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Elements of the Law of Contract

Dr Graham Melling
March 2014

What is a contract?
A contract is a legally binding agreement between
the parties to the contract which confers some
benefit to each other.
A person cannot become liable unless it can be
shown that he entered into the contract willingly.
Contractual liability is strict.
Damages for breach of contract is designed to
compensate for all foreseeable losses flowing
naturally from the breach.

Starting point: Is there a


contract?
1. Agreement
2. Consideration
3. Intention to create legal relations

1. An agreement
For an agreement to be valid there has to be
an offer and acceptance.
The offeror makes an offer by establishing
terms by which he is willing to form a
binding agreement.
The offeree by accepting the terms agrees to
be similarly bound.
An offer can be written, spoken, of inferred
by conduct.

A) Offer
The person making the offer is called the offeror,
and the person to whom the offer is made is called
the offeree.
A communication will be treated as an offer if it
indicates the terms which the offeror is prepared to
make a contract; and
Gives a clear indication that the offeror intends to
be bound by those terms if they are accepted by the
offeree. Storer v Manchester City Council Cf
Gibson v Manchester City Council

(i) When is an offer not an


offer?
Invitations to treat
Advertisements - Partridge v Crittenden
A bilateral contract
Contrast:
Carlill v Carbolic Smoke Ball Company A
unilateral contract.

When is an offer not an offer?


Goods in shops - Pharmaceutical
Society of Great Britain v Boots Cash
Chemists (Southern) Ltd A contract is
not completed until, the customer having
indicated the articles which he needs, the
shopkeeper, or someone on behalf,
accepts that offer.

B) Points about Acceptance


Acceptance of an offer means unconditional
agreement to all the terms of that offer. Tinn v
Hoffman
An acceptance can be made by words or conduct
and must be a mirror image without adding
anything new. Brogden v Metropolitan Railway
Company; Day Morris Associates v Voyce; Hyde v
Wrench For a bi-lateral contract, the acceptance
must be positive, i.e. you cannot accept a contract
by omission, even if the offeror says so.

Points about Acceptance:


Queries and requests for further information is not
acceptance or rejection Stevenson, Jacques & Co
v McLean
Differing standard forms battle of the forms
last shot wins Butler Machine Tool v Ex-Cell-O;
Tekdata Interconnections Ltd v Amphenol Ltd
Unless the offer was unilateral, the acceptance
must be communicated. Entores Ltd v Miles Far
East Corporation (1955) A must be able to hear
Bs acceptance before it can take effect.

Exceptions to the
communication rule
Unilateral contracts Carlill v Carbolic Smoke Ball
Company performance is acceptance. No need to
communicate attempt to perform.
Conduct of the offeror. An offeror who fails to receive an
acceptance through their own fault may be prevented from
claiming that the non-communication means they should not
be bound by the contract.
In Entores Ltd v Miles Far East Corporation (1955); The
Brimnes (1975)
Postal acceptance Adams v Lindsell; Household Fire
Insurance v Grant

Exceptions to the
communication rule
Conduct of the offeror. An offeror who fails to
receive an acceptance through their own fault may
be prevented from claiming that the non communication
means they should not be bound by the contract.
In Entores Ltd v Miles Far East Corporation (1955) it
was suggested that this principle could apply where an offer
was accepted by telephone, and the offeror did not catch the
words of acceptance, but failed to ask for them to be
repeated.
In The Brimnes (1975) where the acceptance is sent by
telex during business hours, but is simply not read by
anyone in the offerors office acceptance was effective.

Termination of offers:
Counter offer -A counter offer terminates
the original offer. Hyde v Wrench (1840)
Withdrawal of offer/Revocation:
Errington v Errington & Woods
Lapse of time reasonable length
Condition not fulfilled
Death of offeror or offeree

Withdrawal of Offer/
Revocation
Withdrawal must be communicated Byrne & Co v Leon
Van Tienhoven (1880).
The revocation of an offer does not have to be
communicated by the offeror. Dickinson v Dodds (1876)
Withdrawal of an offer to enter into a unilateral contract
An offer to enter into a unilateral contract cannot be
revoked once the offeree has commenced performance.
Errington v Errington and Woods (1952) See also: Daulia
Ltd v Four Millbank Nominees Ltd (1978) Luxor
(Eastborne) Ltd v Cooper (1941).

2. Consideration
In bilateral contracts, the consideration takes the
form of promising to do something in the future.
In a unilateral contract, the consideration will be
one of conduct Currie v Misa. 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.

Points to watch out for:


Existing obligations as good consideration
Collins v Godefroy; Ward v Byham; Stilk v Myrick;
Williams v Roffey Bros & Nicholls Ltd
Past consideration the act which confers the
benefit has already been performed. Past
consideration is no consideration. Re McArdle.
Level of consideration - Sufficient v adequate
consideration White v Bluett.

Promissory estoppel
Central London Property Trust Ltd v High Trees
House Ltd.
Limitations:
Need for existing legal relationship
Need for reliance
Shield not a sword
Must be inequitable for promisor to go back on
promise
Suspensory
Where promise is prohibited by legislation

3. Intention to create legal


relations
Parties have intend to create legal relations and
they must do so willingly.
Again the court takes the objective standpoint.
The courts divide & treat agreements differently.
Business and commercial agreements.
Social and domestic agreements: Balfour v
Balfour (1919) Jones v Padavatton (1969)
Both presumptions can be rebutted.

Certainty
A contract only comes into existence when all the
essential terms of the contract have been accepted.
Courts are reluctant to interfere with a bona fide
contract without good reason.
If they have to interfere, they will take an objective
view, i.e. the reasonable man as opposed to what the
parties think. They will think what the parties
appeared to mean.
If a contract seems certain to a reasonable man,
then it will be considered certain to all parties.

Contractual Terms
Terms define the obligation, promises
and consideration of a contract.
They can be express or implied.
A breach of a contract would in reality
be a breach of one of the terms.
Breach of condition.
Breach of warranty.

Express Terms
In the process of negotiating a contract, certain terms are quite
clearly elements of a contract and some may be just
representations to facilitate a contract.
Disputes generally centre around statements which have
proved to be untrue: if the statement is a representation, it can
give rise to an action for misrepresentation, whereas if it is a
term, it can give rise to an action for breach of contract.
Whether a statement is a representation or a term is largely a
question of the parties intentions. If the parties have indicated
that a particular statement is a term of the contract, the court
will carry out the intention. In other cases, the following
guidelines can be used.

Express Terms: Intention


To assess intention, the courts consider:
a) The relative degree of the parties knowledge. Where a
statement is made by someone who has expert knowledge that
is relevant to the subject at hand, the courts will be more
willing to deem that statement a term. Oscar Chess Ltd v
Williams (1957).
b) The reliance shown to be placed on the statement. A
statement is likely to be seen as a term if the injured party has
made the other party aware that had it not been for that
statement, they would not have entered into contract.
Bannerman v White (1861).

Express Terms: Intention


c) The strength of the statement. The stronger the
assertion or statement made by the defendant the
more likely the Court will consider it a term.
Schawel v Reade [1913].
d) The time at which the statement was made. In
general, the more time that elapses between the
statement being made and the contract being
concluded, the less likely the Courts will be to
regard that statement as a term. Routledge v Mckay
(1954).

Written Terms
Written terms can be incorporated into a
contact in 3 ways:
Signature
Reasonable notice
Previous course of dealing
This issue arises most commonly in
connection with exclusion and limitation
clauses, but the rules apply to any written
term.

Written Terms: Parole


Evidence Rule
Where there is a written contract, extrinsic (parole)
evidence cannot change the express terms laid
down in the document.
Extrinsic evidence includes:
Oral statements
Written material such as draft contracts or letters,
whether relating to pre-contract negotiations or the
parties post contractual behaviour. Henderson v
Arthur (1907).

Interpretation of Express
Terms
The Courts sometimes have to determine the meaning
of a contractual term.
They approach the intention of the parties objectively.
The starting point is the contract itself.
Where possible the words of the contract will be given
their natural and ordinary meaning.
But if a strict interpretation of the words gives them a
meaning that goes against business common sense, the
courts will look beyond the words themselves.

Interpretation of Express
Terms Cont.
In Sirius International Insurance Co Ltd v FAI General Insurance
Ltd (2004) the House of Lords gave an example developed by a C19th
philosopher of what they mean by going beyond business
commonsense: The tendency should be therefore generally be against
literalism. What is literalism? It will depend on the context. But an
example is given in The Works of William Paley (1838 edition)... The
moral philosophy of Paley influenced thinking in the nineteenth
century. The example is as follows. The tyrant Temures promised the
garrison of Sebastia that no blood would be shed if they surrendered
to him. They surrendered. He shed no blood. He buried them all alive.
This is literalism. If possible it should be resisted in the interpretative
process.

Implied Terms
To make a contract commercially
viable, there may be implied terms that a
court will take into consideration. These
can arise from:
Common Law
Statute

Terms implied by custom or


trade usage
Criteria open & known in that business - Can be
contradicted by:
Express term
Tenor of the contract Hutton v Warren (1836) Court
implied a term into an agricultural lease that upon
quitting tenants were entitled to an allowance for seed
and labour on the basis of a custom which was said to
be incorporated into all such contracts unless altered by
the parties.

Terms implied by Courts


Terms may be implied into contracts by the
courts on the basis of an intention imputed by
the parties from the actual circumstances.
The Court seeks to find the parties
unexpressed intentions.
Will only be implied if contract would be
incomplete without it.

Terms implied by Courts


Liverpool City Council v Irwin [1977] Here it is not
enough for the court to say that the suggested term is a
reasonable one the presence of which would make the
contract a better or fairer one; it must be able to say that
the insertion of the term is necessary Per Lord Cross.
Equitable Life Assurance Society v Hyman [2002]
The House of Lords confirmed that a term would only
be implied in fact only if it was required as a matter of
strict necessity.

Terms implied by Courts


Various tests have been developed for
implying terms in fact:
The business efficacy test.
The Moorcock (1889) The term is
implied under this test because without it
the contract cannot be performed as the
parties intended.

Terms implied by Courts


The officious bystander test Shirlaw v Southern
Foundries (1926)...that which in any contract is left to be
implied and need not be expressed is something so
obvious that it goes without saying; so that if while the
parties were making their bargain, an officious bystander
were to suggest some express provision for it in
agreement, they would testily suppress him with a
common oh, of course!
Both the officious bystander and the business efficacy
tests are subjective: they ask what the parties in the case
would have agreed, and not what a reasonable person in
their position would have agreed.

Terms implied by Statute


Sale of Goods Act 1979 implies terms into contracts
where the seller sells goods in the course of
business.
5 major terms implied:
Right to sell
Goods correspond with description
Goods will match quality of sample
Satisfactory quality
Reasonably fit for purpose

Sale of Goods Act 1979


S12 SOGA Seller has right to pass good title to
the buyer.
S13 SOGA where goods sold by description,
goods will correspond to that description.
S14(2) SOGA where goods sold in a course of
business, they are satisfactory quality, i.e. of
standard that a reasonable person would regard as
satisfactory taking into account the description of
the goods, price (if relevant) and all other relevant
circumstances s14(2)(A).

Sale of Goods Act 1979


S14(3) SOGA where goods are sold
in the course of a business, goods are
reasonably fit for the purpose expressly
or impliedly made known to seller.
S15 SOGA where goods are sold by
sample, the bulk of the goods will
correspond with the quality of the
sample.

Supply of Goods & Services


Act 1982
Subsections 4 & 8 contain identical
terms to s14(2) & (3) SOGA implied in
respect of goods supplied or hired under a
contract.
S13 SOGSA where a supplier is acting
in the course of a business, will carry out
service with reasonable care and skill.

Classification of Terms
Whether terms are express or implied
not all contract terms have the same
importance.
The breach of some terms entitles the
injured party to end the contract
(repudiate it) and claim damages, whilst
the breach of other terms just entitles
the injured party to claim damages.

Classification of Terms
Terms divided into:
Conditions Breach of the term will
always be fundamental to the bargain.
Warranties Breach of the term will
never be fundamental to the bargain.
Innominate terms Cannot tell at the
time of making the contract that breach of
the term will ALWAYS or NEVER be
fundamental to the bargain.

Condition
Condition an important term of the contract
which goes to the root of the contract.
If a condition of the contract is breached it allows
the injured party to treat the contract as repudiated,
and claim damages.
Conditions can be identified by the parties in the
contract as such or implied by statute.
Sections12-15 of the Sales of Goods Act implied
terms are classified as conditions.

Warranties
A warranty is a term of the contract
which is not vitally important, judged
at the time the contract was made.
Breach of warranty entitles the
injured party only to claim damages,
but he must continue with the
contract.

Innominate Terms
Defy rigid classification but appear to lie
somewhere between a condition and warranty.
Might be described as the type of term which
may be broken in a number of different ways,
not all of which would be serious.
See Hong Kong Fir Shipping; Cehave v
Bremer HG (The Hansa Nord) The Mihalis
Angelos; and Bunge v Tradax..

Regulation of terms
Exclusion clauses are an important
device for the allocation of risks in the
contract.
Different types of clauses:
Exclusion clause: excluding liability
for part or all of a particular risk.
Limitation clause: limiting liability
for a particular risk.

Exclusion Clauses
Before an exclusion clause can be effective it must be:
Incorporated within the contract. Signature LEstrange
v Graucob If the term is introduced after the conclusion of the
contract then it is not included in the contract. Olley v
Marlborough Court Ltd (1949)
Brought to the attention of the other party. Reasonable
steps must be taken to bring the term to the other partys
attention. Parker v S.E. Railway (1877) The more onerous the
clause the greater the effort needed to bring it to the attention
of the other party. Red Hand Rule Spurling v Bradshaw
[1959].

Exemption Clause: Unfair


Contract Terms
Act 1977
Exemption clauses can only have effect if not rendered
unenforceable by statute s.2(1) death or personal injury.
A business cannot (by contract term or notice generally) exclude
or restrict liability for death or personal injury resulting negligence
s.2(2) Negligence. A business cannot (by contract term or notice
generally) exclude or restrict liability for loss or damage resulting
from negligence except insofar as the exclusion clause is
reasonable.

Unfair Contract Terms Acts


Sect. 3 Breach of Contract - A business cannot
(if it makes a contract with a consumer or using its
own standard terms ) exclude or restrict liability for
breach of contract or for not performing the contract
as agreed except insofar as it is reasonable.
Sect. 4 Indemnity - A business cannot (if it
makes a contract with a consumer) rely on an
indemnity clause except insofar as the clause is
reasonable.

Unfair Contract Terms Acts


Sect. 5 Guarantees - A manufacturers guarantee
cannot exclude or restrict liability for damage caused
by consumer goods resulting from negligent
manufacture or distribution.
Sect. 6 Sale of Goods - s.6(1)(i) the implied terms
as to title cannot be excluded/restricted in any deal s.6(1)(ii) the implied terms as to description, sample,
quality and fitness for purpose - s.6(2) cannot be
excluded or restricted in a consumer deal - s.6(3)
can be excluded or restricted in a non-consumer
deal if the exclusion is reasonable.

Unfair Contract Terms Act s.


11
The meaning of reasonableness
Clauses which are subject to reasonableness by UCTA
obviously only apply if the Courts decide it is reasonable for
them to do so, s. 11 of UCTA gives guidance as to the meaning
of reasonableness. The onus of proving that a term is
reasonable is always on the party seeking to benefit from the
term s. 11(5), s.11(1) - the Court should ask itself whether the
term in question is a fair and reasonable one to include 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

Unfair Contract Terms Act s.


11
s.11(2) refers to Schedule 2 to UCTA, which lays down a number of
issues that the Court may consider when deciding whether a term is
reasonable . For example: The relative strengths of the parties
bargaining positions; Whether the customer received an inducement to
agree to the term (for example, if the goods were offered more cheaply
if the exclusion clause was accepted), or could have entered into a
similar contract with another party without agreeing to that term;
Whether the customer knew, or ought reasonably to have known, about
the term, bearing in mind any trade custom or previous dealing;
Whether the good concerned were made or adapted to a special order.

Unfair Terms in Consumer


Contracts Regulations 1999
The regulations make ineffective certain
unfair terms in contracts between sellers or
suppliers and consumers (reg. 4(1)).
Like UCTA the regulations can control the
use of exemption clauses, but they can also
control other clauses in the contract where
they are considered to be unfair.

Vitiating elements in formation


of contract
Mistake at Common Law.
Non-existence of subject matter Couturier v Hastie; and
Galloway v Galloway.
Mistakes as to ownership Cooper v Phibbs.
Mistake as to quality of subject matter Bell v Lever
Bros Ltd; Great Peace Shipping Ltd v Tsavliris Salvage
[2002].
Express or implied term will override the doctrine of
common mistake Associated Japanese Bank
(International) Ltd v Credit du Nord SA.

Vitiating elements in formation


of contract
Misrepresentation
Representation of fact distinguish between:
Intent
Opinion
Law
Silence
Inducement material representations of fact will generally be
considered to induce making of contract.
Remedy Recission available for all types of misrep. Barred
by lapse of time; if impossible to return parties to original position;
injury to third party.

Vitiating elements in
formation of contract
Duress contract formed because illegitimate
pressure is exerted by one party on the other.
Innocent party entitled to recission.
Physical Duress Barton v Armstrong
Economic Duress Occidental Worldwide
Investment Co. v Skibbs A/S Avanti The Siboen
andThe Sibotre; North Ocean Shipping v
Hyundai

Vitiating elements in formation


of contract
Undue Influence Barclays Bank v OBrien;
Royal Bank of Scotland v Etridge (No 2).
Categories:
Class 1. Actual undue influence Key factor is
domination of other party.
Class 2. Abuse of confidential relationship:
1. 2A presumed
2. 2B - proven

Privity of Contract
Historically, if you were not party to a contract,
you cannot sue even if the contract was expressly
made for you.
The contract is considered exclusive to the parties
involved Tweddle v Atkinson; Dunlop Pneumatic
Tyre Co v Selfridge.
However there may be circumstances where is
possible for a third party to enforce the contract
Beswick v Beswick.
The governing law is now The Contract (Rights
of Third Parties) Act 1999.

The Contract (Rights of Third


Parties) Act 1999
Does not abolish the privity rule.
s1(1) provides a third party may
enforce a term of the contract, if the
terms allows it to and confer a benefit on
him, but, if and only if that was the
intention of the parties, and the third
party is expressly identified.

Vitiating Elements in
Formation of a Contract:
Illegality:
Contracts unenforceable for public
policy reasons:
Statute
Gambling
Public policy at common law

Breach of Contract
Failure to perform, without lawful
excuse, one or more terms of the
contract, e.g. refusal to perform,
defective performance, and delayed
performance

Breach of Contract
Substantial Performance?
Where contract has been substantially
performed, an innocent party cannot treat
itself as discharged from his obligations.
But may have counterclaim/set off for losses
resulting from incomplete performance.
What constitutes substantial performance is
a question of degree in each case.

Breach of Contract
Partial performance:
Where Xs performance is so poor cannot be taken to be
substantial performance, X is not entitled to recover anything
unless Y accepts partial performance, e.g. if insufficient
quantity of goods delivered, Y can reject them but if accepts
them, Y must pay for them at the contract rate.
Quantum Meruit payment of a reasonable sum in
respect of the benefit given by X to Y in partial performance.
Only applies when Y has genuine choice either to accept or
reject partial performance.

Breach of Contract
Prevention of performance:
Where X is prevented from performing his
obligations by Y, X can either:
Recover damages for breach of contract, or
Recover reasonable remuneration on
quantum meruit basis for work already
done.

Breach of Contract
Anticipatory Breach:
Where, before the performance is due, party makes
it clear beyond reasonable doubt that does not intend
to perform his part of contract, innocent party may:
Accept breach & immediately sue for damages.
Refuse to accept the breach & wait to see what
happens.

Discharge by Frustration
Things change that make performance of
contract radically different that that which
undertaken by parties. Davis Contractors
Ltd v Fareham Urban District Council.
Effect of frustration: See Law Reform
(Frustrated Contracts) Act 1943, s.1.

Damages
Purpose of damages in contract is to
compensate C for losses suffered as a result
of the breach.
Aim of damages for breach of contract is to
place C in position he would have been in had
contract been properly performed.
NOT position he would have been in had
contract not been entered into.

Damages
Specified/unspecified sums:
Specified sum sum claimed can be precisely
calculated e.g. simple debt case arising from an
agreed price.
Unspecified sum impossible to precisely
calculate, assessed by court according to breach
itself and the losses arising from it.

Remoteness of Damage
Damages will not be awarded for a loss that is too
remote a consequence of the breach Hadley v
Baxendale [1854]. Twofold test to ascertain whether
loss was in reasonable contemplation of parties:
Did damage arise naturally from breach i.e.
according to usual course of things?
If not, is damage such as may reasonably have been
in the contemplation of both parties, at the time they
made the contract, to be a probable result of the
breach?

Types of Loss
There are 3 bases for assessing awards
of damages:
Loss of bargain or expectation loss.
Reliance loss or wasted expenditure.
Restitution (recovery of payments
made).

Types of Loss
Expectation Loss:
Normal measure of damages. Will put
C in position he would have been in,
had contract been properly performed.
Includes loss of profits.

Anticipated Profits/Loss of
Chance
Generally speculative loss is not recoverable in
contract law. But just because it is difficult to quantify
loss of profits it will not prevent court from awarding
such damages.
Chaplin v Hicks [1911] Court said where contract
gives a man a right to belong to a limited class of
competitors, he is possessed of something of value and it
is the duty of the court to estimate the pecuniary value of
that advantage if it is taken from him.

Reliance Loss
Will place Cl in position he would have been in
had contact never been entered into.
Will compensate him for expenditure incurred in
reliance on the contract.
Useful where expectation loss is too speculative.
Court will not allow him to claim losses for a bad
bargain.

Equitable Remedies
Specific Performance
Damages must be inadequate
Contract can be specifically enforced
No reason for refusing the granting of
specific remedy
Damages in lieu of specific
performance
Injunctions