scope of the Act because
the clause simply defined the obligations of the parties. Slade LJ asserted that, in considering whether there has
been a breach of duty under s.1(1), the court must leave out of account the clause which is relied upon by the
defendants to defeat the plaintiffs' claim. Slade LJ claimed to find support for his interpretation in the words of
s.13(1).

This subsection is extremely difficult to interpret. It is clear that s.13(1) does apply to some duty-defining
clauses; the difficulty lies in ascertaining the extent to which UCTA applies to duty-defining clauses.

The House of Lords failed to come to grips with this issue in Smith v Eric S Bush [1989] 2 WLR 790. Lord
Templeman stated that the Act subjected to regulation ―all exclusion notices which would in common law
provide a defence to an action for negligence‖. Lord Griffiths interpreted s13 as ―introducing a ‗but-for' test in
relation to the notice excluding liability‖; that is to say, a court must decide whether a duty of care would exist
―but for‖ the exclusion clause. Lord Jauncey of Tullichettle stated that the wording of s13 was ―entirely
appropriate to cover a disclaimer which prevents a duty coming into existence‖.

But surely the Act does not catch all duty-defining clauses? Ridiculous conclusions would be reached if the Act
did apply to all duty-defining clauses (for some examples see Palmer and Yates ― The Future of the Unfair
Contract Terms Act 1977 ‖ [1981] Cambridge Law Journal 108 and Palmer ― Clarifying the Unfair Contract
Terms Act 1977 ‖ (1986) Business Law Review 57). One example will suffice to illustrate the point: ―an
overworked accountant says to a potential investor ‗this is all I can say about Company X, but I may be wrong so
don't rely on me'‖. Is such a statement caught by UCTA?

Returning to the distinction between Phillips and Thompson, in the latter case it was held that s2 was
inapplicable because condition 8 did not exclude a liability, it simply transferred it from one party to another. The
vital issue which divides these two cases is whether or not it is sought to exclude liability towards the victim of
the negligent act.

Questions

1. What would have been the position in Phillips if

the driver had damaged property belonging to
someone other than the plaintiffs?

2. What is the relevance of s.4 of the Act to these

claims (see further Adams and Brownsword
―Double Indemnity – Contractual Indemnity
Clauses Revisited‖ [1988] Journal of Business Law
146)?

7.4.1.2 Section 3 claims – breach of contract

Section 3 provides as follows:

―(1) This section applies as between contracting parties where one of them deals as consumer or on the other's
written standard terms of business.

(2) As against that party, the other cannot be reference to any contract term –

(a) When himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

(b) Claim to be entitled –

(i) To render a contractual performance substantially different from that which was reasonably expected of him,
or

(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all,

except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfied the
requirement of reasonableness.‖

It should be noted that section 3 only applies to two types of contract. The first is where one party deals as a
consumer (defined in section 12). The second is where one party ―deals . . . on the other's written standard terms
of business‖. Note the requirements are (i) deals (ii) other's (iii) written and (iv) standard. All these requirements
must be satisfied if the section is to come into play.

The meaning of the phrase ―written standard forms of business‖, particularly the word ―standard‖, was
considered for the first time by Judge Stannard in Chester Grosvenor Hotel Co Ltd v Alfred McAlpine
Management Ltd (1991) Unreported, 14 October.

Judge Stannard state:

―I accept that where a party invariably contracts in the same written terms without material variation, those terms
will become its ‗standard form contract' or ‗written standard terms of business'. However, it does not follow that
because terms are not employed invariably, or without material variation, they cannot be standard terms.

―If this were not so the statute would be emasculated, since it could be excluded by showing that, although the
same terms had been employed without modification on a multitude of occasions, and were employed on the
occasion in question, previously one or more isolated occasions they had been modified or not employed at all.
In my judgement the question is one of fact and degree. What are alleged to be standard terms may be used so
infrequently in comparison with other terms that they cannot realistically be regarded as standard, or on any
particular occasion may be so added to or mutilated that they must be regarded as having lost their essential
identity. What is required for terms to be standard is that they should be regarded by the party which advances
them as its standard terms and that it should habitually contract in those terms. If it contracts also in other terms,
it must be determined in any given case, and as a matter of fact, whether this has occurred so frequently that the
terms in question cannot be regarded as standard, and if on any occasion a party has substantially modified its
prepared terms, it is a question of fact whether those terms have been so altered that they must be regarded as not
having been employed on that occasion.‖

Once over this hurdle we come to the substance of the section. Section 3(2)(a) is relatively straightforward, but
what does section 3(2)(b) mean? In particular, how is the standard of performance which ―was reasonably
expected of him‖ to be assessed?

7.4.1.3 Section 4 and indemnity clauses

Section 4(1) states that any person dealing as a consumer cannot be required, as a term of the contract, to
indemnify another in respect of liability that may be incurred by that other for negligence or breach of contract,
except to the extent that the term satisfies the requirement of reasonableness. This section only applies where the
party required to give the indemnity deals as a consumer, hence the attempt in cases such as Phillips Products Ltd
v Hyland and Hamstead Plant Hire Co Ltd [1987] 2 All ER 620 and Thompson v T Lohan (Plant Hire) Ltd
[1987] 2 All ER 631 to bring what may be called ―commercial indemnity clauses‖ within the scope of s.2.

7.4.1.4 Section 5 – guarantees

Notices in manufacturer's guarantees excluding or restricting liability is controlled in this section.

(1) In the case of goods of a type ordinarily supplied for private use or consumption, where loss or damage:

(a) arises from the goods proving defective while in consumer use, and

(b) results from the negligence of a person concerned in the manufacture or distribution of the goods

liability for the loss or damage cannot be excluded or restricted by reference to any contract term or notice
contained in or operating by reference to a guarantee of the goods.

7.4.1.5 Section 6 – exclusion of implied terms

(1) Liability for breach of the obligations arising from

(a) s.12 of the Sale of Goods Act 1979

(b) s.8 of the Supply of Goods (Implied Terms) Act 1973

cannot be excluded or restricted by reference to any contract term

(2) As against a person dealing as consumer, liability for breach of the obligations arising from:

(a) ss 13,14 or 15 of the SOGA 1979

(b) ss 9,10 or 11 SG(IT)A 1973

cannot be excluded or restricted by reference to any contract term

(3) As against a person dealing otherwise than as consumer, the liability specified in subsection (2) above can be
excluded or restricted by reference to a contract term, but only in so far as the term satisfies the requirement of
reasonableness

7.4.1.6 Section 8 – exclusion of misrepresentation

Imports the test of reasonableness in UCTA into the Misrepresentation Act 1967 .

CA: Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd; [2009] WLR (D) 124
International supply contracts excluding liability for misrepresentation and the right to rescind were not subject
to the requirement of reasonableness.
The Court of Appeal so stated when dismissing the appeal of First Flight Couriers Ltd against a decision of
Aikens J [2008] EWHC 1686(Comm) on 17 July 2008 in the Commercial Court to give summary judgment for
Trident Turboprop (Dublin) Ltd in its claim to terminate two aircraft operating leases and to recover arrears of
rent, damages for breach of contract and to recover possession of both aircraft. First Flight returned the aircraft
but contended that it had rescinded the leases for misrepresentation or retained the right to do so.

7.4.1.7 Dealing as a ‗consumer' – s. 12 UCTA 1977

―(1) A party to a contract ―deals as consumer‖ in relation to another party if:

(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and

(b) the other party does make the contract in the course of a business; and ...........‖

The section goes on to provide, in the case of sale of goods and certain other contracts that the goods must be of a
type ordinarily supplied for private use or consumption.

Dealing in the course of business

R and B Customs Brokers Ltd v UDT Finance Ltd [1988] 1 All ER 847
The purchase of a car by a husband and wife team for their shipping broking business was not held to be an
acquisition in the course of business for the purchase was not an integral part of their part nor was their a degree
of regularity about the purchase.

A one off purchase for the purpose of resale would be ‗in the course of business'?

Case study on dealing as a consumer

Feldarol Foundry PLC v Hermes Leasing (London) Ltd [2004] EWCA 747

The first question is whether in this transaction the respondent was a person dealing as consumer. If he was, the
term implied by Section 10 of the 1973 Act could not be excluded. Section 12 of the 1977 Act states that -
(1) A party to a contract 'deals as consumer' in relation to another party if - (a) he neither makes the contract in
the course of a business nor holds himself out as doing so; and (b) the other party does make a contract in the
course of a business; and (c) in the case of a contract governed by the law of ..... hire purchase ..... the goods
passing under or in pursuance of the contract are of a type ordinarily supplied for private use or consumption." In
this case it is common ground that conditions (b) and (c) are met: the appellant made the contract in the course of
its business and the goods were of a type ordinarily supplied for private use.

In dealing with this question the judge said:

"On first considering this question, it seemed to me that [the respondent] must have been acting in the course of
its business. It is a company, which was purchasing a motor car for the purpose of providing the motor car to its
managing director as a part of the rewards of his employment. It also seemed to me that [the respondent] had
held itself out as acting in the course of its business by the terms of the agreement which provide a statement of
the nature of the business and the number of years it has been established, which was signed by Mr Beresford in
his capacity as director, and which includes a declaration under which Mr Beresford signed 'I confirm that I/we
have selected the goods and that they will be used for the purposes of my/our business." However, he went on to
hold that he was bound to conclude that the respondent had dealt as consumer by the decision of this court in R
& B Customs Brokers Co Ltd v United Dominion Trust Ltd [1988] 1 WLR 321 . The facts in that case could not
be realistically distinguished from those of the present case.

In R & B a company had bought a car for use by one of its directors from a finance company under a credit sale
agreement. The company was a freight forwarder and shipping agency. The car was defective and the company
claimed damages against the finance company for breach of the fitness for purpose term implied by Section 14
(3) of the Sale of Goods Act 1979. The finance company sought to rely on exclusion clauses in its agreement, to
which Section 6 of the 1977 Act applied, if the company bought the car as consumer. In reserved judgments
Dillon and Neil LJJ held that it could not do so because the company had dealt as consumer within the meaning
of Section 12 of the 1977 Act. At page 328 H Dillon LJ said:

"In the present case there was no holding out beyond the mere facts that the contract and the finance application
were made in the company's corporate name, and in the finance application the section headed 'Business Details'
was filled in to the extent of giving the nature of the company's business as that of shipping brokers, giving the
number of years trading and the number of employees, and giving the names and addresses of the directors. What
is important is whether the contract was made in the course of a business. In a certain sense, however, from the
very nature of a corporate entity, where a company which carries on business makes a contract, it makes that
contract in the course of its business; otherwise the contract would be ultra vires and illegal. Thus, where a
company which runs a grocer's shop buys a new delivery van, it buys it in the course of its business. Where a
merchant bank buys a car as a 'company car' as a perquisite for a senior executive, it buys it in the course of its
business. Where a farming company buys a landrover for the personal and company use of a farm manager, it
again does so in the course of its business. Possible variations are numerous. In each case it would not be legal
for the purchasing company to buy the vehicle in question otherwise than in the course of its business." Dillon LJ
went on to refer to the decision of the House of Lords in Davies v Sumner [1984] 1 WLR 1031, a case which was
decided under the provisions of the Trade Descriptions Act 1968, where the House of Lords held that a self-
employed courier who sold his car and falsely represented its mileage had not supplied a false trade description
"in the course of a trade or business", so it had not been guilty of an offence under the Act. Lord Keith had
delivered the only speech in that case. He relied on the fact that the car had not been sold as an integral part of
the defendant's business and that a degree of regularity was required before it could be shown that something had
been done in the course of a trade or business. Dillon LJ continued at page 330 G:

"I find pointers to a similar need for regularity under the Act of 1977, where matters merely incidental to the
carrying on of a business are concerned, both in the words which I would emphasise 'in the course of' in the
phrase 'in the course of a business' and in the concept, or legislative purpose, which must underlie the dichotomy
under the Act of 1977 between those who deal as consumers and those who deal otherwise than as consumers.
This reasoning leads to the conclusion that, in the Act of 1977 also, the words 'in the course of business' are not
used in what Lord Keith called 'the broadest sense'. I also find helpful the phrase used by Lord Parker CJ and
quoted by Lord Keith, 'an integral part of the business carried on'. The reconciliation between that phrase and the
need for some degree of regularity is, as I see it, as follows: there are some transactions which are clearly integral
parts of the businesses concerned, and these should be held to have been carried out in the course of those
businesses; this would cover, apart from much else, the instance of a one-off adventure in the nature of trade,
where the transaction itself would constitute a trade or business. There are other transactions, however, such as
the purchase of the car in the present case, which are at highest only incidental to the carrying on of the relevant
business; here a degree of regularity is required before it can be said that they are an integral part of the business
carried on, and so entered into in the course of that business. Applying the test thus indicated to the facts of the
present case, I have no doubt that the requisite degree of regularity is not made out on the facts." Neill LJ agreed.
In his judgment, at page 336D, he said:

"It is of course true that section 1 of the Trade Descriptions Act 1968 creates a criminal offence whereas the
other sections to which I have referred create no more than obligations in the civil law. Nevertheless, it would be
unsatisfactory in my view if, when dealing with broadly similar legislation, the courts were not to adopt
consistent construction of the same or similar phrases." Mr Richard Maurey QC, for the appellant, makes a
number of submissions on this part of the case. In ascending order of ambition they are:

(1) that the judge should have distinguished R & B on the facts; (2) R & B was the decision of a two-man court
which conflicts with the more recent decision of this court in Stevenson v Rogers [1999] QB 1029, and so should
not be followed;

(3) that R & B was wrongly decided; and

(4) this court should hold that a company can never deal as consumer for the purposes of this legislation.

I think Stevenson v Rogers provides the answer to a number of these submissions. In that case a fisherman had
sold one of his fishing boats to the plaintiffs who claimed damages for breach of the implied term as to
merchantable quality in Section 14 (2) of the Sale of Goods Act 1979 in its unamended form. The question was
whether the sale had been made by the defendant "in the course of a business". In allowing the appeal, this court
held that it had. The judge had relied on R & B . After an exhaustive analysis of the legislative history of Section
14 (2), including a Pepper v Hart excursion, Potter LJ concluded that free of the restraints of precedent the words
were intended to have their wide face value meaning. At page 1040 E he said:

"The question thus becomes, in my view, whether the decision in R & B ..... albeit relating to a separate section
of the Act of 1979, is effectively binding upon us on the basis that the term 'in the course of a business' must be
interpreted so as to bear the same meaning as between the different sections of the codifying Act in which it
appears. While I recognise the force of that argument, I do not think it should prevail. The Act of 1979 forms a
single code: however that is upon the basis simply that it consolidates and enacts within one statute and without
material amendment a number of disparate statutes previously governing the field of sale of goods. While, in the
first instance, a consolidating Act is to be construed in the same way as any other, if real doubt as to its legal
meaning arises, its words are to be construed as if they remained in the earlier Act. Thus, in terms of the proper
construction of its provisions, the Act of 1979 is not to be regarded as more than the sum of its parts. That being
so, I would observe as follows in respect of the R & B ..... case. First, the ratio of the decision is limited to its
context, namely the application of section 12 of the Act of 1977. Second, save for passing reference in the obiter
dicta of Neill LJ to which I have referred, the meaning of the phrase 'in the course of business' in that section was
not treated as coupled with, or dependent upon, the meaning of the phrase in section 14 (2). Thus the court gave
no consideration to whether or not the legislative history of section 14 (2) might require it to be distinguished
from section 12 of the Act of 1977 or, alternatively, if a common interpretation was called for, whether the
construction of Section 12 should not be subordinated to that of section 14 (2). Third, the obiter dicta of Neill LJ
which might suggest that the observations of Lord Keith should be applied generally in the case of a seller of
goods lacked the benefit of contrary argument in relation to section 14 (2) and, not least (at a date well preceding
Pepper v Hart ..... ) any reference to Hansard or the First Report of the Law Commission, of which this court has
had the advantage. It is of course desirable that, when identical phrases occur in associated sections of a statute,
they should be construed to similar effect. I have little doubt that such was the original intention of the Law
Commission and of Parliament in relation both to the modification of section 14 (2) made by section 3 of the Act
of 1973 and the amendment to section 55 of the Act of 1893 made by section 4 of the Act of 1973, which
referred to a 'seller in course of a business' when defining a 'consumer sale.' However, the latter provision did not
survive for long. It was repealed and replaced by section 12 of the Act of 1977, which put in place a different
formula in respect of exemption clauses, based upon either party 'dealing as consumer,' rather than upon a
'consumer sale' defined principally by reference to the seller. In my view, had the court in R & B ..... been
concerned not with the Act of 1977, but with the definition of a consumer sale under the Act of 1973, it might
well have concluded that the phrase 'in the course of a business' in section 55 of the Act of 1893, as amended,
required to be construed in harmony with, and subject to, the proper construction of section 14 (2). As to the
proper construction of section 14 (2), given the clear view which I have formed, I do not consider it right to
displace that construction simply to achieve harmony with a decision upon the meaning of section 12 of the Act
of 1977. Section 14 (2) as amended by the Act of 1973 was itself a piece of consumer protection intended to
afford wider protection to a buyer than that provided in the Act of 1893. Indeed, there is a sense in which the
decision in the R & B case can be said to be in harmony with that intention. It dealt with the position of
consumer buyers and the effect of adopting the construction propounded in Davies v Sumner ..... in relation to
section 12 (1) (a) of the Act of 1977 was to further such buyers' protection. In the context of its statutory history,
section 14 (2), as amended by the Act of 1973 and re-enacted in the Act of 1979, is the primary provision in the
overall scheme of increased protection for buyers which the Act of 1973 initiated. To apply the reasoning in the
R & B case ..... in the interests only of consistency, thereby undermining the wide protection for buyers which
section 14 (2) was intended to introduce, would in my view be an unacceptable example of the tail wagging the
dog. Accordingly, I would hold that there was an implied term ..... in the contract [in that case]." Butler Sloss LJ
and Sir Patrick Russell agreed with Potter LJ.

It is clear from this decision that the court felt bound by R & B . The fact that it was a decision of a two-man
court is not to the point. It was and is a decision which is binding on this court. Secondly, the decision is not
inconsistent with R & B . Lord Justice Potter explains in the passage I have cited at length how the two decisions
can be reconciled. An interpretation of the words "deals as consumer" in the 1997 Act, which gave increased
protection for consumer buyers, was consistent with the wide meaning which the court gave the words "seller in
the course of a business" in the 1979 Act.

This disposes of Mr Maurey's second, third and fourth submissions. In argument this morning he subjected R &
B to sustained criticism: no reason is given as to why the meaning of words in the Trade Descriptions Act should
be the same as in the 1977 Act; "integral part of the business" and "regularity" do not appear in the statute:
application of such tests will produce anomalous results. Far better, he said, to go for a root and branch solution
which was simply to say that a company can never be a consumer for the purpose of this legislation. This was
consistent with other consumer protection legislation and regulations where consumers are defined as natural
rather than legal persons.

But none of this answers the point that R & B is binding on us. It is a reported decision that has stood
unchallenged for more than 15 years, during which time the relevant provisions in the 1977 Act have stood
unamended. If harmonisation of the various provisions dealing with consumer protection is required, that is
Parliament's job. If R & B is to be challenged, that cannot be done in this court.

It is only therefore Mr Maurey's first submission which survives in this part of the case. Here he relies on a
number of points which he says distinguish this case from the facts in R & B . R & B was a one-man private
company. The respondent is a public company. The car must have been put through the company's books and
treated as part of its assets. But I do not think that these factors enable us to distinguish this case from R & B
which was not decided on a one-off basis or related specifically to the size of the company. The car in that case
must also have been put through the company's books.

Mr Maurey however does have a further point of distinction. He says that by its declaration in the agreement
signed by Mr Beresford that "I/we confirm that I/we have selected the goods and they will be used for the
purposes of my/our business" and the acknowledgment by the hirer in the terms themselves that "the goods will
be used for his own business purposes", the respondent had held itself out as making the contract in the course of
a business within the meaning of Section 12 (1) (a) of the 1977 Act.

I do not accept this submsision. Neither the declaration or the acknowledgment are directed to the capacity in
which the respondent is dealing. They deal with the use to which the car is intended to be put. They say nothing
about whether the buying of cars is an integral part of the company's business or the regularity of such
transactions.

It follows from what I have said that I think the appellant's first and main ground of appeal fails. This makes it
unnecessary to consider whether the judge was right to conclude that clause 4 of the terms and conditions failed
to satisfy the requirement of reasonableness. Suffice it to say that I think there is much in the appellant's
argument that it was reasonable for much the same reasons as Dillon LJ gave for reaching the same conclusion in
R&B.

This therefore brings me to the arguments about breach, rejection and affirmation. The appellant first says that
the judge should not have held that there was a breach of Section 10 (2) of the 1973 Act. In reaching his
conclusion that the defects in the car were sufficiently serious as to amount to a breach, the judge attached too
much weight to Mr Beresford's view of the car when it was the respondent company which was the hirer.
Applying the objective standard demanded by Section 10 (2) (2A) and (2B), there was no breach as demonstrated
by the relatively small cost of repairing the defects.

I disagree. There was ample evidence to justify the judge's conclusion. Whether the car is a company car or
individually owned, if it is potentially unsafe to drive because of defects in its steering and brakes it cannot be
described as being of satisfactory quality. As the implied term was a condition of the contract - Section 10 (7) of
the 1973 Act - its breach entitled the respondent to reject the car.

The appellant however says that the respondent did not reject the car or attempt to do so, at least until after he
had affirmed the contract by accepting it. This he did by his arrangement to substitute the car, by his
correspondence with TCA and the appellant and by paying the first instalment under the agreement after he knew
of the defects.

The judge found that the respondent rejected the car on the ground that it was not of satisfactory quality when the
appellant received the respondent's solicitor's letter of 23 August, to which I have referred. The appellant says
this was too late. In reaching his conclusion that there had been rejection, the judge should have ignored the
respondent's dealings with the dealer since the agreement made it clear that the dealer was not the appellant's
agent.

Whether a buyer or a hirer has rejected or accepted goods under contracts of sale or supply of this kind is a broad
issue of fact which does not depend upon technicalities or legal niceties. What the court must determine
objectively from what the buyer or hirer has said or done is whether he has accepted or rejected the goods
tendered in performance of the seller's or owner's contractual obligation to deliver goods of the contract quality.

Judged in this way, I think there was only one answer in this case. As the appellant was told within a very short
time of delivery, the respondent had expressed his dissatisfaction with the Lamborghini and within days had
returned it to the dealer. In his letter to the appellant of 12 August Mr Beresford made it clear that he had rejected
the car and payment had been made under the agreement to keep it alive so that it could be rolled over for use
with the substitute car which he was still expecting to be provided. In these circumstances, I fail to see how the
appellant or anyone else could possibly have thought that the respondent had accepted the Lamborghini or, to put
it another way, affirmed the agreement under which that car was to be hire-purchased by the respondent. The
Lamborghini had self-evidently been rejected. The fact that the reasons for doing so emerged later is not to the
point.

For these reasons I reject Mr Maurey's arguments about rejection and affirmation.

See also Rasbora Ltd v JCL Marine Ltd [1977] 1 Lloyd's Rep 645

7.4.1.8 Reasonableness – s.11 UCTA 1977

(1) In relation to a contract term, the requirement of reasonableness is that the term shall have been a fair and
reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been ,
known to or in the contemplation of the parties when the contract was made. Section 8 of the Act amends s.3
Misrepresentation Act 1967 , which had required that terms excluding liability for misrepresentation should be
reasonable.

(2) In determining for the purposes of ss 6 or 7 above whether a contract term satisfies the requirement of
reasonableness, regard shall be had in particular to the matters specified in Schedule 2 to this Act; but this
subsection does not prevent the court or any arbitrator from holding, in accordance with any rule of law, that a
term which purports to exclude or restrict any liability is not a term of the contract.

(3) In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under
this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances
obtaining when the liability arose or (but for the notice) would have arisen.

(4) 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 not 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.

(5) It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that
it does.

7.4.1.9 The Schedule 2 guidelines

The matters to which regard is to be had in particular for the purposes of ss.6(3), 7(3) and (4), 20 and 21 are any
of the following which appear to be relevant:

(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other
things) alternative means by which the customer's requirements could have been met;

(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of
entering into a similar contract with other persons but without having to accept a similar term;

(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term
(having regard, among other things, to any custom of the trade and any previous course of dealing between the
parties);

(d) where the term excludes or restricts any relevant liability if some condition is not complied with, whether it
was reasonable at the time of the contract to expect that compliance with that condition would be practicable;

(e) whether the goods were manufactured, processed or adapted to the special order of the customer.

7.4.1.9 Analysis of reasonableness

This is the most difficult issue of all because so much depends upon the discretion of the court (see Adams and
Brownsword ― The Unfair Contract Terms Act: A Decade of Discretion ‖ (1988) 104 LQR 94).

Appellate courts have refused to interfere with the finding of the trial judge unless satisfied that the judge
proceeded upon some ―erroneous principle or was plainly and obviously wrong‖ ( George Mitchell (Chesterhall)
Ltd v Finney Lock Seeds [1983] 2 AC 803).

The courts have taken into account a number of factors in deciding whether an exclusion clause is reasonable: the
respective bargaining power of the parties, whether the exclusion clause was freely negotiated, the extent to
which the parties were legally advised, the availability of insurance, the availability of an alternative source of
supply to the innocent party and the extent to which the party seeking to rely on the exclusion clause sought to
explain its effects to the other party. In many cases a limitation clause may be more likely to pass the
reasonableness test.
Regus (UK) Ltd v EPCOT Solutions Ltd (2008) EWCA Civ 361
The Court of Appeal held that exemption and limitation clauses in a contract for the supply of serviced office
accommodation were reasonable under the Unfair Contract Terms Act 1977.

7.4.2 Unfair Terms in Consumer Contracts Regulations 1999

Office of Fair Trading v Foxtons Ltd [2009] EWCA Civ 288; [2009] WLR (D) 128
CA: Waller, Arden and Moore-Bick LJJ: 2 April 2009

CONTRACT — Consumer contract — Unfair terms — Office of Fair Trading seeking injunction against estate
agents in relation to fairness of its standard terms — Estate agent applying to strike out parts of relief sought —
Judge striking out words which otherwise would prevent estate agent enforcing terms in current contracts —
Whether court having power to grant injunction and/or declaration— Whether injunction capable of extending to
use of unfair terms in existing contract — Unfair Terms in Consumer Contracts Regulations 1999, reg 12(1)(4)
— Council Directive 93/13/ECC, art 7

This appeal raises an important point relating to the scope of the relief that the court can grant in proceedings
brought by the Office of Fair Trading ("the OFT"), under the Unfair Terms in Consumers Contracts Regulations
1999 ("the UTCCRs"). The UTCCRs implemented Directive 93/13/EEC on Unfair Terms in Consumer
Contracts. The Judgment is worth reading for a fairly definitive and up to date assessment of the law on this
matter.

UTCCR s.4 (read with the definitions in s.3) states that applies only to contracts between a ―seller or supplier‖
acting in his trade business or profession, and a ―consumer‖. The consumer can only be a natural person, not a
corporation.

UTCCR s.5 specifies that the regulations apply only to terms which have not been individually negotiated.

7.4.2.1 UCCTR: what is unfair?

Section 5 describes unfair terms, and s.6 gives guidance on assessment of unfair terms. Treitel analyses the effect
of these provisions as creating four tests which may be applied to decide whether a term is unfair. The four tests
are:

(a) Significant imbalance : ―Section 5(1) (1) A contractual term which has not been individually negotiated
shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the
parties' rights and obligations arising under the contract, to the detriment of the consumer.‖ The key phrase is
―significant imbalance‖. It is clearly based on the idea, familiar in several European legal systems, that a court
can interfere where one party does unreasonably well and the other party does unreasonably badly out of a
transaction.

Section 6(1) makes it clear that what is fair must be assessed by looking at the contract as a whole, and at the
circumstances in which it was made: ―The unfairness of a contractual term shall be assessed, taking into account
the nature of the goods or services for which the contract was concluded and by referring, at the time of
conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other
terms of the contract or of another contract on which it is dependent.‖

(b) Core provisions . However, freedom of contract is preserved by the regulations in respect of the basic subject
matter, and price of the contract s.6(2) ―In so far as it is in plain intelligible language, the assessment of fairness
of a term shall not relate: (a) to the definition of the main subject matter of the contract, or (b) to the adequacy of
the price or remuneration, as against the goods or services supplied in exchange.‖
(c) Good Faith . This phrase, contained in s. 5(1) (quoted above) has been interpreted by the English Courts to
require ―fair and open dealing‖ Director General of Fair Trading v First National Bank plc [2001 UKHL 52;
[2002] 1 AC 481.

(d) Examples of unfair terms : Schedule 2 of the Regulations gives a long but non-exhaustive list of examples
of terms ―which may be regarded as unfair‖. These include terms designed to prevent the consumer from going
to court; terms imposing excessively penalties for breach on the consumer (already void at common law); terms
extending duration of a contract unless the consumer gives notice to terminate; terms allowing the supplier to
leave the price open for later determination or increase; terms ―irrevocably binding the consumer to terms with
which he had no real opportunity of becoming acquainted before the conclusion of the contract‖ (which appears
to potentially over-ride the signature rule in L'Estrange v Graucob ); and several others.

7.4.2.2 Effect of unfair terms

―Section 8.- (1) An unfair term in a contract concluded with a consumer by a seller or supplier shall not be
binding on the consumer.

(2) The contract shall continue to bind the parties if it is capable of continuing in existence without the unfair
term.‖

7.4.2.3 Enforcement

The rest of the regulations deal with mechanisms for public enforcement of the regulations. They give the
Director General of Fair Trading (alternatively a number of other designated bodies) a duty to investigate
complaints. S. 12 gives the designated bodies power to apply for an injunction to restrain the use of unfair terms.

Case Study

Office of Fair Trading v Foxtons Ltd [2009] EWCA Civ 288; [2009] WLR (D) 128

CA: Waller, Arden and Moore-Bick LJJ: 2 April 2009

An injunction granted in a general challenge by the Office of Fair Trading against the
unfairness of certain clauses in an estate agent's standard terms could extend to the
continuing use of unfair terms in an existing contract.

The Court of Appeal so stated when allowing the appeal of the Office of Fair Trading
(―OFT‖) and dismissing the cross-appeal of the defendant, Foxtons Ltd, against a decision
by Morgan J [2008] EWHC 1662(Ch) on 17 July 2008 to grant the defendant's application
to strike out from OFT's prayer for an injunction against the defendant in respect of
unfairness in its standard terms words which would otherwise injunct it from enforcing
those terms in current contracts.

WALLER LJ said that the judge had distinguished between the general challenge which
bodies like OFT could make, and the challenge which an individual could make if sued.
He had held that the defendant should not be prevented from enforcing individual
contracts already entered into since the circumstances of those individual contracts might
establish that in that individual contract the term was fair even if, on the general challenge,
the term had been held unfair. The appeal raised an important point relating to the scope of
the relief a court could grant in proceedings brought by the OFT under the Unfair Terms in
Consumers Contracts Regulations 1999 which implemented Council Directive 93/13/EEC
on Unfair Terms in Consumer Contracts. Art 7 of the Directive was intended to cover
existing as well as future contracts. Thus an issue on a general challenge could be the
fairness of a term in a current contract. It would be quite inadequate protection to
consumers if a court on a general challenge, having found a term as used in current
 contracts to be unfair, had no power to prevent the supplier or seller from continuing to
enforce that term in current contracts: see Director of Fair Trading v First National Bank
plc [2002] 1 AC 481, at para 33 "the system of pre-emptive challenges is a more effective
way of preventing the continuing use of unfair terms…than ex casu actions". It was
therefore most unlikely that the Directive intended that a general challenge should not
relate to a standard term in current contracts and did not intend the courts of member states
to have power to prevent continued reliance on that term by a supplier or service provider
against a consumer. Prima facie, in a situation where on a general challenge a court had
found a term or terms in a set of standard conditions in use in current contracts unfair, it
must be a proper exercise of its power to grant an injunction to prevent enforcement of that
term or terms in existing contracts. It followed that it had been wrong of the judge to strike
out the words he had from the terms of the injunction sought. It was, however, important
to add a rider so that there was no misunderstanding. What injunction was granted must
await the decision of the trial judge. If all that the court had considered were the particular
terms contained amongst the particular standard terms before it, consideration would have
to be given as to whether the injunction granted should relate to those terms alone or to
like terms or something different. Reg 12(4) of the 1999 Regulations gave the power to
grant an injunction wide enough to include "like" terms. But all would depend on what the
court had found. The judge struck had out OFT's request for a declaration on the same
basis as he had struck out the words of the injunction. The judge had been right in his view
that declarations could be granted by the court and wrong to strike out the requested
declaration.

ARDEN LJ agreed.

MOORE-BICK LJ, agreeing in the result, said that the judge had been right to recognise
that it might not be appropriate to grant relief in unqualified terms and would not be right
to do so if there were any possibility that the terms in question should be regarded as fair
in the light of all circumstances surrounding an individual contract.

Summary from WLR Daily

Case Study

Article by Kristian Laingchild

Penningtons LLP

The Consumer Protection from Unfair Trading Regulations 2008 came into force on 26 May. They target rogue
traders but also require all businesses - whether trading on-line, on the high street or via telephone – to treat
consumers fairly.

The Regulations are divided into three parts - a general prohibition on unfair commercial practices, a specific
prohibition on misleading actions or omissions and aggressive commercial practices, and an annex of 31
practices which are automatically deemed unfair.
General Prohibition

The Regulations have imposed a general prohibition on all business from treating consumers unfairly. They
define an unfair commercial practice as 'one that runs contrary to the requirements of professional diligence and
which materially distorts the economic behaviour of a consumer or is likely to do so'. The practice may occur
either before, after or during a transaction with a consumer.

Specific Prohibition

The Regulations define misleading actions and omissions, as well as aggressive practices, as 'unfair commercial
practices'.

Misleading actions and omissions primarily refer to situations where false information is provided to a consumer,
or information is deliberately concealed or provided in an ambiguous manner. It appears that use of 'copycat'
packaging by a business could fall within this prohibition. The Regulations contain fairly detailed definitions of
'misleading actions' (Regulation 5) and 'misleading omissions' (Regulation 6).

An 'aggressive commercial practice' refers to a situation where a consumer is subjected to harassment, coercion
or undue influence by a trader and the trader's actions cause or are likely to cause the consumer to make a
decision concerning a transaction which he may not otherwise have made. The Regulations contain a detailed test
for an 'aggressive commercial practice' (Regulation 7).

Deemed Unfair Practices

The Regulations set out a blacklist of 31 commercial practices which are unfair in all circumstances. For
example, describing a product as free or without charge, if the consumer has to pay anything other than
unavoidable costs involved in responding to the trader and collection or delivery of the item. This prohibition is
not intended to include 'buy one get one free' promotions but rather 'bundling' situations, where part of a package
of goods or services is described as free, when in practice, there is an expense in acquiring the larger item. This
sometimes occurs with communication services.

Other banned practices include making persistent and unwanted communications by telephone, fax or other
remote media, visiting a consumer's home and ignoring requests to leave or not to return, limited time offers
which are later extended, bogus closing down sales, and displaying false testimonials on websites.

Enforcement And Penalties

The Regulations will be enforced by the Office of Fair Trading (OFT) as well as the local authority Trading
Standards Services, which have wide powers of investigation, including making test purchases and entering
premises and seizing goods or documents.

A breach of the Regulations is a criminal offence. The penalties on conviction are a fine not exceeding £5,000
and up to two years' imprisonment. A business being investigated may also be subject to injunctions brought
under Part 3 of the Enterprise Act 2002.

Due Diligence Defence

Providing a business can demonstrate that it took reasonable precautions and exercised due diligence to avoid
committing an offence, this is a defence if it can prove that either the commission of the offence was due to a
mistake, reliance on information supplied by another person, the act or default of another person, an accident, or
another cause beyond its control (Regulation 17).

Conclusion

It has been suggested that the Regulations are beneficial to businesses since they will clamp down on those using
unfair commercial practices to gain a competitive advantage. However, until there are some reported decisions,
the question of whether a particular practice is unfair, and the level of proof required for a defence, remain
uncertain.

While the OFT has commented that 'businesses which already act honestly and fairly may not need to change the
way they work at all', UK businesses should be cautious and consider the following measures:

 reviewing existing marketing and sales practices with consumers to consider their fairness;

 ensuring that no existing practice falls within the 31 deemed unfair practices;

 considering not only the actions of a business, but also its omissions when dealing with consumers;

 providing education and training to staff concerning the Regulations, in particular covering sales
strategies and techniques.

Demonstration Question – Exclusion Clauses

Norman, an electrician and editor of Loft Laggers Monthly, bought an electrical drill from
Plus Grande Electricity Ltd, a firm owned by Monsieur Clouseau, a retired officer of the
law. He was shown a document headed ―Terms and Conditions‖ which stated, inter alia,
―Plus Grande Electricity Ltd accept no responsibility for any loss or damage suffered as a
result of the use of the equipment. All conditions and warranties, express or implied are
hereby excluded.‖

When he had arrived back at home, Norman put a plug on the drill and began work,
putting up a shelf for his wife Norma. It was all very lamentable but owing to a defect in
the manufacture of the drill, Norman was badly electrocuted, flung fifteen feet across the
room, breaking his arm and a beautiful glass bowl and pulled down the heavy velvet
curtains covering the French windows in a frantic attempt to steady himself and avoid
crashing through the French windows onto the crazily paved patio where his wife Norma
was gardening.

Advise Norman. How would your answer differ if Norman had been using the drill while
working for a customer with similar unfortunate results.

Tutorial – Terms and Exclusion clauses

1. Read George Mitchell (Chesterhall) Ltd v Finney Lock Seeds [1983] 2 AC 803 – in
particular, the speech of Lord Bridge.

What matters did Lord Bridge consider relevant in determining whether the limitation
clause was reasonable or not.

2. Slick Ltd purchased used engineering machinery, serviced it and leased it out to
customers. A clause in the printed leasing contract said ― Neither the company nor its
employees accept any liability for damage caused by defects in machines unless the
customer makes an additional payment of 20% of the contract price.

Alf the owner of a small engineering firm, urgently needed a machine. Having dealt with
Slick Ltd in the past, he rang the company and agreed over the telephone to lease a
machine at a fixed price. a copy of the printed leasing contract was subsequently delivered
 with the machine.

When the machine was used for the first time it burst into flames and then exploded,
totally destroying Alf's premises. This was caused by faulty workmanship by Eric, an
employee of Slick Ltd, and a defective component.

Slick Ltd denies any liability for the damage because Alf had not made the additional 20%
payment.

Analyses in Contract & Sale of Goods

Exclusion clauses

Drafted 20th August 2009

Mike Semple Piggot

Aardvark purchases a new conservatory from Buildatory Ltd after visiting their website and seeing their
extensive range of conservatories. He is impressed by the testimonials and the range and arranges for a salesman
to call and measure up 'without obligation'. A salesman from Buildatory measures up, talks the specification of
the conservatory through with Aardvark. Aardvark and the salesman continue talking about the conservatory and
the Buildatory Ltd salesman gives Aardvark a 'Memorandum of Agreement' confirming the specification, the
price and delivery and installation date which Aardvark agreed and when the price of £15,000 was agreed
Aardvark signed the memorandum to confirm the agreement. On the back of the memorandum is an exclusion
clause, which Aardvark did not read, which reads:

(a) Buildatory Ltd accept no responsibility, whether through their contractors or by third parties, for personal
injury occasioned by whatever means during the installation of the conservatory.

(b) All conditions and warranties in relation to the quality and fitness for purpose of the conservatory are hereby
excluded

(c) Damage to property caused by contractors during the installation is limited to £250.

During the installation, due to negligent fitting on the part of Buildatory's installation team, part of the structure
falls down and injures Aardvark, breaking his arm and causing damage to the rear of the house is caused which
will cost £1500 to fix. The conservatory installation is fitted and Aardvark is satisfied with the quality of that
work.

You are asked to advise Aardvark on the validity of the exclusion clause.

1. This is a contract for the sale and installation of a conservatory governed by the Suppply of Goods and
Services Act 1979. There are no goods liability issues arising and the only issue is the the incorporation,
construction and validity of the exclusion clause at common law and under The Unfair Contract Terms Act 1977
(UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR).

2. The exclusion clause in the 'Memorandum of Agreement' is a contractual clause which seeks to exclude or
restrict liability for breach of contract, negligence, breach of implied terms or misrepresentation. A contracting
party who wishes to include an exclusion clause in a contract and rely upon it must overcome three hurdles
before he can do so. He must show: (i) that it is incorporated in the contract (ii) That, as a matter of construction,
it applies to cover the events which have arisen (iii) That it is valid under the Unfair Contract Terms Act 1977
and the Unfair Terms in Consumer Contracts Regulations 1999

Incorporation
3. No statements, oral or written, including exclusion clauses, may become a term of the contract unless made
before the contract was concluded. Any statement made after the conclusion of a valid contract will not be a part
of it, will not be supported by valid consideration and will not be binding or enforceable. Roscorla v Thomas
(1842) 3 QB 234 In Olley v Marlborough Court Hotel [1949] 1 KB 532 A notice on the back of the room door
disclaiming liability was not enforceable. The disclaimer or exclusion clause should have been drawn to the
attention of the husband and wife when they checked in and before the contract for the hire of the room had
thereby been concluded.

4. The difficulty here is that while all the terms of the agreement were discussed and agreed to - and Aardvark
signed the memorandum, he did not read the exclusion clause on the back of the document, nor was it drawn to
his attention. While L'Estrange v F Graucob [1934] 2 KB 394 applied strictly would suggest that aardvark is
bound by signature the court in the more recent case of Interfoto Picture Library Ltd v Stiletto Visual
Programmes [1989] QB 433; [1988] 2 WLR 615 has emphasised where, as here, the exclusion is particularly
harsh, exluding liability for everything that extra care must be given to drawing the attention of the other
contracting party to it. This did not happen and it may be, on that ground alone, the court would refuse to uphold
the clause by refusing to accept it as being incorporated into the contract.

Construction

5. As a matter of construction there are no significant issues. The clauses clearly cover the damage which has
arisen (Canada Steamship Lines v The King [1952] AC 192 et al)

Validity: exclusion of liability for personal injury

6. The Unfair Contract Terms Act covers notices and contract terms which purport to exclude or restrict liability
in contract and tort. The liability arising must be a business liability (s.1(3) UCTA 1977). Buildatory Ltd is
acting in the course of business so the Unfair Contract terms Act 1977 applies.

7. Section 2 and Negligence Claims

Section 2 provides:

(1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular
persons exclude or restrict his liability for death or personal injury resulting from negligence.

(2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in
so far as the term or notice satisfied the requirement of reasonableness.

(3) Where a contract term or notice purports to exclude or restrict liability for negligence a person's agreement to
or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk.

The first point to note is whether s.2 of the Act applies to contract terms or notices which seek to define the
obligations of the parties. In answering this question it is necessary to have regard to two particular provisions of
the Act and the interpretation which has been placed upon them by the courts.

The first provision is the definition of negligence in s.1(1) as ―the breach:

(a) of any obligation, arising from the express or implied terms of a contract, to take reasonable care or exercise
reasonable skill in the performance of the contract;

(b) of any common law duty to take reasonable care or exercise reasonable skill (but not any stricter duty);

(c) of the common duty of care imposed by the Occupiers' Liability Act 1957 or the Occupiers' Liability Act
(Northern Ireland) 1957.‖

The second provision is s.13(1) which states that:

―To the extent that this Part of this Act prevents the exclusion or restriction of any liability it also prevents –

(a) making the liability or its enforcement subject to restrictive or onerous conditions;

(b) excluding or restricting any right or remedy in respect of the liability, or subjecting a person to any prejudice
in consequence of his pursuing any such right or remedy;

(c) excluding or restricting rules of evidence or procedure;

8. Buildatory Ltd will not be able to rely on the exclusion clause in relation to their negligence which caused
Aardvark's injury. This is invalidated by s. 2 Unfair Contract terms Act 1977

9. Other loss or damage

The exclusion clause in relation to toher loss or damage - here the damage caused to the rear of the property -
will be subject to the 'Reasonableness test in s.11 UCTA 1977 and the guielines set out in Schedule 2.

Reasonableness – s.11 UCTA 1977

(1) In relation to a contract term, the requirement of reasonableness is that the term shall have been a fair and
reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been ,
known to or in the contemplation of the parties when the contract was made. Section 8 of the Act amends s.3
Misrepresentation Act 1967 , which had required that terms excluding liability for misrepresentation should be
reasonable.

(2) In determining for the purposes of ss 6 or 7 above whether a contract term satisfies the requirement of
reasonableness, regard shall be had in particular to the matters specified in Schedule 2 to this Act; but this
subsection does not prevent the court or any arbitrator from holding, in accordance with any rule of law, that a
term which purports to exclude or restrict any liability is not a term of the contract.

(3) In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under
this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances
obtaining when the liability arose or (but for the notice) would have arisen.

(4) 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 not 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.

(5) It is for those claiming that a contract term or notice satisfies the requirement of reasonableness to show that
it does.

The Schedule 2 guidelines

The matters to which regard is to be had in particular for the purposes of ss.6(3), 7(3) and (4), 20 and 21 are any
of the following which appear to be relevant:

(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other
things) alternative means by which the customer's requirements could have been met;

(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of
entering into a similar contract with other persons but without having to accept a similar term;
(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term
(having regard, among other things, to any custom of the trade and any previous course of dealing between the
parties);

(d) where the term excludes or restricts any relevant liability if some condition is not complied with, whether it
was reasonable at the time of the contract to expect that compliance with that condition would be practicable;

(e) whether the goods were manufactured, processed or adapted to the special order of the customer.

10. The time for determining reasonableness is the time of entering into the contract. It is unlikely that a court
could be persudaded, in the circumstances of this case, given the failure to draw attention to the clause on the
back of the document, the relative inequity in the bargaining position of the parties and whether Aardvark could
cover himself for insurance - being quite unaware of the exclusion clause and, therebfore, a need to do so. S.
11(4) covers this situation (above). In my opinion the clause is likely to be regarded as unreasonable.

Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR).

11. The UTCCR 1999 apply to this contract. Buildatory is a business supplier (reg 3(1)) and Aardvark is a
'consumer'. The regyulations apply to contract terms, as here and the difficulty for Buildatory Ltd here is that the
exclusion clause has not only not been individually negotiated but it was not even drawn to the attention of
Aardvark. It is, in effect, a pre-formulated standard contract (reg 5(3)). I am of the view that the caluse would be
rendered unreasonable under reg 8(1) on grounds that they are 'contrary to good faith' and cause a significant
imbalance in the parties rights and obligations arising under the contract. The exclusion clause is, in practical
terms, a unilateral imposition of Aardvark and he has not been dealt with fairly or equitably because the clause
was not drawn to his attention.

12. For the reasons given, the exclusion clause is unlikely to be upheld and aardvark will be able to pursue his
contractual and tortious remedies for injury and damage to property in the usual way.

9. Vitiating Factors / Misrepresentation

Misrepresentation Act 1967

9.1 Vitiating Factors

9.1.1 Introduction

Even where it is established that the essential elements of a legally binding contract are present, and the terms
can clearly be identified, the agreement may not be legally enforceable because of the presence of some vitiating
factor. Thus, where fraud is present or a fundamental mistake as to the contract has been made by one or both
parties, the contract may be either totally void or voidable at the option of the innocent party.

The main vitiating factors which we will examine are Misrepresentation, Duress and Undue Influence, Mistake
and Illegality (with particular reference to Restraints of Trade).

***

9.2 Misrepresentation

9.2.1 Introduction

Introductory note

The law of misrepresentation is an amalgam of common law and statute. Before the Misrepresentation Act 1967
the law was already complex because Equity provided the remedy of rescission for ‗innocent' misrepresentation
(in effect, any misrepresentation). Courts of Law (as distinct from Courts of Equity) provided for damages and in
some cases rescission for fraudulent misrepresentation. The law was adjusted by the Misrepresentation Act 1967
.

A further complicating factor is that an action for damages for fraudulent misrepresentation, is part of the law of
tort, where it is also called ‗deceit', and cases where the fraudulent misrepresentation has induced a contract can
be regarded as a specialized subset of the tort of fraudulent misrepresentation. In some cases negligent
misrepresentation inducing a contract will also amount to the tort of negligent mis-statement.

There is a clear exposition of the structure of the law in the chapter on Misrepresentation in Chitty on Contract ,
29th edition (for which edition the relevant chapter was completely rewritten).

Definition

An action for misrepresentation is the remedy for a party who has entered into a contract in reliance on a false
statement (representation) of fact by the other party but the statement has not become incorporated in the contract
as a term, i.e. the statement is not part of the bargain that the parties have made. Where the statement has become
a term the remedy will be an action for breach of contract.

Example

X, wishing to buy a used car privately, enters into negotiations with Y who has advertised his car for sale. The
odometer of the vehicle in question is turned back to nought. In the course of negotiations Y makes a number of
statements including a (false) statement that the car has a very low mileage. A few days later X returns and
agrees to buy the car. The written note of the transactions makes no statement as to the mileage of the car.

The remedy in this instance will be an action for misrepresentation and not an action for breach of contract.

Where there is an actionable misrepresentation it renders the contract voidable, i.e. valid until avoided at the
instance of the innocent party.

We shall deal first with the distinction between representations and terms, then the concept of actionable
misrepresentation and the remedies available, and conclude by looking at clauses which purport to exclude
liability for misrepresentation.

9.2.2 Representations and terms

A reminder

Statements made by the parties in the course of negotiations leading up to the formation of a contract are
classified as either representations or terms.

Whether a statement is a representation or a term is primarily a question of intention. If the parties have indicated
that a statement is to be regarded as a term, the court will implement their intention. In other cases, the following
guidelines may be applied:

Manner and timing of statement

A statement is not likely to be a term if the person making the statement asks the other party to check or verify it,
as where the seller of a boat stated that it was sound but asked the buyer to have it surveyed; Ecay v Godfrey
(1947) 80LL LR 286. If the statement is made with the intention of preventing the other party from finding a
defect, and succeeds in this, the court may consider it to be a term. Thus in Schawel v Reade (1913) 2 IR 64, the
vendor of a horse said to the buyer, ―you need not look for anything, the horse is perfectly sound‖ and the House
of Lords held that the statement was a term.

Where there is a distinct interval of time between the making of the statement and the conclusion of the contract,
this may indicate that the parties do not intend the statement to be a term; Routledge v McKay [1954] 1 WLR
615.
Importance of statement

A statement is likely to be a term if it is such that the injured party would not have entered the contract had it not
been made.

Bannerman v White (1861) 10 CB NS 844

A prospective purchaser of hops asked whether they had been treated with sulphur, adding that if they had, he
would not even trouble to ask the price. The seller's (erroneous) statement that sulphur had not been used was
held to be a term.

Special knowledge and skill

Where one of the parties possesses superior knowledge and skill relating to the subject matter, the court may
conclude that any statement made by such a party is a term.

Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623,
A car dealer gave a false statement as to the mileage of a Bentley. The Court of Appeal held the dealer's
statement to be a term, thus distinguishing Oscar Chess Ltd v Williams [1957] 1 WLR 370 where, on a part-
exchange deal, a private car owner falsely (but honestly) stated the age of the car to the dealer. The statement was
held to be a representation; the dealer was in at least as strong a position to verify the truth of the statement.

See: The Judgment of Lord Justice Denning (as he then was) in Oscar Chess v Williams

The crucial question is: was it a binding promise or only an innocent misrepresentation? The technical distinction
between a "condition" and a "warranty" is quite immaterial in the case, because it is far too late for the buyer to
reject the car. He can at best only claim damages. The material distinction here is between a statement which is a
term of the contract and a statement which is only an innocent misrepresentation. This distinction is beet
expressed by the ruling of Lord Holt, "Was it intended as a warranty or not?", using the word warranty there in
its ordinary English meaning: because it gives the exact shade of meaning that is required. It is something to
which a man must be taken to bind himself.

In applying Lord Holt's test, however, some misunderstanding has arisen by the use of the word "intended". It is
sums times supposed that the tribunal must look into the minds of tae parties to see what they themselves
intended. That is a mistake.

Lord Moulton made it quite clear that "The intention of the parties can only be deduced from the totality of the
evidence". The question whether a warranty was intended depends on the conduct of the parties, on their words
and behaviour, rather than on their thoughts. If an intelligent bystander would reasonably infer that a warranty
was intended, that will suffice. And this, when the facts are not in dispute, is a question of law. That is shown by
Heilbut v. Buckleton itself, where the House of Lords upset the finding by a jury of a warranty.

It is instructive to take some recent instances to show how the Courts have approached this question. When the
seller states a fact which is or should be within his own knowledge and of which the buyer is ignorant, intending
that the buyer should act on it and he does so, it is easy to infer a warranty. See Couchman v. Hill (1947 King's
Bench, page 554) where the farmer stated that the heifer was unserved and Harling v. Eddy (1951, Volume 2,
King's Bench, page 739) where he stated that there was nothing wrong with her. So also if he makes a promise
about something which is or should be within his own control. See Birch v. Paramount Estates Ltd. decided on
2nd. October 1956 in this Court, where the seller stated that the house would be as good as the show house. But
if the seller, when he states a fact, makes it clear that he has no knowledge of his own but has got his information
elsewhere, and is merely passing it on, it is not so easy to imply a warranty. Such a case was Routledge v.
McKay (1954, Volume 1, Weekly Law Reports at page 636) where the seller "stated that it was a 1942 model
and pointed to the corroboration found in the boon", and it was held that there was no warranty.

Turning now to the present case, much depends on the precise words that were used. If the seller says "I believe
it is a 1948 Morris. Here is the registration book to prove it," there is clearly no warranty. It is a statement of
belief, not a contractual promise. But if the seller says "I guarantee that it is a 1948 Morris. This is borne out by
the registration book, but you need not rely solely on that. I give you my own guarantee that it is," there is clearly
a warranty. The seller is making himself contractually responsible, even though the registration book is wrong.

In this case much reliance was placed by the Judge on the fact that the buyer looked up Glass's Guide and paid
£290 on the footing that it was a 1948 model: but that fact seems to me to be neutral. Both sides believed the car
to have been made in 1948 and in that belief the buyer paid £290. That belief can be just as firmly based on the
buyer's own inspection of the log book as on a contractual warranty by the seller.

Once that fact is put on one side, I ask myself: What is the proper inference from the known facts? It must have
been obvious to both that the seller had himself no personal knowledge of the year when the car was made. He
only became owner after a great number of changes. He must have been relying on the registration book. It is
unlikely that such a person would warrant the year of manufacture. The most he would do would be to state his
belief, and then produce the registration book in verification of it. In these circumstances the intelligent bystander
would, I suggest, say that the seller did not intend to bind himself so as to warrant that it was a 1948 model. If the
seller was asked to pledge himself to it, he would at once have said "I cannot do that. I have only the log-book to
go by, the same as you".

The Judge seems to have thought that there was a difference between written contracts and oral contracts. He
thought that the reason why the buyer failed in Heilbut Symons and Routledge v. McKay was because the sales
were afterwards recorded in writing, and the written contracts contained no reference to the representation. I
agree that was an important factor in those cases. If an oral representation is afterwards recorded in writing, it is
good evidence that it was intended as a warranty.

If it is not put into writing, it is evidence against a warranty being intended. But it is by no means decisive. There
have been many cases where the Courts have found an oral warranty collateral to a written contract such as Birch
v. Paramount Estates. But when the purchase is not recorded in writing at all, it must not be supposed that every
representation made in the course of the dealing is to be treated as a warranty. The question then is still: Was it
intended as a warranty? In the leading case of Chandelor v. Lopus in 1603 a man by word of mouth sold a
precious stone for gold affirming it to be a bezoar stone whereas it was not. The declaration averred that the
seller affirmed it to be a bezoar stone, but did not aver that he warranted it to be so. The declaration was held to
be ill because "the bare affirmation that it was a bezoar stone, without warranting it to be so, is no cause of
action." That has been the law from that day to this and it was emphatically re-affirmed by the House of Lords in
Heilbut Symons v. Buckleton (1913 Appeal Cases at pages 36 and 50)

Statement reduced to writing

Where the agreement has been reduced to a written document, statements appearing in the written contract will
normally be regarded as terms. Subject to the matters discussed above, statements excluded from the written
contract are likely to be regarded as representations. Nevertheless, the court will look to the intention of the
parties to see whether they intended a contract partly written and partly oral; J Evans and Son (Portsmouth) Ltd v
Andrea Merzario Ltd [1976] WLR 1078.

***

9.3 Actionable Misrepresentation

9.3.1 Definition

An actionable misrepresentation is a false statement of fact made during pre-contractual negotiations by one
party which induces the other party to enter into a contract.

False statement of fact

To be actionable, the statement must be one of some specific existing fact or past event. Thus the vendor who
states that ―the drains are in good working order‖ or ―the car's engine has been re-conditioned‖ is clearly making
a false statement of fact which would be actionable if manifestly false.
However, the position is rarely so straightforward and it is necessary to distinguish between statements of fact,
which are actionable if false, and statements of opinion or belief; statements of future conduct or intention;
statements of law and cases of silence or non-disclosure which are not in general actionable.

(i) Statements of opinion or belief

Such statements, if false, do not constitute actionable misrepresentation.

Bisset v Wilkinson [1927] AC 177

The owner of a farm, which had never been used as a sheep farm stated that he believed it would support a
certain number of sheep. The court held the statement to be one of opinion not fact.

Of course, very often, the makers of such statements are dealers or agents who have special knowledge or skill in
relation to the subject-matter, or are in a stronger position to know the truth. Here the court may infer an implied
representation of fact; see, for example Smith v Land and House Property Corporation (1884) 28 Ch D 7 where
the plaintiff put his hotel up for sale declaring that it was let to a ‗most desirable tenant'. The tenant was not
desirable, he was bankrupt! The defendant refused to complete and was sued. The Court of Appeal held that the
plaintiff's statement was a statement of fact, not a mere opinion.

See also Esso Petroleum Co Ltd v Mardon (1976) QB 801. A petrol company offering an inaccurate sales
forecast were liable in damages to thetenant who contracted in reliance on the forecast.

Brown v Raphael [1958] Ch 636 CA

Clearly, many (but not necessarily all) statements made by advertisers are classed as ―mere puff‖ and are not
actionable because they have no factual basis (e.g. ―we take the drama out of a crisis‖).

(ii) Statements of future conduct or intention

A statement by a person as to what he will do in the future is not a statement of fact, e.g. ―over the next five
years, our investment plans amount to five million pounds‖. But even here a person who wilfully lies about his
intentions may be guilty of a (fraudulent) misrepresentation of fact, as illustrated by the following case.

Edgington v Fitzmaurice (1885) 29 Ch D 459

A company raised money from the public by saying that the money would be invested in the expansion of the
business. In fact, the directors' real intention was to use the money to pay off the company's debts. The statement
was held to be a fraudulent misrepresentation of fact. Bowen L J, in a famous judicial pronouncement said:

―There must be a mis-statement of an existing fact; but the state of a man's mind is as much a fact as the state of
his digestion. It is true that it is very difficult to prove what the state of a man's mind at a particular time is, but if
it can be ascertained, it is as much a fact as anything else. A misrepresentation as to the state of a man's mind is,
therefore, a misstatement of fact.‖

The same principle would also apply to a dishonest statement of opinion or belief; see (i) above.

(iii) Statements of law

A false statement as to what the law is, is not an actionable misrepresentation, e.g. ―a valid contract of hire
purchase does not need to be in writing.‖ However, in practice, such bold statements are rarely made and
statements containing legal propositions may be related to the subject matter in such a way that they are really
statements of fact. For example, in Solle v Butcher (1950) 1 KB 671 a statement that a flat was ―new‖ and
therefore not subject to the Rent Acts was held to be fact.

Besides, this principle may have to be called into question since the House of Lords declared, in Kleinwort
Benson v Liverpool City Council [1999] 1 AC 953 that a mistake of law could render a contract void for mistake,
contrary to the traditional view that it could not. A mistake, and misunderstanding induced by misrepresentation,
are similar, so the doctrines of mistake (discussed in a later chapter) and misrepresentation are related.
(iv) Silence or non-disclosure

The general rule here is that to remain silent does not amount to misrepresentation. Thus a commercial traveller
who kept quiet, at a job interview, the fact that he had serious motoring convictions was not guilty of
misrepresentation; Hands v Simpson Fawcett (1928) 44 TLR 295. Obviously, if he had been directly asked
whether he had such convictions and had denied it, he would have been liable.

However, as was stated by Lord Campbell L C in Walkers v Morgan (1861) 3 D F & J 718, although simple
reticence does not amount to a legal wrong ... a single word or a nod or a wink or a shake of the head or a smile
from one party might amount to misrepresentation. And of course it is also possible to have a misrepresentation
by conduct.

Thus to deliberately physically conceal dry rot in a building may amount to misrepresentation.

R v Barnard (1837) 7 C & P 784D, in Oxford, wore a cap and gown in order to persuade shopkeepers to let him
have goods on credit. The fact of appearing so dressed was held to amount to a false pretence; this was a criminal
case but there is no reason to suppose that the same principles would not apply to civil liability.

In Sykes v Taylor-Rose [2004] EWCA Civ 299 the seller who was asked if there was anything the buyer had a
right to know was held not liable in misrepresentation despite the fact that a murder had occurred several years
before. To some extaent - caveat emptor or 'let the buyer beware' still operates.

The rule about silence not being misrepresentation is subject to four exceptions:

1. Statement a half truth

Clearly, a statement that is partial, i.e. fails to present the whole truth, can constitute misrepresentation; Tapp v
Lee (1803) B & P 367. Thus a vendor of property who states that the property has planning permission for
business purposes but fails to add that the permission is a temporary one and is shortly due to expire would be
guilty of misrepresentation.

2. Change of circumstances

A duty of disclosure may arise where the circumstances have changed, i.e. a statement which was true when
made has become false by the time it is acted upon. An example is the following case:

With v O'Flanagan (1936) Ch D 575

A doctor, negotiating the sale of his practice, correctly stated that it produced an income of £2,000 per annum.
However, by the time the contract was signed four months later the practice had declined so that it was worth no
more than £5 per week. It was held that the failure of the vendor to disclose this state of affairs was an actionable
misrepresentation.

3. Contracts uberrimae fidei (of the utmost good faith)

These are a type of contract which require full disclosure of all material facts. The most important example of
such contracts are contracts of insurance.

Norwich Union Insurance Ltd v Meisels [2006] exemplifies the principle.

4. Parties in a fiduciary relationship

Where the parties are in a relationship based on good faith (e.g. principal and agent, solicitor and client, doctor
and patient) a duty of disclosure will arise.

See: Conlon and Another v Simms [2006] EWHC 401 CH

Inducement
To amount to an actionable misrepresentation, a false statement of fact must be material in the sense that it
induces the misrepresentee to enter the contract. If the misrepresentee relies on his own judgment or
investigations, there will be no liability on the part of the misrepresentor, as in the following case:

Attwood v Small (1838) 6 Ch & Fin 232

The vendors of a mine made exaggerated statements as to its earning potential and the purchaser instructed a firm
of expert surveyors to check the veracity of the statements. The surveyors reported that the vendor's statements
were correct. It was held that the vendors were not liable – the purchasers had been induced to enter the contract
by the expert's report and not by the vendors. (The purchasers in such a situation would, of course, have an action
against the surveyors).

A complication to the above principle is introduced by the following case:

Redgrave v Hurd (1881) Ch D 1

P, a solicitor, wished to take a partner and negotiated with Hurd. P told Hurd that the income of the practice was
£300-£400 per annum and Hurd was shown papers purporting to prove this. If Hurd had carefully read these
documents he would have seen that the practice was virtually worthless. He did not read them but the court
nevertheless held the misrepresentation to be actionable, and the plaintiff's action for breach of contract failed. It
made no difference that a prudent purchaser would have discovered the true position.

Obviously, if the plaintiff is unaware of the misrepresentation at the time of the contract there can be no liability (
Horsfall v Thomas (1862) 1 H & C 90) and the position is the same if he is aware of it but it is proved that it
cannot possibly have affected his judgment; Smith v Chadwick (1884) 9 AC 187.

The misrepresentation does not have to be the sole inducing factor.

See: Peekay Internmark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA CIV 386 stated that
the principle in Redgrave v Hurd required actual knowledge and not constructive knowledge.

9.4 Types of Misrepresentation

In the modern law, misrepresentation is classed as fraudulent, negligent or wholly innocent. These are considered
below.

9.4.1 Fraudulent misrepresentation

Definition

―Fraudulent‖ in this sense was defined by Lord Herschell in Derry v Peek (1889) 14 App Cas 337 as a false
statement that is ―made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless as to whether it
be true of false.‖ The essence of fraud is the absence of honest belief; in Derry v Peek , a share prospectus falsely
stated that the company had the right to use mechanical power to draw trams, without explaining that
governmental consent was required for this. In fact, the directors honestly believed that obtaining consent was a
pure formality, although it was ultimately refused. The House of Lords held that there had been no fraudulent
misrepresentation.

Lord Herschell however did point out that though unreasonableness of the grounds of belief is not deceitful, it is
evidence from which deceit may be inferred. There are many cases,

"where the fact that an alleged belief was destitute of all reasonable foundation would suffice of itself to
convince the court that it was not really entertained, and that the representation was a fraudulent one."

On the other hand, there need be no intention to defraud. An intention to deceive (with no intention to cause the
claimant loss) is sufficient.
9.4.2 Negligent misrepresentation

Negligent mis-statement at common law

Until 1963, damages could only be claimed for misrepresentation where it was fraudulent. All non-fraudulent
misrepresentations were classed as ―innocent‖ and damages were not available for such innocent
misrepresentations. In 1963, the House of Lords stated, obiter, in Hedley Byrne Co Ltd v Heller Partners Ltd
[1964] AC 465 that in certain circumstances damages may be recoverable in tort for negligent mis-statement
causing financial loss. The liability depends on a duty of care arising from a ―special relationship‖ between the
parties. It is now clear that a party can claim damages under the principle in Hedley Byrne where a negligent
mis-statement has induced him to enter a contract; Esso Petroleum Co Ltd v Mardon (1976) QB 801. Broadly
speaking, the special relationship will only arise where the maker of the statement possesses knowledge or skill
relevant to the subject matter of the contract and can reasonably foresee that the other party will rely on the
statement.

Negligent misrepresentation under the Misrepresentation Act 1967

Section 2(1) of the Act of 1967 introduced, for the first time, a statutory claim for damages for non-fraudulent
misrepresentation. Section 2(1) provides that where a person has entered a contract after a misrepresentation has
been made to him by another part thereto and a result thereof he has suffered loss, then, if the person making the
misrepresentation would be liable to damages in respect thereof had the misrepresentation been made
fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently,
unless he proves that he had reasonable ground to believe and did believe up to the time the contract was made
that the facts represented were true.

It should be noted that the sub-section assumes all non-fraudulent statements to be negligent and puts the burden
on the maker of the statement to disprove negligence.

Wholly innocent misrepresentation

We have seen that before 1963, the word ―innocent‖ was used to describe all misrepresentations that were not
fraudulent.

In the light of Hedley Byrne and s.2(1) of the Act of 1967, the word innocent may now be used to refer to a
statement made by a person who has reasonable grounds for believing in its truth. To avoid confusion, ―wholly
innocent‖ is a better description.

9.5 Remedies for Misrepresentation

Once it has been established that an actionable misrepresentation has occurred, it is necessary to consider the
remedies available to the injured party. These are:

9.5.1 Rescission

9.5.2 Damages for misrepresentation

9.5.3 Damages in lieu of rescission

9.5.1 Rescission

Rescission means setting aside the contract. This may be done by the injured party applying to the court for an
order rescinding the contract, or the injured party may rescind by notifying the other party or by any other act
indicating repudiation of liability, e.g. notifying the police or a Justice of the Peace.

Rescission is available whether the misrepresentation is fraudulent, negligent or innocent. The effect of rescission
is to terminate the contract ―ab initio‖, i.e. the parties are put back in the position they would have been in had
the contract never been made. In order to achieve this position, an order of rescission may be accompanied by the
court ordering an indemnity. This is a money payment by the misrepresentor which is designed to restore the
parties to their position had the contract not been made. It is limited to payments in respect of obligations
necessarily created by the contract and is to be distinguished from damages.

The distinction is illustrated by the following case:

Whittington v Seale Hayne (1900) 82 LT 49

Poultry breeders took a lease of premises as a result of an innocent misrepresentation that the premises were
sanitary. They were not and the contract was rescinded. It was held that an indemnity could be recovered in
respect of rent, rates and repairs as these were obligations necessarily created by taking the lease. The indemnity
would not however cover loss of business profits, loss of stock and medical expenses etc as these were losses
related to the plaintiffs' business and the plaintiffs were not obliged to carry on a business under the terms of the
contract. Such items, had they been awarded, would have amounted to damages.

An indemnity may still be awarded after the Misrepresentation Act 1967 although it will not be appropriate
where damages are in fact awarded either under that Act or at common law. This means that the remedy remains
particularly significant where the contract is rescinded for a wholly innocent misrepresentation.

There are certain ―bars‖ to rescission, i.e. situations in which a party may lose the right to rescind. These are:

(i) Affirmation

Long v Lloyd (1958)1 WLR 753

Affirmation will occur where the injured party, with full knowledge of the misrepresentation, states (expressly or
impliedly) that he intends to continue with the contract. Thus if X, having bought a vehicle from Y as a result of
a misrepresentation as to its condition, subsequently agrees to share with Y the cost of necessary repairs and
continues to use it, he may be said to have affirmed the contract;

Lapse of time in seeking a remedy may be evidence of affirmation. In the case of non-fraudulent
misrepresentation, rescission may be barred where, even though there is no delay in seeking a remedy once the
plaintiff is aware of the misrepresentation, a period of time has elapsed since the contract.

Leaf v International Galleries [1950] 2 KB 86

P bought a picture as a result of an innocent misrepresentation that it was a Constable. Some five years later he
discovered it was not genuine and the Court of Appeal held that rescission was barred.

(ii) Impossibility of restitution

The injured party will lose the right to rescind if the parties cannot be restored to their original position:

Clarke v Dickson (1858) E B & E 148

The plaintiff invested money in a partnership to exploit a lead mine as a result of a misrepresentation by the
defendants. Later the partnership was in financial difficulty and with the plaintiff's consent it was converted into
a limited company and the partnership capital was converted into shares. On discovery the falsity of the
representations, the plaintiff sought rescission of the contract. It was held that rescission could not be granted
because the partnership was no longer in existence, having been replaced by the company, and it was not possible
to restore the parties to their original positions.

In the above case the property had totally changed in nature but where the property has merely deteriorated the
court may rescind with a cash adjustment; Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218.

(iii) Third party rights

Rescission is not available where an innocent third party has acquired rights to the subject-matter of the contract.
This bar to rescission also operated in Clarke v Dickson above as creditors had acquired rights over the company.

It should be noted that two further bars to rescission were abolished by s.1 Misrepresentation Act 1967 , i.e.
where the misrepresentation had become incorporated as a contractual term, and where, after a non-fraudulent
misrepresentation, the contract had been executed. This should be borne in mind when looking at some of the
older cases.

9.5.2 Damages for misrepresentation

Damages for misrepresentation may be claimed or, as the case may be, awarded under the following heads:

(i) Damages for fraudulent misrepresentation

This is essentially a claim for compensation in the tort of deceit. The object is to restore the plaintiff to the
position he would have been in had there been no misrepresentation, i.e. the amount by which he is out of pocket
by entering the contract. Thus in McC onnel v Wright (1903) 1 Ch 546, the plaintiff was induced to buy shares
by a fraudulent misrepresentation. He recovered the difference between the purchase price and the actual value of
the shares, assessed at the time of the contract.

Damages for breach of contract, on the other hand, are normally on the ―loss of bargain‖ basis i.e. the injured
party is put in the position he would have been in if the contract had not been broken. Thus if in McConnel
(above), the shares had been warranted as having a certain value, then the plaintiff could recover (in an action for
breach of contract) that value. In practice the difference can be striking.

By way of example, suppose the vendor of a business makes certain misrepresentations which, if true, would
mean the business was worth £100,000. The purchaser puts down a deposit of £50,000, the balance to be paid at
a later date. In fact the business is really worth £25,000. Damages on the tortious basis (i.e. for
misrepresentation) would amount to £25,000; on the contractual basis to £75,000.

(ii) Damages for negligent misrepresentation

The plaintiff may elect to claim damages under Hedley Byrne provided the ingredients of the tort are established.
The measure of damages here will be on the same basis as deceit (i.e. the ―out of pocket‖ rule discussed above),
however the remoteness test will be one of reasonable foreseeability.

As an alternative the plaintiff may base claim for damages on s.2(1) of the Misrepresentation Act 1967 . As
explained later, where the plaintiff has entered into a contract, s.2(1) will be the normal remedy, not Hedley
Byrne.

Under s.2(1), the maker of the statement is deemed to have been negligent and bears the burden of disproving
negligence. The wording of the subsection (which is not a model of clarity) appears to introduce what has been
called a ―fiction of fraud‖. This apparently requires the plaintiff to establish that the defendant would have been
liable in damages if the statement had been made fraudulently. The main consequence is that the measure of
damages under s.2(1) is on the same basis as damages for deceit, i.e. the out of pocket rule. Similarly, the
remoteness test will be the same as that laid down in Doyle v Olby (above). This was affirmed by the Court of
Appeal in Royscott Trust Ltd v Rogerson [1991] 3 All ER 294. Despite earlier cases (e.g. Watts v Spence (1976)
Ch 165) placing damages under s.2(1) on the contractual basis, it would now seem to be established, as a result
of Sharneyford Supplies Ltd v Edge (1987) Ch 305 that damages under s.2(1) are indeed on the same basis as the
tort of deceit.

The following case, which repays careful study, is the leading decision on s.2(1):

Howard Marine and Dredging Co Ltd v Ogden and Sons [1978] QB 574
There took place negotiations for the hire of certain sea-going barges and the owner's negotiator misrepresented
their capacity. He relied on Lloyd's Register which was in fact incorrect – the correct information was on file at
the owner's head office. The Court of Appeal held that there was liability under s.2(1); the presumption of
negligence had not been rebutted in this case and so the burden on the misrepresentor is a heavy one. It is clear
that the reasonable grounds of belief must continue up to the time when the contract was made and so the statute
imposes an absolute obligation on the representor not to state facts which he cannot prove he had reasonable
grounds to believe. (Such an obligation does not necessarily exist under Hedley Byrne).

(iii) Remoteness

Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158,

HELD : in a fraudulent misrepresentation action the plaintiff may recover for all the direct loss incurred as a
result of the misrepresentation, regardless of foreseeability. This is therefore a more generous basis than either
contract (reasonable contemplation) or negligence (reasonable foreseeability) and can, in practice, bring the
damages up to the contractual level or even exceed it, as happened in the Doyle case.

Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254
Affirmed that foreseeability is irrelevant in a claim for fraudulent misrepresentation, and cannot ordinarily be
used to limit damages. However, in that case, the House of Lords threw doubt on whether this principle applies
also to claims under Misrepresentation Act s.2(1). In such cases, foreseeability may be relevant to identifying
which damages are recoverable, just as it is relevant in tort cases under Hedley Byrne.

(iv) Hedley Byrne and s. 2(1) compared

Given that there are two possible actions for negligent misrepresentation, it may be useful at this point to
consider the relative advantages and disadvantages of each:

1. Section 2(1) only applies ―where a person has entered into a contract‖, thus if there is an operative mistake
(see later) and the contract is void, no action for damages under s.2(1) would be possible since there is no
contract.

2. Under Hedley Byrne you don't have to prove that a misrepresentation as such has been made, i.e. it could be a
statement of opinion or law.

3. An action may be brought under Hedley Byrne where the misrepresentation was made by a third party to the
contract.

4. Hedley Byrne may be applicable where negotiations do not result in a contract between the plaintiff and
defendant but the plaintiff nevertheless suffers loss in reliance on the misrepresentation.

5. The great advantage, however of s.2(1) is the fact that it provides the plaintiff with an assumption of
negligence on the part of the defendant – under Hedley Byrne there is a far greater burden of proof.

Nevertheless, in all cases where the plaintiff has entered into a contract as a result of negligent misrepresentation,
an action under s.2(1) will be the normal remedy.

(v) Contributory negligence no defence to fraudulent misrepresentation

In an action for negligent mis-statement under Hedley Byrne the Law Reform (Contributory Negligence) Act
1945 will apply, so that damages may be reduced to take account of contributory negligence.

Standard Chartered Bank v Pakistan National Shipping Co [2000] 1 Lloyd's Rep 218 (HC)

HELD: contributory negligence was not relevant in a claim for fraudulent misrepresentation. The decision was
upheld by a majority of the Court of Appeal in Standard Chartered Bank v Pakistan National Shipping Co [2000]
EWCA Civ 230.

(vi) In fraud cases agents are personally liable

Standard Chartered Bank v Pakistan National Shipping Co [2002] UKHL 43; [2003] 1 All ER 273

When the same case reached the House of Lords, the only live question was whether the agent who made the
misrepresentation was personally liable. Mr Mehra apparently had some money. ‗His' company, on whose behalf
(and therefore acting as agent) he told the lie, did not. The House of Lords rejected his argument that he was not
personally liable. They found that as agent he was personally liable for any fraudulent misrepresentation; and so
long as he acted within his authority, the principal would also be liable.

9.5.3 Damages in lieu of rescission

Prior to the 1967 Act damages could not be claimed for a wholly innocent misrepresentation, i.e. one that is
neither fraudulent or negligent. The remedy for wholly innocent misrepresentation was rescission, accompanied
by an indemnity.

However, s.2(2) of the Misrepresentation Act 1967 gives the court a discretion, where the injured party would be
entitled to rescind, to award damages in lieu of rescission. Note that damages under s.2(2) cannot be claimed as
such, they can only be awarded by the court. The power of the court under the subsection can only be used in the
case of non-fraudulent misrepresentation (i.e. negligent and wholly innocent misrepresentation) and cannot be
used where one of the bars to rescission exist.

Where damages are awarded under s.2(1) the court must (by virtue of s.2(3)) take into account any damages
awarded in lieu of rescission under s.2(2).

See: UCB Corporate Services Ltd v Thomason [2005] EWCA CIV 225 discretion to refuse recission was
exercised and no substantial damages were awarded in lieu of the rescission denied.

9.6 Exclusion of Liability for Misrepresentation

9.6.1 Concept

Attempts to exclude liability for misrepresentation are not uncommon, e.g. by estate agents. The law on this is to
be found in s.3 of the Misrepresentation Act 1967 which provides:

―If a contract contains a term which would exclude or restrict –

(a) any liability to which a party to a contract may be subject by reason of any misrepresentation made by him
before the contract was made; or

(b) any remedy available to another party to the contract by reason of such a misrepresentation,

that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in s.11(1)
of the Unfair Contract Terms Act 1977 ; and it is for those claiming that the term satisfies that requirement to
show that it does.‖

A couple of points in connection with s.3 should be noted. It is clear that it cannot be evaded by the contract term
in question deeming that statements of fact are not representations; Cremdean Properties Ltd v Nash (1977) 244
EG 547. But a term which stated that an auctioneer had no authority to make any representation was held to fall
outside s.3 as it was not an exclusion clause at all but a limitation on the apparent authority of the auctioneer;
Overbrooke Estate Ltd v Glencombe Properties Ltd (1974) 3 All ER 511.

The Unfair Terms in Consumer Contracts Regulations 1999 are unlikely to add anything to s.3 as amended by
UCTA s.11(1). However UTCCR may be useful against a term where there is some doubt about whether the kind
of liability excluded is or is not a misrepresentation within the meaning of s.3.

9.7 How to Approach Problems on Misrepresentation

Misrepresentation is one of the most difficult topics in the law of contract involving as it does a mixture of
common law, equity and statutory rules. If you are faced with a problem involving pre-contractual negotiations it
is suggested you follow the following ―action guide‖:

1. Are the statements terms or representations: It there's any chance that they are the latter, proceed to:-

2. Is there any actionable misrepresentation? If so then:-

3. What type of misrepresentation is it? Is it fraudulent, negligent or innocent? On the facts this may be a difficult
question to decide.

4. What are the remedies available?

5. Deal with any clause purporting to exclude liability for misrepresentation.

Legal Research Exercise – Misrepresentation

1. It has been said that after 1967, the distinction between representations and terms is no
longer of such great significance. Do you agree?

2. What are the ingredients of actionable misrepresentation?

3. What are the exceptions to the rule that silence is not misrepresentation?

4. In the context of misrepresentation distinguish between fraudulent, negligent and

innocent.

5. Distinguish between damages and indemnity. When is an indemnity payable?

6. What are the bars to rescission?

7. On what basis are damages awarded for:

(i) fraudulent misrepresentation, and

(ii) negligent misrepresentation under s2(1) Misrepresentation Act 1967 ?

How does the award of damages for breach of contract differ from the above?

8. What were Lord Denning's reasons for dissenting from the majority of the Court of
Appeal in Howard Marine v Ogden? Do you agree with them?

9. In what situations is Hedley Byrne likely to be used instead of s.2(1)?

Tutorial – Misrepresentation

1. Dick, a wealthy car enthusiast, decided to look for a pre-owned Bentley. He went to
Harold's showroom.

Dick was examining a smart looking Bentley which had the mileometer turned back to
nought when he was approached by Harold, who said, ―No need to examine that one, she's
a great little bus. Don't take my word for it, look at the engineer's report in my office. I
think I'm right in saying she's done about 20,000 miles or so.‖

Dick declined the invitation to look at the engineer's report. If he had done so he would
 have seen that the bodywork, although appearing sound on a superficial examination, was
very badly rusted in certain places.

Also, the report stated that the car had done 20,000 since the engine had been overhauled.
Prior to that, the vehicle's mileage was 100,000 miles.

Three days later Dick called at Harold's showroom to buy the car. The written contract
made no reference to the statements made during negotiations, but contained a term that
the dealers were not to be held liable for any false statements made in the course of
negotiations.

Some months after delivery, Dick discovers the true position as to the engine. The
bodywork is now so badly rusted that the car has fallen completely apart.

Advise Dick as to his civil remedies.

2. Neil owned a comer shop where he ran a newsagent's and tobacconist's business. Neil
advertised the business and premises for sale in the local paper, stating that planning
permission had been obtained for the development of an off-licence extension to the
business.

Having seen the advertisement, Jane visited the premises and was told by Neil that the
profits were £40,000 per annum, and that he would anticipate an increase of at least 15%
in the next year. Neil said, ―If you don't believe me, look at these accounts.‖ Jane declined
to do so, but had she done so she would have discovered that the profits had never
exceeded £25,000 and were on a downward trend.

Shortly after this conversation Neil was notified by the local authority that the street on
which the premises were situated would become a traffic-free zone in the near future. Neil
didn't communicate this information to Jane.

Having entered into a written contract to purchase the premises which made no mention of
the above statements, Jane discovers that Neil's statement as to planning permission was
incorrect and that the profits position is not what she thought it to be. Furthermore, the
local authority has now closed the street, causing a drastic fall-off in passing trade.

Advise Jane .

10. Product Liability

10.1 Introduction

The English law relating to product liability is a complex amalgam of common law and statute law (with an EEC
Directive also floating in the background). The principal statutory provisions are of course contained within Part
I of the Consumer Protection Act 1987 (CPA). The common law contribution largely consists of rules of contract
law and tort law. In this paper consideration will not be given to the relevant rules of contract law, such as the
satisfactory quality provisions under the Sale of Goods Act 1979. Instead, concentration will be focused upon the
relevant rules of the law of tort and upon Part I of the CPA.

10.2 The Law of Tort

The origins of the contribution of the law of tort to product liability can be traced back to the famous case of
Donoghue v Stevenson [1932] AC 562. Lord Atkin stated that:

“A manufacturer of products, which he sells in such a form as to show that he intends them to reach the ultimate
consumer in the form in which they left him with no reasonable possibility of intermediate examination, and with
the knowledge that the absence of reasonable care in the preparation or putting up of the products will result in
an injury to the consumer's life or property, owes a duty to the consumer to take that reasonable care.”

Although this statement of principle constituted a significant improvement upon the law prior to Donoghue, it
suffered from a number of restrictions which made it an unsatisfactory basis for the development of the modern
law. It was often very difficult for a plaintiff to prove that the manufacturer of the product was at fault in the
manufacture of the product. It could also be very difficult to prove that the defect occurred in the course of the
manufacturing process (see Evans v Triplex Safety Glass Co Ltd [1936] 1 All ER 283) or that the defect in the
product was the cause of the damage to the plaintiff. As we shall see, many of these difficulties have been
alleviated by the enactment of the CPA.

But there remains at least one situation in which a plaintiff may wish to resort to the common law rather than
bring her case under the CPA. Such a situation arises were the defect lies in the product itself and there is no
personal injury or damage to other property of the plaintiff. In such a case the plaintiff cannot bring an action
under the CPA because s.5 (2) provides that a defendant shall not be liable in respect of the ―loss of or damage to
the product itself or for the loss of or damage to the whole or any part of the product which has been supplied
with the product in question comprised in it‖.

However it is possible to recover damages in the tort of negligence in respect of the cost of repairing a defect in
the product itself in certain exceptional situations. An example of such a phenomenon is Junior Books v The
Veitchi Co Ltd [1983] 1 AC 520. However Junior Books was interpreted extremely restrictively by the House of
Lords in D & F Estates v The Church Commissioners [1988] 3 WLR 368. See also the landmark decision of the
House of Lords in Murphy v Brentwood DC [1991] IAC 398, which affirms the approach adopted by the House
of Lords in D & F Estates and overrules the earlier decision of the House of Lords in Anns v Merton London
Borough Council [1978] AC 728. Lord Bridge stated that damages in tort do not generally extend to the cost of
repairing a defect in the product itself. Such a claim lies, if at all, in contract. Lord Bridge stated that:

―[if] the hidden defect in the chattel is the cause of personal injury or of damage to property other than the chattel
itself, the manufacturer is liable. But if the hidden defect is discovered before any such damage is caused, there is
no longer any room for the application of the Donoghue v Stevenson principle. The chattel is now defective in
quality, but it is no longer dangerous. It may be valueless or it may be capable of economic repair. In either case
the economic loss is recoverable in contract by a buyer or hirer of the chattel entitled to the benefit of a relevant
warranty of quality, but is not recoverable in tort by a remote buyer or hirer of the chattel.‖

This statement of principle does not close the door completely on the possibility of recovering damages in tort
for the cost of repairing a defect in the product itself. But such a claim can only be brought if the plaintiff can
bring herself within the scope of Junior Books. Junior Books has been subjected to an extremely restrictive
interpretation. In D & F Estates Lord Bridge stated that:

―the consensus of judicial opinion, with which I concur, seems to be that the decision of the majority is so far
dependent upon the unique, albeit non-contractual, relationship between the pursuer and the defender in that case
and the unique scope of the duty of care owed by the defender to the pursuer arising from that relationship that
the decision cannot be regarded as laying down any principle of general application in the law of tort or delict.‖

See to similar effect:

Muirhead v Industrial Tank Specialities Ltd [1968] QB 507

Aswan Engineering Establishment Ltd v Lupdine Ltd [1987] 1 All ER 135

Simaan General Contracting Co v Pilkington Glass Ltd (No. 2 ) [1988] 2 WLR 761 and
Greater Nottingham Co-operative Society Ltd v Cementation Piling and Foundations Ltd [1988] 2 All ER 971.

10.3 Property and Other Property

The distinction which we have been seeking to draw between damage to property and damage to other property
is important, not only to the common law of negligence, but also the CPA (s.5 (2)). There is little English
authority on this point. In Aswan Engineering Establishment Ltd v Lupdine Ltd [1987] 1 All ER 135, at 152
Lloyd LJ conceded that, in the vast majority of cases, it was not difficult to distinguish between damage to
property and damage to other property of the plaintiff. But he did provide some examples where the distinction
was not so obvious. What is the position where a tyre, which was bought with the car, bursts and damages the
car; where a defect in the cork renders a bottle of wine undrinkable or a buyer purchases lupdine in pails and, as a
result of a defect in the pails the lupdine is lost? In all these cases the ―provisional view‖ of Lloyd LJ was that
―there is damage to other property of the plaintiff, so that the threshold of liability is crossed.‖ (See further Owles
“Damage to Property” (1988) NLJ 771).

In reality the distinction is one of the policy tools which the courts use to limit the scope of liability for
negligence. Therefore boundaries of the distinction can seem somewhat arbitrary.

10.4 What is a Product?

In this section of the paper attention will be switched to the provisions of the CPA. The first question which must
be asked is ―What constitutes a product for the purposes of the Act?‖ A ―product‖ is defined in s.1(2) of the Act
as:

―any goods or electricity and (subject to subsection (3) below) includes a product which is comprised in another
product, whether by virtue of being a component part or raw material or otherwise‖.

―Goods‖ is further defined in s.45 as including:

―substances, growing crops and things comprised in land by virtue of being attached to it and any ship, aircraft or
vehicle‖.

This definition should be contrasted with the definition contained in Art 2 of the EEC Directive which states that:

―‗product' means all movables, with the exception of primary agricultural products and game, even though
incorporated into another movable or into an immovable. ‗Primary agricultural products' means the products of
the soil, of stock-farming and of fisheries, excluding products which have undergone initial processing. ‗Product'
includes electricity.‖

A number of difficult issues are likely to arise in relation to the definition of product. One is the extent to which
the following are likely to be caught by the Act:

(a) books,

(b) advice, and

(c) computer software.

(See further Whittaker ―European Product Liability and Intellectual Products‖ (1989) 105 LQR 125 and Walter v
Bauer Sup 439 NYS 2d 821).

Care should also be taken in relation to buildings. Although they are prima facie within the scope of s.45(1),
s.46(3)-(4) excludes liability under the CPA where goods are supplied by virtue of the creation or disposal of an
interest in land. In such a case a plaintiff must seek to invoke the Defective Premises Act 1972 or common law
liability.

10.5 When is a Product Defective?

There are broadly speaking two approaches which could be adopted to the issue of ―defectiveness‖. On one view
it could be said that a product is defective when it does not live up to the expectations of consumers (―the
contract standard‖). On the other hand a product could be said to be defective when the product is in a condition
which is unreasonably dangerous to persons or to their property (―the tort standard‖) (see further on this issue
Clark ― The Conceptual Basis of Product Liability ‖ (1985) 48 MLR 325). The 1987 Act appears to be closer to
the tort standard than the contract standard because s.3(1) provides that there is a defect in the product if:

―the safety of the product is not such as persons generally are entitled to expect; and for those purposes ―safety‖,
in relation to a product, shall include safety with respects to products comprised in that product and safety in the
context of risks of damage to property, as well as in the context of risks of death or personal injury‖.

Section 3(2) continues by providing that:

―In determining for the purposes of subsection (1) above what persons generally are entitled to expect in relation
to a product all the circumstances shall be taken into account, including –

(a) the manner in which, and purposes for which, the product has been marketed, its get-up, the use of any mark
in relation to the product and any instructions for, or warnings with respect to, doing or refraining from doing
anything with or in relation to the product;

(b) what might reasonably be expected to be done with or in relation to the product; and

(c) the time when the product was supplied by its producers to another; and nothing in this section shall require a
defect to be inferred from the fact alone that the safety of a product which is supplied after that time is greater
than the safety of the product in question.‖

Section 3 should be contrasted with Art 6 of the EEC Directive which states that:

―1. A product is defective when it does not provide the safety which a person is entitled to expect, taking all
circumstances into account, including:

(a) the presentation of the product;

(b) the use to which it could reasonably be expected that the product would be put;

(c) the time when the product was put into circulation.

2. A product shall not be considered defective for the sole reason that a better product is subsequently put into
circulation.‖

The definition of defectiveness is likely to give rise to a number of practical problems:

(a) to what extent can a producer discharge his obligations under the Act by putting a warning on his products?
Can he render an otherwise dangerous product safe by an appropriate warning? (See further Clark ― Strict
Liability for Product Defects – the Failure to Warn Issue ‖ (1983) JBL 130).

(b) to what extent will a cost benefit calculus enter into the decisions of the courts? and

(c) to what extent does ―defectiveness‖ depend upon standards which approximate to those at issue in a common
law negligence action? (See further Newdick ― The Future of Negligence in Product Liability ‖ (1987) 103 LQR
288).

10.6 Who is Liable under the Act?

The general principle is contained in s.2(1) of the Act which states that:
―where any damage is caused wholly or partly by a defect in a product, every person to whom subsection (2)
below applies shall be liable for the damage.‖

Section 2(2)-(5) state that:

(2) this subsection applies to –

(a) the producer of the product;

(b) any person who, by putting his name on the product or using a trade mark or other distinguishing mark in
relation to the product, has held himself out to be the producer of the product;

(c) any person who has imported the product into a member State from a place outside the member States in
order, in the course of any business of his, to supply it to another.

(3) Subject as aforesaid, where any damage is caused wholly or partly by a defect in a product, any person who
supplied the product (whether to the person who suffered the damage, to the producer of any product in which
the product in question is comprised or to any other person) shall be liable for the damage if –

(a) the person who suffered the damage requests the supplier to identify one or more of the persons (whether still
in existence or not) to whom subsection (2) above applies in relation to the product;

(b) that request is made within a reasonable period after the damage occurs and at a time when it is not
reasonably practicable for the person making the request to identify all those persons; and

(c) the supplier fails, within a reasonable period after receiving the request, either to comply with the request or
to identify the person who supplied the product to him.

(4) Neither subsection (2) above nor subsection (3) above shall apply to a person in respect of any game or
agricultural produce if the only supply of the game or produce by that person to another was at a time when it had
not undergone an industrial process.

(5) Where two or more persons are liable by virtue of this Part for the same damage, their liability shall be joint
and several.

10.7 What are the Defences Available under the Act?

It is for the person who is alleged to be liable for any defect in a product who must make out any of the defences
which are contained in s.4 of the Act. The defences contained in the Act are as follows:

(a) that the defect is attributable to compliance with any requirement imposed by or under any enactment or with
any Community obligation; or

(b) that the person proceeded against did not at any time supply the product to another; or

(c) that the following conditions are satisfied, that is to say –

(i) that the only supply of the product to another by the person proceeded against was otherwise than in the
course of a business of that person's; and

(ii) that s.2(2) above does not apply to that person or applies to him by virtue only of things done otherwise than
with a view to profit; or

(d) that the defect did not exist in the product at the relevant time; or
(e) that the state of scientific and technical knowledge at the relevant time was not such that a producer of
products of the same description as the product in question might be expected to have discovered the defect if it
had existed in his products while they were under his control; or

(f) that the defect –

(i) constituted a defect in a product (―the subsequent product‖) in which the product in question had been
comprised; and

(ii) was wholly attributable to the design of the subsequent product or to compliance by the producer of the
product in question with instructions given by the producer of the subsequent product;

(2) In this section ―the relevant time‖, in relation to electricity, means the time at which it was generated, being a
time before it was transmitted or distributed, and in relation to any other product, means:

(a) if the person proceeded against is a person to whom subsection (2) of section 2 above applies in relation to the
product, the time when he supplied the product to another;

(b) if that subsection does not apply to that person in relation to the product, the time when the product was last
supplied by a person to whom that subsection does apply in relation to the product.

The defence which has attracted the most interest is the ―developments risk‖ defence or the ―state of the art‖
defence (s.4(1)(e)). It is interesting to contrast s.4(1)(e) with Art 7 of the EEC Directive which states that:

―The producer shall not be liable as a result of this Directive if he proves . . . . (e) that the state of the scientific
and technical knowledge at the time when he put the product into circulation was not such as to allow the
existence of the defect to be discovered.‖

It can be seen that there are significant differences between the wording of the two provisions. The wording of
the defence is crucial:

(a) what is ―scientific and technical‖?

(b) what is ―knowledge‖?

(c) how discoverable must the defect be?

(d) what happens to the ultra-sensitive user?

(e) what happens where there are no comparators to assess the ―state of the art‖?

(f) what is the relationship between the developments risk defence and the definition of defectiveness?

(g) how significant is the shift in the burden of proof?

(h) what is the relationship between this defence and negligence based standards?

10.8 What Counts as Damage?

We have already seen that damages cannot be claimed under the Act in respect of the defect in the product itself,
but damages can be claimed for death or personal injury or any loss of or damage to any property (including
land) (s.5(1)). In relation to damage to property the following provisions also have effect:

(3) A person shall not be liable under section 2 above for any loss of or damage to any property which, at the
time it is lost or damaged, is not –

(a) of a description of property ordinarily intended for private use, occupation or consumption; and
(b) intended by the person suffering the loss or damage mainly for his own private use, occupation or
consumption.

(4) No damages shall be awarded to any person by virtue of this Part in respect of any loss of or damage to any
property if the amount which would fall to be so awarded to that person, apart from this subsection and any
liability for interest, does not exceed £275.

(5) In determining for the purposes of this Part who has suffered any loss of or damage to property and when
such loss or damage occurred, the loss or damage shall be regarded as having occurred at the earliest time at
which a person with an interest in the property had knowledge of the material facts about the loss or damage.

10.9 Contracting Out

Section 7 of the Act prohibits excluding or restricting liability under the Act. The Act does not appear to exclude
the transfer of liability from one person to another, as in Thompson v T Lohan (Plant Hire) Ltd [1987] 2 All ER
631 (contrast Phillips Products Ltd v Hyland and Hamstead Plant Hire Co Ltd [1987] 2 All ER 620). It should be
pointed out that ―notice‖ is defined in s.45(1) as meaning a ―notice in writing‖ and it has been argued that the
effect of this is that it is possible to contract out of the CPA by an oral notice.

10.10 Limitation

The limitation provisions are contained in a schedule to the Act. Basically, there is a three year limitation period
which runs from the date of discoverability but that limitation period is subject to a ten year long-stop which runs
from the date at which the product was first put into circulation.

10.11 Practical Advice to the Business Client

The phrase Product Liability is a fairly meaningless concept to the average UK manager. They may have heard
about some of the goings on in the United States, relating to such inanities as ―poodles in Micro-waves‖. But as
far as he is concerned it is not a problem that he has historically had to face. Such exposure as they may have had
may involve occasional visits to Insurance Brokers, payments of premiums, a few rude letters and the very
occasional visit to court, resulting in a small payout.

A company's legal advisers will do their clients a grave disservice, if they were to suggest that historic patterns of
legal exposure will be repeated in the future. Moreover legal exposure in itself is very much the tip of the iceberg
of a problem should a product related crisis arise. The corollary of product liability is obviously product safety
and in an increasingly safety conscious culture, environmental and safety issues are coming to the fore.

In one case where inadequate instructions led to a DIY enthusiast injuring himself in putting together a piece of
garden furniture, there was £2,000 in the way of legal damages, but this was dwarfed into insignificance by the
fact that the company lost many millions of pounds in that the large DIY chains refused to stock the product until
the necessary changes were made. In another case involving a similar type of product, adverse remarks on the
Esther Rantzen Show had a catastrophic effect on the product line concerned.

Lawyers should not pretend to be engineers, quality insurance inspectors, or the like, but the legal profession
must look to protecting the client's commercial position as well as its strict legal position. Advice to clients on
these issues increases the client's perception of a firm's potential involvement in the business.

Solicitors can have a role in auditing from a legal and commercial point of view, the operations of client
companies to maximise product safety and to limit any exposure to legal and commercial risks. This audit forms
the basis of the rest of the presentation in terms of directing the client towards the area of its business that may
require or benefit from your input in explaining to the Company how safety and liability may be affected.

10.11.1 A product safety audit

The purposes of the product safety and liability audit are to:
(i) assess the company's exposure to product safety and liability risks, particularly under the developing EC legal
regime; and

(ii) recommend action to be taken for limiting such exposure.

This involves interviews with the managers who are best able to provide accurate information about the
company's arrangements through which product liability risks can now arise. Since many of their arrangements
were established before the legal changes, one would fully expect the audit to uncover many areas which need to
be tightened up so that adjustments can be made to comply with the new requirements.

The product safety and liability audit is divided into 10 audit sections (i.e. 1-10). Each audit section is divided
into a number of audit topics (e.g. 5.1. – 5.11).

Sections 1–4 cover general management and company administration responsibilities, such as may rest with the
chief executive, company secretary, personnel director and insurance manager.

Sections 5–10 cover departmental management responsibilities, such as scientific, production, marketing, sales
and distribution.

For the purposes of scheduling audit interviews following this seminar the company should identify, for each of
the sections, the ―responsible manager‖ (who is knowledgeable about most of the company's arrangements
covered by the topics under a particular section) and any other managers to whom particular section) and any
other managers to whom particular topics may need to be referred.

As an example, the manager with responsibility for and knowledge of most of the topics under section 5 (R & D)
will need to be interviewed. He or she is the ―responsible manager‖ for section 5 and is asked to consider who
else may be ore knowledgeable about any particular topic, or aspects of a topic, so that they can be available on
the day of interview to deal with any questions referred to them.

Friday January 22nd 2010

01815137632317 FORID:10 UTF-8 Search

11. Mistake

Great Peace Shipping Limited v Tsavliris (International) Limited [2002] CA

Lord Phillips MR

A mistake can be simply defined as an erroneous belief. Mistakes have relevance in the law of contract in a
number of different circumstances. They may prevent the mutuality of agreement that is necessary for the
formation of a contract. In order for two parties to conclude a contract binding in law each must agree with the
other the terms of the contract. Whether two parties have entered into a contract in this way must be judged
objectively, having regard to all the material facts. It may be that each party mistakenly believes that he has
entered into such a contract in circumstances where an objective appraisal of the facts reveals that no agreement
has been reached as to the terms of the contract. Such a case was Raffles v. Wichelhaus (1864) 2 H&C 906. The
parties believed that they had entered into a contract for the purchase and sale of a cargo of cotton to arrive "ex
Peerless from Bombay". That term was capable of applying equally to a cargo of cotton on two different ships,
each called "Peerless" and each having sailed from Bombay, one in September and one in December. The court
accepted that parole evidence could be adduced to prove which shipment the parties had intended to be the
subject of the contract. Had one party intended the October shipment and the other the December shipment, the
agreement necessary for a binding contract would have been absent.

29. Raffles v. Wichelhaus was a case of latent ambiguity. More commonly an objective appraisal of the
negotiations between the parties may disclose that they were at cross-purposes, so that no agreement was ever
reached. In such a case there will be a mutual mistake in that each party will erroneously believe that the other
had agreed to his terms. This case is not concerned with the kind of mistake that prevents the formation of
agreement.

30. Another type of mistake is that where the parties erroneously spell out their contract in terms which do not
give effect to an antecedent agreement that they have reached. Such a mistake can result in rectification of the
contract. Again, this case is not concerned with that type of mistake.

31. In the present case the parties were agreed as to the express terms of the contract. The defendants agreed that
the "Cape Providence" would deviate towards the "Great Peace" and, on reaching her, escort her so as to be on
hand to save the lives of her crew, should she founder. The contractual services would terminate when the
salvage tug came up with the casualty. The mistake relied upon by the defendants is as to an assumption that they
claim underlay the terms expressly agreed. This was that the "Cape Providence" was within a few hours sailing
of the "Great Peace" . They contend that this mistake was fundamental in that it would take the "Great Peace"
about 39 hours to reach a position where she could render the services which were the object of the contractual
adventure.

32. Thus what we are here concerned with is an allegation of a common mistaken assumption of fact which
renders the service that will be provided if the contract is performed in accordance with its terms something
different from the performance that the parties contemplated. This is the type of mistake which fell to be
considered in Bell v. Lever Brothers . We shall describe it as "common mistake", although it is often alternatively
described as "mutual mistake".

***

11.1 Introduction

11.1.1 Underlying principle: Caveat Emptor

Bell v Lever Bros Ltd [1932] AC 161

“If mistake operates at all, it operates so as to negative or in some cases to nullify consent”

per Lord Atkin, p217.

The underlying principle of the law of contract is still caveat emptor (―let the buyer beware‖). The situations in
which a contract will be avoided on the ground that one or both parties have made a mistake will be somewhat
limited.

Nevertheless the cases reveal that in certain circumstances a contract may be void at common law on the ground
of a mistake and in some cases even where the contract is valid at law it may nevertheless be voidable in equity
on the ground of mistake.

A mistake which has the effect of rendering a contract void is described as an ―operative‖ mistake.
It used to be thought that mistakes as to law would not be operative, but in Kleinwort Benson v Liverpool City
Council [1999] 1 AC 953 the House of Lords declared that this rule is not part of English law.

The law relating to mistake will be considered under five heads:

1. Common Mistake; (11.2)

2. Mutual Mistake; (11.3)

3. Unilateral Mistake; (11.4)

4. Mistake as to Identity; (11.5)

5. Mistake Relating to Documents. (11.6)

***

11.1.2 Classification of mistake

Commentators are not agreed as to the classification of Mistake.

Treitel deals with Mistake by contrasting Mistake nullifying consent (Parties reach agreement which is based on
a fundamental mistaken assumption) with Mistake negativing consent (Where mistake prevents the parties from
reaching an agreement e.g. where they intend to contract about different things)

Treitel classification:

Mistake nullifying consent

(1) Mistake as to the existence of the subject matter

Consent is nullified where both parties are mistaken as to the existence of the subject matter.

Galloway v Galloway (1914)

(2) Mistake as to the identity of the subject matter

A variant of mistake as to quality

(3) Mistake as to the possibility of performing the contract

(a) Physical impossibility

Sheikh Bros v Ochsner [1957] AC 136

(b) Legal impossibility

Cooper v Phibbs (1867) LR 2 HL 149

(c) Commercial impossibility

Griffith v Brymer (1903) 19 TLR 434

Great Peace Shipping v Tsavliris Salvage (The Great Peace) (2002)

(4) Mistake as to quality

If there is no misdescription, mistake as to quality generally does not nullify consent.

Scott v Littledale (1858)

Kennedy v Panama etc Royal Mail Co (1867)

Bell v Lever Bros [1932] AC 161 ***

Leaf v International Galleries [1950] 2 KB 86

Rose v Pim [1953]

Oscar Chess v Williams [1957] 1 WLR 370

(5) Mistake as to quantity

Cox v Prentice (1815) 3 M&S 344

(6) Cases in which a fundamental mistake does not nullify consent

Clark v Lindsay (1903) 19 TLR 202

Couturier v Hastie (1856.

McRae v Commonwealth Disposals Commission (1951)

Barrow Lane & Ballard v Phillips [1929] 1 KB 574

S.6 Sale of Goods Act 1979

Mistake negating consent

(1) Mistake as to the person

Cundy v Lindsay (1878) 3 App Cas. 459

King's Norton Metal v Edridge Merrett & Co (1897)

Phillips v Brooks [1919] 2 KB 243

Lewis v Averay [1972] 1 QB 198

Ingram v Little [1961] 1 QB 31.

Shogun Finance v Hudson [2003] UKHL 62, [2004] 1 AC 919.

(2) Mistake as to the subject matter

Raffles v Wichelhaus (1864)

Falck v Williams [1900] AC 176

Smith v Hughes (1871) LR 6 QB 597

(3) Mistake as to the terms of the contract

Smith v Hughes (1871) LR 6 QB 597

Mistake must induce the contract

Some commentators divide the mistake into two, that is, common mistake shared by the parties, and mistake in
communication. Because mistake in communication can be on all sides (mutual mistake), or on one side only
(unilateral mistake), we will adopt the following classification:

***

11.2 Common Mistake: Common Law

Great Peace Shipping Limited v Tsavliris (International) Limited [2002] CA

Lord Phillips MR

A mistake can be simply defined as an erroneous belief. Mistakes have relevance in the law of contract in a
number of different circumstances. They may prevent the mutuality of agreement that is necessary for the
formation of a contract. In order for two parties to conclude a contract binding in law each must agree with the
other the terms of the contract. Whether two parties have entered into a contract in this way must be judged
objectively, having regard to all the material facts. It may be that each party mistakenly believes that he has
entered into such a contract in circumstances where an objective appraisal of the facts reveals that no agreement
has been reached as to the terms of the contract. Such a case was Raffles v. Wichelhaus (1864) 2 H&C 906. The
parties believed that they had entered into a contract for the purchase and sale of a cargo of cotton to arrive "ex
Peerless from Bombay". That term was capable of applying equally to a cargo of cotton on two different ships,
each called "Peerless" and each having sailed from Bombay, one in September and one in December. The court
accepted that parole evidence could be adduced to prove which shipment the parties had intended to be the
subject of the contract. Had one party intended the October shipment and the other the December shipment, the
agreement necessary for a binding contract would have been absent.

29. Raffles v. Wichelhaus was a case of latent ambiguity. More commonly an objective appraisal of the
negotiations between the parties may disclose that they were at cross-purposes, so that no agreement was ever
reached. In such a case there will be a mutual mistake in that each party will erroneously believe that the other
had agreed to his terms. This case is not concerned with the kind of mistake that prevents the formation of
agreement.

30. Another type of mistake is that where the parties erroneously spell out their contract in terms which do not
give effect to an antecedent agreement that they have reached. Such a mistake can result in rectification of the
contract. Again, this case is not concerned with that type of mistake.

31. In the present case the parties were agreed as to the express terms of the contract. The defendants agreed that
the "Cape Providence" would deviate towards the "Great Peace" and, on reaching her, escort her so as to be on
hand to save the lives of her crew, should she founder. The contractual services would terminate when the
salvage tug came up with the casualty. The mistake relied upon by the defendants is as to an assumption that they
claim underlay the terms expressly agreed. This was that the "Cape Providence" was within a few hours sailing
of the "Great Peace" . They contend that this mistake was fundamental in that it would take the "Great Peace"
about 39 hours to reach a position where she could render the services which were the object of the contractual
adventure.

32. Thus what we are here concerned with is an allegation of a common mistaken assumption of fact which
renders the service that will be provided if the contract is performed in accordance with its terms something
different from the performance that the parties contemplated. This is the type of mistake which fell to be
considered in Bell v. Lever Brothers . We shall describe it as "common mistake", although it is often alternatively
described as "mutual mistake".
11.2.1 Definition

Here, the parties, although apparently in agreement, have entered into the contract on the basis of a false and
fundamental assumption. It is called common mistake since both parties make the same mistake. The contract is
not necessarily void at law in these circumstances.

The cases may be categorised as follows:

1. Mistake as to the existence of the subject matter (res extincta)

The contract will be void at common law if, unknown to the parties, the subject matter of the agreement does not
exist or has ceased to exist.

Thus, a cargo of corn, en route to London per the ‗Kezia Page', had to be sold at a port of refuge in Tunis as it
had begun to ferment. Unaware of this, the respondents agreed a sale of the corn in London. It was held that no
contract of sale had come into being as the subject matter effectively did not exist; Couturier v Hastie (1856) 5
HLC 673. The case must be contrasted with McRae v Commonwealth Disposals Commission (Infra).

Similarly, the parties may contract on the basis of a false assumption which underlies the contract, as in Scott v
Coulson (1903) 2 Ch 249 where the plaintiff contracted to sell to the defendant a policy of life insurance on the
life of a certain Mr Death. However, at the time of the contract, Death was already dead. The court set aside the
transaction. This case is considered by Treitel alongside the mistake as to quality cases and reference should be
made to it in that context as well.

A statutory version of this principle is to be found in s.6 , which provides that where there is a contract for the
sale of specific goods and the goods without the knowledge of the seller have perished at the time when the
contract was made, the contract is void. (Infra)

But even where the subject matter is not in existence, the contract is not automatically void. There are three
possibilities which may have to be considered before the law of mistake:

Kyle Bay Ltd v Underwriters Subscribing under Policy 019057/08/01 [2007] EWCA Civ 57
A nightclub was gutted by arson on a nearby proprty. The club was unable to operate for over a year and they
claimed under their insurance policy for lost profits. The settlement the claimants had been advised to sign was
£108,319 less than they believed they were entitled to under the policy.

The Court of Appeal upheld the decision of the High Court, the mistake in the compromise agreement did not
stop the contract from being performed. The Test the Court of Appeal applied was whether the mistake rendered
the subject matter of the contract essentially and radically different from the subject matter the parties believed to
exist. The answer to that in the case was not.

Lord Justice Neuberger:

The case on mistake

On this issue, the facts are simple and were not in dispute before the Judge. The settlement for the claimant's
business interruption claim against the defendant underwriters was settled at about £205,000 on the common
assumption that the Policy was not declaration-linked, whereas it was so linked, and, had the parties been aware
of this, they would (I assume for present purposes) have settled at a figure about 50% higher.

As the Judge said, the leading modern case in which the circumstances in which a common mistake can vitiate a
contract were considered was the decision of this court in Great Peace Shipping Ltd –v-Ttsavliris Salvage
(International) Ltd [2002] EWCA Civ 1407 , [2003] QB 679 . Relying on what Lord Phillips of Worth Matravers
MR (giving the judgment of the court) said at paragraphs [73] to [76], the Judge held that the proper test to apply
in this case was whether the mistake in question rendered the contract in issue "impossible of performance" (the
expression also used by Lord Phillips when ultimately formulating the critical question in the Great Peace case
itself at paragraph [162]). At least on the face of it, it seems difficult to quarrel with the Judge's view that, if that
is the right test, it was self-evidently not satisfied here.

Mr Butler, who appears for the claimant, runs as his main argument the contention that this test was
inappropriate in a case such as this; his alternative argument is that the test, if properly applied, was in any event
satisfied here. I should in this context refer to the decision of this court in Brennan –v- Bolt Burdon [2004]
EWCA Civ 1017 , [2005] QB 303. In that case, a personal injuries action was settled on the common assumption
that the claim form had been served out of time, and a subsequent decision of this court showed that that
assumption was wrong. The claimant unsuccessfully sought to impeach the settlement.

In paragraph [22] of his judgment, Maurice Kay LJ gave three reasons why the Great Peace decision gave rise to
difficulties for the claimant, the first of which was that it was "quite simply not a case of impossibility of
performance. The compromise has at all times remained performable…". Sedley LJ, however, was more
concerned about the application of the "impossibility of performance" test in cases of common mistake of law –
see at paragraphs [60] to [61]. At the end of paragraph [59], he had identified the "difficulty…in seeing how the
effect of [a common mistake of law…on an agreement by which litigation is compromised] can be equiparated
with the impossibility of a contractual venture". The third member of the court, Bodey J, did not discuss this
aspect.

In my opinion, it is unnecessary for us on this appeal to decide which view is preferable. Indeed, I suspect that
ultimately, the two approaches may essentially amount to the same thing. If the doubts of Sedley LJ are justified,
then, as Mr Butler argues, the right test is that propounded by Steyn J in Associated Japanese Bank
(International) Ltd –v- Credit du Nord SA [1989] 1 WLR 255. In a passage at p. 268F, cited and expressly
approved in the Great Peace case at paragraphs [90] and [91], Steyn J said that, in order to vitiate a contract, "the
mistake must render the subject matter of the contract essentially and radically different from the subject matter
which the parties believed to exist". He justified this at p. 268E on the basis that "the law ought to uphold rather
than destroy apparent contracts".

It appears to me that, by approving Steyn J's observations and by applying the "impossible to perform" test, this
court in the Great Peace case must have considered that the two approaches amounted to much the same thing. In
practice, the concept of impossibility of performance, at least in a case such as this, can be said to raise an issue
of definition: if one defines the contract as the assessment of compensation under a declaration-linked policy,
then it is, at least in a sense, impossible to perform if both parties negotiate on the basis that the policy is not
declaration-linked. It seems to me, therefore, that there is much to be said for applying, as Mr Butler argues we
should, Steyn J's test in the Associated Japanese Bank case in the instant case.

In my judgment, applying that approach, the mistake in this case did not render what the parties believed to be
the "subject matter of the [Settlement agreement] essentially and radically different" from what it actually was.
The parties correctly believed that they were settling a business interruption claim resulting from a fire at certain
premises at which the claimant ran a night club; they made no mistake as to the period of interruption or the
estimated level of gross profit, or indeed any other mistake about the claim or the nature of the cover, save that
they assumed that it was on the gross profits basis, rather than on the declaration-linked basis. The difference
between the actual and assumed subject matter of the settlement can in my view certainly be characterised as
significant, but it is not an "essential…and radical…" difference.

I suspect that it is normally not easy to say precisely why a difference such as there is in this case is not, or
indeed is, radical and essential. If that is right, this case is no exception to the norm. However, it seems to me that
the following factors strongly drive one to the conclusion that the difference in this case was not radical or
essential. In conceptual terms, once one appreciates what was correctly assumed or agreed (as discussed in the
preceding paragraph), it is hard to say that if one corrects the one aspect which was wrongly assumed, it would
radically and essentially alter the nature of the contract. What was wrongly assumed was a detail, albeit a
significant detail, of the basis on which the Policy was written: it did not go to the validity of the Policy, the
parties, the property or nature of the business, or even the nature of the risks covered. In addition, if it is
appropriate to look at the matter in commercial terms (as I believe it is in this case at any rate), although the
claimant received some 33% less than it should have done, which is a significant, even a substantial, reduction on
its entitlement, I do not think it can fairly be characterised as an "essentially or radically" different sum from its
entitlement.

Accordingly, I think the Judge was right to dismiss the claim in so far as it was based on common mistake. I
would leave open the question whether it would, in any event, be right to hold the settlement vitiated by mistake,
given that the question of whether the Policy was declaration-linked had been raised by the claimant and
considered by the parties in the very negotiations which resulted in the Settlement which is now sought to be
impeached on the ground of a common mistake that it was not declaration-linked.

(a) Warranty, and the construction of the contract

One party may have impliedly warranted the existence of the subject matter, as in McR ae v Commonwealth
Disposals Commission (1950) 84 CLR 377. The defendants purported to sell the salvage rights to an oil tanker
sunk on the Jourmand Reef. The plaintiffs mounted a salvage operation and discovered that there never had been
any such tanker. The High Court of Australia held that the defendants had impliedly warranted the existence of
the tanker and in breach of this warranty were liable in damages. The defendants recovered reliance interest
damages, but the argument that the contract was void was rejected.

(b) Chitty (29th ed. 5-041) points out that there is an overlap between the doctrine of mistake, and the doctrine of
implied terms. For example, in The Great Peace (discussed below) the parties both mistakenly believed that a
vessel chartered for a salvage operation was conveniently close to the vessel which need help. When the charterer
cancelled the contract, they refused to pay a cancellation fee on the grounds that the parties had made a mistake
about the location of the ships. The court held there had been no fundamental mistake. As in McR ae v
Commonwealth Disposals Commission , the court rejected the theory that the doctrine of mistake is based on
there being an implied term that the contract will be void if certain facts are not as the parties believe. However,
the court made clear that on facts like this, before considering whether mistake is relevant, the court must first
consider whether the contract has provided for which parties bears the risk if the facts are not as the parties
suppose.

(c) Misrepresentation

Rescission and/or damages may be available where one party has misrepresented the existence of the subject-
matter.

(d) Assumption of risk

The true construction of the contract may be that one party has assumed the risk of the subject-matter not being
in existence, e.g. if in Couturier v Hastie the purchaser had assumed the risk of the non-existence of the com.

2. The particular problem of sales of goods

Treitel draws attention to the difficulty in sales of goods cases. In summary:

In McR ae 's case the risk of non-existence of the subject matter was thrown on one party; in this case the
defendant who was held to have warranted the existence of the goods.

Section 6 of the Sale of Goods Act 1979 provides:

―Where there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have
perished at the time when the contract is made, the contract is void. ―

Barrow Lane & Ballard v Phillips [1929] 1 KB 574

―Where a contract relates to specific goods which do not exist, the case is not to be treated as one in which the
seller warrants the existence of those specific goods, but as one in which there has been failure of consideration
and mistake.‖

Per Wright J.

As Treitel has observed – The seller will not be held to have warranted the existence of the goods in English law
any more than the buyer will be held to have bound himself to pay for them in any event.

―Neither party is bound and the contract can properly be called void.‖

(Treitel Law of Contract (11th Edition) p. 296)

3. Mistake as to title

Treitel regards this category as falling within the concept of legal impossibility. The mistake will nullify the
consent.

The contract will be void at common law in the situation, rare today, where one party agrees to transfer property
to the other which the latter already owns and neither party is aware of this fact.

Cooper v Phibbs (1867) LR 2HL 149

The court set aside an agreement whereby A had agreed to lease a fishery to B, but unknown to either, the fishery
was already owned by B.

The use of the term ‗set aside' seems to indicate that the contract was valid at law and only voidable in equity. (
Solle v Butcher [1950] 1 KB 671). The contract is void at law, a view supported by Lords Atkin and Wright in
Bell v Lever Bros [1932] (Infra).

4. Mistake as to quality

There is authority in the cases that a common mistake as to the quality of the subject-matter, as opposed to its
existence, is not operative at common law.

Leaf v International Galleries [1950] 2 KB 86

HELD: if A sells to B a painting which both parties mistakenly believe to be the work of the famous John
Constable (and therefore very valuable), but which in fact is not his work (and therefore worth far less), the
contract is valid at law, assuming the absence of actionable misrepresentation or the other matters outlined above.
The mistake concerns the quality of the subject-matter.

Leaf was based on the earlier and rather difficult case of Bell v Lever Bros [1932] AC 161, a decision of the
House of Lords. Indeed the judgments in Bell , discussed below, are somewhat at variance but the orthodox
interpretation of the case (and the one followed in most subsequent cases) is that a common mistake as to quality,
however fundamental, can never render the contract void at common law. Nevertheless, there are dicta in the
speeches of the House of Lords in Bell which suggest that a contract may be void if the common mistake as to
quality is sufficiently fundamental. This view was accepted by Steyn J in Associated Japanese Bank v Credit du
Nord [1988] 3 All ER 902.

5. Bell v Lever Bros Ltd [1932]

In the absence of a breach of a contractual term or misrepresentation the victim of a mistake as to quality will
generally have no remedy for a mistake as to quality rarely, if ever, renders the contract void.

Bell v Lever Bros [1932] AC 161

In Harrison & Jones v Bunten & Lancaster [1953] 1 QB 646

A contract was upheld as valid even through both parties believed the kapok to be pure when in fact it was not
and of no use to the buyer. See also Kennedy v Panama etc Royal Mail Co (Supra) where Blackburn J referring
to the Roman law doctrine of error in substantia (mistakes of quality going to the substance of the contract) may
render a contract void. (Treitel considers this).

Bell v Lever Bros [1932] AC 161 (HL)

Bell and Snelling agreed to serve for a period of four years as Chairman and Vice-Chairman of a Lever Bros
subsidiary company. Lever Bros wished to terminate the contract early and agreed with Bell and Snelling to pay
£50,000 compensation split between them. Lever Bros then discovered breaches by Bell and Snelling of their
service contracts which would have allowed Lever Bros to terminate the contracts without payment of
compensation. There was no fraudulent concealment on the part of Bell and Snelling and the House of Lords had
to consider whether the compensation agreements were void for mistake.

Treitel observes:

―The mistake related only to a quality of the service contracts and was not fundamental‖

―The contract released is the identical contract in both cases and the party paying for the release gets exactly
what he bargained for.‖

Lord Atkin.

Lord Thankerton took the view that mistake, even if it was as to a fundamental quality, was not operative unless
it related to some assumption which both parties regarded as essential.

Treitel's observations

Treitel observes that the cases and examples given (some of which follow) cannot be perfectly reconciled but that
there is a principle which runs through them:

“A thing has many qualities. A car may be black, old, fast and so forth. For any particular purpose one or more
of these qualities may be uppermost in the minds of the persons dealing with the thing. Some particular quality
may be so important to them that they actually use it to identify the thing. If the thing lacks that quality, it is
suggested that the parties have made a fundamental mistake, even though they have not mistaken one thing for
another, or made a mistake as to the existence of the thing. The matter may be tested by imagining that one can
ask the parties, immediately after they made the contract, what its subject matter was. If, in spite of the mistake,
they would give the right answer the contract is valid at law. Thus in Bell v Lever Bros the parties would have
said, quite rightly, “We are contracting about a service agreement.”

Treitel Law of Contract (11th Edition) p292

In Nicholson & Venn v Smith-Marriott they might have said, rightly, “We are contracting about antique table
linen,” in which case the contract would be valid; or they might have said, wrongly, “We are contracting about
a Carolean relic,” in which case the contract would be void.”

Treitel Law of Contract (11th Edition) p292

6. Lord Atkin's examples from Bell v Lever Bros Ltd

The House of Lords recognised that some mistakes as to quality could be fundamental.

―Mistake as to quality) will not affect assent unless it is the mistake of both parties and is as to the existence of
some quality which makes the thing without the quality essentially different from the thing as it was believed to
be.‖
Lord Atkin, Bell v Lever Bros Ltd [1932] AC 161at 218

Treitel notes that Lord Thankerton stated that a mistake as to quality of the subject matter must relate to:

―something which both must necessarily have accepted in their minds as an essential and integral element of the
subject matter.‖

Lord Atkin then goes on to give a number of illustrations – all of which are considered in Treitel fully.

Lord Atkin's illustrations

According to Lord Atkin a mistake as to quality will not make a contract void where:

(a) a man bought a horse mistakenly believed to be sound

(b) if he bought a dwelling house mistakenly believed to be habitable

(c) if he bought a garage on a road which was about to be starved of all traffic by the construction of a by-pass.

(d) A buys a picture from B; both believe it to be the work of an old master and a high price is paid. It turns out
to be a modern copy.

(Treitel Law of Contract (11th Edition) p 290)

In the absence of a warranty or misrepresentation the buyer has no remedy. The contract is valid.

See Solle v Butcher where a lease was not void because the parties believed the premises to be free from rent
control. (Infra)

See also Oscar Chess v Williams [1957] 1 WLR 370 where the parties made a mistake as to a car's age so that the
buyer paid more for the car than he would have done had he known the truth.

7. Concluding thoughts: Treitel's observation

“The suggested test for determining whether a mistake is fundamental, presupposes that both parties would give
the same answer to the question “what are you contracting about”?” If they would give different answers, the
mistake, whatever else its effect may be, will not nullify consent. A seller may intend to sell antique table linen
and the buyer to buy a Carolean relic. If the parties are thus at cross-purposes consent may be negatived.”

(Treitel Law of Contract (11th Edition) p 294)

See (Infra):

Raffles v Wichelhaus (1864) 2 H&C 906

Falck v Williams [1900] AC 176

Smith v Hughes (1871) LR 6 QB 597

***

11.3 Mutual Mistake

11.3.1 Definition

A mistake is said to be ―mutual‖ where the parties misunderstand each other's intentions and are at cross-
purposes.
Unlike common mistake, in this situation the parties do not both make the same mistake

Please ensure that you read this case!

Great Peace Shipping Limited v Tsavliris (International) Limited

English Court of Appeal: Phillips MR, May and Laws LJJ: 14 October 2002

SALVAGE: CONTRACT FOR HIRE OF STAND-BY VESSEL: BELIEVED TO BE IN CLOSE PROXIMITY: MUTUAL MISTAKE:
WHETHER CONTRACT VOID AT LAW: WHETHER CONTRACT VOIDABLE IN EQUITY

Summary
The Court of Appeal has held that there is no basis on which to rescind a contract on the grounds of a mutual
mistake where the contract is valid and enforceable at common law. In other words, the doctrine of equitable
mistake established by Lord Denning in Solle v Butcher ([1950] 1 KB 671) no longer exists. .

11.3.2 Operative mistake

A mistake which (as Treitel puts it) ‗negatives' consent does not necessarily make the contract void. The contract
will be valid in spite of the mistake if the person ―so conducts himself that a reasonable man would believe he
was assenting to the terms proposed by the other party, and that other party, upon that belief enters into a contract
with him.‖

Treitel goes on to say ‗that this ―objective principle‖ is sometimes regarded as a kind of estoppel by
representation.‖ (which would require detriment) but that a person who invokes the ―objective principle‖ need
only show that he has entered into the contract relying on the appearance of contract created by the other party's
conduct.

The illustration given by Treitel is that of a person who by mistake bids for the wrong lot at an auction. The
parties are not ad idem but the bidder by his conduct is prevented from relying on the mistake.

11.3.3 Illustrations of operative mistake

Operative mutual mistake is illustrated by:

Raffles v Wichelhaus (1864) 2 H & C 906

D agreed to buy cotton from the plaintiffs ex the ship ―Peerless‖ from Bombay. Two ships of that name were due
to leave Bombay; it seems D had in mind the ship leaving in October and P had in mind the ship leaving in
December. The court held that the transaction was too ambiguous to be enforced as a contract.

It will be noticed that the problem in the above case is essentially one of defective offer and acceptance, and so
the test applied by the court in this type of case is to ask what a reasonable third party would take the agreement
to mean.

Would he take the agreement to mean what one party, A, understood it to mean or what the other party, B
understood it to mean. It is only when the transaction is totally ambiguous under this objective test that the
contract is void for mutual mistake.

Compare the following cases:

Wood v Scarth (1855) 2 K & J 33

D offered in writing to let a pub to the plaintiff at £63 per annum. After a conversation with the defendant's clerk,
the plaintiff accepted by letter, believing that the £63 was the only payment under the contract. The defendant
had intended that a £500 premium would also be payable and he believed that his clerk had explained this to the
plaintiff. It was held that the contract as understood by the plaintiff would be enforced and the court awarded him
damages.

Scriven v Hindley (1913) 3 KB 564

At an auction, lots of hemp and also of tow (an inferior commodity) were up for sale. The defendants bid for two
lots believing that both were for hemp whereas one was for hemp and tow.

The bid was accepted. The defendants believed that they had bid for hemp. Their bid was about right for hemp
but extravagant for tow, although the auctioneer was unaware of the true nature of the defendant's mistake – he
thought they were ignorant of the value of tow. However, the catalogue and samples were misleadingly described
and marked, and these factors, together with other circumstances, meant that a reasonable person could not say
whether the contract was for hemp or tow. The contract was held to be void.

Treitel Law of Contract (11th Edition) p 309 categorises this as a case of mistake negligently induced.

See also: Tamplin v James (1880) 15 Ch D 215 where there was no misdescription in the particulars at an
auction and the mistake was due to the plaintiff's carelessness).

***

11.4 Unilateral Mistake

11.4.1 Definition

Here one party is fundamentally mistaken concerning the contract and the other party is aware of the mistake, or
the circumstances are such that he may be taken to be aware of it.

11.4.2 Operative mistake

For a unilateral mistake to be operative, the mistake by one party must be as to a fundamental term of the
contract itself, rather than an error of judgment as to the quality of the subject-matter.

The distinction is illustrated by the following pair of cases:

In the first case it was a mistake as to a term of the contract, whereas in the second it was a mistake as to the
quality of the subject matter.

Hartog v Colin and Shields (1939) 3 All ER 566

The defendants offered hare skins to the plaintiff at a certain price ‗per pound' but had intended to offer them at
the same price ‗per piece'. The value of a piece was one third that of a pound. It was held that the circumstances
were such that the plaintiffs must have realised the defendants' error, which, as it concerned a term of the
contract, rendered the contract void.

(Treitel analyses the distinction by remarking that consent is negatived if the parties intend to contract on
different terms (as in Hartog), whereas mistakes as to the person (infra) or the subject matter ( Smith v Hughes )
only negative consent if they are fundamental.)

Smith v Hughes (1871) LR 6 QB 597

D was shown a sample of oats by the plaintiff. The defendant bought them in the belief that they were ―old‖ oats;
he did not want ―new‖ oats. They were new oats.

The court was of the view that the mistake was merely as to the quality of the subject-matter and could not render
the contract void, even if the plaintiff seller knew of the mistake.

(But if the buyer mistakenly believed that the seller had warranted that the oats were old and the seller was aware
of this mistake, the mistake would be operative.
If a sale of oats believed by one party to be warranted as ‗old' and not intended by the other party to be so
warranted the contract may be void. The mistake then would be a mistake as to the terms of the contract and
would negative consent (Treitel)).

***

11.5 Mistake as to Identity

This topic is worthy of separate analysis, classified here as a unilateral mistake and by Treitel as a mistake
negativing consent.

11.5.1 Definition

Where one party is mistaken as to the identity of the other party, in certain circumstances the contract may be
void at common law.

Almost all the decided cases of operative mistake in this area are in fact instances of unilateral mistake, as the
non-mistaken party is aware of the mistake because he has engineered it through his own fraud.

Even where the contract is not void, it may be voidable for fraudulent misrepresentation and if the goods which
are the subject matter have passed to an innocent third party before the contract is avoided, that third party may
acquire a good title (see below for examples).

11.5.2 For the contract to be void, certain requirements must be satisfied:

The identity of the other party must be of crucial importance

Cundy v Lindsay (1878) 3 App Cas 459

The plaintiffs received an order for linen from a rogue, Blenkarn, who gave his address as 37, Wood Street,
Cheapside. In the correspondence, he imitated the signature of a reputable firm, Blenkiron and Co, known to the
plaintiffs, who traded at 123, Wood Street, Cheapside. The plaintiffs were thus fraudulently induced to send
goods to Blenkarn's address, where he took possession of them and disposed of them to the defendants, innocent
purchasers. It was held that the contract between the plaintiffs and Blenkarn was void for mistake as the plaintiffs
intended to deal only with Blenkiron and Co. No title in the goods passed to Blenkarn (because the contract was
void) and therefore none passes to the defendants who were liable in conversion to the plaintiffs.

Phillips v Brooks [1919] 2 KB 243

Identity was held not to be crucial. Here, a rogue called North entered the plaintiff's shop and having selected
some jewellery, wrote a cheque and announced himself as Sir George Bullough of St James' Square, a man of
means of whom the plaintiff had heard. The plaintiff, having checked this addressed in a directory, allowed North
to take away a ring. He then pledged the ring with the defendants, who had no notice of the fraud. In an action by
the plaintiffs to recover the ring from the defendants, it was held that the contract between the plaintiffs and
North was not void for mistake, because the plaintiffs had intended to contract with the person in the shop,
whoever it was. The only mistake was as to the customer's credit-worthiness, not his identity. The contract was,
however, voidable for fraud but because the defendants had acquired the ring in good faith before the contract
was sought to be set aside, they acquired good title.

Despite Phillips v Brooks , identity was held to be crucial in Ingram v Little [1961] 1 QB 31. The plaintiffs,
elderly ladies, advertised their car for sale. A rogue, calling himself P G M Hutchinson of an address in
Caterham, offered to buy it. The plaintiffs would only accept a cheque when they had checked, from a directory,
that there was such a person at that address. The cheque was worthless and the rogue disposed of the car to the
defendant, who took in good faith. It was held that the contract between the plaintiffs and the rogue was void for
mistake. The decision in this case is very difficult to distinguish from Phillips v Brooks .

See also: Shogun Finance v Hudson [2003] UKHL 62

11.5.2 The decision in Lewis v Averay

The decision in Phillips v Brooks was followed by Court of Appeal in Lewis v Averay [1972] 1 QB 198 where
the plaintiff, a post-graduate student advertised a car for sale and was visited by a rogue posing as the actor
Richard Greene, who offered to buy it. The rogue signed a cheque but the plaintiff only allowed him to take the
car away after being shown a forged studio admission pass. The cheque was worthless and the rogue sold the car
to the defendant, an innocent purchaser. The Court of Appeal held that the contract, though voidable, was not
void. The court took the view that, where the parties are face to face, there is a presumption that a person intends
to deal with the person before him, as identified by sight and hearing. There was insufficient evidence in this case
that the plaintiff intended to deal only with the well-known actor.

11.5.3 The decision in Shogun Finance v Hudson

Cundy v Linday has come to be regarded as establishing a principle that a mistake as to identity will be
fundamental, and render the contract void, where a the parties communicate in writing; although there may be a
valid contract, regardless of a mistake as to identity, where parties deal face to face. This principle has been
confirmed by a bare majority of the House of Lords in Shogun Finance v Hudson [2003] UKHL 62, [2004] 1 AC
919. The judgments contain important discussions of the doctrine of mistake general.

Shogun Finance v Hudson [2003] UKHL 62, [2004] 1 AC 919

A rogue obtained a car on hire purchase. He pretended to be a Mr Patel – a case of ‗identity theft.' The car dealer
contacted the hire purchase company, Shogun Finance, with Mr. Patel's details. Shogun Finance checked Mr
Patel's credit, and agreed to extend finance. This involved the finance company buying the car then renting to the
ultimate customer. They thought they were renting it to Mr Patel. They were in reality renting it to a rogue. The
rogue sold it Mr Hudson. If the contract with the rogue posing as Mr Patel was valid (if voidable for
misrepresentation) Mr Hudson got good title to the car (under Hire Purchase Act 1964 s.27). If the contract was
void, Mr Hudson got no title, and the car still belonged to the finance company.

The minority in the House of Lords thought that, contrary to Cundy v Lindsay , the fact that there was no face to
face communication between the finance company and the rogue posing as Mr Patel did not prevent them from
having a valid contract (in which case M. Hudson would be entitled to the car). The majority followed Cundy v
Lindsay and decided that a mistake as to identity where the parties are not face to face means the contract is void.
Therefore the rogue never had good title to pass to Mr Hudson, and the finance company still owned the car.

A mistake as to identity should be distinguished from a mistake as to the capacity in which a party deals

Hardman v Booth (1863) 1 H & C 803,

P intending to sell cloth to Thomas Gandell Co, negotiated with one Edward Gandell at the firm's offices.
Edward, an employee and not a member of the firm, intended to take possession of the goods for his own use.
Having obtained possession, he sold them to the defendant, an innocent third party. It was held that the contract
between P and Edward was void. P had believed he was a representative of the firm and never intended to deal
with him personally.

It is sometimes stated that an additional requirement for the contract to be void is that the mistaken party must
have taken reasonable steps to verify the identity of the other party. It may be that this is more in the nature of an
evidential burden to establish that the identity of the other party is crucial.

The mistaken party must have in mind an identifiable person with whom he intends to contract

Norton Metal Co v Edridge Merrett Co Ltd (1897) 14 TLR 98.

This requirement was not satisfied: P received a letter purporting to be from ―Hallam and Co‖ with an impressive
letterhead. In fact Hallam was a fictitious firm consisting entirely of a rogue named Wallis. The plaintiffs
despatched goods on credit to the bogus company. The court took the view that the plaintiffs had intended to
contract with the writer of the letter, whoever it may be, and the contract was not void for mistake. The only
mistake was as to the credit-worthiness of the other party and not as to his identity. This decision should be
compared with Cundy v Lindsay, and Shogun Finance (above), where the rogue posed as a real person who was
creditworthy.
The other party must be aware of the mistake

In the cases discussed above, identity was fraudulently misrepresented and therefore this requirement was
satisfied.

An unusual case in this context is:

Boulton v Jones (1857) 2 H&N 564.

P was employed by Brocklehurst, a pipe hose manufacturer, with whom the defendants had had previous
dealings. The plaintiff took over Brocklehurst's business and on the same day the defendants ordered hose form
Brocklehurst. The plaintiff supplied the goods but the defendants refused to pay on the ground that they intended
to contract, not with the plaintiff, but with Brocklehurst as they wished to enforce a set-off against him. It was
held that there was no contract, although the precise state of knowledge of the plaintiff was not made clear. If the
plaintiff was unaware of the fact that the offer was not intended for him them, arguably, the contract was valid.

11.5.5 The practice where there is a sale of goods in a Lewis v Averay situation

Sale under a voidable title: s.23 SOGA 1979

―When the seller of goods has a voidable title to them, but his title has not been avoided at the time of the sale,
the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of the seller's
defect of title.‖

Confirms common law rule that a person cannot avoid a voidable contract to the prejudice of third party rights
acquired in good faith and for value.

Phillips v Brooks [1919] 2 KB 243

Lewis v Averay [1972] 1 QB 198 (CA)

Contrast:

Cundy v Lindsay (1878) 3 App Cas. 459

Ingram v Little [1961] 1 QB 31.

Communication of rescission –

Car & Universal Finance Ltd v Caldwell [1965] 1 QB 525

Buyers of motor vehicles are now protected by Hire Purchase Act 1964 s.27 (as amended). A private person who
buys in good faith, and without notice that there is a hire purchase, from the bailee under a hire purchase
agreement, acquires good title.

However, the buyer cannot acquire title if there is in fact no hire purchase agreement because the supposed
agreement with the bailee is void:

Shogun Finance v Hudson [2003] UKHL 62, [2004] 1 AC 919.

Note : If the innocent third party does not acquire title under section 23 he may do so under section 25 of the Act
(Infra)

Disposition by a Buyer in Possession: S.25 SOGA 1979

―Where a person, having bought or agreed to buy goods, obtains with the consent of the seller possession of the
goods or the documents of title to the goods, the delivery or transfer, by that person or by a mercantile agent
acting for him, of the goods or the documents of title under any sale, pledge or other disposition thereof [ or
under any agreement for sale, pledge or other disposition thereof] * to any person receiving the same in good
faith and without any notice of any lien or other right of the original seller in respect of the goods, shall have the
same effect as if the person making the delivery or transfer were a mercantile agent in possession of the goods or
documents of title with the consent of the owner.‖

Consent of the seller

Du Jardin v Beadman Bros [1952] 2 All ER 160

‗Seller = owner' so it is possible therefore to obtain title down the chain from a thief. [TO – THIEF – B1 – B2:
B2 can get title.]

Having bought or agreed to buy goods

Does not apply to Hire Purchase – debtor does not agree to buy in HP: See HPA 1964 Pt.III ss.27 – 29. (Infra)

Possession of the Goods

3P only protected if obtains possession of the goods and not if he has merely bought or agreed to buy them

Good Faith and Notice

Newtons of Wembley v Williams [1965] 1 QB 560

B in possession was not a Merc Agent. Treat him notionally as one; examine behaviour. If behaves as [MA]
would 3P gets title. If not 3P does not get title.

National Employers Mutual General Insurance Association Ltd v Jones [1990] 1 AC 24 HL

***

11.6 Common mistake: Equity

11.6.1 Introduction

Where a contract is void at common law on the ground of common mistake (e.g. existence of the subject matter,
title and quality) the court, exercising its equitable jurisdiction, may refuse specific performance of the contract.

Alternatively, the court may rescind any contractual document between the parties, and in order to do justice
between them, impose terms.

In Cooper v Phibbs , while setting aside the lease, the House of Lords imposed a requirement that the ―lessor‖
should have a lien on the fishery for such money as he had spent on improvements during the time he wrongly
thought it belonged to him.

11.6.2 Where there is a mistake as top quality although the agreement is probably valid at law, it is not voidable
in equity

The case of Solle v Butcher [1950] 1 KB 671 broke new ground in that the Court of Appeal enunciated a new
doctrine of common mistake in equity under which the courts have a discretionary jurisdiction to grant such
relief as in the circumstances seems just. It will come as no surprise to learn that Lord Denning was involved in
this decision.

Other examples of this equitable jurisdiction include Grist v Bailey [1967] Ch 532 and Magee v Pennine
Insurance [1969] 2 QB 507 (again Lord Denning).
However, in Great Peace Shipping v Tsavliris Salvage (The Great Peace) [2002] EWCA Civ 1407; [2003] QB
679, the Court of Appeal declared that where the contract is valid at common law, there is no jurisdiction to set it
aside in Equity.

In The Great Peace the defendant owned a ship which was in trouble. Both defendant and claimant believed The
Great Peace was close to the ship in trouble. It was not. The defendant's discovered this and cancelled the
contract (because The Great Peace would take longer to get to where it was needed than the charterers had
anticipated). The owners of the Great Peace, the claimant, claimed a cancellation fee. The defendants refused to
pay. The owners succeed, on the basis that the contract, although a bad deal for the charterers, was possible to
perform, and contained no warranty about the relative position of The Great Peace to the ship in trouble.

The Court of Appeal, in refusing to set aside the contract in The Great Peace, effectively, though not formally,
overrules Solle v Bucher . The Court said that the test for whether a contract is void for mistake is in Bell v Lever
Bros, and the idea in Solle v Butcher that there is an alternative, equitable ground for ‗setting aside' a contract for
mistake is inconsistent with Bell v Lever Bros , and is wrong.

See: Sedley Solle v Butcher bites the dust

11.6.3 Mutual mistake in equity

If the contract is void at law on the ground of a mutual mistake, equity ―follows the law‖ and specific
performance will be refused, and any contractual document the parties have entered into, e.g. a lease, will be
rescinded. However, even where the contract is valid at law, specific performance will be refused if to grant it
would cause hardship. Thus the remedy of specific performance was refused in a sequel to Wood v Scarth
(1855), in Wood v Scarth (1858) 1 F & F 293.

11.6.4 Unilateral mistake in equity

As with mutual mistake, equity follows the law and will rescind a contractual document affected by operative
unilateral mistake or refuse specific performance.

Webster v Cecil (1861) 54 ER 812

D, having refused to sell his property to P for £2,000, wrote offering to sell it to him for £1,250. This offer was
immediately accepted. The defendant had intended to write £2,250. It was held that the mistake was operative
and specific performance was refused.

11.6.5 Mistake Relating to Documents

Non est factum

As a general rule, a person is bound by his signature to a document, whether or not he has read or understood the
document.

L'Estrange v Graucob [1934] 2 KB 394.

Where he has been induced to sign a contractual document by fraud or misrepresentation, the transaction will be
voidable.

Similarly, if one of the other forms of mistake discussed in this chapter are present, the contract may be void.

In the absence of these factors, the plea of non est factum (not my deed) may be available
The plea is an ancient one and was originally used to protect illiterate persons. It eventually became available to
literate persons who had signed a document believing it to be something totally different from what it actually
was.

Foster v Mackinnon (1869) LRCP 704

D, a senile man with poor eyesight, was induced to sign a document which he was told was a guarantee. In fact, it
was a bill of exchange upon which the plaintiff ultimately became entitled. It was held that D, who had not been
negligent, was not liable on the bill; the plea of non est factum succeeded.

An unrestrained right to raise the plea would lead to abuse and uncertainty and so the courts have placed
two restrictions on the right to raise the plea:

(i) the signer's mistake as to the nature of the document must be fundamental or radical, and

(ii) the signer must not have been careless in signing the document.

With regard to (i) the courts originally took the view that the plea was not available where the signer's mistake
was merely as to the contents of the document rather than as to its character or class; Howatson v Webb [1908] 1
Ch 1. This test was not a realistic one and was substituted by the House of Lords in Saunders v Anglia Building
Society [1971] AC 1004.

The test is now that there must be a fundamental or radical difference between the document actually signed and
what the signer believed it to be.

With regard to (ii), the Court of Appeal had ruled in Carlisle and Cumberland Banking Co v Bragg [ 1911] 1 KB
489 that negligence on the part of the signer only defeated the plea if the document was a negotiable instrument.
The distinction was illogical and Bragg's case was overruled by Saunders; the position is now that the plea
cannot be raised by a signer who has been careless.

Saunders v Anglia Building Society [1971] AC 1004.

An elderly widow wished to transfer the title of her house to her nephew by way of gift. Her nephew and a man
named Lee prepared a document assigning the property to Lee and asked her to sign. She signed it unread as she
had lost her spectacles and trusted her nephew. Lee mortgaged the property to the Building Society and disposed
of the moneys raised for his own use. He defaulted on the repayments and the Building Society sought
possession of the house. Saunders (the widow's executrix) sought a declaration that the assignment to Lee was
void by reason of non est factum.

In the view of both the Court of Appeal and the House of Lords, the plea could not be raised because, (i) the
transaction the widow had entered was not fundamentally different from what she intended at the time she
entered it; and (ii) she had been careless in signing the document; she could at least have made sure that the
transfer was to the person intended by her. The effect of Saunders v Anglia Building Society is, if anything, to
restrict the circumstances in which the plea of non est factum can be successfully raised.

Rectification

Where the parties are agreed on the terms of the contract but by mistake record them incorrectly in a subsequent
written document, the remedy of rectification may be available. The court can rectify the error and order specific
performance of the contract as rectified.

The remedy is an exception to the parol evidence rule as oral evidence is admissible to show that the written
document is in error.

In order to obtain rectification the following must be established:

(i) There must be a concluded antecedent agreement upon which the written document was based. The agreement
need not necessarily be a finally binding contract, Joscelyne v Nissen [1970] 2 QB 86.

(ii) The written document must fail to record what the parties had agreed. In Frederick E Rose (London) Ltd v
William H Pim Co Ltd [1953] 2 QB 450 the parties had contracted for the sale of a type of horsebean and the
written contract referred to ―horsebeans‖. The goods delivered were not of the type the parties had in mind.
Rectification was refused since the written contract correctly recorded what the parties had agreed.

(iii) The written document must fail to express the common intention of the parties. However, if one party
mistakenly believes the document gives effect to that intention and the other party is aware of this mistake but
nevertheless is guilty of sharp practice in allowing the contract to be executed, rectification may be ordered, A
Roberts Co v Leicestershire CC [1961] Ch 555.

(iv) It must be equitable to grant the remedy; in particular, it will be refused where third parties have acquired
rights on the faith of the written contract.

Rectification is an equitable doctrine. A court can correct obvious slips of the pen under ordinary rules of
evidence, without the need to grant rectification.

A note on mistake. When approaching questions on mistake it is advisable to remember that the law of mistake is
often a last resort, i.e. there may have been an actionable misrepresentation or a warranty which will provide the
plaintiff with a remedy.

Demonstration Question – Mistake

P and Q are rival art dealers who live in the same town. In August, 2004, while P was on
holiday in Spain, he acquired what he honestly believed was a valuable painting by Goya.
On returning home he offered the painting for sale. Q, after having viewed the painting
and also believing it to be a Goya, sent his agent, W, to buy the painting, instructing him
to pose as Sir Charles Trevelyan. P sold the painting to W for £250,000, pleased at last
that he was attracting wealthy clientele.

Q subsequently resold the painting for £300,000 to S who also believed it was a Goya.

Last month all the parties discovered that they were mistaken and that the painting is in
fact a missing part of Guernica by Picasso and that the art world has been searching for
this painting for years. It is worth £2,000,000.

Advise P.

Answer

Issues

(a) Mistake as to identity and,

(b) Mistake as to quality at common law and in equity.

Law and application

The contract: P v W/Q

W an agent for an undisclosed principal.

1. Misrepresentation

P induced to sell by fraudulent misrepresentation.

No remedy of rescission for Fr. Misrep because the goods have been sold on to an
innocent third party

(s.23 SOGA 1979, the right of rescission being barred)

Remedy in damages available against W

(Remedies in Agency will not be canvassed)

2. Mistake as to identity

Is the contract void at common law? If so, then no title will vest in W, Q or S.

Contrast Cundy v Lindsay (affirmed by Shogun Finance) with Lewis v Avery

A Lewis v Avery situation – person thus present to sight and hearing; therefore not void,
but only voidable for fraud. Cundy v Lindsay distinguished (not inter praesentes)

Compare Ingram v Little and reconcile.

3. Mistake as to quality

The perception on the part of (all) parties was that the painting was a Goya when in fact it
is a Picasso raises mistake as to quality.

Bell v Lever Bros [1932] AC 161

Lords Atkin and Thankerton

Atkin specifically raised this case as an illustration of when mistake as to quality would
not be operative. (See: Treitel criticism)

See also:

Kennedy v Panama etc Royal Mail Co (1867)

Smith v Hughes (1871) LR 6 QB 597

Peco Arts Inc v Hazlitt Gallery Ltd [1983]

Associated Japanese Bank v Credit du Nord [1988] 3 All ER 902 per Steyn J.

Any remedy in Equity?

Equity does not allow rescission for mistake where the contact is valid at common law.

See :

Great Peace Shipping v Tsavliris Salvage (The Great Peace ) [2002] EWCA Civ 1407;
[2003] QB 679

Could Q recsind against S and, thereby allow the possibility of P rescinding against Q?
Questions on Mistake

1. What is a ―common mistake‖?

2. What is the difference between the approach of common law and equity to common
mistake as to quality?

3. How does the court decide whether a mutual mistake is operative?

4. What must be established before a unilateral mistake will be operative?

5. If a person wishes to avoid a contract on the ground of a unilateral mistake as to

identity, what must he prove?

6. ―I do not accept the theory that a mistake as to identity renders a contract void. I think
the true principle is ... that the contract is voidable.‖ (Lord Denning MR in Lewis v
Averay [1972] 1 QB 198

To what extent, if at all, does this statement reflect the current legal position relating to
mistaken identity in the Law of Contract?

7. ―After Gallie v Lee the plea of non est factum is now not available to persons of sound
mind and full capacity‖.

How far do you agree with this view?

8. Under what circumstances is rectification available?

Tutorial – Mistake (1)

1. Oscar, a frequent visitor to Diana's house, had always admired her dining table. On one
occasion he expressed interest in buying it and Diana said, ―it is an Elizabethan relic and
actually belonged to Queen Elizabeth the First herself.‖ One week later Diana sold the
table to Oscar for £20,000.

Some two years later, Oscar wished to sell the table and sent it to Northeby's, the auction
house, for valuation. They reported that the table was no more than 100 years old and
worth about £500.

Advise Oscar.

How far, if at all, would your answer differ, if the table had been genuine as Diana stated
but just before Diana and Oscar agreed the sale and unknown to either of them, it was
stolen and replaced by a copy?

2. On Saturday, Peter put an advertisement in the local newspaper, offering his Ford Sierra
for sale for £2,500 and giving his telephone number. That evening Peter received a
telephone call from bill, who, impersonating the well-known television and stage
personality Ronnie Parker, agreed to buy the car. In his assumed voice, Bill said that he
would send his chauffeur round to collect and pay for the vehicle. On Sunday morning Bill
called at Peter's house, saying he had been sent by Ronnie Parker. Peter handed over the
 car in exchange for a cheque for £2,500 signed by ‗R Parker'.

Bill then asked Peter to sign a piece of paper, which read: ‗Received of R Parker, a cheque
for £2,500'. Peter read this and signed. Just before leaving, Bill handed Peter another piece
of paper, saying it was just a copy of the receipt for Parker's records. Peter signed the
document without reading it. It was in fact a guarantee to Tom, a tradesman, of Bill's debts
up to £3,500.

On Monday, Bill sold the car to Doris for £500 and by showing the guarantee, induced
Tom to let him have goods on credit to the value of £500.

Advise Peter who wishes to recover the vehicle from Doris and refuses to honour the
guarantee.

Tutorial – Mistake (2)

1. Gartmore agrees to buy a house from Murray which both parties believe to be rented by
Fleming who enjoys protection under the Rent Acts at a low price to reflect Fleming's
protected residency.

Murray has now learnt that Fleming was killed in a car crash just before the contract was
signed.

Advise Murray.

Would it make any difference if Gartmore had sold the property on at a considerable profit
when, on taking possession, he realised that Murray had been killed?

2. Horace, pretending to be the well known City financier Rupert Murdoch, persuades
Throgmorton who wished to add to his personal pension, to part with his AC Cobra
against an uncleared cheque from him.

Throgmorton later that day realised that he had been defrauded by Horace when told that
the cheque was worthless by his banker and unable to find Horace reported the fraud to the
Police.

Later in the day Horace sold the car on to Barclay. Barclay paid for the car in cash. Horace
has now disappeared. Barclay is in possession of the car.

Advise Throgmorton as to whether he may recover the car from Barclay.

Waiver, and Promissory Estoppel

14.1 Alteration of the contracted obligation

14.1.1 Prologue
Whole, complete and exact performance

Each party to a contract is entitled to demand of the other – whole, complete and exact performance.

In the absence of a valid alteration the original contract remains in force until discharged by performance, breach,
frustration or by agreement between the parties under an accord and satisfaction.

Alteration

The parties, having concluded a contract on agreed terms, may, however, alter the nature of the obligation or
even replace it altogether.

By way of illustration:

1. The parties may alter the contract and replace it with a new contract. This would amount to a rescission.

2. The parties may vary the terms of the contract. This variation benefits both parties and generates its own
consideration.

3. A party to the contract may agree a variation which benefits one party only. Such a variation does not generate
its own consideration. This category is exemplified by a promise by one party to release the other from a debt.
The contrast between the common law rule and equity – promissory estoppel – is considered below.

14.2 Rescission

14.2.1 The principles

The need for consideration

For a rescission to be effective at law consideration must be present.

Executory contracts

Where a contract is executory and neither person is in breach any agreement between the parties to rescind the
contract will generate its own consideration and be valid.

The Trado [1982] Lloyd's Rep 157

The same is true where both parties have broken the contract and in cases where the contract is not wholly
executed and there are obligations on both sides yet to be performed.

Morris v Baron & Co [1918] AC 1

Both sides are able to forego a right and in so doing provide consideration.

Collin v Duke of Westminster [1985] QB 581

Where the rescission does not generate its own consideration

Where only one party has extant srights under the contract any agreement to rescind, in the absence of a separate
consideration, will fail for lack of consideration.

Treitel gives the illustration of goods having been sold and delivered and the parties then agree to rescind the
contract. If the buyer is simply released from his promise to pay the price he provides no consideration and the
promise is not legally enforceable for a ‗debt can only be truly released and extinguished by agreement for
valuable consideration or under seal' ( Commissioners of Stamp Duties v Bone [1977] AC 511). Whereas, if the
buyer returns the goods, in so doing he provides consideration for the promise and is thus able to enforce it.
Accord and satisfaction

Where a rescission does not generate its own consideration a separate consideration is required. There must be an
accord and satisfaction.

British-Russian Gazette Ltd v Associated Newspapers Ltd [1933] 2 KB 616

Treitel observes that an executory accord may be enforced by the person to whom the satisfaction was offered.

Elton Cop Dyeing Co Ltd v Robert Broadbent & Son Ltd (1920) 89 LJKB 186

14.3 Variation

14.3.1 The principle

The creation of a fresh contract

Where the parties rescind a contract and replace it with a fresh contract the variation is legally enforceable. The
variation generates its own consideration.

Stead v Dawber (1839) 10 A&E 57

Variation which benefits both parties

Where the parties vary the contract and both benefit the variation is legally enforceable. The variation generates
its own consideration.

Variation benefiting only the one party

A variation which benefits only one party does not generate its own consideration and will not be enforceable
unless supported by a separate consideration. See:

Vanbergen v St Edmunds Properties Ltd [1933] 2 KB 233

Discussion of Promissory Estoppel (Infra)

The part payment of a debt does not discharge the obligation at law even if a promise to accept the tendered sum
in full and final satisfaction is given by the creditor.

Pinnel's Case (1602) 5 Co Rep 117a

Foakes v Beer (1884) 9 App Cas 605.

14.4 Waiver

14.4.1 The principle

Where an individual promises to give up rights under a contract this may amount to a waiver.

Treitel identifies three meanings of the word ‗waiver':

(a) To mean rescission

(b) To mean variation

(c) To mean forbearance

(a) To mean rescission

Where both parties abandon the contract the rescission is valid. The rescission generates its own consideration.

Rescission unsupported by consideration is not enforceable at law. (Infra)

(b) To mean variation

Where both parties vary the contract the variation is valid provided the variation generates its own consideration.

(c) To mean forbearance

A variation of the contract may fail for want of consideration or for lack of form, yet have some limited effect in
law.

Treitel distinguishes such variations from contractually binding variations and calls them ‗forbearances'.

Treitel develops three points to illustrate principle:

―(i) The party requesting the forbearance cannot refuse to accept the varied performance. Thus, if a seller at the
request of the buyer delivers late, the buyer cannot refuse to accept on the ground that delivery was not made at
the time specified in the contract.

Hickman v Haynes (1875) LR 10 CP 598

(ii) If the varied performance is actually made and accepted, neither party can claim damages on the ground that
performance was not in accordance with the original contract. Thus in the above example the seller who delivers
late, or the buyer who takes delivery late, is not liable in damages. But if the contract is not performed at all, the
damages are assessed on the footing that the breach took place at the end of the extended period.

Ogle v Vane (1868) LR 3 QB 272

(iv) The cases that give rise to the greatest difficulty are those in which the party granting the forbearance refuses
to perform, or to accept performance, in accordance with it.

Suppose, for example, that a buyer agrees, at the seller's request, to accept late delivery. The buyer cannot then
claim damages for the seller's failure to deliver within the contract period; but a further set of problems can arise
if, after expiry of that period but within the extended period, the seller tenders delivery, and the buyer refuses to
accept it. One possible view is that the seller cannot derive rights from a forbearance that is not binding as a
contract, and that therefore he is not entitled to damages for the buyer's refusal to take delivery within the
extended, but outside the original, contract period. A claim for such damages was accordingly rejected in Plevins
v Downing (1876) 1 CPD 230 where the agreement to extend the delivery dates had no contractual force since it
was oral when it should have been evidenced in writing and since it was probably unsupported by consideration
having been made at the request, and for the sole benefit, of the seller.‖

Treitel, Law of Contract (11th Edition) pp 103-104

Forbearance differs from variation supported by consideration in the sense that it does not irrevocably alter the
rights of the parties under the original contract. The party giving the forbearance may, in most cases, retract it.

Charles Rickards v Oppenheim [1950] 1 KB 616 A buyer who pressed for delivery after the delivery date was
not allowed to sue for late delivery but could retract the forbearance by giving the seller a new delivery date (a
reasonable date) beyond which he must not go.
The Courts have extinguished legal rights on a forbearance when the party relying on the forbearance is not able
to return to the status quo ante. A buyer who states that he will accept goods of a lesser quality from those
contracted for will lose his right by forbearance if the seller then acts in such away that he cannot then supply
goods of the contract quality within the delivery period.

Toepfer v Warinco A.G. [1978] 2 Lloyd's Rep 569

The Doctrine of Promissory Estoppel

1 The context

―Where by his words or conduct one party to a transaction makes to the other a clear and unequivocal promise or
assurance which is intended to affect the legal relations between them (whether contractual or otherwise), or was
reasonably understood by the other party to have that effect, and, before it is withdrawn, the other party acts upon
it, altering his or her position so that it would be inequitable to permit the first party to withdraw the promise, the
party making the promise or assurance will not be permitted to act inconsistently with it.‖

Snell's Equity (31st Edition) 10-08

Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 Denning J In 1937 the plaintiffs let a
block of flats to the defendants for a period of 99 years at a rent of £2500 per annum. In 1940 plaintiffs agreed to
reduce the rent to £1250 because many of the flats were unlet due to the war. At the end of the war the plaintiffs
asked for the full rent to be reinstated. Denning J HELD that the plaintiffs were entitled to reinstate the rent.
Denning J went on to state that the plaintiffs could not have sued for the full rent for the period covered by the
agreement.

―The logical consequence no doubt is that a promise to accept a smaller sum, if acted upon, is binding
notwithstanding the absence of consideration.‖

Denning J. @ 134.

Denning founded his assertion upon the dictum of Lord Cairns in Hughes v Metropolitan Railway Co (1877) 2
App Cas 439

“it is the first principle upon which all the Courts of Equity proceed, that if parties who have entered into definite
and distinct terms involving certain legal rights – certain penalties or legal forfeiture – afterwards by their own
act or with their own consent enter upon a course of negotiations which has the effect of leading one of the
parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in
suspense, or held in abeyance, the person who otherwise might have enforced these rights will not be allowed to
enforce them where it would be inequitable having regard to the dealings which have thus taken place between
the parties.'

Hughes had been cited with approval in Birmingham & District Land Co v L&NW Ry (1889) LR 40 Ch D 268

The precedents Denning avoided

(a) Jorden v Money (1854) 5 HL Cas 185

Jorden v Money [1854] UKHL J50 (1854) 5 HL Cas 185, (1854) HL 185, 10 ER 868

The House of Lords held that only a representation of past or existing fact could establish an estoppel – whereas
Denning J was asserting the promise as the foundation of estoppel.

Denning J, while acknowledging Jorden, evaded the point by declining to describe his doctrine as an estoppel.

(b) Foakes v Beer (1884) 9 App Cas 605.

Foakes v Beer [1884] UKHL 1 (1883-84) L.R. 9 App. Cas. 605;(1884) 9 App Cas 605

Payment of a smaller sum in satisfaction of a larger sum is no satisfaction of the larger sum.

Pinnel's Case (1602) 5 Co Rep 117a

A rule confirmed by the House of Lords in Foakes v Beer – the facts of which have been canvassed earlier in
relation to the doctrine of consideration.

Two members of the House of Lords who sat in Foakes were members of the House in Hughes – seven years
before. While the Hughes point was not pleaded in Foakes the two members of the Lords appear to have been
quite unaware of the ‗effect' of the Hughes decision some seven years later!

Denning made the point that Hughes was not pleaded in Foakes , that the decision was per incuriam.

It is possible to reconcile Foakes with High Trees . In Foakes the debt had already accrued whereas in High Trees
the promise was in relation to future payments. If this point is taken and accepted the two cases are reconcilable
and that Foakes remains good law.

2 The conditions for the applicability of the doctrine

There must be a pre-existing legal relationship

Hughes v Metropolitan Railway Co (1877) 2 App Cas 439

There must be a promise

There must be a clear promise intended to alter the contracted (or otherwise legally binding) obligation. The
court assesses intention objectively rather than taking evidence on the party's state of mind.

Woodhouse Israel Cocoa Ltd v Nigerian Produce Marketing Board [1972] AC 741

There must be reliance on the promise

The promisee must have acted upon the promise and altered his position.

Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761 HL

Does the promisee need to act to his detriment?

While there was no detriment in High Trees and the point was not taken in Ajayi v Briscoe or in Tungsten
Electric it appears to be the case – strictly speaking – that detriment is not required.

Detriment not required in WJ Alan & Co v El Nasr Export and Import Co [1972] 2 QB 189.

In Goldsworthy v Brickell [1987] 1 All ER 853 Nourse LJ in the Court of Appeal indicated that detriment was
required.

Goff J in Societe Italo-Belge v Palm Oils [1982] 1 All ER 19 thought that detriment was not required.

The issue has never been tested on appeal. The usual view is that to invoke the doctrine, it must be ‗inequitable'
for the promisor to go back on his promise. Detriment is one reason why it may be inequitable, but not the only
one. ‗Misconduct' by the defendant, e.g. unreasonably withdrawing the forbearance at short notice, may make it
inequitable.

It must be inequitable to go back on the promise .

The point on detriment may be academic for there is a further requirement that it must be inequitable to go back
on the promise. If a person has not altered his position to his detriment it may be easier to assert that it is not
inequitable to go back on the promise.

A shield and not a sword

The doctrine cannot create any new rights. Denning made this perfectly clear in the Court of Appeal in the case
of Combe v Combe [1951] 2 KB 215.

The doctrine operates as a defence to a cause of action and not to found a cause of action in itself.

Baird Textile Holdings Ltd v Marks and Spencer [2001] EWCA Civ 274

Baird had made clothes for M&S for 70 years. The companies had worked closely together. M&S was Britain's
most successful clothes retailer. Wishing to build on that position, M&S decided to stop buying from Baird and
to import clothes from cheaper suppliers abroad. This was disaster for Baird. Baird argued that M&S's close
involvement with them amounted to conduct which induced Baird to believe M&S would not ‗pull the plug'
without reasonable notice. HELD: the argument that M&S could not suddenly stop buying from Baird was an
argument for a positive legal right (i.e. that M&S would continue to buy for a reasonable period after giving
notice). Promissory Estoppel cannot be used to create a legal right, so Baird's case could not succeed on the basis
of promissory estoppel.

Clean hands

Those who seek the protection of equity must have clean hands – they must have behaved equitably themselves.

D &C Builders v Rees [1966] 2 QB 617

Plaintiffs were owed £480 for building works. The defendant offered £300 which was accepted. The defendant
had delayed in payment and had indicated that it was £300 or nothing, knowing that the builders were in serious
financial difficulties. The plaintiffs sued for the balance. Lord Denning held that the plaintiffs were entitled to the
full amount. The defendants had not behaved equitably.

The effect of the doctrine

Does the doctrine operate to extinguish legal rights or merely so as to suspend them.?

Denning – extinctive

Others – suspensory.

In Tool Metal v Tungsten Electric the effect of the doctrine was to suspend legal rights.

Wikipedia notes:

The doctrine of promissory estoppel has had a major impact on English and Irish contract law since the High
Trees case. Debates surrounding the expansion and application of the doctrine have included whether or not
detrimental reliance is required in order to bring the doctrine into effect, whether the doctrine can create a cause
of action or merely provide a defence to a cause of action and whether or not the evolution of the doctrine has
abrogated or abolished the rule in Pinnel's case .

In Amalgamated Investment Co v Texas Bank [1982] 1 QB 122 it was held that the doctrine could act as a sword
and not merely as a shield (that is, it could be used as a cause of action rather than merely providing a defence to
an action).
Attempts have been made to utilize the doctrine of promissory estoppel after High Trees to create a new inroad
into the rule in Pinnel's case that an agreement to accept part payment of a debt in full satisfaction of it is
unenforceable for want of consideration. In the High Trees case Lord Denning commented, obiter , that such an
agreement should now be enforceable under the doctrine of promissory estoppel. However, the courts have
traditionally been reluctant to overrule cases like Pinnel's case and Foakes v Beer as they have formed part of the
common law for so long. Lady Justice Arden in Collier v P & MJ Wright (Holdings) Ltd [2007] EWCA Civ
1329 accepted in principle that High Trees could be used to extinguish a creditor's right to full payment of a debt
in such circumstances.

Wikipedia reference

Demonstration question

Charles contracted to supply Peter with 10,000 widgets per month for 24 months, for a
fixed sum of £20,000, payable in advance. After six months the market price of widgets
unexpectedly doubles, due to the outbreak of war in Ruritania (the main widget producing
country) Peter, hearing that as a result of this Charles has started to cancel similar
contracts, suggest to Charles that he will be prepared to take 7000 widgets per month in
satisfaction of their contract.

Charles agrees, and delivers 7000 widgets per month for the next five months. The war in
Ruritania then ends and the market price of widgets collapses. Peter now demands (a) the
15,000 shortfall in deliveries in relation to the past five months; and (b) 10,000 widgets
per month for the rest of the contract.

Tutorial – Alteration of the contracted obligation

1. The doctrine of promissory estoppel interferes with the purity of absolutist principle and
militates against certainty in commercial contracts.

Discuss.

2. If the facts of Foakes v Beer were to be repeated before the House of Lords today the
Lords would decide the case in exactly the same way.

Discuss.

13. Discharge of Contracts

13.1 Discharge of Liability

We are concerned here with the various ways in which the parties may become discharged (released) from their
contractual obligations.
1. Performance (13.2)

2. Breach (13.3)

3. Agreement (13.4)

4. Frustration (13.5)

13.1.1 Definition

The difficulty of exposition of discharge by performance or by breach is that performance and breach are in
reality mirror images of each other (―two sides of the same coin‖ Anson).

E.g. X contracts to build a shed for Y for £800. X carries out the work, feels that he has performed his
obligations, has no further obligation under the contract, and claims the £800 contract price. However, Y may
claim that X's performance is defective i.e. that X is in breach of contract, and that he, Y, is released from his
contractual obligation to pay, or at least X should remedy the defect or make a deduction from the contract price
because of the defective work. X may claim the work is not defective.

THUS – in reality performance and breach should be considered at one and the same time. In addition, of course,
the extent of one's contractual obligations is to be discovered from the terms of the contract. They will provide
the answer to the question of what performance is to be required.

Conversely, if performance is defective i.e. there is breach of a term, we need to know what sort of term
(condition, warranty or intermediate term) in order to ascertain whether or not the innocent party has any right to
repudiate the contract i.e. to regard himself as discharged from his contractual obligations.

13.2 Discharge By Performance

13.2.1 Historical approach

An historical approach is useful. The original rule at Common Law was always that performance must be precise
and exact. In other words, the obligation under the contract was entire and only an entire performance would
entitle a party to payment under the contract.

Cutter v Powell (1795) 6 Term Reports 320

D agreed to pay Cutter 30 guineas provided he executed his duties as second mate on a voyage from Kingston,
Jamaica to Liverpool. Cutter began the voyage but died when the ship was 19 days short of Liverpool. Cutter's
wife sought a proportion of his wage equivalent to the amount of the voyage for which Cutter had acted as
second mate. It was HELD that she failed because Cutter hadn't performed his entire contractual obligation.

Similarly in:

Bolton v Mahadeva [1972] 2 All ER 1322

P agreed to install a central heating system in D's house for a lump sum of £560. He installed a system which
failed to heat the house adequately and gave off fumes. D refused to pay. The Court of Appeal HELD that it was
a lump sum contract and the obligation entire; the plaintiff could recover nothing.

13.2.2 Harsh rule

Both of the above decisions are harsh because the defendant either receives a benefit or makes a profit without
having to pay anything. Consequently, the courts have developed certain doctrines in order to achieve justice
between the contracting parties:

(i) Substantial Performance

If the contract has been substantially performed, though not necessarily literally or exactly, the injured party
cannot treat himself as discharged from his obligation to pay, though he will have a counterclaim or a right of
set-off for any loss sustained by reason of the incomplete performance.

No right to repudiate

In other words, the injured party has no right to repudiate for breach of condition but does have a right to
compensation for breach of warranty.

What is substantial performance?

What constitutes substantial performance is a question of degree in the circumstances of each particular case. It is
usually established if the actual performance is not far short of the required performance and the cost of
remedying the defects is not too great in proportion to the overall contract price.

Dakin & Co Ltd v Lee [1916] 1 KB 566

The plaintiff builders contracted to carry out certain repairs to the defendant's house for £1,500. P sought the
contract price and D resisted on three grounds:- the underpinning of a wall was two feet thick instead of four feet;
four inch solid columns instead of five inch hollow ones had been used; the joists over a bay window were not
bolted as stipulated. All defects could have been rectified at a cost of £80. The Court of Appeal HELD that P was
entitled to the contract price less an amount in respect of the part of the work which had been carried out contrary
to specification.

Conclusion:

Whether entire performance is a condition precedent or not to any payment is a question of construction of the
terms of the contract in each particular case. Clearly the court construed the contracts as requiring entire
performance in both Cutter v Powell and Bolton v Mahadeva. In modern times such construction is not
uncommon in cases involving contracts of sale of goods, but is very much exceptional in other cases.

(ii) Acceptance of Partial Performance

The usual rule is that a party who partly performs a contract (i.e. there is no substantial performance, and thus a
breach of condition is committed) is not entitled to recover anything.

HOWEVER – a claim to remuneration may arise if the other party accepts the partial performance.

In sale of goods cases this is recognised by the Sale of Goods Act 1979 s.30(1):

“Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject
them, but if he accepts them he must pay for them at the contract rate.”

Quantum meruit

In other cases any such claim rests upon a quantum meruit basis (a reasonable sum in respect of the benefit
conferred by the partial performance). The basis of the liability here is that if Y accepts X's partial performance,
both parties by implication mutually release one another from the original contract and agree to a new contract to
pay for the work done or the goods supplied.

The doctrine of partial performance applies only if the party not in default has a genuine choice either to
accept or to reject partial performance.

Sumpter v Hedges [1898] 1 QB 673

P agreed to erect certain buildings on the D's land for £565. He did part of the work and then abandoned the
contract. D completed the buildings himself, using materials left on the site by the plaintiff. P sued to recover the
value of the work done and of the building materials used. It was HELD that P couldn't recover for the work he
had done because the defendant had no option but to accept the partly erected buildings. Conversely, he could
recover the value of the materials used because the defendant did have a choice whether or not to use them in
completion of the building.

(iii) Prevention of Performance

If one party is prevented from completing his contractual obligations by the default of the other party, the injured
party can either recover damages for breach of contract or alternatively reasonable remuneration on a quantum
meruit basis for work already done.

Planché v Colburn (1831) 8 Bing 14 P had agreed to write a book on Costume and Ancient Armour for a series
published by the defendants called ―The Juvenile Library‖. He was to receive £100 on completion of the book, to
which end he collected materials and wrote part of the book. D then abandoned the series. The plaintiff was
HELD to be entitled to recover 50 guineas on a quantum meruit basis.

(iv) Divisible Covenants

Many of the partial/substantial performance difficulties may be evaded if the court discovers the contract to
consist of a number of severable obligations rather than one entire obligation. Whether this is so or not is a
question of construction of the intention of the parties in each particular case.

E.g. X agrees to sell to Y 120 tons of wheat for £12,000 to be delivered 10 tons per month between January and
December 1989. There is no specification of time of payment. X makes appropriate 10 ton deliveries in January,
February and March, but fails to make any further deliveries.

If the contract is one entire obligation then X is entitled to nothing until he makes all 12 deliveries.

If the obligations are severable then payment is due each month upon delivery and X can recover for the January,
February and March deliveries.

Suggested Approach to Performance Difficulties

Problems involving performance revolve around construction of the contract. The suggested approach is as
follows:

(i) Is the contract an entire obligation requiring precise performance? If it is, nothing less will do, e.g. re Moore
& Re Moore & Co Ltd v Landauer & Co Ltd [1921] 2 KB 519This will be unusual except in sale of goods cases.

(ii) If precise performance is not required, are the contractual obligations divisible?

(iii) If not, has there been substantial performance, acceptance of partial performance or prevention of
performance?

13.2.3 There remains for consideration two further aspects relating to performance:

Time of Performance

(i) When the contract doesn't stipulate a time within which the contractual obligations must be performed,
performance must be within a reasonable time.

(ii) When there is a time stipulation in the contract then that is the time for performance.

(iii) In either case what is the effect of late performance? This depends upon whether time is of the essence of the
contract or not i.e. in the nature of a condition or not.

United Scientific Holdings Ltd v Burnley BC [1977] 2 All ER 62

The House of Lords stated that time is of the essence of the contract if such is the genuine intention of the parties,
and such intention may be expressly provided for or inferred from the nature of the subject matter or the
surrounding circumstances.

An interesting consideration of the problem can be seen in:

Charles Rickards v Oppenheim [1950] 1 KB 616

D purchased a Rolls Royce chassis from P. P contracted to build a body to go on the chassis, the work to be
completed by March 20th at the latest. It was not completed by that date, but the defendant continued to press for
delivery. However, on June 29th D wrote to the plaintiffs and said that he wouldn't take delivery after July 25th.
P didn't deliver by July 25th and the defendant treated the contract as repudiated. The Court of Appeal HELD
that he was entitled to do so. The original date of the 20th March had been of the essence of the contract, but the
defendant had waived it as such by his conduct. But, he had given reasonable notice of a new date, July 25th as
being of the essence of the contract.

Time fixed for performance

Tender of Performance

If one party makes a valid tender of performance and the other party refuses to accept it, he is freed from liability
for non-performance provided that the tender is made under such circumstances that the other party has a
reasonable opportunity of examining the performance tendered in order to ascertain conformity with the contract.

Startup v MacD onald [1843] 6 Man & C 593

The parties contracted for the sale of ten tons of linseed oil to be delivered ―within the last 14 days of March.‖
The plaintiff delivered the oil at 8.30 pm on Saturday, 31st March and the defendant refused to accept delivery
because of the lateness of the hour. It was HELD that the tender of the oil in the circumstances was equivalent to
performance and the plaintiff was entitled to damages for non-acceptance.

***

13.3 Discharge by Breach

13.3.1 Definition

When can the innocent party terminate the contract and regard himself as discharged from his contractual
obligations because of the other party's breach?

It is always possible to sue for damages for breach of contract (i.e. for breach of condition or warranty), but the
right of the innocent party to treat the contract as discharged arises only where there has been a breach of
condition, or a repudiatory breach in the case of an intermediate term, viz.

(a) Where the party in default repudiates either before performance is due (anticipatory breach) or before the
contract has been fully performed.

(b) The defaulting party has committed breach of a term of major importance.

13.3.2 Repudiation before or during performance

Such repudiation may be either express or implied, and it must be established that the defaulting party has made
it clear beyond reasonable doubt that he no longer intends to perform his part of the contract.

Breach before performance becomes due is known as – Anticipatory Breach

In this situation the innocent party may accept the breach and immediately sue for breach of contract, or he may
refuse to accept the breach and wait until the due date for performance, hoping the other party will change his
mind.

Hochster v De La Tour [1853] 2 E & B 678

In April the defendant agreed to engage the plaintiff as a courier during a foreign tour starting on the 1st June. On
11th May the defendant wrote to the plaintiff informing him of a change of mind and that his services would no
longer be required. The plaintiff sued for damages immediately and succeeded.

N.B. It may be dangerous for the innocent party to wait for the due date for performance as the contract continues
at the risk of both parties.

Avery v Bowden (1855) 5 E & B 714

B chartered A's ship and agreed to load her with cargo at Odessa within 45 days. After a while B told A that he
had no cargo and advised him to leave. Instead, A waited at Odessa hoping B would find a cargo. Before the end
of the 45 days the Crimean War broke out between England and Russia and performance of the contract became
illegal. HELD: The refusal by B to provide a cargo was an anticipatory breach and A could have sued
immediately. When he chose not to do so the contract remained on foot until performed. However, in the
meantime both parties were discharged from the contract by frustration (subsequent illegality in this case) due to
the outbreak of war. Thus, B was not liable to A for breach of contract.

N.B. There are some problems surrounding the relationship between anticipatory breach and damages due to the
decision in White & Carter (Councils) Ltd v McG regor [1961] 3 All ER 1178. These will be considered later in
the section on Remedies.

13.3.3 Breach occurring during performance

Such breach raises a difficult question of construction of the contract for the court, for it has to decide whether an
act alleged by one party to be a repudiatory breach in fact amounts to such in law.

Thus, in the general law of contract, if X breaches the contract and Y repudiates, alleging a breach of condition
by X, then if the court agrees, Y has acted perfectly properly. However, if the court finds X's breach to be of
warranty only, then Y also will be in breach of contract due to wrongful repudiation.

Mersey Steel & Iron Co v Naylor Benzon & Co [1884] 9 App Cas 434

Some guidance as to the test of construction to be applied, at least in sale of goods cases, was given by the Court
of Appeal in:

Maple Flock Co Ltd v Universal Furniture Products [1934] 1 KB 148

―First, the ratio quantitatively which the breach bears to the contract as a whole, and secondly, the degree of
probability or improbability that the breach will be repeated.‖

Thus, in the case itself the buyer was held not to be entitled to repudiate on the following facts: the contract was
for 100 tons of rag flock; the first 15 deliveries were in order; the 16th was defective; deliveries 17-20 were in
order. Thus, only 12 tons of the deliveries had been defective, and the breach was unlikely to be repeated.

Cf Munro & Co Ltd v Meyer [1930] 2 KB 312The buyer was held to be entitled to repudiate the whole contract
for 1,500 tons of meat and bone meal, when more than half of the total quantity delivered was found to be
seriously defective.

13.3.4 Breach of a term of major importance

The relevant law here was considered in the earlier section on terms (conditions/warranties/intermediate terms).
Consequences of repudiation or breach of a major term

There are two possibilities here. The innocent party will either (a) treat the contract as still operative or (b) treat
the contract as terminated.

(a) Contract still operative

Breach in itself does not discharge the innocent party from his obligations, he must accept the breach. Thus, if he
refuses to accept the breach, the contract remains in being for the future on both sides.

Howard v Pickford Tool Co [1951] 1 KB 417

―An unaccepted repudiation is a thing writ in water and of no value to anybody; it affords no legal rights of any
sort or kind.‖

per Asquith L J

THUS –

In the case of breach of a major term the plaintiff cannot repudiate or sue for damages until he accepts the breach,
and in the case of an unaccepted anticipatory breach the plaintiff cannot sue for damages until the due date for
performance arrives.

(b) Contract treated as terminated

The contract will be terminated for the future as from the moment the acceptance of the breach is communicated
to the defaulting party.

However, it is clear from the House of Lords decision in Johnson v Agnew [1980] AC 367; [1979] 1 All ER 883
that the breach doesn't operate retrospectively, i.e. the defaulting party will be liable in damages both for any
earlier breaches and also for the breach leading to the discharge of the contract, but will be excused any further
performance.

***

13.4 Discharge by Agreement

13.4.1 Definition

Just as a contract is formed by agreement so it can be discharged or varied by agreement; BUT – just as
consideration is essential to agreement so it is substantially necessary for discharge or variation, unless the
release is executed by deed. The process is known as ACCORD AND SATISFACTION; the accord is the
agreement and the satisfaction the consideration.

13.4.2 Two forms of accord and satisfaction

There are two forms of discharge by agreement:

(a) Bilateral (b) Unilateral.

(a) Bilateral

Applies to executory agreements. X and Y mutually release one another from their obligations.

(b) Unilateral
If X has performed his part of the contract a promise from him to release Y from further performance will not
bind him unless Y provides consideration.

Pinnel's Case (1602) 5 Co Rep 117a, Elton Cop Dyeing Co Ltd v Robert Broadbent & Son Ltd (1920) 89 LJKB
186

Of course, even if Y hasn't provided consideration, he may be able to set up promissory estoppel by way of
defence.

13.4.3 Third party rights

Under Contracts (Rights of Third Parties) Act 1999 , s. 2, in a contract to which the Act applies, where the third
party has ‗assented to' or relied on the term from which he benefits, then the parties who made the contract
cannot vary it or rescind it without his consent.

***

13.5 Discharge by Frustration

Whilst the doctrine has seen expansion from its inception, it is still narrow in application; Lord Roskill stated that
it is: "not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent bargains."

CTI Group v Transclear SA [2008] EWCA Civ 856

Court of Appeal

The case illustrates the principle that Frustration, as a doctrine, is very narrowly applied. To show frustration it
would be necessary to demonstrate that performance of the new contract would be fundamentally different from
that originally contemplated. The Court of Appeal also confirmed that frustration can apply to a contract for the
sale by description of unascertained goods of a specified origin.

13.5.1 Concept

Frustration occurs whenever a contract, after its formation, becomes impossible to perform without default of
either party; the doctrine is often called subsequent or supervening impossibility, and its effect is that the parties
are released from their contractual obligations.

Origins : Paradine v Jane : Absolutism

Until the nineteenth century the common law adopted a doctrine of absolute obligation to perform a contract.
Hence, in:

Paradine v Jane (1647) Aleyn 26

A tenant was sued for arrears of rent and in defence pleaded that for the last three years he had been dispossessed
of his farm by the King's enemies. The court rejected his plea and the tenant was liable for the rent, even though
he was unable to take the benefit of the lease.

Gryf-Lowczowski v Hinghingbrooke Healthcare NHS Trust [2005] EWHC 2407

Gray J reviews the modern law of Frustration and starts with an extract from Lord Reid's speech in Davis
Contractors v Fareham UDC [1956] (Infra)

This case is worth looking at before reading the detail below.

Effect mitigated

The basic principle of frustration was formulated to alleviate the harshness of the absolute obligation doctrine by
Blackburn J in:

Taylor v Caldwell (1863) 3 B & S 826 | Full report

The defendant agreed to hire to the plaintiff a music hall and Surrey Gardens for the purposes of entertainment.
Before the day of the performance, due to the default of neither party, the music hall was destroyed by fire. The
plaintiff sued the defendant for breach of contract. The court HELD the defendant not liable, the contract being
frustrated by the fire.

Underlying Theories

There are two underlying theories: (a) the implied term theory, (b) and the just solution theory. Some cases base
their approach upon (a), others upon (b).

Treitel lists a third theory where frustration follows from destruction of the basis of the contract. This can be seen
as a different way of expressing the implied term theory. Treitel also lists construction as a fourth theory, since
the issue always comes down to one of construction of the contract; and failure of consideration (which is
certainly incorrect) as a fifth.

(a) The Implied Term Theory

The contract will be discharged only where the court can imply a term into the contract that the contract shall
come to an end upon the occurrence of the events in question.

This view is expressly supported by Lord Loreburn in Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum
Products Co Ltd [1916] 2 AC 397

(b) The Just Solution Theory

The contract is discharged by operation of law; otherwise the parties would have to perform a contract radically
different from that originally undertaken.

This view is expressly supported by (amongst others) Lord Radcliffe in Davis Contractors Ltd v Fareham UDC
[1956] AC 696

13.5.2 The circumstances in which frustration may apply

Destruction of the subject-matter of the contract

Taylor v Caldwell (1863) 3 B & S 826 | Full report

The non-occurrence of a particular event which forms the basis of the contract

This invites a comparison of two of the ―Coronation Cases‖ arising out of the postponement of the coronation of
Edward VII due to his sudden illness.

Krell v Henry [1903] 2 KB 740

D agreed to hire a flat from the P for June 26th and 27th, 1902. The contract contained no reference to the
coronation processions, but they were to take place on those days and were to pass the flat. The processions were
cancelled due to the illness of Edward VII and P sued to recover rent not already paid. It was HELD by the Court
of Appeal that the plaintiff failed; the processions and the location of the flat were the foundation of the
agreement and the contract was frustrated.
Cf Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 D chartered the SS Cynthia from P for June 28th and
29th, 1902 for the express purpose of taking paying passengers to see the coronation naval review by Edward VII
at Spithead and to tour the assembled fleet. The review was cancelled due to Edward VII's pneumonia but the
fleet remained assembled. The Court of Appeal HELD that the contract was not frustrated. Vaughan Williams
and Romer L JJ felt that neither the review nor the tour were at the foundation of the contract (they were matters
of importance to the charterer only and not to the owner); Stirling L J felt that both the review and the tour were
objects of the contract, and the tour could still be effected.

The decision in Krell v Henryhas often been criticised as potentially opening the floodgates to contractors to
escape from contracts which have become less profitable due to changed circumstances. Consequently, it has
rarely been followed in subsequent cases:

Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1976] 3 All ER 509

Non-availability of one of the parties due to death, illness or other circumstances

This applies to contracts for personal services, e.g. contracts of employment.

Condor v Barron Knights Ltd [1966] 1 WLR 87

Edward Lottian Condor, a talented drummer, was contracted to play seven nights per week with the Barron
Knights pop group, when he had a minor nervous breakdown. He was advised by a doctor that to continue the
demanding schedule might well lead to a major breakdown, and the contract was HELD to be frustrated.

Apparently, even contracts of employment determinable by notice on either side can be frustrated by long term
illness – Notcutt v Universal Equipment Co (London) Ltd [1986] NLJ Reps 393.

Frustration of the common adventure

FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397 A steam ship was
chartered for a period of five years, 1912-1917. However, in 1915 the government requisitioned the ship for use
as a troopship. The charterers were willing to continue paying the agreed freight, but the owners claimed the
charterparty to be frustrated as they wished to obtain a larger amount by way of compensation from the Crown.

The House of Lords HELD that there was no frustration, the interruption being of insufficient duration and
insufficiently continuous to make it unreasonable for the parties to continue.

Cf Jackson v Union Marine Insurance Co Ltd [1874] LR 10 CP 125 where the interruption was of sufficient
duration for the contract to become frustrated.

Building contracts

Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119

DK contracted with MWB to build a reservoir within six years. After two years the Minister of Munitions
required DK to cease work, remove and sell its plant. MWB claimed the contract subsisted on the basis of a
contract provision allowing a time extension in the event of difficulties. The House of Lords HELD the contract
to be frustrated on the basis that if it were resumed after such interruption it would effectively be a different
contract.

Supervening illegality

Avery v Bowden (1855) 5 E&B 714

Leases

It was for some time uncertain whether the doctrine of frustration can apply to leases; leases create proprietary
rights which usually receive special treatment in English law. However, the House of Lords in National Carriers
Ltd v Panalpina (Northern) Ltd [1981] AC 675 HELD that frustration can apply but the circumstances of its
operation would be very rare.

Unifying themes

A unifying thread running through all of the above cases is that the contract will not be frustrated unless its
foundation has been destroyed so that performance becomes impossible or fundamentally different from what
was agreed. It is not enough that the contract has become more onerous or expensive to perform.

Tsakiroglou & Co Ltd v Noblee & Thorl GMBH [1962] AC 93 The appellants agreed to sell ground nuts to the
respondents and to shop them from Sudan to Hamburg in Nov/Dec 1956. However, on 2nd November the Suez
Canal was closed and remained closed for five months. The price of the nuts had been calculated on the basis of
shipment via the canal which was the normal route, though there was no term in the contract designating it the
exclusive route. The appellants refused to perform the contract. The House of Lords HELD that there was no
frustration; it was still possible to ship the nuts via the Cape of Good Hope, a journey some 3,000 miles longer.
The journey wouldn't be commercially or fundamentally different from that by the canal, merely much more
expensive.

Davis Contractors Ltd v Fareham UDC [1956] AC 696

The appellants contracted with the respondents to build 78 houses for £94,000. Due to unexpected strikes and
materials shortages the contract took 22 months instead of 8 to perform and cost £115,000. The appellants
claimed that the contract was frustrated, and that they were entitled to their actual costs on a quantum meruit
basis. The House of Lords HELD that this was not so; the contract had merely become more onerous and
expensive not radically different.

Lord Reid explained the distinction between a contract becoming more onerous, and being of a different kind:

― In a contract of this kind the contractor undertakes to do the work for a definite sum and he takes the risk of
the cost being greater or less than he expected. If delays occur through no one's fault that may be in the
contemplation of the contract, and there may be provision for extra time being given: to that extent the other
party takes the risk of delay. But he does not take the risk of the cost being increased by such delay. It may be
that delay could be of a character so different from anything contemplated that the contract was at an end, but
in this case, in my opinion, the most that could be said is that the delay was greater in degree than was to be
expected. It was not caused by any new and unforeseeable factor or event: the job proved to be more onerous
but it never became a job of a different kind from that contemplated in the contract.

Lord Reid:

Frustration has often been said to depend on adding a term to the contract
by implication: for example, Lord Loreburn in Tamplin Steamship Co. Ltd.
v. Anglo Mexican Petroleum Products Co. Ltd. [1916] 2 A.C. 397 at p. 404,
after quoting language of Lord Blackburn, said: " That seems to me another way of saying that from the nature of
the contract it cannot be supposed the parties, as reasonable men, intended it to be binding on them under such
altered conditions. Were the altered conditions such that, had they thought of them, they would have taken their
chance of them, or such that as sensible men they would have said: ' If that happens, of course, it is all over
between us"? What, in fact, was the true meaning of the contract? Since the parties have not provided for the
contingency, ought a court to say it is obvious they would have treated the thing as at an end?

I find great difficulty in accepting this as the correct approach because it

seems to me hard to account for certain decisions of this House in this way.
I cannot think that a reasonable man in the position of the seaman in Horlock v. Beal [1916] 1 A.C. 486 would
readily have agreed that the wages payable to his wife should stop if his ship was caught in Germany at the
outbreak of war, and I doubt whether the charterers in the Bank Line case could have been said to be
unreasonable if they had refused to agree to a term that the contract was to come to an end in the circumstances
which occurred. These are not the only cases where I think it would be difficult to say that a reasonable man in
the position of the party who opposes unsuccessfully a finding of frustration would certainly have agreed to an
implied term bringing it about.
I may be allowed to note an example of the artificiality of the theory of
an an implied term given by Lord Sands in Scott & Sons v. Del Sel [1922]
S.C. 592 at p. 595: " A tiger has escaped from a travelling menagerie. The
" milk girl fails to deliver the milk. Possibly the milkman may be exonerated from any breach of contract: but
even so it would seem hardly reasonable to base that exoneration on the ground that ' tiger days excepted ' must
be held as if written into the milk contract".

I think that there is much force in Lord Wright's criticism in Denny, Mott
& Dickson at p. 275: " The parties did not anticipate fully and completely, if at all, or provide for what actually
happened. It is not possible, to my mind, to say that, if they had thought of it, they would have said: ' Well, if '
that happens, all is over between us '. On the contrary, they would almost certainly, on the one side or the other,
have sought to introduce reservations or qualifications or compensations ".

It appears to me that frustration depends, at least in most cases, not on

adding any implied term but on the true construction of the terms which are
in the contract read in light of the nature of the contract and of the relevant
surrounding circumstances when the contract was made. There is much
authority for this view. In British Movietonews Ltd. v. London & District
Cinemas, Ltd. [1952] A.C. 166 at p. 185 Lord Simon said: " If, on the other
hand, a consideration of the terms of the contract, in the light of the circum-
stances existing when it was made, shews that they never agreed to be bound in a fundamentally different
situation which has now unexpectedly emerged, the contract ceases to bind at that point—not because the court
in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true
construction it does not apply in that situation ".

In Parkinson v. Commissioners of Works [1949] 2 K.B. 632 Asquith, LJ.

said (at p. 667): " In each case a delay or interruption was fundamental
enough to transmute the job the contractor had undertaken into a job of a
different kind, which the contract did not contemplate and to which it
could not apply, although there was nothing in the express language of
either contract to limit its operation in this way ". I need not multiply
citations but I might note a reference by Lord Cairns so long ago as 1876 to
additional or varied work so peculiar so unexpected and so different from
what any person reckoned or calculated upon " (Thorn v. The Mayor and

Commonalty of London, 1 App. Cas 120 at p. 127). On this view there is

no need to consider what the parties thought or how they or reasonable men in their shoes would have dealt with
the new situation if they had foreseen it. The question is whether the contract which they did make is, on its true
construction, wide enough to apply to the new situation: if it is not
then it is at an end.

In my view, the proper approach to this case is to take from the arbitrator's
award all facts which throw light on the nature of the contract or which
can properly be held to be extrinsic evidence relevant to assist in its con-
struction and then, as a matter of law, to construe the contract and to
determine whether the ultimate situation as disclosed by the award is or
is not within the scope of the contract so construed.

The incidence of risk

Before the doctrine of frustration can apply the court must be satisfied that neither party has agreed to run the risk
of the event in question. The court construes the contract to see if the risk is expressly provided for (a FORCE
MAJEURE clause) or if there is evidence of intention to run such risk. Indeed, FORCE MAJEURE clauses are
common in modern commercial contracts so that the parties know where they stand right from the outset.
Let us consider the circumstances in which this question of risk is particularly relevant:

(i) Express Provision

If the contract expressly provides for the risk in question that provision will usually apply and the doctrine of
frustration will not.

HOWEVER – such provision must be full and complete, and embrace totally the nature of the risk in question.

Jackson v Union Marine Insurance Co Ltd [1874] LR 10 CP 125

A provision: ―dangers and accidents of navigation excepted‖ didn't apply when a tanker's availability under a
charterparty was delayed for 8 months after it ran aground, because it was deemed not to cover an accident
causing injury of such an extensive nature.

SIMILARLY – in:

Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119 A proviso to the effect that if the work should
be ―unduly delayed or impeded‖ an extension of time for completion was to be granted was deemed inapplicable
to a delay causing a radical change in the obligation.

(ii) Can a contract be frustrated by events which are foreseeable by both parties?

The most obvious suggestion is that if the event was foreseeable the parties should have provided for it in the
contract. Indeed, many of the cases refer to frustration applying to ―unexpected‖ or ―uncontemplated‖ events, and
many obiter dicta express the view that a contract cannot be frustrated by foreseen or foreseeable events.

However, the point remains undecided, and there is support for the opposite view, viz. Lord Denning MR obiter
in The Eugenia [1964] 1 All ER 161, and the strange decision of Goddard J in W J Tatem Ltd v Gamboa [1938]
3 All ER 135 where he held a charterparty to be frustrated by its foreseeable seizure, because it was not
foreseeable that it would be seized for such a lengthy period of time; i.e. a very high degree of foreseeability is
required to exclude frustration!

(iii) A party cannot rely, as a basis for frustration, on an event foreseen by him but not by the other party

Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch 274 The plaintiffs were granted the right by the
defendant to display an advertising sign on the defendant's hotel during a seven year period. Within this period
the hotel was compulsorily acquired and demolished, a risk of which the defendants were aware and the plaintiffs
were not. The defendant was HELD liable in damages, the contract not being frustrated since the defendant could
have provided for such risk in the contract.

(iv) Lack of common assumption

A contract cannot be frustrated by an event which prevents performance in a manner contemplated by one of the
parties only.

Blackburn Bobbin Co Ltd v Allen & Sons Ltd [1918] 2 KB 467

Edwinton v Tsavliris [2007] EWCA CIV 547

Rix LJ said that a multi-factorial approach had to be taken to see if a contract is frustrated. This case is worth
reviewing.

For a detailed review of recent judicial analysis of Frustration - see Lord Justice Riux's judgment extracted at the
foot of this section.
Self-Induced Frustration

Frustration cannot apply where the alleged frustrating event arises from a deliberate act or choice of one of the
parties.

Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524

The respondents chartered to the appellants a steam trawler fitted with an otter trawl. Both parties knew that it
was illegal to use an otter trawl without a licence from the Canadian government. The appellants applied for five
licenses for the trawlers they were operating, including the respondent's trawler. However, they were granted
three licenses only, which they used for their own vessels, and proceeded to repudiate the charterparty on
grounds of frustration. The Privy Council HELD that there was no frustration; the failure of the charterparty was
a result of the appellant's own election.

N.B. It is uncertain whether a negligent act can amount to self-induced frustration, though the House of Lords
have suggested that it might in obiter dicta in Joseph Constantine Steamship Line Ltd v Imperial Smelting
Corporation Ltd [1942] AC 154

Furthermore, the burden of proof of self-induced frustration rests upon the party alleging it.

13.5.3 The effects of the doctrine of frustration

At common law

At common law the contract was terminated automatically and immediately, and both parties were released from
their future obligations under the contract; however, they were required to fulfil any obligations which fell due
before the occurrence of the frustrating event i.e. the loss lay where it fell.

In other words the contract was not void right from the outset, but only from the occurrence of the frustrating
event (cf the effect of mistake which overrides the contract right from the beginning).

This led to unfortunate consequences:

Appleby v Myers [1867] LR 2 CP 651

P undertook to erect machinery upon the D's premises, the work to be paid for upon completion. When the work
was almost completed both the premises and the machinery already erected were destroyed by fire. It was HELD
that the contract was frustrated; however, the plaintiff could recover nothing for the work done since the
obligation to pay didn't arise until completion.

Chandler v Webster [1904] 1 KB 493

P agreed to hire from D a room in Pall Mall to watch Edward VII's coronation procession. The price was £141,
payable immediately. The plaintiff paid £100, but before he could pay the balance the procession was cancelled.
P sought to recover the £100 paid. The Court of Appeal HELD that not only did he fail to recover his £100, but
also he was liable to pay the balance of £41, an obligation which fell due before the occurrence of the frustrating
event.

Chandler v Webster in particular provoked much judicial criticism, and was eventually overruled to some extent
in:

The Fibrosa [1942] 2 All ER 122

The respondents contracted with the appellants, a Polish company, to manufacture certain machinery and to
deliver it to Gdynia. Part of the price was to be paid in advance, and the appellants paid £1,000. However, the
contract was frustrated by the occupation of Gdynia by hostile German forces in September 1939. The appellants
requested the return of their £1,000. This request was refused on the basis that considerable work had already
been done on the machinery.
Clearly, if Chandler v Webster had been followed then the £1,000 would have been irrecoverable because it had
already been paid at the time of the frustrating event. However, the House of Lords HELD that the appellants
could recover their £1,000. The basis for this was not the contract which had ceased to exist, but an action in
what is known as quasi-contract for the restitution of money paid where there has been total failure of
consideration. Consideration in quasi-contract does not have the same meaning as the consideration necessary to
formation of contract; thus, if the party paying the money has received no part of the performance for which he
bargained (i.e. none of the machinery had been delivered) there is total failure of consideration.

THUS – the position was improved, but was still unsatisfactory for two reasons:

(i) The party who had to return the pre-payment might have incurred expenses but would be entitled to nothing
(as in The Fibrosa ).

(ii) If the party seeking to recover the pre-payment had received any part of what he bargained for, no matter how
small, e.g. 1% of the machinery in The Fibrosa , there would be no total failure of consideration.

An attempt to deal with these difficulties led to the enactment of:

***

The Law Reform (Frustrated Contracts) Act 1943

The Law Reform (Frustrated Contracts) act 1943

The Act applies to all contracts governed by English Law except:

* Contracts for the carriage of goods by sea or charterparties (other than a time charterparty or charterparty by
way of demise).

* Contracts of insurance.

* Contracts for the sale of specific goods where the goods have perished, s.7 Sale of Goods Act 1979 .

THUS – in modern times it is the 1943 Act which must be applied to ascertain the position of the parties upon
the occurrence of frustration and not the common law (unless the contract falls within the exempted categories).

***

What is the effect of the 1943 Act?

(i) The right to recover money paid and the right to set-off expenses against pre-payment

Section 1(2):

―All sums paid or payable to any party in pursuance of the contract before the time when the parties were so
discharged ... shall, in the case of the sums so paid, be recoverable from him as money received by him for the
use of the party by whom the sums are paid, and, in the case of sums so payable, cease to be so payable:

Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of
discharge in, or the purpose of, the performance of the contract, the court may, if it considers it just to do so
having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole
or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.‖

There are three main points to be made about s.1(2):

(a) It applies only when there has been a pre-payment or agreement to make a prepayment.

(b) It embodies the rule in The Fibrosa in terms of recovering pre-payments, but it is not now necessary to prove
total failure of consideration.

(c) It goes further than The Fibrosa in that it gives the court a discretionary power to permit the payee to set-off
against the sum paid or payable a sum not exceeding the value of any expenses incurred in performing the
contract before frustration occurred.

X can look to s.1(2) for £2,000 maximum (if anything);

X must look to s.1(3) (yet to be considered) for the remaining £7,000 (if anything); X couldn't look to S.1 (2) at
all if there had been no pre-payment or agreed pre-payment.

(ii) Restitution of Benefits other than Money where there has been Partial Performance

Section 1 (3) represents an attempt to deal with the difficulties created by cases like Appleby v Myers [1867] LR
2 CP 651.

Section 1 (3):

―Where any party to the contract has, by reason of anything done by any other party thereto in, or for the purpose
of, the performance of the contract, obtained a VALUABLE BENEFIT (other than the payment of money) before
the time of discharge, there shall be recoverable from him by the other party such sum (if any), not exceeding the
value of the said benefit to the party obtaining it, as the court considers just, having regard to all the
circumstances of the case and in particular:

(a) the amount of any expenses incurred before the time of discharge by the benefited party in, or for the purpose
of, the performance of the contract, including any sums paid or payable by him to any other party in pursuance of
the contract and retained or recoverable by that party under S.1(2), and

(b) the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract.‖

Effectively, either party may be awarded compensation in respect of any non-monetary valuable benefit
conferred by him upon the other party in pursuance of the contract.

This involves a two-stage process:

(a) Identification and valuation of the ―valuable benefit‖ which will set the upper limit of any ―just sum‖ award.

(b) Calculation of the ―just sum‖.

(a) Identification and valuation of the Valuable Benefit:

This is very difficult and controversial, for, if we take a case like Appleby v Myers there are two alternative
arguments, viz. Firstly, that no valuable benefit has been obtained because the completed work has been totally
destroyed; or secondly, on a more liberal interpretation, that a valuable benefit was obtained by the owner in that
work had been done on his land as per contract immediately before discharge.

Perhaps, in an Appleby v Myers situation, the second interpretation is preferable in that the Act does speak of a
valuable benefit being obtained BEFORE the time of discharge, and the owner is more likely to be insured
against fire than the builder. However, even with a liberal interpretation the Act wouldn't cover all situations, e.g.
in Krell v Henry Krell would not be able to claim that he conferred a valuable benefit upon Henry by arranging
to have his furniture stored away whilst Henry was in the flat.
Section 1(3) was considered by Robert Goff J, whose judgment was affirmed by the Court of Appeal and House
of Lords, in:

B P Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 125

Hunt, who owned an oil concession in Libya, contracted for its development with B P Exploration. B P were to
provide the capital and expertise, and if and when the oil was developed and sold B P would be paid back from
Hunt's share of the oil. After B P had done considerable work and incurred great expense in developing the oil
field successfully, the Libyan government withdrew the concession and the contract was frustrated. B P claimed
under s.1(3). The House of Lords (affirming the judgment of Robert Goff J) HELD that B P had incurred
expenditure under the contract, and consequently a valuable benefit had been conferred upon Hunt in the form of
the increased value in his share of the concession.

(b) Calculation of the “Just Sum”:

The second stage is for the court to assess what sum (not exceeding the value of the benefit) it considers just to
award (if anything). In accordance with s.1(3) it must consider any sum received by the plaintiff under s.1(2) if
any, and the circumstances giving rise to the frustration of the contract, i.e. the position AFTER the frustrating
event, e.g. in Appleby v Myers , the fact that the owner's valuable benefit no longer exists!

X can look to s.1(3) to the extent of £9,000, if he is deemed to have conferred a valuable benefit from Y
immediately before discharge (a big if!).

The court will take account the destruction of the machinery in the calculation of the ―just sum‖.

Section 1(2) does not apply because there is no pre-payment.

Perishing of specific goods – Section 7 SOGA 1979

―Where there is an agreement to sell specific goods, and subsequently the goods, without any fault on the part of
the seller or buyer, perish before the risk passes to the buyer, the agreement is thereby avoided.‖

The section applies only to specific goods and will operate therefore in cases where the property passes under
s.18 rr 2 and 3.

The consequences of frustration – s.7 SOGA 1979 cases

The Law Reform (Frustrated Contracts) Act 1943 is not applicable.

1. Both parties discharged from contractual obligation.

2. Where the price, or part thereof, has been paid it can be recovered on a total failure of consideration

3. On a total failure of consideration the seller cannot deduct anything for expenses incurred before frustrating
event occurred.

4. Payments made under a contract cannot be recovered if there is only a partial failure of consideration.

5. If price not paid but [S] has delivered some goods cannot sue for price.

Cutter v Powell (1795) 6 Term Reports 320

A seaman whose wages were due on completion of the voyage, died during it. His executrix recovered nothing.

Unascertained goods

Doubtful if frustration will ever be successful – ‗genus numquam perit', cf. the perishing of the entire bulk.
Appleby v Myers (1867) et al.

But see Sainsbury v Street [1972] 1 WLR 834

CTI Group v Transclear SA [2008] EWCA Civ 856

Court of Appeal

The case illustrates the principle that Frustration, as a doctrine, is very narrowly applied. To show frustration it
would be necessary to demonstrate that performance of the new contract would be fundamentally different from
that originally contemplated. The Court of Appeal also confirmed that frustration can apply to a contract for the
sale by description of unascertained goods of a specified origin.

For frustration other than that arising under s.7 SOGA 79

The Law Reform (Frustrated Contracts) Act 1943

1. Can recover payments even on partial failure of consideration (s.1(2) LR(FC)A 43).

2. Payee can retain part or all of sum otherwise recoverable if he has incurred expenses in or for the performance
of the contract (s.1(2) LR(FC)A 43).

3. Buyer can be compelled to pay for any goods received (s.1(3) LR(FC)A 43 – Cutter v Powell overruled for
frustration at common law (not under s.7 cases above)

See B P Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 125 per Robert Goff J.

***

CASE STUDY ON FRUSTRATION

Edwinton v Tsavliris [2007] EWCA CIV 547

Rix LJ said that a multi-factorial approach had to be taken to see if a contract is frustrated. This case is worth
reviewing.

# Two classic modern statements of the incidence of frustration are to be found in the dicta of Lord Radcliffe in
Davis Contractors Ltd v. Fareham Urban District Council [1956] AC 696 at 729 and Lord Simon of Glaisdale in
National Carriers Ltd v. Panalpina (Northern) Ltd [1981] AC 675 at 700. Lord Radcliffe said:

"…frustration occurs whenever the law recognises that without default of either party a contractual obligation has
become incapable of being performed because the circumstances in which performance is called for would
render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It
was not this that I promised to do."[1]

# Lord Simon said:

"Frustration of a contract takes place when there supervenes an event (without default of either party and for
which the contract makes no sufficient provision) which so significantly changes the nature (not merely the
expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could
reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense
of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from
further performance."

# The reference by Lord Simon in that latter passage to the role that the concept of justice plays in the doctrine
has a distinguished pedigree, which he elaborated at 701:

"In the first place, the doctrine has been developed by the law as an expedient to escape from injustice where
such would result from enforcement of a contract in its literal terms after a significant change in circumstances.
As Lord Sumner said, giving the opinion of a strong Privy Council in Hirji Mulji v. Cheong Yue Steamship Co.
Ltd. [1926] A.C. 497, 510: "It is really a device, by which the rules as to absolute contracts are reconciled with a
special exception which justice demands."…

Secondly, in the words of Lord Wright in the Cricklehood Property case [Cricklewood Property and Investment
Trust Ltd v. Leighton's Investment Trust Ltd [1945] AC 221] at p. 241: "…the doctrine of frustration is modern
and flexible and is not subject to being constricted by an arbitrary formula." It is therefore on the face of it apt to
vindicate justice wherever owing to relevant supervening circumstances the enforcement of any contractual
arrangement in its literal terms would produce injustice."

# Lord Wilberforce (at 696H) and Lord Roskill (at 712D/E) also referred to the doctrine of frustration as a means
for finding just solutions or avoiding injustice.

# In The Super Servant Two [1990] 1 Lloyd's Rep 1, at 8, Bingham LJ on the same subject included the
following as a proposition established by the highest authority and not open to question:

"The object of the doctrine was to give effect to the demands of justice, to achieve a just and reasonable result, to
do what is reasonable and fair, as an expedient to escape from injustice where such would result from
enforcement of a contract in its literal terms after a significant change in circumstances…"

# The particular problem of delay as a cause of frustration has to be tested as at the time it had to be considered
by the parties, but on an objective basis. For these purposes past and prospective delay has to be taken into
account. The issue, if disputed, requires an informed judgment and the decision on such an issue by the tribunal
of fact cannot easily be upset on appeal (subject of course to any error of law). As Lord Sumner famously said in
Bank Line, Limited v. Arthur Capel & Co [1919] AC 435 at 454 –

"The probabilities as to the length of the deprivation and not the certainty arrived at after the event are also
material. The question must be considered at the trial as it had to be considered by the parties, when they came to
know of the cause and the probabilities of the delay and had to decide what to do. On this the judgments in the
above cases substantially agree. Rights ought not to be left in suspense or to hang on the chances of subsequent
events. The contract binds or it does not bind, and the law ought to be that the parties can gather their fate then
and there. What happens afterwards may assist in showing what the probabilities really were, if they had been
reasonably forecasted, but when the causes of frustration have operated so long or under such circumstances as to
raise a presumption of inordinate delay, the time has arrived at which the fact of the contract falls to be decided."

# To which has to be added an equally well-known passage from the speech of Lord Roskill (with whom their
other Lordships agreed) in Pioneer Shipping Ltd v. BTP Tioxide Ltd (The "Nema") [1982] AC 724 at 752:

"But in others, where the effect of that event is to cause delay in the performance of contractual obligations, it is
often necessary to wait upon events in order to see whether the delay already suffered and the prospects of
further delay from that cause, will make any ultimate performance of the relevant contractual obligations
"radically different," to borrow Lord Radcliffe's phrase, from that which was undertaken under the contract. But,
as has often been said, business men must not be required to await events too long. They are entitled to know
where they stand. Whether or not the delay is such as to bring about frustration must be a question to be
determined by an informed judgment based upon all the evidence of what has occurred and what is likely
thereafter to occur. Often it will be a question of degree whether the effect of the delay suffered, and likely to be
suffered, will be such as to bring about frustration of the particular adventure in question. Where questions of
degree are involved, opinions may and often legitimately do differ. Quot homines, tot sententiae. The required
informed judgment must be that of the tribunal of fact to whom the issue has been referred. That tribunal,
properly informed as to the relevant law, must form its own view of the effect of that delay and answer the
critical question accordingly. Your Lordships' House in Tsakiroglou & Co. Ltd. v. Noblee Thorl G.m.b.H. [1962]
A.C. 93, decided that while in the ultimate analysis whether a contract was frustrated was a question of law, yet
as Lord Radcliffe said at p. 124 in relation to that case "that conclusion is almost completely determined by what
is ascertained as to mercantile usage and the understanding of mercantile men."

# In the light of these principles, it is instructive to consider as illustrations some of the well known cases
concerned with the frustration of a charterparty which have been relied on before this court.
# Anglo-Northern Trading Company, Limited v. Emlyn Jones & Williams [1917] 2 KB 78 concerned the
frustration of a one year time charter by requisition during the First World War. The requisition occurred within
three months from the end of the charter, in July 1916. There was an exception, but no off-hire provision, for
restraint of princes. There was no intimation of the length of time for which the vessel was requisitioned. The
arbitrator therefore held that there was no frustration, but stated a special case for the court. In finding the charter
to have been frustrated, Bailhache J opined that –

"The main consideration is the probable length of the total deprivation of use of the vessel as compared with the
unexpired duration of the charterparty" (at 84).

# On appeal to this court, that case was heard together with another appeal, see Countess of Warwick Steamship
Company v. Le Nickel Société Anonyme [1918] 1 KB 372, also concerning the requisition of a one year time
charter, in that case occurring some six months from its expiry, in October 1915. Bailhache J's dictum was
approved (at 378). However, this court treated the prospective delay, despite the absence of any particular
evidence deployed or found upon in the Anglo-Northern arbitration, as being the same in that case as in the
Countess of Warwick Steamship case, namely "it was a question of goodbye to them; that there was no
expectation of return" (at 379, 380). A finding of frustration founded on requisition in the middle of the Great
War was inevitable. It seems to me that in that context the dictum cited above contributes little insight into
different cases.

# Bank Line v. Capel [1919] AC 435 is the most famous of the First World War requisition cases. There another
vessel subject to a one year time charter was requisitioned, but the requisition occurred before delivery, in May
1915. The charter as usual made provision for restraint of princes and there was also a special clause giving the
charterer an option to maintain or cancel the charter if the vessel could not be delivered "through unforeseen
circumstances". Such clauses were relied on for saying that the doctrine of frustration could not apply, but
unsuccessfully. By September 1915 the owner was entitled to say that the charter had been frustrated. Lord
Sumner qualified Bailhache J's dictum in Tamplin's Case by saying that –

"…I agree in the importance of this feature, though it may not be the main and certainly is not the only matter to
be considered" (at 454).

# He also said –

"A contingency may be provided for, but not in such terms as to show that the provision is meant to be all the
provision for it" (at 456); and

"Delay even of considerable length and of wholly uncertain duration is an incident of maritime adventure, which
is clearly within the contemplation of the parties, such as delay caused by ice or neaping, so much so as to be
often the subject of express provision. Delays such as these may very seriously affect the commercial object of
the adventure, for the ship's expenses and over-head charges are running on and, even with the benefit of
Protection and Indemnity Club policies, the margin of profit is quickly run off. None the less this is not
frustration; the delay is ordinary in character, and in most cases the charterer is getting the use of the chartered
ship, even though it is unprofitable to him…" (at 458/9).

# Tatem v. Gamboa [1939] 1 KB 132, already mentioned above, concerned a 30 day charter of a vessel by the
Republicans during the Spanish Civil War. After a fortnight the vessel was seized by a Nationalist ship and
detained for just under two months, whereupon she was redelivered to her owner. The charterers claimed that the
charter had been frustrated from the moment of seizure, and Goddard J agreed. He was prepared to assume that
the parties contemplated that the vessel might be seized and detained, but not for the length of time in question
(at 135/6). He said (at 137/8):

"It is true that in many of the cases there is found the expression "unforeseen circumstances", and it is argued that
"unforeseen circumstances" must mean circumstances that could not have been foreseen. But…it makes very
little difference whether the circumstances are foreseen or not. If the foundation of the contract goes, it goes
whether or not the parties have made a provision for it."
# Goddard J considered that the requisition cases mentioned above were of assistance to him in this regard, since
requisition must have been anticipated there.

# Mr Hamblen for Tsavliris relied strongly on Tatem v. Gamboa, as had his junior counsel, Mr Hill, before the
judge. In my judgment, right or wrong, its reasoning proves too much. If the charter was frustrated at once, then
that must have been because the prospective delay already as at that time destroyed the contract: as may well
have been the case with seizure of a vessel by opposing forces during war-time, even if the issue of prospective
delay is not discussed expressly in the judgment. Such immediate frustration, however, is not the case here, for it
is no longer said that the charter was frustrated before 13 October 2003. Moreover, as the judge remarked, there
was no question in that case of any possibility of recourse to a court to obtain a remedy against unlawful seizure.
In my judgment, war-time requisition, seizure or trapping (see, for instance, the subsequent cases arising out of
the Iran-Iraq war and the closing of the Shatt-el-Arab waterway) are of uncertain relevance. Some wars, as
modern times have shown, may of course be very short: the possibility therefore that an outbreak of war may
come to a rapid end may have to be considered: see The Wenjiang (No 2) [1983] 1 Lloyd's Rep 400 per Bingham
J at 404/406. But subject to that possibility, the requisition, seizure or trapping of a vessel in the course of a
major conflict are quite unlike the present case. One cannot negotiate or litigate one's way out of such
consequences of war. If in such circumstances the charter has not made express provision for what has occurred
(as may yet happen, eg in the case of requisition, or by reference to a war clause: see Kuwait Supply Co v. Oyster
Management Inc (The "Safeer") [1994] 1 Lloyd's Rep 637), the possibility of frustration, subject to any default
by either party, can never be far away.

# It is certainly true, however, that a contract may be frustrated even though the supervening event was
foreseeable or contemplated. That, after all, is what happened in the requisition cases, as it did again in The
Nema, where the frustrating event was a lengthy strike: even though strikes were of course not only foreseeable,
but the subject matter of express provision in the contract in that case.

# Apart from Tatem v. Gamboa, the authority on which Mr Hamblen placed greatest reliance was Eridania SpA
v. Rudolf A Oetker (The "Fjord Wind") [1999] 1 Lloyd's Rep 307. That, however, was a very different kind of
case. The claimants there were cargo owners whose goods were being carried on a vessel whose owners had let
her to disponent owners who had in turn voyage chartered her to the buyers of the goods. The vessel had suffered
an engine breakdown on the voyage, which led to lengthy delays and prospective further delays for repairs. The
judge, Moore-Bick J, found that the voyage charter and bill of lading would have been frustrated, but for the fact
that the defendant owners and disponent owners were in breach of contract. His reasons were primarily that –

"there was a significant risk that after nearly five months in this vessel this cargo would have suffered very
serious damage as a result of mould growth. From the point of view of both the cargo-owner and the shipowner a
contract for a voyage of about one month which involved no appreciable risk of damage to the cargo resulting
from its inherent qualities had been transformed into one which involved both prolonged delay and a significant
risk of serious damage. That in my judgment rendered the performance of the contract radically different" (at
333).

# I am not in general assisted by this authority, which it seems to me turns ultimately on the consequences for the
cargo of the prolonged delay in question. However, Moore-Bick J did emphasise the learning of The Nema,
saying that –

"As Lord Roskill pointed out in The Nema, whether a contract has been frustrated in circumstances such as those
of the present case is essentially a matter of judgment. In a case where an unforeseen event has led to a
prolongation of the voyage which is sufficient to give rise to a significant risk, or worse, of damage to the cargo,
the question whether performance of the voyage has become radically different is essentially one of fact and
degree" (at 332).

Although there was an appeal to this court (at [2000] 2 Lloyd's Rep 191), it did not concern issues of frustration.
# There were lengthy submissions before us from both parties as to the role in the doctrine of frustration of the
fact that a risk might be foreseen or foreseeable. We had cited to us numerous passages from a major work of
broad, detailed and exceptional scholarship by Professor Sir Guenter Treitel QC, his Frustration and Force
Majeure, 2nd ed 2004. Similar submissions in reliance on this work were made to the judge. Mr Hamblen's
summary of Professor Treitel's thesis as relevant to present purposes is that foreseeability of a risk may be a weak
or inconsequential factor to take into account, unless the three tests of kind, extent, and degree are met. As to
kind and extent, both the type and the extent or length of the interference or delay must be foreseeable; as to
degree, the degree of foreseeability has to be very high.

# The significance of foreseen or of unforeseen but foreseeable events is in my judgment well, if briefly,
summarised in Chitty on Contracts, 29th ed, 2004 at paras 23-057/8. Para 23-057 which deals with foreseen
events can be seen to make the point that there is no rule of exclusion, at best some prima facie iandications.
Thus –

"While an unforeseen event will not necessarily lead to the frustration of a contract, a foreseen event will
generally exclude the operation of the doctrine. The inference that a foreseen event is not a frustrating event is
only a prima facie one and so can be excluded by evidence of contrary intention."

# However, there is no finding in terms that the detention by KPT which occurred in this case was actually
foreseen (or unforeseen) even by Tsavliris, merely that unreasonable detention by port authorities is a "risk of the
industry", and as such foreseeable. In such circumstances it is para 23-058 which is perhaps particularly
pertinent, which reads –

"Event foreseeable but not foreseen. When the event was foreseeable but not foreseen by the parties, it is less
likely that the doctrine of frustration will be held to be inapplicable. Much turns on the extent to which the event
was foreseeable. The issue which the court must consider is whether or not one or other party has assumed the
risk of the occurrence of the event. The degree of foreseeability required to exclude the doctrine of frustration is,
however, a high one: " 'foreseeability' will support the inference of risk-assumption only where the supervening
event is one which any person of ordinary intelligence would regard as likely to occur, or…the contingency must
be 'one which the parties could reasonably be thought to have foreseen as a real possibility.' " "

# The latter quote by Chitty is from Treitel's work at para 13-09, itself citing the American authority of Mishara
Construction Company Inc v. Transit-Mixed Concrete Corp 310 NE 2d 363, 367 (1974). The judge took account
of such submissions: see at para 84 of his judgment.

Submissions on appeal
# The submissions on appeal followed the same pattern as those at trial (see above), but refined to take account
of the fact that Tsavliris were no longer contending for a frustration date earlier than 13 October. In particular,
Mr Hamblen on behalf of Tsavliris submitted that the judge had erred in his final conclusions at para 106. Thus
he erred:

(i) in resisting the compelling case (which the judge had himself described as a "realistic argument" (at para
106(iii)) for the frustration of a charter whose unexpired period was far exceeded by the probable length of delay;

(ii) in being influenced or overly influenced by "the risk in the salvage context" (at para 106(iv)), when that risk
was poorly and too broadly defined, and, in the form in which it eventuated, was neither found to have been
actually foreseen nor could properly be said to be foreseeable, neither in its type, nor in its extent, and not to the
degree of foreseeability required by sound doctrine, at any rate not as "a real possibility" (see Mishara and
Treitel), and was arguably unprecedented;

(iii) in being influenced by "the decision by Tsavliris to opt in the first instance for a negotiated setting" (at para
106(iv)), when that was relevant if at all to negative the complaint by Global of self-induced frustration and
otherwise was merely part of the background which led, with the collapse of that strategy, to the frustration of the
charter;

(iv) in concluding that Tsavliris had assumed the risk of detention under "the sphere of responsibility" which it
had undertaken under the charter (para 106(iv)), when the cause of the detention which took place was not in
truth about port dues at all, since from beginning to end the KPT had made it clear that they wanted payment or
security for the pollution caused by the casualty and would not release any vessel until that was provided;

(v) in being influenced or overly influenced by the so-called "striking feature of the case" that as at 13 October
there was still time, before the charter could be said to be frustrated, to invoke the assistance of the Pakistani
courts (para 106(v)), when (a) the charter was already frustrated, and (b) the prospects of a successful outcome
within any reasonable time, especially following appeal, were wholly uncertain and speculative, as was shown
ultimately by the fact that (c) the litigation did not succeed in obtaining the release of the vessel without further
negotiations involving the agreement of and payments by third parties.
# In sum, Mr Hamblen submitted that the judge had erred in not asking himself the critical question as at 13 (or
let it be 17) October 2003: whether the delay which had already taken place added to the prospective delay
amounted to a total, ongoing, indefinite delay of such unreasonable and inordinate length, especially when
viewed against the short period of the charter and its extremely short unexpired portion, as to cause performance
of the charter in those circumstances to amount to that radically different thing which amounts in law to
frustration. If the judge had found what the prospective delay was as at 13 or 17 October, and, in the light of that
finding had asked himself the critical question, he would have been bound to say, as this court should say, that
the charter was by then frustrated, as Tsavliris had claimed in their letter of 21 October.

# On behalf of Global, Mrs Blackburn submitted that the judge was right for the reasons which he gave, and, as
she had also submitted at trial, for additional reasons (such as self-induced frustration, breach of the safe port
warranty of due diligence, the obligation to redeliver in Fujairah, the rider clause) which formed part of the
respondents' notice. She singled out Mr Constantinides' evidence, both in relation to his strategy for a negotiated
solution at any rate by Christmas, and in accepting the risk of such unreasonable detention by KPT as had
occurred in this case as being definitely foreseeable as a risk of the industry, and the generally uncontroversial
evidence of the Pakistani law experts, as constituting the critical facts of the case. The assessment of those facts
was for the trial judge.

Discussion
# It is to be observed that Tsavliris's appeal does not amount to an attack on the judge's restatement of the law,
but on his application of that law to the facts of the case. To a certain extent complaint is made about his findings
of fact themselves, such as his attitude to the uncertainties and length of litigation, particularly on appeal from the
Pakistani trial court. Ultimately however the complaint is that the judge weighed the facts, or the various factors
which he had to assess, wrongly and was therefore led to the wrong conclusion. He was helped in that error by
defining the risk which might have had to be calculated in the parties' contemplation at the time of contracting
too broadly, and in failing to consider sufficiently explicitly the future period of uncertainty and delay.

# In the course of the parties' submissions we heard much to the effect that such and such a factor "excluded" or
"precluded" the doctrine of frustration, or made it "inapplicable"; or, on the other side, that such and such a factor
was critical or at least amounted to a prima facie rule. I am not much attracted by that approach, for I do not
believe that it is supported by a fair reading of the authorities as a whole. Of course, the doctrine needs an overall
test, such as that provided by Lord Radcliffe, if it is not to descend into a morass of quasi-discretionary decisions.
Moreover, in any particular case, it may be possible to detect one, or perhaps more, particular factors which have
driven the result there. However, the cases demonstrate to my mind that their circumstances can be so various as
to defy rule making.

# In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the
factors which have to be considered are the terms of the contract itself, its matrix or context, the parties'
knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at
any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event,
and the parties' reasonable and objectively ascertainable calculations as to the possibilities of future performance
in the new circumstances. Since the subject matter of the doctrine of frustration is contract, and contracts are
about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express or
implied provision but may also depend on less easily defined matters such as "the contemplation of the parties",
the application of the doctrine can often be a difficult one. In such circumstances, the test of "radically different"
is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or
onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as
provided for and contemplated and its performance in the new circumstances.

# What the "radically different" test, however, does not in itself tell us is that the doctrine is one of justice, as has
been repeatedly affirmed on the highest authority. Ultimately the application of the test cannot safely be
performed without the consequences of the decision, one way or the other, being measured against the demands
of justice. Part of that calculation is the consideration that the frustration of a contract may well mean that the
contractual allocation of risk is reversed. A time charter is a good example. Under such a charter, the risk of
delay, subject to express provision for the cessation of hire under an off-hire clause, is absolutely on the
charterer. If, however, a charter is frustrated by delay, then the risk of delay is wholly reversed: the delay now
falls on the owner. If the provisions of a contract in their literal sense are to make way for the absolving effect of
frustration, then that must, in my judgment, be in the interests of justice and not against those interests. Since the
purpose of the doctrine is to do justice, then its application cannot be divorced from considerations of justice.
Those considerations are among the most important of the factors which a tribunal has to bear in mind.

# Mr Hamblen submitted that whereas the demands of justice play an underlying role, they should not be
overstated. He referred the court to Chitty at para 23-008 ("But this appeal to the demands of justice should not
be taken to suggest that the court has a broad absolving power whenever a change of circumstances causes
hardship to one of the contracting parties…Such a test is too wide, and gives too much discretion to the court"). I
respectfully agree. Mr Hamblen also referred to Treitel at para 16-009 ("The "theory" does not, in other words,
supersede the rules which determine the circumstances in which the doctrine of frustration operates"). I would
again respectfully agree, as long as it is not sought to apply those rules as though they are expected to lead one
automatically, and without an exercise of judgment, to a determined answer without consideration of the
demands of justice.

# Mr Hamblen further cited two authorities. In Notcutt v. Universal Equipment Co (London) Ltd [1986] 1 WLR
641, this court had to consider a contract of employment which the trial judge had found to have been frustrated
by the permanent incapacity of an employee. The narrow issue was whether the contract should have come to an
end by frustration (without notice) or whether the proper way of ending it was by the employer giving notice,
during which period there would have been a statutory requirement of sick pay. The appeal was dismissed. There
was a submission, based upon some of the dicta cited above, that an additional condition for the incidence of
frustration was that the survival of the contract should be unjust. In his judgment (with which the only other
member of the court, Sheldon J) agreed, Dillon LJ said (at 647):

"I do not for my part see that these references to justice or injustice introduce any further factor. If the
unexpected event produces an ultimate situation which, as a matter of construction, is not within the scope of the
contract or would render performance impossible or something radically different from that which was
undertaken by the contract, then it is unjust that the contracting party should be held to be still bound by the
contract in those altered circumstances. I approach the facts of this case on the footing that the test to be satisfied
is that explained by Lord Reid and Lord Radcliffe in the passages set out above."

# In a case in which the contract was overcome by permanent disability and the court considered that it would be
unjust for the contract to survive in such circumstances, I see no difficulty with these observations.

# In Eridania SpA v. Rudolf Oetker (The "Fjord Wind") [1999] 1 Lloyd's Rep 307 at 328/9 Moore-Bick J said,
with reference to Bingham LJ's reference to the demands of justice in The Super Servant Two (see above), that –

"his intention was clearly to describe the considerations which had given rise to the development of the doctrine
rather than to suggest that the Court is entitled to adopt a more liberal approach than would be indicated by Lord
Radcliffe's speech. I am unable, therefore, to accept Mr Gee's submission that in this case I ought to have regard
to some wider considerations of justice and fairness than the earlier authorities would otherwise suggest."

That reflects the formulation of Chitty (above).

# I turn then to the facts of this case. I agree with Mr Hamblen that the critical question was whether, as of 13
October, (or 17 October, and for present purposes I am content to adopt either date), the delay which had already
occurred and prospective further delay would have led the parties at that time to have reasonably concluded that
the charter was frustrated. No later date of frustration was relied upon. For these purposes, since on the facts a
delay of some 5 weeks had already occurred and the prospective delay involved in a revised strategy involving
litigating in the Pakistani courts would involve a further 4 to 6 weeks at least, the first question to consider is
whether Mr Hamblen is right in his submission that the Bailhache J test of comparing the probable length of the
delay with the unexpired duration of the charter is the critical or main and in any event overbearing test to apply
(see Anglo-Northern, Bank Line, Tatem v. Gamboa).

# In my judgment it is not. It may be an important consideration, but it is, on our facts, only the starting point. In
the first place, the development of the law shows that such a single-factored approach is too blunt an instrument.
As stated above, a finding of frustration of a charter of no longer than a year, based on requisition during the First
World War, against the view that requisition meant "goodbye to them", was in any event close to inevitable.
Secondly, requisition, like seizure in Tatem v. Gamboa, could not be rectified; whereas in our case, the
consequences of the detention by the port authorities remained very much a matter for enquiry, negotiation,
diplomacy, and, whatever the ordering of the tactics, legal pressure. Thirdly, where, as in our case, the
supervening event comes at the very end of a charter, with redelivery as essentially the only remaining
obligation, the effect of the detention on the performance of the charter is purely a question of the financial
consequences of the delay, which will fall on one party or the other, depending on whether the charter binds or
does not bind. It is not like the different situation where the supervening event either postpones or, which may be
even worse, interrupts the heart of the adventure itself: as, for instance, in Tatem v. Gamboa or The Fjord Wind.
In our case, the purpose for which the Sea Angel had been chartered, namely the lightening of the casualty, had
been performed.

# Fourthly, in general terms the contractual risk of such delay caused by detention by government authorities was
firmly on the charterers, Tsavliris. I will develop this below: but in essence it follows from their obligation to pay
hire, subject to the off-hire clause, until redelivery. And even the off-hire clause itself expressly provided for
"detention by the authorities at home or abroad" but not in terms which were relied on as covering the particular
event here. Fifthly, as was even common ground, the risk of detention by the littoral authorities arising out of a
salvage situation where there was a concern about pollution was, at any rate in general terms, foreseeable. This
remained the case even if, as Mr Hamblen submitted, the particular form in which that risk showed itself in this
case was unforeseeable, or only weakly foreseeable, or was even unprecedented. Sixthly, that general risk was
foreseeable by the salvage industry as a whole, and was provided for by the terms of that industry: see SCOPIC
and Brice's commentary on it. Indeed, in my view the particular risk which occurred was within the provisions of
SCOPIC. As such, those matters were part of the matrix itself of the charter under enquiry. In this connection, I
bear in mind that Global were not themselves part of the salvage industry: but they chartered the vessel to well-
known international salvors, to perform salvage services directly to a casualty, at a high price which reflected the
emergencies and risks of such services: and therefore the foreseeable risks of the salvage context, and the
incidence of those risks subject to SCOPIC, are properly part of the matrix of the charter. In justice, they bear
particularly on Tsavliris, the salvors, themselves.

# Seventhly, it is now common ground, on the particular facts of this case, that, short as the charter was, a mere
20 days, and shorter still as the unexpired period of the charter was, a mere 3 days, there was no frustration until
the strategy of commercial negotiation had initially failed (by 13 or 17 October), some five weeks after the
detention began. So, in any event, this is not a case like Anglo-Northern and Tatem v. Gamboa, where the
charters were frustrated then and there by the supervening event. Ours is one of those "wait and see" situations
discussed in other authorities. In such situations, it is a matter for assessment, on all the circumstances of the
case, whether by a particular date the tribunal of fact, putting itself in the position of the parties, and viewing the
matter in the role of reasonable and well-informed men, concludes that those parties would or properly speaking
should have formed the view that, in all fairness and consistently with the demands of justice, their contract, as
something whose performance in the new circumstances, past and prospective, had become "radically different",
had ceased to bind.

# For these reasons, some of which have been sufficiently grounded above, and others of which I shall elaborate
below, it seems to me that the primary point on which Tsavliris have founded their claim to frustration fails. I
turn to discuss particular aspects of these reasons.

The test as of 13/17 October

# Mr Hamblen submitted that the judge had not properly asked himself the right question as of 13/17 October
because he did not state in terms what the length of the prospective delay was as of the time in mid-October
when the commercial strategy failed and it had become necessary to have recourse to law. In my judgment, that
criticism essentially fails. The judge had squarely before him Mr Hamblen's argument, there made by Mr
Timothy Hill, Mr Hamblen's junior on this appeal, that "as of the 13th – 18th October…the probable length of
delay, compared to the unexpired period of the charterparty, meant that the charterparty was frustrated" (at para
106(iii)). He spoke again of "the prospective extent of the delay" at para 106(v). He had previously for these
purposes carefully considered the question of the availability of the Pakistani court and the time-scale within
which it might be able or not to grant effective relief (at para 104). I am satisfied that the judge was answering
the right question. As he said (ibid) – "Plainly, if effective and timely relief could be anticipated, the charterparty
could not yet be regarded as frustrated."
# The judge's conclusion, however, was against the Tsavliris argument, both as a matter of those facts which
involved consideration of the evidence of the Pakistani legal experts and as a matter of the judge's overall
assessment of the situation. In particular, he had in mind the important evidence that a decision on an application
limited to an order for release of the vessel could be achieved within 4 – 6 weeks, as well as the ramifications of
any dilatory attempt by the KPT, if so far unsuccessful, to string matters out during an appeal. His view of
events, looking forward as of 13/17 October, was justified by the cross-check of events as they unfolded (see
Lord Sumner in Bank Line). The judge was entitled to view the prospects of such delaying tactics, if KPT should
fail at first instance, as merely speculative. In fact there was no appeal.

# Although, as things turned out, the Pakistani judge's decision was not accepted by the KPT, which continued to
use every opportunity allowed it, even in the absence of an appeal, to spin out further negotiations, until an
application to commit its senior officers for contempt of court finally brought matters to a head, it was the
essential strategy adopted from the beginning by Tsavliris, with the owners of the casualty and their Club acting
in tandem, which ultimately bore fruit. The only difference from that opening strategy which emerged over the
period was that, whereas resort to law was regarded as something to be avoided for as long as possible, it was in
time used, as it had always been contemplated it might be, as part of a combination of pressures to reach a final
result. In the meantime, it was not simply a matter for Tsavliris alone to decide whether or not and when to go to
law. The casualty owners, whose underwriters, the Club, were also intimately interested, not only because of
KPT's direct claims but also through their SCOPIC obligations, also had to decide if and when to resort to law,
as, equally or more significantly, had Global themselves. It was in fact Global's legal suit which became the basis
for the parties' legal attack on the KPT. It was for Global, and their linked company the ultimate owners of the
Sea Angel, as much as anyone to calculate when and if the right moment had arrived for legal action.

# In effect, one can see the parties moving towards the solution over a period: Tsavliris instructed their lawyers
on 19 September to prepare a legal notice; Global instructed their lawyers on 2 October to issue proceedings; the
owners of the casualty and the Club's English lawyers, Eversheds, were perhaps more sceptical as to the
usefulness of legal proceedings, but the Club's financial power remained part of the solution. In these
circumstances, I do not regard the temporary breakdown of negotiations as of mid-October as a turning-point, so
much as a staging point in a continuous process. At the outset of that process, Tsavliris's managing director, Mr
Constantinides, regarded three months as a likely time for a solution, and he did not regard such a period then as
amounting to a frustrating delay.

# It seems to me that that is essentially what the judge is saying at paras 99 and 104/106 of his judgment.

The foreseeability of the risk

# In my judgment, the submissions under this heading became over-refined. In a sense, most events are to a
greater or lesser degree foreseeable. That does not mean that they cannot lead to frustration. Even events which
are not merely foreseen but made the subject of express contractual provision may lead to frustration: as occurs
when an event such as a strike, or a restraint of princes, lasts for so long as to go beyond the risk assumed under
the contract and to render performance radically different from that contracted for. However, as Treitel shows
through his analysis of the cases, and as Chitty summarises, the less that an event, in its type and its impact, is
foreseeable, the more likely it is to be a factor which, depending on other factors in the case, may lead on to
frustration.

# In the present case it was both highly relevant that the unreasonable detention of a vessel participating in
salvage services, whether owned or contracted in by the salvors, could be foreseen and was actually provided for
in SCOPIC, and also relevant, if it be the case, that the actual circumstances of the detention were comparatively
unusual or even unprecedented and lasted for a long time. All such circumstances would need to be taken into
account. In Mr Hall's experience the particular circumstances of this detention were then unprecedented but now
needed to be taken into account; but in Mr Constantinides's experience, they "definitely" fell at the time within
the industry risk. It seems to me that, for the reasons discussed above (at paras 63/65), the judge's treatment of
this issue was fair. Once a port authority acts unreasonably, the precise circumstances and consequences must
essentially be variants on a theme. The foreseeability of this general risk, recognised within the industry, and
provided for in its well-known terms of trade (SCOPIC), provides a special and highly relevant factor against
which the issue of frustration needs to be assessed. However, like most factors in most cases, it must not be
exaggerated into something critical, excluding, preclusive: for if, on the special facts of a particular case, the
charter is frustrated, then the obligation to reward the salvor under SCOPIC goes – despite his inability to
demobilise his equipment.
The sphere of responsibility
# Under the topic of this factor, the judge mostly had in mind the responsibility for port dues imposed on
Tsavliris in clause 7 of the charter form (as well as in the specially adopted terms of the recap fixture). I would
prefer myself to put the point more broadly. This is firstly because, on the facts of this case, I think that the
charterer's responsibility for port dues can be overstated. The issue raised by KPT was not really about port dues,
it was, as Mr Hamblen I think rightly submits, about KPT's determination to protect itself against its fears and the
expenses of pollution damage and wreck removal. If the demands for port dues had been reasonable, but wrongly
rejected by Tsavliris, then any consequent delay would have been for their account under the charter. I do not see
why an unreasonable demand for port dues, a fortiori a demand for port dues as a pretence to cloak a claim
against pollution damage caused by the casualty, should be regarded as falling within the charterer's sphere of
responsibility. That remains the case even if it takes a little time to grasp the real nature of the reasons for the
detention by the local authorities. Moreover, where the demand for port dues is made an unreasonable excuse for
the unlawful detention of the vessel, I do not see why the responsibility for trying to extract the vessel from her
situation is not prima facie as much that of her owners (and disponent owners) as her charterers. It is not as
though her charterers have ordered the vessel into salvage services under some general discretion as to her
employment: she has been specifically contracted to such services at a price which is intended to reflect the risks.

# The way I would therefore prefer to put the factor of the sphere of responsibility under the charter which the
judge had in mind is to emphasise that, generally speaking, the risk of delay under the charter was upon Tsavliris
as charterers. This is because of the essential structure of a time charter, under which, absent express provision,
time runs continuously against the charterer until redelivery. Thus an off-hire clause is the place to find
exceptions against the incidence of a continuous liability for hire, but such a clause did not avail Tsavliris in this
case, even though clause 21(a)(v) expressly deals with detention by authorities.

# The point is also illustrated by other provisions of the charter form. Thus clause 27 expressly provides a mutual
exception against liability for loss or damage arising from restraint of princes, but that does not avail to stop a
liability for hire due to delay caused by such restraint. Restraint of princes is of course of direct relevance in this
case. Not of direct relevance, but again illustrative of the general point are specific provisions to deal with other
circumstances in which detention of the vessel may arise. Thus constructive total loss of the vessel, which may
arise from trapping, is specifically dealt with in clause 20. Requisition, an old cause of dispute, is specifically
dealt with in clause 32. Both these clauses are additional off-hire clauses which operate in circumstances of
actual or potential frustration. Against this background, where the charterer assumes the general risk of delay,
subject to express provision, it necessarily requires something special to frustrate the charter through mere delay:
and a fortiori where, as here, the consequences of the delay are purely financial since the charter is over, save for
redelivery, and the delay in question falls within a foreseeable risk of the salvage industry.

The dictates of justice

# I have referred to this factor above. It is not an additional test, but it is a relevant factor which underlies all and
provides the ultimate rationale of the doctrine. If one uses this factor as a reality check, its answer should
conform with a proper assessment of the issue of frustration. If it does not appear to do so, it is probably a good
indication of the need to think again. The question in this case is whether it would be just to relieve Tsavliris of
the consequences of their bargain, or unjust to maintain the bargain, in a situation where they have assumed the
general risk of delay, and have done so in a specific context where the risk of unreasonable detention is
foreseeable and has at least in general been actually foreseen, as demonstrated by SCOPIC which, subject to the
limits of frustration, protects the salvor from the financial consequences of the delay; where from the very
beginning a solution was considered to be possible rather than impossible or hopeless, but only after a period of
some three months, and where that solution, although not entirely or even mainly in Tsavliris's own control, was
achievable with the co-operation of the owners of the casualty and their Club, known to be in principle available,
and the assistance of legal action in the local courts; and where the outcome has confirmed the calculations of the
objectively reasonable participants in the events.

# In my judgment, the judge's conclusion, that the charter had not been frustrated by 13 or 17 October, shows the
doctrine working justly, reasonably and fairly. At the appellate level, the question is whether the judge's
assessment of the various factors involved displays an error of law or of rationality or a failure to appreciate the
facts which should call for reversal by this court – in an area where, as Lord Roskill has said, the informed
judgment must be that of the tribunal of fact to whom the issue has been referred. For the reasons which I have
sought to explain in the course of this judgment, I have concluded that the appellants, Tsavliris, have failed in
their burden to show that the judge was in error.
The respondents' notice
# It is therefore unnecessary to deal with the respondents' detailed notice. I would merely say that, if this appeal
had prima facie succeeded thus far, I would be surprised if the additional matters raised in the respondents' notice
would have made the difference. We did not ask Mr Hamblen to reply on issues of self-induced frustration or
safe port warranty of due diligence.

Conclusion
# I would dismiss this appeal.

Demonstration Question – Discharge by Frustration

The Lagerlout Rugby team arranged a visit to Murrayfield to see an exhibition of first
class rugby (as it, the match, turned out) in the Scotland v Wales match in February 2005.

For this purpose they hired a full stretch limousine from ―Deeply Dippy‖ Cars Ltd – the
team, excluding ringers, comfortably being accommodated within the confines of the car.

The rental for the trip was £250 plus petrol costs. A deposit of £50 was paid when the car
was collected.

Advise The Lagerlout Rugby team in the following circumstances:

(a) ‗Over refreshed' from a session on the Friday lunchtime none of the team are fit to
make the journey, by car or otherwise, to Scotland. (Would it make any difference if they
had been food poisoned?)

(b) Murrayfield is razed to the ground by a person or persons unknown and the match has
to be cancelled.

The team see the flames as they arrive at Murrayfield.

(c) Police arrest the driver of the car who had been banned from driving for speeding two
weeks before and the team, none of whom are insured to drive the car on, are unable to
complete the journey to Scotland by any means in time for the match. (Would it have
made any difference if the team could have gone by train and have reached Murrayfield in
time?)

(d) On the Saturday morning, the team, agreed that Scotland would win comfortably, felt
that their time could be employed to greater effect elsewhere asked the managing director
of Deeply Dippy Cars (Chiswick) Ltd if they could cancel the trip agreeing a cancellation
fee of £15. Deeply Dippy Cars are now suing for the balance.

Questions on Discharge by Frustration

1. Distinguish between partial performance and substantial performance.

2. Would either partial performance or substantial performance have been any use in
Cutter v Powell or Bolton v Mahadeva ?

3. Explain the relationship of partial performance, substantial performance and prevention

of performance to breach of condition/warranty.

4. ―A simple repudiation in itself is of no value‖. Explain.

5. Explain the difference between unilateral and bilateral discharge by agreement.

6. Distinguish between the circumstances in which the law applies the doctrine of
operative mistake and the doctrine of frustration.

See Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1976] 3 All
ER 509.

7. How impossible of performance must a contract become before the doctrine of

frustration will apply?

8. Do you think that the House of Lords would have reached the same decision in Tamplin
Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397if the
owners hadn't been likely to receive a larger sum from the Crown if the contract were
frustrated?

9. Are the different decisions justifiable in Krell v Henry and Herne Bay Steamboat Co v
Hutton ?

10. Distinguish between the circumstances in which ss.1(2) and 1(3) of the Law Reform
(Frustrated Contracts) Act 1943 are operative?

11. In B P Exploration Co (Libya) Ltd v Hunt (No 2) [1982] 1 All ER 125 Robert Goff J
in identifying and valuing the benefit conferred took into account the value of a possible
claim for compensation against the Libyan government, i.e. he looked at the situation
immediately AFTER the occurrence of the frustrating event.

Is this approach correct? If so, what would be the outcome in a case like Appleby v Myers
?

Tutorial – Discharge of Contracts

1. In January Tex contracted with Doris, Ethel and Percy respectively. The contracts were
as follows:

Doris : to renovate her flat for £2,000 payable on completion.

Ethel : to supply and construct a new greenhouse for £1,000 payable on completion.

Percy : to install a new toilet and bathroom suite for £2,000 payable on completion.

In March, Tex claimed to have completed his work for Doris and Ethel. However, in
Doris' case he had given the flat only one coat of paint instead of the two agreed and the
new door didn't fit properly. In Ethel's case he had used Respex rather than Suspex glass,
and the replacement cost would have been £300.

In April, Tex had installed the new toilet and almost completed the bathroom suite, though
the work contained several minor defects, when Tex abandoned the work and went to
 work on a North Sea oil-rig.

Advise Doris, Ethel and Percy.

2. Drake and Scott were friends who had spent many happy hours together touring the
canals of England in Drake's narrow-boat. In April, Scott agreed to hire Drake's narrow-
boat for a fortnight's family holiday in June touring the Midshire and Sunshire canals; total
hire charge £800, £200 payable in advance. Drake didn't normally hire out his boat, but
did so because Scott and his family were his friends and he didn't want to deny them the
opportunity of exploring the exceptionally beautiful Sunshire Valley.

Drake spent considerable time and money converting his boat for family usage and by the
beginning of June it was ready. However, two days before Scott's hire was due to begin an
all-out strike of Sunshire Waterways' workers was called, rendering the Sunshire Canal
unnavigable for an indefinite period. Scott repudiated the contract claiming frustration and
a beautiful friendship came to an end.

Advise Drake.

12. Illegality and Restraint of Trade

A brief note on Competition policy

The law has tried to protect competition for a long, long time. At common law, a contract in restraint of trade has
to be reasonable if it is to be enforceable. The essence of the restraint of trade doctrine is still contained in the
famous speech of Lord MacNaghten in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC
535:

The public have an interest in every person's carrying on his trade freely: so has the individual. All interference
with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are
contrary to public policy . . . .

More recently, the old common law rules have been supplemented by statutory provisions. The earliest laws in
the UK were enacted in the period following the Second World War, when businesses had to adjust to the
requirements of peacetime and switch from co-operation in the national interest to an environment in which they
had to compete for business.

Later, the European Economic Community (and, before it, the Coal and Steel Community and the Atomic
Energy Community) established rules designed to preserve competition as an essential part of creating a common
market. These rules remain essentially in force today, and they are now closely followed by domestic laws in all
EC Member States – as well as in candidate states, of which Turkey is the current example, and other countries
which have simply adopted a tried-and-tested set of rules (Russia).

• The importance of compliance

Competition rules are backed by tough sanctions – in the case of the Competition Act 1998, enough to make
offender's eyes water, according to the then Director-General of Fair Trading. Not only are there sanctions for
organisations that breach the rules, but there are also criminal sanctions for individuals who lead their employers
into illegal activities. Breaches of the rules, even inadvertent, can have serious consequences.

The consequences of breaching competition rules are not limited to the penalties that can be imposed by the
authorities. The reason we have competition rules is to protect the consumer from conspiracies of businesses
who, left to their own devices, would be inclined to maximise profits rather than supplying the market at a price
where supply and demand are in equilibrium. In other words, competition laws are designed to prevent
businesses getting away with making fewer goods (or supplying less or fewer services) at a higher price, so that
consumer welfare is maximised. Businesses involved in such conspiracies against the public, or who abuse their
market power to make super-normal profits, can expect the media to take an interest in their activities and
breaches of the rules can be public relations disasters.

Those affected by breaches of the rules also have rights to claim damages from the businesses that have caused
them damage. Claims for damages have been rare up to now, but following the Crehan case (although that was
ultimately unsuccessful) it can be expected that more claims will be made. Law suits are pending in the replica
football kit affair, for example.

Competition law is important enough to merit putting substantial effort into avoiding breaches. Compliance
requires first a familiarity with the rules, so the largest part of this presentation is devoted to an explanation of the
substantive rules and their enforcement.

Crehan v Inntrapreneur [2006] UKHL 38.

12.1 Illegal and Void Contracts

As a general proposition, the courts will not enforce contracts whose purpose is illegal and this includes not only
agreements that are criminal in intent but also injurious to society in the wider sense.

The Law Commission published a consultation paper on Effects of Illegality on Contracts and Trusts in 1999
(Law Com. No. 154), but has not yet recommended any reform of the law.

In order to have an understanding of that topic, however, it will be necessary to look at the question of illegality
generally.

12.1.1 Illegal contracts

Contracts may be illegal under English law in one of two ways, either by statute or on the grounds of public
policy. (The effects of illegality under foreign law are more complex, and are not covered here).

Illegal by statute

A contract may be expressly forbidden by statute or the prohibition may be implied, e.g.

Cope v Rowlands (1836) 2 M & W 149

A statute required that persons acting as stockbroker must obtain a licence or forfeit £25. The plaintiff did
brokerage work for the defendant without a licence. In the absence of an express prohibition, the brokerage
contract was held impliedly illegal since the object of the licences was to protect the public.

Contracts illegal under public policy

A further group of contracts are illegal at common law on the grounds of public policy and include contracts to
commit a crime, a tort or a fraud.

Everett v Williams (1725), see 9 LQ Rev 197.

A contract by two highwaymen to ambush a coach was illegal.

Similarly, contracts promoting sexual immorality are likewise illegal.

Pearce v Brooks (1866) LR 1 Exch 213

A prostitute hired a carriage ―of intriguing design‖ for the purposes of her trade. The contract was held illegal.

The modern approach

The modern tendency is for the courts to look more benignly on agreements which contemplate stable extra-
marital relations, thus in Somma v Hazlehurst [1978] 2 All ER 1011 (overruled but not on this issue) an
unmarried couple rented a room but the contract was not struck down on the grounds of public policy.

Other contracts illegal on public policy grounds are contracts prejudicial to public safety, contracts prejudicial to
the administration of justice (e.g. stifling a prosecution), contracts promoting corruption in public life and
contracts to defraud the revenue.

12.1.2 The Consequences of illegality

Where a contract is illegal, the consequences are in general as follows:

(i) The contract is void and therefore neither party can sue upon it – ex turpi causa non oritur actio (no right of
action arises from a base case);

(ii) Money paid or property transferred under the contract are normally not recoverable; (although there are
exceptions; for example, in Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548; [1992] 4 All ER 409 the owner of
the money was not a party to the gaming contract, and the casino was order to repay the stolen money which had
been used for gambling).

(iii) Related transactions will also be void, see e.g. Fisher v Bridges (1854) 3 E & B 642.

12.1.3 Void Contracts

Certain contracts are expressly declared to be void by statute.

The most notable examples are wagering contracts (rendered void by the Gaming Act 1845 ) and restrictive
trading agreements (controlled by the Restrictive Trade Practices Act 1976 ). Individual resale price maintenance
agreements are rendered void by the Resale Prices Act 1976 .

In addition mere are three categories of contract that are void at common law on the grounds of public policy; (i)
contracts to oust the jurisdiction of the courts; (ii) contracts prejudicial to the status of marriage, and (iii)
contracts in restraint of trade, which will now be considered more fully below.

***

12.2 Contracts in Restraint of Trade

Prior to the case of Mitchel v Reynolds (1711) 1 P Wms A contract regulating or preventing trade was void.

Lord Smith L.C. said,

"it is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his own mode of
carrying it on according to his own discretion and choice. If the law has regulated or restrained his mode of doing
this, the law must be obeyed. But no power short of the general law ought to restrain his free discretion."

In Mitchel v Reynolds , allowing for a more flexible approach, it was decided that a restraint was prima facie
valid if it was supported by consideration and did not extend over the whole kingdom. The validity of present
day restraints is considered below.

12.2.1 Definition

Esso Petroleum v Harper's Garage (Stourport) Ltd [1968] 2 AC 269

―A contract in restraint of trade is one in which a party (the covenantor) agrees with any other party (the
covenantee) to restrict his liberty in the future to carry on trade with other persons not parties to the contract in
such manner as he chooses.‖

Lord Hodson, adopting the formulation put forward by Diplock LJ in Petrofina (Great Britain) Ltd v Martin
[1966] Ch 146

―Every member of the community is entitled to carry on any trade or business he chooses and in such manner as
he thinks the most desirable in his own interests, so long as he does nothing unlawful; with the consequence that
any contract which interferes with the free exercise of his trade or business, by restricting him in the work he
may do for others, is a contract in restraint of trade. It is invalid unless it is reasonable as between the parties.‖

Lord Morris, (ibid) referring to Lord Denning MR in Petrofina .

***

12.2.2 Types of contract

Much of the case law concerns contractual clauses in contracts for the sale of a business or in written contracts of
employment.

Vendor/Purchaser covenants

The buyer of a business, e.g. a shop, will want an assurance that the seller will not immediately set up in
competition next door and entice back the old customers.

Employer/Employee covenants

An employee, on terminating his employment with a particular employer, will agree not to work for a competing
employer nor set up a competing business.

Both types of agreement usually have some limits of area and duration.

12.2.3 Effect of restraint covenants

Covenants: prima facie void

Covenants in restraint of trade are contrary to public policy and prima facie void, unless they can be regarded as
reasonable as between the parties and as regards the public interest.

The rule, whereby the restraint could not be general, no longer applies. In Nordenfelt v Maxim Nordenfelt Guns
and Ammunition Co [1894] AC 535 the owner of an armaments business who sold it was held to a covenant
applicable for 25 years anywhere in the world.

Burden of proof

The burden of proving that, as between the parties, the restraint is reasonable lies on the promisee; the burden of
proving that as far as the public interest is concerned, the restraint is unreasonable lies on the promisor.
Reasonableness is considered as at the time of the agreement.

Commercial Plastics v Vincent [1965] 1 QB 623

12.3 The principles of enforcement

12.3.1 Three conditions must be satisfied

In employer/employee and vendor/purchaser covenants three conditions must be satisfied:

(a) there must be an interest to protect

(b) the restraint must be reasonable, and

(c) it must not be contrary to the public interest.

While the principles will apply both to employer/employee and vendor/purchaser covenants the law is very much
stricter in relation to the former and the latter will be considered later in so far as the criteria differ.

12.3.2 There must be an interest to protect

The interest to be protected comes from the relationship of vendor/purchaser or employer/employee.

Where there is no such relationship, a bare promise not to compete will not be upheld.

Freedom from competition is not an interest which may be protected, as such.

An agreement imposing a restriction on an employee after leaving an employer will only be reasonable between
the parties if there is some proprietary interest of the employer meriting protection:

The valid proprietary interests are trade secrets and trade connection.

Treitel notes that the common law will give the employer a degree of protection where there is no
covenant:

* Using or disclosing trade secrets (at any time)

Faccenda Chicken v Fowler [1986] ICR 297

* Soliciting the employer's customers (only to solicitation during employment)

* Using or disclosing confidential information (Normally limited to employee's conduct during employment but
thereafter if he sells memorised lists (as opposed to using it himself)

The proprietary interests may all be protected specifically by covenant.

The restriction must be no wider than reasonably necessary to protect such interest. The employer may not
protect himself against competition from his employee. (A vendor of a business may be able to protect himself
against competition.)

The classic statement of these principles by Lord MacNaghten is to be found in Nordenfelt's Case (1894) AC
535.

Two cases illustrate these principles:

Forster v Suggett (1918) 35 TLR 87

D was employed as the works manager of the P's glass works. He agreed that for five years after termination of
employment with P, he would not divulge any secret manufacturing process learnt during employment, nor
would he work in the glass industry in the UIC. It was held that the restraint was reasonable to protect P's
legitimate interest and was enforceable.
Herbert Morris Ltd v Saxelby [1916] 1 AC 688
The respondent was employed by the appellants as a draftsman in their business of manufacturing lifting
machinery. The company had its head office in Loughborough and branches in eight large cities. The contract of
employment contained a clause that for seven years after leaving he would not become engaged anywhere in the
UK in any similar business. The House of Lords held that the clause was wider than reasonably necessary to
protect the appellant's interest – the appellants were merely trying to reduce competition.

Lord Atkinson said that the clause would deprive the respondent ...

―for a lengthened period of employing, in any part of the United Kingdom, that mechanical and technical skill
and knowledge which ... his own industry, observation and intelligence have enabled him to acquire in the very
specialised business of the appellants, thus forcing him to begin life afresh, as it were, and depriving him of the
means of supporting himself and his family‖.

12.3.3 Employer / Employee covenants Trade secrets, know-how and trade connection

An employer is entitled to protect his trade secrets but may not restrict an employee from using his skill and
knowledge – even if that skill was acquired while the employee worked for the employer.

Herbert Morris v Saxelby [1916] 1 AC 688

The interests which the law will protect are trade secrets and trade connection.

(a) Trade secrets

Trade secrets include secret formulae, processes and confidential information (but excluding information which
is confidential only in the sense that during employment the employee must not reveal it.

Faccenda Chicken v Fowler [1986] ICR 297

(b) Know-how

Know-how, once considered as not within legal protection, given commercial application and potential is likely
to be protected.

Treitel observes that Pearson LJ in Commercial Plastics v Vincent [1965] 1 QB 623 has hinted at this.

(c) Trade connection

An employer is entitled only to protection in cases where the employee was likely to have come into contact with
clients or customers and to have acquired influence over them.

Faccenda Chicken v Fowler [1986] ICR 297

Restraints protecting business connection have been upheld in the case of:

A milk roundsman – Home Counties Dairies v Skilton [1970] 1 WLR 526

A solicitor's clerk – Fitch v Dewes [1921] 2 AC 158

A restraint against an employee who had had no contact with the employer's clients would not be upheld.

12.3.4 The restraint must be reasonable

The Court will only enforce restraint covenants which go no further than is reasonably necessary to protect the
employer's interest.

The Court will not uphold a covenant which seeks to protect employer's activities which the employee was not
involved in.

A covenant in a tailor's service agreement against working as a hatter was struck down as unreasonable

Attwood v Lamont [1920] 3 KB 571

(a) Area of restraint

To some extent an employer may actually protect himself against competition from an employee because the law
allows a restraint preventing an employee from setting up in business – to prevent exploitation of trade secrets or
trade connection – within a given (reasonable) area for a given (reasonable) time.

An area restraint will be struck down as void if it covers an area wider than is necessary for the protection of the
employer's interest.

Mason v Provident Clothing & Supply Co Ltd [1913] AC 724

A restriction on a canvasser was held void as the area of restraint (25 miles of London) was one thousand times
larger than the area of employment.

Fitch v Dewes [1920] 2 Ch 159

A life-long restraint on a solicitor's managing clerk not to work within seven miles of Tamworth was held to be
reasonable in the circumstances.

Arbuthnot Fund v Rawlings [2003] EWCA Civ 518 Chadwick LJ considered the Home Counties Dairies v
Skelton and Littlewoods v Harris [1997] approaches.

# The first task of the court - faced with the contention that post-termination restraints on an employee's ability to
engage in future business activity are not enforceable - is to construe the contract under which those restraints are
said to be imposed. That, as it seems to me, is a task which the court ought to carry out on an application for
interim relief (if there is one) if it can properly do so. Unless the court is satisfied that there are disputed facts
which bear on the construction of the relevant contractual terms, and that those facts cannot be resolved without a
trial, the court at the interlocutory stage is as well able to construe the relevant contractual terms as a court will
be at a trial. There is no need to put off until trial determination of the question - what do the contractual terms
mean? The court can, and should, determine the scope of the restraints which, as a matter of construction, the
contractual terms seek to impose.

# It is not suggested, in the present case, that there are disputed facts which need to be resolved before the task of
construction can properly be undertaken. In addressing that task, it is necessary to keep in mind two factors; the
first is that the exercise is one of construction; and that, in the construction of a covenant in restraint of trade, the
same principles are to be applied as in the construction of any other written term. The principles are conveniently
set out in this context in the judgment of Lord Justice Harman in this Court in Home Counties Dairies Ltd v
Skilton [1970] 1 WLR 526. At page 533 he pointed out that it is the first principle in construing written
documents that the court should consider the circumstances at the time when they were made, and the position of
the parties who entered into them. He referred to the observations of Sir Nathaniel Linley MR in Haynes v
Doman [1899] 2 Ch 13, 25;

"Agreements in restraint of trade, like other agreements, must be construed with reference to the object sought to
be attained by them. In cases such as the one before us, the object is the protection of one of the parties against
rivalry in trade. Such agreements cannot be properly be held to apply to cases which, although covered by the
words of the agreement, cannot be reasonably supposed ever to have been contemplated by the parties, and
which on a rational view of the agreement are excluded from its operation by falling, in truth, outside, and not
within, its real scope."
# That approach is particularly apposite in a case such as the present. The opening words of clause 15.1, which
govern the sub-clauses which come after it, are these:

"In order to protect the goodwill confidential information trade secrets and business connections of the company
..... "

Those words direct the reader to construe what comes afterwards with that object in view. Unless compelled by
the language to do so, the court should not construe what comes afterwards so as to encompass activities which
could never have been thought by the parties as likely to damage the goodwill or business connections which the
clause (as a whole) is intended to protect.
# The second factor which it is necessary to keep in mind is that it is not the function of the court to strive to give
to the clause a meaning which enables it to have effect within the constraints of public policy if that is not the
meaning which, as a matter of construction, the parties are to be taken to have intended that it should have. As
Lord Justice Simon Brown put it in J A Mont (UK) Ltd v Mills [1993] IRLR 172 at paragraph 28 on page 176:

" ..... the court should not too urgently strive to find within restrictive covenants ex facie too wide, implicit
limitations such as alone could justify their imposition."

# The court must steer a course between giving to the clause a meaning which is extravagantly wide; and giving
to the clause a meaning which is artificially limited. The task of the court, in construing the contractual term is
simply to ask itself: "what did these parties intend by the bargain which they made in the circumstances in which
they made it?"

(b) Duration of the restraint

The Court will consider the nature of the business to be protected when determining reasonableness as to
duration.

In Fitch v Dewes [1920] 2 Ch 159

A life-long restraint on a solicitor's managing clerk not to work within seven miles of Tamworth was held to be
reasonable because the clients of the firm would have been likely to have wanted to deal with the former
managing clerk for a very long time.

12.3.5 Other interests meriting protection

From time to time the courts are prepared to recognise other interests as meriting protection, apart from trade
secrets and business connection.

Greig v Insole [1978] 1 WLR 302

A case arising out of the Packer cricket affair, when Packer established a rival set of teams to games to
international test cricket, and poached players. It was held that the governing bodies of cricket had a legitimate
interest in the administration of the game to justify the imposition of reasonable restraints on the players.
However it was also held that the bans in question, preventing players who had joined the Packer organisation
from playing in test and county cricket, were too wide. In this case, however, it should be noted that there was no
contract between the governing body and the players.

See also:

Eastham v Newcastle United Football Club Ltd [1964] Ch 413

See also the exclusive dealing cases:

Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269

A Schroeder Music Publishing Co v Macauley [1974] 1 WLR 1308

Treitel suggests that these new interests are ‗commercial' interests and that an expressly drawn covenant would
be needed to protect them whereas, at common law, the other interests, to a limited extent, are protected in the
absence of a covenant.

12.3.6 Reasonableness

Exceptionally, agreements between an employer and an employee will be held unreasonable as regards the public
interest.

Wyatt v Kreglinger and Fernau [1933] 1 KB 793

An employee (a wool worker) was promised a pension on his retirement and it was agreed that he would not
receive the pension if he competed against his employers in the wool trade. The Court of Appeal held the
transaction void – it was contrary to the public interest to deprive the community of a valuable skill.

The Court will examine the relative strength of the bargaining position of the parties. The Court will be
particularly concerned to ensure that the dominant party does not take advantage of the weaker party.

Public interest is almost impossible to define. It is unlikely that a particular restraint will be struck down simply
because some broad based economic interest will be effected. Precision of drafting will be required. The public
interest is likely to focus on the freedom of the individual to work with restriction.

12.3.7 Construction of restraint clauses

It is clear that the court cannot redraft a restraint clause that is too wide but it can, as a matter of construction,
reach the conclusion that the parties intended to limit the clause to matters which are legitimate to protect. The
following case is an illustration of this approach:

Littlewoods v Harris [1978] 1 All ER 1026

Harris was executive director of the mail-order firm of Littlewoods. He entered into a restraint clause whereby he
agreed not to work for any company in the Great Universal Stores group for a period of 12 months after leaving
Littlewoods. Harris had acquired a great deal of confidential information with regard to the catalogue which is
the whole foundation of the mail-order business. Great Universal Stores were Littlewoods' main rival in the mail-
order business, however Great Universal Stores operated worldwide and their business was not confined to mail-
order, whereas Littlewoods operated only in the UK. Littlewoods sought an injunction against Harris to prevent
him from working for Great Universal Stores.

The Court of Appeal held that although the clause, on its literal wording, was too wide, by construing the clause
by reference to circumstances existing when the contract was made, it was possible to limit it to those matters it
was clearly intended to protect, i.e. the mail-order business in the UK.

12.3.8 Drafting of restraint covenants

It is of crucial importance to ensure that the restraint clause is not drafted to widely. As will be seen, the Court
has power to strike out offending clauses and leave valid clauses intact provided the clause or contract as a whole
when then construed makes sense. The Court does not have power to add to or vary or re-write a clause. The
danger of a valid provision being failing because a part of the same clause is struck down as void is ever present.

Commercial Plastics v Vincent [1965] 1 QB 623

See the section on severance towards the end of this section.

12.3.9 Agreements between the buyer and seller of a business

Restraints imposed on the seller of a business to restrict competition are more readily upheld than restraints on
employees but are generally subject to the same principles.
In particular, there must be a proprietary interest meriting protection, and so:

(i) only the actual business sold is entitled to protection. See, for example, British Reinforced Concrete Co v
Schleff [1921] 2 Ch 563, and therefore

(ii) a restriction which purports to restrain a business not actually carried on will be void – Vancouver Malt and
Sake Co Ltd v Vancouver Breweries Ltd [1934] AC 181.

(iii) Area covenants in vendor/purchaser cases are readily enforced even if the area is worldwide as in the
Nordenfelt case.

Note that this would effectively prevent the vendor dealing even with people he had had no contact with while he
owned the business ( Plowman & Son v Ash [1964] 1 WLR 568).

12.3.10 Difficult cases

Treitel makes the point that the distinction between employer/employee and vendor/purchaser contracts is by no
means exhaustive. He suggests that covenant by a retiring doctor or solicitor would not fall into either category
Bridge v Deacons [1984] AC 705 and asserts that the Courts will not subject such covenants to the strict
employer/employee rules.

Treitel then gives the illustration of the man who sells his business to a company and then becomes managing
director of the company working under a covenant. Treitel suggests that this type of case would be treated in the
same more generous manner as vendor/purchaser covenants.

On the other hand, Treitel gives the illustration of a writer or composer agreeing not to dispose of his work save
to a particular publisher and suggests that this will be treated akin to an employer/employee covenant – even
though there was no contract of employment between the two parties.

A Schroeder Music Publishing Co v Macauley [1974] 1 WLR 1308

12.3.11 Agreements between manufacturers to restrict output and fix prices

Such agreements are prima facie void at common law but the courts have been prepared to uphold where
reasonable, e.g. to avoid a glut on the market; English Hop Growers v Dering (1928) 2 KB 174. See also:

Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd [1919] 1 KB 418

Two manufacturers agreed not to employ each others employees for five years after they left their original
employer. The Court of Appeal held that the contract was void as it covered all employees whether they knew
trade secrets or not and that it was of excessive duration.

In fact such agreements are now almost entirely subject to statutory control under the Restrictive Trade Practices
Act 1976 .

12.3.12 Exclusive dealing agreements

―Solus‖ agreements, for example, whereby a garage agrees to purchase all its supply of petrol from one oil
company, are within the doctrine of restraint of trade and are prima facie void.

Esso Petroleum Co Ltd v Harper's Garage (Stourport) Ltd [1968] AC 269

The owner of two garages agreed, inter alia, to sell only Esso's petrol, in return for a rebate on the price per
gallon. On one of the garages, the tie was to last for nearly four and a half years and on the other it was to last for
21 years, being contained in this case in a mortgage of the premises to Esso. The House of Lords upheld the four
and a half year agreement although the agreement for 21 years was held to be unreasonable and void as being
longer than necessary to protect Esso's interests i.e. the continuity and stability of their marketing operation.
However, if a trader, when purchasing or leasing new premises, covenants with the vendor or lessor (in the
conveyance or lease) to buy only the latter's products, and then goes into possession, the exclusive dealing tie is
outside the restraint of trade doctrine; Harper's Case . This would apply to a person who buys or takes a lease of a
public house or garage subject to a tie; the reason is that the person has surrendered no freedom previously
enjoyed.

The approach of the courts to exclusive dealing ties is illustrated by Alec Lobb (Garages) Ltd v Total Oil Ltd
[1985] 1 WLR 173. The plaintiffs, whilst in financial difficulties, leased their garage to the defendant oil
company for 51 years at a premium of £35,000. The defendants sub-leased it back to the plaintiffs for 21 years at
an annual rent of £2,500, with a mutual right to break at 7 or 14 years. The sublease contained a solus tie
whereby the plaintiffs agreed to sell only the defendants' petrol. The Court of Appeal held that the lease and
lease-back were subject to the restraint of trade doctrine but the tie was valid as being reasonable in the
circumstances. The principal purpose of the agreement was as a financial rescue operation from which the
plaintiffs benefited as they received ample consideration (£35,000) for the lease and they were free to exercise
the break clause after 7 or 14 years.

A Schroeder Music Publishing Co v Macauley [1974] 1 WLR 1308.

Exclusive service agreements, such as where, for example, a songwriter agrees to provide his services for a music
publisher for a period of time, are within the restraint of trade doctrine (i.e. prima facie void) if oppressive and
one-sided.

12.4 Effects of the contract being void

The effects discussed below relate to contracts void at common law and will apply by analogy to contracts void
by statute unless the statute in question has special provisions dealing with the matter. The effects are as follows:

The contract is void insofar as it contravenes public policy

Wallis v Day (1837) 3 B & A 113

A contract of employment contained a provision which was alleged to be a void restraint of trade. This did not
prevent the plaintiff being able to recover arrears of salary. It follows from this that subsequent or collateral
transactions are not necessarily void unless they relate solely to that part of the original transaction that is itself
void.

Money paid or property transferred is recoverable

Authority for this proposition is to be found in Herman v Charlesworth (1905) 2 KB 123.

Severance

Severance is the power of the court to remove a void provision in a contract and enforce the remainder. The
power exists in the case of void contracts and there is authority that an illegal contract may be subjected to
severance, Carney v Herbert (1985) AC 301.

Severance will not be possible if it would eliminate the whole or substantially the whole of the consideration
given by a party to the contract; Wyatt v Kreglinger and Fernau [1933] 1 KB 793.

It may be possible to sever in the sense of removing the void part of a promise and enforcing the rest. This will
be possible providing the severance does not alter the meaning of the contract in any way.

Goldsoll v Goldman (1915) 1 Ch 292

D sold a jewellery business to the plaintiff, D covenanting that he would not deal in real or imitation jewellery in
the United Kingdom or in other specified foreign places. The restraint as to the latter was too wide in the
circumstances, as was the reference to real jewellery since the business dealt only in imitation jewellery in the
United Kingdom. The void restrictions were severed leaving a valid contract in restraint of trade.

Contrast: Attwood v Lamont [1920] 3 KB 571

D was employed as a tailoring cutter for the plaintiff, a general outfitter. The defendant covenanted not to
subsequently engage in a number of trades carried on by the plaintiff's business, including tailor, milliner, draper,
hatter and haberdasher within a ten mile radius. The court refused to sever so as to leave the tailoring restriction
valid; the covenant formed a single indivisible covenant for the protection of the plaintiff's entire business. It was
not a series of covenants for the protection of each department of the plaintiff's business. The whole covenant
was therefore void.

It should further be noted that the court will not re-draft the covenant in any way, thus applying the so-called
―blue pencil test‖. The court will merely strike out the offending words; what is left must make sense without
further additions.

12.5 Competition Law

Many contracts between businesses which restrain trade will fall foul of the Competition Act 1998 , or at the EU
level, of EU competition law, except where the relevant competition authorities have permitted exceptions to the
rules against anti-competitive practises. Competition law is too complex to summarise here, but it is important to
be aware that in practice some agreements in restraint of trade may raise competition law issues as well as
common law issues.