Contract Law Notes

AGREEMENT

1. Offer
An offer is an expression of willingness to contract on the specified terms without further negotiation.

It contains:

(i) A proposal of the terms of the exchange; and

(ii) An expression of willingness to be bound as soon as the offeree manifests acceptance.

Objectivity and mistaken offersf

The objective test is how an honest and reasonable person in the position of the offeree observer would interpret it. This is to
protect honest and reasonable expectations.

 The Leonidas D case (1985):

the communication of acceptance must be actually received by the offeror, and where the means of communication are
instantaneous (oral, telephone, telex), the contract will come into being when and where acceptance is received.

 RTS Flexible Systems v Molkerei Alois Muller 2010

whether there is a binding contract on the parties, and if so, on what terms depends upon what they have agreed. I t
depends not upon their subjective state of mind, but on a consideration of what was communicated between them by
words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had
agreed upon all the terms which they regarded, or the law requires as essential for the formation of legally binding
relations.

 Gibson v Manchester City Council (1978)

Fact: D has adopted a policy of selling council houses to its tenants. C was a tenant who had applied for details by
filing designated form supplied by D. later D responded to this application by stating that C may be prepared to
sell the house at the purchase price and providing details of mortgage. The letter also stated that it did not
amount to a firm offer, and invited C to make application.. After local election, D decided not to sell house to the
claimant.

Held: there was no concluded contract and D was not legally bound to sell the house to C, as D’s letter did not state the
price and was not an offer but an invitation to treat.

 Storer v Manchester City Council (1974)

Fact: D refused to proceed with the sale of its property to C under an arrangement which had been agreed with its
predecessor. All of the terms of the contract had been agreed but for the date on which the lease was to end and
mortgage payment was to begin. C claimed for specific performance.

Held: it was held that the contract was complete despite the absence of some fact left blank. D had made clear by their
conduct and language that they intended to be bound upon the acceptance of the offer. In distinguishing
between an offer and an invitation to treat, it is necessary to look, not subjective intentions or beliefs of the
parties, but rather on what their words and conduct might reasonably be understood to mean.

 Sherrington v Berwin Leighton Paisner (2006)

Fact: offer made by seller at 45k. Second letter incorrectly stated that the offer of 35k remained open.

Held: objective approach. 35k was not new offer as referred to “remaining open” and had not been previously open for
acceptance. Self-contradictory offer will not make a contract.

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 Contract Law Notes

 Centrovincial Estates v Merchant Investors Assurance

Fact: Cs were the leaseholder of an office and let several floor to a third party, who underlet 12 th floor to D. TP later
surrendered their lease to C, who became director lessor. C wrote letter to D offering a renewal rent of 65K/year,
which was 3k less than D’s payment to TP. D accepted. Letter mistaken. C intended to propose a renewal rent of
126K/year. When C tried to correct this, D asserted that they had a binding contract for 65K.

Held: it was held in favor of D. The existence of a mistake was to be judged objectively, not subjectively.

Offers and invitations to treat

General principles

Generally, no offer is made when a party communicates his proposed terms unless he also communicates his commitment to be
bound on the other’s acceptance of the terms.

 Storer v Manchester CC

 However, no concluded contract was found in Gibson v Manchester CC

A communication may only be a request for or supply of information, not an offer.

 Harvey v Facey (1893)9

Fact: C sent a telegram asking if D was willing to sell products and the selling price. D responded by providing the
lowest price. C responded with an intention to buy the product with the selling price. D did not reply. C sued.

Held: PC held in favor of D. C’s first telegram was merely a request for information, and D’s response was merely
providing that information, not an offer. C’s second telegram was an offer. Therefore, no binding contract.

Alternatively, a party’s communication may not amount to an offer because it is an invitation to treat: statements indicating a
willingness to receive offers.

Displays and advertisements

The general rule is that displays or advertisements of goods for sale are not offers to sell those goods, but only invitations to treat.
The customer is generally regarded as making the offer when he presents the goods at the cash desk or otherwise evinces an
intention to buy. This leaves traders with the power to choose whether to accept or reject the customer’s offer.

Pharmaceutical Society of GB v Boots Cash Chemists established that displays and advertisements are not offers.

Three reasons:

(i) Practical inconvenience: if displays were offers, then the customer’s act of putting it into the basket amounts to
acceptance, preventing the customer from changing his mind thereafter without breaching the contract.

(ii) Freedom not to deal: if displays or advertisements were offers, then vendors would be deprived of their freedom not to
deal with a particular customer.

(iii) Limited stock: if displays or advertisements were offers, vendors would be obliged to supply goods to everyone who
accepts, even if he runs out of stock.

Other cases: advertisement or window display

 Partridge v Crittenden: the advertisement for the sale of wild birds was an invitation to treat and therefore did not
contravene the Protection of Birds Act.

 Grainger v Gough: wine merchant’s circulation of price list for its products is only an invitation to trade, not an offer.
Customer has to place an order, then it’s the merchants’ decision whether to accept or reject its offer.

 Fisher v Bell: a display of a flick-knife in a shop window was not an offer to sell the item in contravention of legislation
restricting the sale of offensive weapons.

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 Contract Law Notes
Exceptions to the general rule:

 Chapelton v Barry UDC (1940)

Fact: C hired a desk chair from D displaying an advertisement (with great details, including hiring price) with a ticket
containing exclusion clause for any accident. C suffered injury when sitting on the chair. C sued D.

Held: It was held the ticket with exclusion clause was a receipt and conditions of the advertisement were offers (which
did not contain exclusion clause). D had not brought C’s attention on the exclusion clause, so they cannot rely on it.

 Carlil v Carbolic Smoke Ball Co (1893)

Fact: D placed an advertisement in a newspaper for their product, stating that any person who purchased and used
product but contracted influenza despite properly following instructions would be entitled to a 100 reward. It also stated
that company has placed 1000 in a bank account to act as the reward. C bought the product and suffered the disease.

Held: it was held that the advertisement to the offer for a unilateral contract by D. In completing the conditions stipulated
by the advertisement, C provided acceptance.

Timetables and automatic vending machines

It has been held that the railway and bus timetables are offers which can be accepted by passengers who buy railway tickets or
board buses.

 Thornston v Shoe Lane Parking Ltd – vending machine

vending machine as constituting a standing offer on the basis that once the machine is activated, there is no possibility of
negotiation.

 National Car Park Ltd v HMRC (2019) - timetable

Fact: a ticket machine which accepted payment in cash. When customer could not pay the exact, ticket machine kept the
excess will be retained. NCP claimed that such extra payment was part of consideration, which are not taxable. HMRC
claimed that these were ex gratia (by favor) payment, and thus taxable.

Held: when the customer put extra money into the ticket machine and the machine flashes up “press the green button for
ticket”, rather than cancelling the transaction. The contract was entered into and the adjusted price agreed. Therefore,
extra payment retained by NCP were part of consideration, not taxable.

Auctions

The law analyses a sale by auction in the following steps:

(i) The advertisement that an auction will take place on a certain day is merely an invitation to treat (Harris v Nickerson);

(ii) Putting up goods for sale with a reserved price is also an invitation to treat (British Car Auctions Ltd v Wright);

(iii) A bid by the purchaser is the offer; and

(iv) The fall of the hammer indicates the acceptance.

This analysis allows:

 The auctioneer to refuse to hold the auction at all (e.g. if it is poorly attended); or

 The auctioneer to refuse to knock down to the highest bidder if the bid fails to reach the reserve (a minimum) price.

However, where the words ‘without reserve’ are added to the advertisement, this indicates bidders’ expectation that (i) the auction
will take place, (ii) no minimum price will be set, and (iii) the item will be sold to the highest bidder.

 Warlow v Harrison an auction without reserve

Tenders
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 Contract Law Notes
Generally, requests for tenders will constitute invitations to treat. Harvela Investments Ltd v Royal Trust Co of Canada (CI) Ltd
sets out the traditional analysis – unilateral contract analysis:

(i) An invitation to tender for a particular project is merely an invitation to treat;

(ii) The offer is made by those submitting the tenders (see also Spence v Harding); and

(iii) The acceptance is made when the person inviting the tenders accepts one of them.

Exceptions to the general rule

(i) A promise to accept the most competitive bid

 referential bid not acceptable - Harvela Investments [providing an amount in excess of any other fixed offer
(not a fixed bidding sale without referring to other sales), an invalid offer]

(ii) A promise to consider bids which conform to the bid conditions

 Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council –D by missing the tender of P submitted
within the stipulated time, was held liable because they failed to consider all eligible tender (as promised).

Website

I. General rule: websites appear to be the electronic equivalent of displays, advertisements or catalogues of
products for sale, which means that a website constitutes an invitation to trade.

II. Pricing mistakes on website:

(i) If a website constitutes no more than an invitation to trade, mispricing will not result in the supplier
having to fulfil a contract at the misquoted price; (Chwee Kin Keong v Digilandmall.com Pte Ltd,
Singapore case)
(ii) If orders were not accepted or confirmed, there could be no binding contract;

(iii) In case of a unilateral offer on the website, it only requires the performance of an act by the offeree

Lefkowitz v Great Minneapolis Surplus Store 86 NW 2d (1957) – TV set price at 3 dollars to the first ten
online buyer after 6p.m. GMT on Thursday, 1 March

Where customer has paid its bills

 There will be no binding contract where the online buyer either knew, or ought reasonably to have
known of the mispricing (Hartog v Colin and Shields [1939] 3 All ER 566)

Overview of considerations in determining the existence of an offer

(1) Certainty of offer

(a) No contract – parties are still in the course of negotiation

(i) No contract

 Scammell v Ouston – (purchase of lorry on a hire-purchase term, too vague)

 May v Butcher – (purchase price of tentage varied from time to time, no binding contract established since it
could not be implied that the price had to be a reasonable price)

 Courtney & Fairburn v Tolaini Bros – price is a fundamental to the contract, there could be no binding contract
unless the price has been agreed.

 Compagnie NOGA v Abacha – regarding the enforcement of tripartite settlement agreements, it was void for
uncertainty since the terms of agreement did not expressly provided settlement figure which indicate that parties
were still in negotiation.

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 Contract Law Notes
 Baird Textile Holdings v Marks & Spencer – the alleged term was that M&S would acquire garments from BTH
in quantities and at prices which in all the circumstances were reasonable, but there were no criteria for assessing
any reasonable quantity or price. CA held that it could not make any agreement for the parties in the absence of
any objective basis for determining its terms.

(ii) The court may recognize the bargain

 Hillas v Arcos (1932) – H and A entered into an agreement which provided H an option of entering a further
contract for the purchase of more timber in the next year. The option clause did not specify the kinds, size or
quality or details of the shipment. HL held that a court could reasonably imply terms where a contractual
intention was clear but the contract was silent on certain details. In the instant case, the agreement had been
complete and did not depend on the exercising of the option for its validity.

 Durham Tees Valley Airport v BMI Baby – the contract required the airline to base and fly two aircraft from a
particular airport overt a ten-year term. The airline later shut its base. CA held that the agreement was not void
for uncertainty since it contained sufficient terms to enable a court to give the agreement a practical meaning and
to determine whether the airline was in breach. It was not necessary for the contract to specify a minimum
number of flights or passengers.

 Petromec v Petroleo Brasileiro Petrobas No.3 - the court must give effect to a term which parties deliberately
incorporated into their contract, which was consistent with party autonomy and fulfilling the reasonable
expectations of commercial parties. The best endeavors are enforceable provided that the object of the clause is
clear and there are sufficient criteria to identify good faith in particular context.

(b) Factors relevant in deciding if there is a contract

 previous dealings between the parties are relevant - Hillas v Arcos

 executed or executory contract - Trentham v Archital Luxfer : where both parties had partially or fully
performed the agreement, it will be unrealistic to argue that the transaction is void for vagueness or uncertainty.
The fact that the transaction is executed makes it easier to imply a term resolving any uncertainty.

 Agreed mechanism to clarify vague terms

Foley v Classique Coaches – an agreement for the purchase of petrol at a price to be agreed from time to time
with an arbitration clause, was linked to a deal of sale and purchase land by C. The contract had been executed
for three years and D argued the contract unenforceable because the price clause was uncertain. CA held that
the contract was enforceable, D having to pay a reasonable price for petrol supplied. Whether reasonable or not
can be determined by arbitration clause.

Cable & Wireless v IBM – a contract containing a benchmark price term and ADR (similar to an arbitration
clause) for dispute are certain and enforceable. A contract clause which seems subjective or uncertain can be
rendered certain if it specifies object criteria for assessing whether a party breached it.

Wills Management Ltd v Cable & Wireless: the agreement was an agreement to agree, since the parties has yet
to agree on a key term of the contract, i.e. the amount of compensation. Therefore, the agreement was
uncertain and incomplete.

 Objective view that parties did intend to contract

Hughes v Pendragon – C and D entered into an agreement to sell and purchase a limited edition vehicle,
subject only to a condition that a vehicle be allocated to D., and awarded C damages of 35,000 in case of
breach. It was a certain contract and D was in breach by allocating the vehicle to another one.

 If the contract contains an indefinite but subsidiary provision, the court may strike it out as being of no
significance

Nicolene v Simmonds: a contract for the sale of steel bars containing a clause “usual condition of acceptance”
while two parties had never done business before. The Court held that the usual conditions of acceptance was a
meaningless phrase because of no usual conditions existed, but this could be severed from the rest of the
contract, and would not affect the enforceability of the contract.

2. Acceptance
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 Contract Law Notes
An acceptance is an unequivocal expression of assent to all terms of an offer and has the effect of immediately binding both
parties to the contract. A valid acceptance must:

(i) Correspond with the offer;

(ii) Be given in response to the offer (there must be a nexus between the acceptance and the offer);

(iii) Be made by an appropriate method; and

(iv) Be communicated to the offeror.

Correspondence of acceptance with the offer

The mirror image approach to contract formation requires the acceptance to mirror the offer.

Conditional acceptance

‘Acceptances’ which contemplate further conditions being satisfied or steps being taken, such as a more formal contract, generally
render the agreement incomplete and not binding.

Counter-offer kills the original offer

An offeree whose response deviates from the offer will usually be regarded as having made a counter-offer. A counter-offer
terminates the original offer.

 Hyde v Wrench

However, the offeree can retain his power to accept the original offer if the court finds:

(i) That the original offeror’s rejection of the counter-offer includes a renewed offer on the original terms; or

(ii) That the offeree’s response was not a counter-offer but merely a request for information or clarification about the
availability of better terms.

 Stevenson, Jaques & Co v McLean (second telegraph inquiring the arrangement of delivery time, no indication
of counter offer)

Battle of forms

Battle of forms arises where the parties purport to conclude a contract by an exchange of forms containing incompatible terms.

The conventional rule is that the contract is bound on the terms by the party that ‘fired the last shot’: the party who presents his
terms last without provoking objection from the recipient.

 Brogden v Metropolitan Railway Co: despite of no official contract, offeree signed approved at the end of draft contract,
court held the contract existed, with approved substance of the draft, not an approval of the mere form.

 Butler Machine Tool Co Ltd v Ex-Cell-O Corp: seller’s quotation contained a varied price term while buyer placed the
order containing a fixed price term. Seller signed on the confirmation slip and returned to buyer. Seller by signing the slip
confirmed on the buyer’s offer and must comply with the fixed price term.

 Pickfords v Celestica Ltd: where two offers were made in series prior to a purported offer, the second offer was capable
of revoking the former if it were materially inconsistent. In the instant case the offeree had purported to accept the
revoked offer with an additional term. The acceptance was a counter-offer which could be accepted by the offeror’s
conduct.

The traditional approach vs Lord Denning approach in Butler:

 The traditional approach required an exact ‘mirror image’ reflection of the terms of the acceptance as to the terms of the
offer, otherwise there would be no acceptance but merely a counter-offer.

 However, Lord Denning thought that: ‘our traditional analysis of offer, counter-offer, rejection, acceptance and so forth is
out of date… The better way is to look at all the documents passing between the parties – and glean from them, or from
the conduct of the parties, whether they have reached agreement on all material points’.

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 Contract Law Notes
 His approach is that a contract could be formed, notwithstanding the fact that there were conflicting terms in the
documents passing between the parties, so long as the parties were agreed on all material points.

A restatement of the traditional approach in Tekdata Interconnections Ltd v Amphenol Ltd.- acceptance of the last shot

Pros and cons of the two approaches

 The traditional approach has the advantage of certainty, but has the disadvantage of being excessively rigid. The courts
cannot use their discretion to fill-in-the-gaps and help reach a conducive compromise for the parties and it encourages
businessmen to continue to exchange their standard terms of business in the hope of getting the ‘last shot’.

 The ‘Denning approach’ has the advantage of flexibility – it allows the court to pick and choose between respective terms
and seek to find an acceptable compromise. However, this approach has the disadvantage of uncertainty, leaving too
much discretion for the courts, meaning that businessmen will be unsure as to which standard applies.

Nexus between offer and acceptance

A valid acceptance must be made in response to a known offer. This requirement means that conduct purporting to be an
acceptance is ineffective if it is done in ignorance of the offer, even if it matches the offer.

Cross-offers

Two identical cross-offers made in ignorance of each other do not amount to a contract, unless or until one is further accepted.

 Tinn v Hoffman

Rewards

A person who is ignorant of the reward offered for his conduct has no contractual right to the reward.

 R v Clarke 1927 (Australia case)

 Williams v Cawardine 1833: Publication of reward advertisement. It was held that informant was entitled to recover the
reward, although she was led to inform by other motives, and not by the proffered reward.

Method of acceptance

The method of acceptance may be stipulated in the offer. Otherwise, any words or conduct that objectively evince the offeree’s
intention to accept are enough.

Method of acceptance prescribed

If the offer requires the offeree to comply with a particular method of acceptance, a purported acceptance which deviates from this
way may not bind the offeror unless the offeror waives his right to insist on compliance.

 This is consistent with the mirror-image rule.

 However, if the offeror does not stipulate that acceptance must only be communicated via a particular medium, then an
acceptance via an equally efficacious mode of communication will be sufficient, i.e. the actual method of acceptance did
not disadvantage him.

o Manchester Diocesan Council for Education v Commercial and General Investments Ltd

Acceptance by silence

The general rule is that acceptance cannot be inferred from the offeree’s silence.

 Felthouse v Bindley: no valid contract between the parties, no assumption of acceptance by the offeree by silence

 Taylor v Allen: insurance cover note does not count as a valid insurance contract, insured’s acceptance was required. In
case of bilateral contract, acceptance by silence does not apply.

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 Contract Law Notes
 Dresdner Kleinwort v Attrill: varied legal relationship by announcement of one party meet the conditions of the unilateral
variation power: (1) where a term is introduced into a pre-existing legal relationship, the burden of proof is on the offeror
to show that they did not intend to be legally binding; (2) an offer may waive the need for a communicated acceptance.
The key issue is how a reasonable recipient of the offer would interpret it, and whether they would see the need for
communicated acceptance.

Three reasons support the rule:

(i) Silence is ambiguous: it will often be difficult to infer an intention to accept from it.

(ii) Acceptance must generally be communicated to the offeror so that he knows when a contact binds both parties.

(iii) The rule prevents an offeror from exploiting an offeree’s inertia (by imposing liability unless he actively rejects the
offer).

Communication of acceptance
The general rule is that the offeree must communicate his acceptance to the offeror. Only at that moment does (i) the offeror know
that the contract is binding; and (ii) each party know that they can safely rely on the existence of the contract.

 Where the method is instantaneous (e.g. by telephone), acceptance takes effect when and where it actually comes to
the offeror’s attention (effective when received): the offer can be rejected or revoked before that time.

 Where the method is postal, acceptance takes effect when the letter is sent: the offer cannot be rejected or revoked
afterwards.

 Powell v Lee (1908):

Fact: C applied for the post of Headmaster of D school. D passed a resolution to appoint C but later canceled. C sued D.

Held: The court held that the passing of resolution without communication to C did not constitute a contract of
appointment for the breach of which C was entitled to sue.

 Entores v Miles Far East Corp – the issue when the acceptance was effective matter for the choice of law

Fact: C(UK) sent offer to D (Dutch) for purchase of copper cathodes and D sent acceptance of this offer by Telex
(instantaneous communication). C sued D for breach.

Held: the court held that post rule does not apply for Telex (as an instantaneous communication). The acceptance was
acknowledged by C after receiving it, thus the choice of law should be English law.

 Brinkibon v Stahagstahl

Fact: D (seller in Australia) sent a finalized term to C (UK buyer). C accepted those terms using telex to D. C sued D for
breach.

Held: by applying the Entores v Miles Far East Corp case, the contract was established when the acceptance was received
by D in Australia, hence the contract was formed in Australia, the choice of law being Australia law.

 Mondial Shipping v Astarte Shipping

Issue: Charterparty included one clause, in case of charters’ failure of payment, the shipowner could give 48 hours notice
of the failure, if charterer did not pay within that time, shipowner could withdraw the ship. THe issue is whether a telex
notice of intention to withdraw the vessel for non-payment of hire, sent by the shipowners to the charters later on evening
of Friday 2 December 1994 (at 23:41pm) was received instantaneously or at the start of business on the next working
day, 5 December. This was important on the facts because if the notice took effect at 23:41 pm on Friday 2 December, the
charterers would have been in default when he did not made payment within 48 hours. On the other hand, if the notice
was deemed served on 5 December, then the charterer was not in breach of payment term.

Held: the court held that the notice was communicated at the start of business on the next working day, namely, Monday
5 December and the charterer was not in breach. (However, the notice was nevertheless invalid because it did not indicate
the action required of the charterers (i.e. make payment).)

 Susanto-Wing Sun v Yung Chi Hardware: communication of acceptance is required.

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 Contract Law Notes
Fact: two contracts for the sale of product by D to C. D in Taiwan faxed each of the two agreements to C in HK.
Immediately upon receipt of each agreement, C accepted the agreement by signing and faxing it back to D.

Held: the contract was concluded in Taiwan and not in HK, because it was in Taiwan that the communication of C’s
acceptance of the offer was received by D. The rule relating to communication by telex applies here.

 Thomas and Another v BPE Solicitors 2010

Fact: To complete the sale, the claimants had to deliver specific documents. The parties envisaged that this would occur
after the buyer’s solicitors had undertook to provide the purchase money, at a completion meeting scheduled by phone for
a particular date. On that date, a Friday, the buyer’s solicitors sent the defendant an undertaking to send the purchase
price by electronic transfer the next working day (Monday). The defendant stated that it would require interest for the
period between the undertaking being given and the money being sent (i.e., over the weekend). The buyer pulled out of
the deal the next day after learning that the company’s business was suffering. C sued his lawyer of negligence.

Held: there was no complete contract as D did not acceptance the amount of the purchase money (without interest). C
decided to withdraw the transaction because of its bad financial situation, therefore suffer no loss.

Two-way instantaneous (accepted when received)

The assumption with instantaneous methods of communication is that both parties are present, there is no delay between the
sending and receiving of the acceptance.

Lord Denning gave the following examples in Entores v Miles Far East Corp:

 If a face-to-face oral acceptance is drowned out by a noisy aircraft flying overhead, the offeree must repeat his
acceptance once the aircraft has passed;

 If a telephone goes ‘dead’ before the acceptance is completed, the offeree must telephone back to complete the
acceptance;

 If the offeror does not catch the clear and audible words of an acceptance or the printer receiving a telex runs out of ink,
but the offeror does not bother to ask for the message to be repeated, it is the offeror’s own fault that he did not get the
acceptance and he will be bound.

One-way instantaneous (accepted when received/accepted when sent)

A flexible approach of when acceptance happens is required. Three possibilities can be mooted; acceptance can take place:

(i) When it is sent: this prejudices the offeror who may not know of it at that time.

(ii) When it actually comes to the offeror’s notice: this prejudices the offeree because it allows the offeror too much control
over whether and when the contract is concluded.

(iii) When a reasonable offeror would access the message, taking account of all the circumstances: this allows a court to
balance the parties’ respective interests. For example:

a. Business hours: acceptance when received

 If a telex was sent to a place of business during ordinary business hours, acceptance / revocation is
effective when it was received on the telex machine, even if it remained unread (The Brimnes).

 The risk lies with the offeree because he might reasonably expect his faxed acceptance to be actually
communicated when received by the fax machine.

b. Stipulated mode of acceptance: accepted when sent

 If the mode of acceptance is permitted or invited by the offeror, he can be expected to act reasonably by
checking the technology he puts into use in a timely manner.

 The risk lies with the offeror – he assumed the risk.

Acceptance by post

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 Contract Law Notes
The postal acceptance rule: effective when post

Acceptance takes place when the offeree posts his acceptance (Adams v Lindsell). Two consequences follow:

 The offeror is bound before he knows of the acceptance, even if its arrival is delayed, and even if he never actually
receives it (Household Fire & Carriage Accident Insurance Co Ltd v Grant).

 The offeror cannot revoke his offer after the offeree’s acceptance is posted (Byrne v Van Tienhoven).

o The postal rule does NOT apply to revocations (Byrne v Van Tienhoven).

 Postal rule does not apply when a letter of acceptance was sent to the wrong number or address (Korbetis v
Transgrain Shippng)

Exception to the postal rule: when communication is explicitly required

 Other means of acceptance is clearly required: when the offer stipulates that a particular means of acceptance (other
than post) is required, or by wording the offer to require actual communication of any acceptance.

o Holwell Securities v Hughes: the offer required written notice to the offeror at a given address within six
months. Offeree posted the letter of acceptance, but it never came to offeror. No legally binding contract,
and post rule did not apply.

o Eliason v Henshaw (1819) – where the method of acceptance is stipulated, the offeree must accept in that
way, there will be a contract, even though the offeror does not know of the acceptance.

Fact: E offered H to buy flour by sending a wagon owned by E, with a letter requesting H to reply to the
same wagon. H received the letter and agreed to sell flour to H by post (thought it’s faster) However, the
letter of acceptance was 6 days after the wagon and E bought flour from third party. H sued for breach.

Held: there was not a binding contract, because the offeree (H) does not accepted in the manner prescribed
by the offeror (E).

 Not applicable to instantaneous communication, eg. Telephone or fax

Revocation of a posted acceptance

 Dunmore v Alexander: where two letters were received at the same time, one including an acceptance and one a
revocation, there could be no contract but notably stated that if one had arrived in the morning and the other in the
afternoon, this could have been different.

 Wenkheim v Arnd (New Zealand case): C offered to marry D. D accepted the offer by sending C the confirmation
letter. D’s mother disagreed and sent C a refusal letter by telegram, which was arrived earlier than D’s letter. IT WAS
HELD that the refusal letter from D’s mother was invalid, because she was not a party to the communication
between C and D, also D’ mother unauthorized person.

Justifications for the postal acceptance rule

(i) Protecting the offeree

 Without the rule, the offeree would not know whether a contract has been formed and so could not rely on
his acceptance until he has confirmation that the acceptance was received.

(ii) Commercial convenience

 No contract could ever be completed by post. It might go on ad infinitum.

(iii) Protecting the offeror

 The rule prevents an offeree from speculating by posting an acceptance and then attempting to withdraw it
by a faster means (e.g. by fax or email) when, for example, the market price changes in his favour.

(iv) Offeror should bear the risk

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 Contract Law Notes
 An offeror who chooses to use the post to start negotiations and make the offer should bear the risk of loss
or delays through using the post.

 If the offeror does not wish the offeree to use post, he can expressly stipulate this in the offer and thereby
exclude any operation of the postal rule.

(v) Post Office as agent

 It could be argued that the postal authority is the common agent of both parties and so communication to
this agent is the same as communication to the other party.

3. Unilateral contracts
A contract may be unilateral, involving an exchange of a promise for a completed act.

Acceptance

Unilateral contracts are only concluded by the performance of the stipulated act . The offeree need not communicate to the offeror
his intention to do so; any such communication is legally irrelevant.

 Carlil v Carbolic Smokeball

Revocation

 An implied obligation on the offeror not to revoke the offer once the offeree has started performance.

 Chitty states that the unilateral offer can be accepted ‘as soon as the offeree has unequivocally begun performance of
the stipulated act of abstention… so that the offer can no longer be withdrawn’.

 Errington v Errington

4. Termination of the offer

An offer can be terminated by: (i) revocation by the offeror; (ii) rejection by the offeree, (iii) lapse of the offer, or (iv) death of
either the offeror or the offeree.

Revocation by the offeror

- General rule

 An offer can be revoked any time before the offeree communicates his acceptance. (Payne v Cave; Routledge v Grant)

 An exception would be a unilateral offer, which is irrevocable once the offeree has commenced performance.

 A revocation becomes effective if it is communicated to the offeree before his acceptance takes effect.

 A postal revocation is not effective on posting, but only when it is ‘brought to the mind’ of the offeree (Henthorn v
Fraser), or when it would be reasonable to expect the offeror to acquire notice of it.

 An offer can be revoked by a reliable third party, even if he acts without the offeror’s authority (Dickinson v Dodds).

Henthorn v Fraser: C and D negotiated for the sale of the house. The secretary of D passed an offer to C, which would
be valid for 14 days. D noted potential buyers and concluded contract with third party. The next day, D withdrew the
offer to C by post. The post did not reach C until 5pm, while C had responded to D’s offer at 3:50pm

Dickinson v Dodds: Owner of a property signed a document purporting to be an agreement of S&P. Owner also signed a
postscript stating that “offer to be left over until Friday 9 am” was added. C did not make actions until he learned from a
reliable third party that D agreed to sell the property to a third party. C then attempted to communication his acceptance
of the offer. IT WAS HELD that (1) the signed documents by D only amounted to an offer, which might be withdrawn at
any time before acceptance; (2) the manner of communication of revocation was irrelevant, provided that C knew D no
longer intend to sell property to him by the time he purported to accept the offer. NO Binding offer.

- Exception: revocation of unilateral offers made to the world

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 Contract Law Notes
 Where a unilateral offer has been made to the world in which the offerees cannot be identified so that revocation to
individual offerees cannot occur, IT WOULD BE SUFFICIENT that the same notoriety to be given to the revocation that
was given to the offer. If the same channel is used and the same level of publicity achieved, the fact that individual
offeree has not seen the revocation is irrelevant. (Shuey v United States)

 Luxor (Eastbourne) v Cooper: where an agent is promised a commission only if he brings about the sales, there is no
room for an implied term that the principal will not dispose of the property himself or through other channels so as to
prevent the agent from earning the commission.

 Errington v Errington: unilateral offer invalid when the offeror died but only when it’s personal related contract. If not
and the offer with certain condition, the offer would be effective if the offeree can satisfy such conditions.

 Daulia v Four Millbank Nominees: D sent C a proposed contract and stated that if C satisfy certain condition (bank
deposit), D would sign the agreement with C. C satisfied the condition and went to D but D refuse to enter the agreement.
C sued for damages. IT was held that, even though D breached a unilateral contract established when C fulfilled the
condition, there needs to be an act of partial performance to enforce it. Since C hasn’t performed the contract, he could
not claim for damages.

 Soulsbury v Soulsbury CA: Ex-husband death could not revoke his previous promise of leaving 100,000 to his ex-wife,
being clarified in a signed contract, despite his remarriage with another one, his promise to his ex-wife was still valid and
binding upon the husband’s estate.

Revocation needs not to be authorized by the offeror, provided that offeree ought reasonably to believe it (Dickinson v
Dodds)

Rejection by the offeree

 A counter offer invalid the original offer (Hyde v Wrench)

 An offer is terminated as soon as the offeree communicates his rejection of it to the offeror.

 A rejection only takes effect when it is actually communicated to the offeror. Thus:

o An offeree who posts his rejection, then changes his mind and posts his acceptance before his rejection letter
arrives, can bind the offeror, although his acceptance arrives after his rejection letter.

Lapse of the offer

An offer may lapse on:

(i) The expiry of the stipulated period for which the offer is open;

(ii) The expiry of an express or implied condition;

(iii) The passage of a reasonable period of time where no time limit or other condition is imposed.

 Ramsgate Victoria Hotel Co., Ltd v Montefiore: the company failed to allot shares to C within a reasonable time (C
request in June and the Company allotted in later November)

Death of the offeror or offeree

 An offer is generally terminated by the death of the offeree (Reynolds v Atherton) or of the offeror (Coulthart v
Clementson). In case of death of offeree, the offer cease to be an offer, the proposition is probably that the offeree’s
representatives can accept the offer if it is of a non-personal nature. (Reynolds v Atherton)

 Exception: Errington v Errington shows that an offer remains open if the offeror could not have terminated the offer
during his lifetime, and the performance of the contract does not depend on the offeror’s personality but can be satisfied
out of his estate.

 Errington v Errington: a father bought a house in his own name and promised to his son and daughter-in-law that
if the couple paid all the mortgage instalments, the father would transfer the house to them. The father later died,
and the mother inherited the house. The couple continued to pay the instalment. Mother brought a lawsuit against
the couple. IT WAS HELD that the promise made by the father was unilateral offer and as long as the couple

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 Contract Law Notes
continue to pay the instalment, they are in the process of accepting the offer. Unilateral contract acceptance
takes place only on full performance

 Bradbury v Morgan: surety gave a guarantee to C and the surety later died. The court held that the death of the
surety did not operate as a revocation of the a continuing guarantee, therefore the surety’s executor were liable to C
under the guarantee promised.

5. Assessment of the mirror image approach

Criticisms of the mirror image approach

(i) Unsuitable for analyzing many cases;

(ii) Insufficient to explain the conditions of enforceability; and

(iii) Misleading as to what courts are really doing.

Unsuitability: cases that don’t fit

In The Eurymedon, Lord Wilberforce: ‘English law has committed itself to a rather technical and schematic doctrine of contract,
in application takes a practical approach, often at the cost of forcing the facts to fit uneasily into the marked slots of offer,
acceptance, and consideration’.

 E.g. Sale at auction, supermarket purchases, boarding a bus, etc.

Insufficiency: other requirements of enforceability

Offer and acceptance are necessary but insufficient to establish the formation of a contract. In addition:

 The agreement must be sufficiently complete and certain.

 There must be intent to create legal relations.

 The agreement must satisfy one of the criteria of enforceability: consideration, formalities, or promissory estoppel.

Even then, the contract may be set aside for vitiating factors such as duress or misrepresentation. Moreover, the contents of a valid
contract are subject to legal control.

Misleading: concerns beyond consensus

(i) The objective test of intention ‘bites’ when a party’s actual intention differs from his apparent intention.

(ii) Courts can cure agreements which are vague or incomplete, by interpretation and gap-filling.

(iii) The situation specific rules may contradict the objective test as to whether there is an ‘offer’ or an ‘acceptance’ (e.g.
displays do not generally constitute offers, and acceptance cannot be made by silence).

(iv) The courts may find that an agreement has come into existence before one of the parties can know of the other’s
agreement.

Backward reasoning

Judicial reasoning may sometimes be described as ‘backwards’ in the sense that the judges reason back from their sense of the
‘right’ solution to ‘find’ the presence or absence of offer and acceptance necessary to justify it.

The policy considerations

(i) Respecting the parties’ intentions

 Courts are genuinely concerned to ascertain whether the parties have committed to a binding contract.

(ii) Certainty

 Sufficient certainty in the agreement is necessary in order to enforce it.

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 Contract Law Notes
 The rules on how specific and common conduct will normally be interpreted (e.g. display, advertisement,
postal acceptance) to allow parties to know where they stand.

(iii) Preventing unfairness

 Some rules discourage opportunism and encourage fair negotiating practices (e.g. the rule that silence is no
acceptance).

 The use of the unilateral contract analysis prevents one party from acting inconsistently with the reasonable
expectations or reliance induced in the other party.

 Unfair terms can be excluded by moving forward the time of contract formation to before the offending
clause is introduced (e.g. Chapelton v Barry).

Alternative approaches to formation

The offer and acceptance model is still the dominant approach because:

(i) Many contracts are naturally susceptible of this analysis.

(ii) It is analytically convenient and provides a degree of certainty about the general framework that courts will adopt in
resolving questions about the existence or content of contracts.

(iii) Considerable flexibility is built in to take account of other policy concerns

(iv) The offer and acceptance model is well established and has the weight of authority.

Lord Denning advocates a more transparent approach to resolving minor differences in the parties’ intention. In Gibson v
Manchester CC, Lord Denning:

‘It is a mistake to think that all contracts can be analysed into the form of offer and acceptance… You should look at the
correspondence as a whole and at the conduct of the parties… [to decide] whether the parties have come to an agreement on
everything that was material’.

Where the parties’ terms are mutually contradictory, it should be possible for a court to ‘scrap’ the terms and replace them by a
‘reasonable implication’.

A contract will be bound if the parties are sufficiently committed to the material terms, leaving the court to iron out the differences
on immaterial terms.

 Sufficient notice to incorporate particular provision

Sterling Hydraulics v Dichtomatic Ltd (2006)

 A faxed acknowledgement of the PO stated “delivery based on general T&C (containing an exclusion clause)”
but second page containing T&C was blank. When disputes arose, supplier argued to limit liability. The court
held that the exclusion term did not incorporate since it did not amount to adequate notice.

 Consistent course of dealing

Balmoral Group Ltd v Borealis (2006) – even if the notice of the terms was not given on the particular provision,
where the parties deal with each other on a regular basis on standard terms and conditions, the terms may be
incorporated into the particular contract. The person seeking to reply on a course of dealing for the incorporation of
past conduct has been sufficiently consistent to give rise to the implication that, in similar circumstances, the same
contractual result will follow.

VS

 Capes (hatherden) Ltd v Western Arable Service Ltd (2009) – consistent course of dealing rejected
 Buyer entered into four contracts for the S&P of grains with S by incorporating standard terms (with an
arbitration clause) within 6 months. Since there was no evidence that the chosen standard terms were the usual
term used in all grain merchants, nor the S would have known such standard terms, the court held that the
limited course of dealing (four in five months) between parties was not sufficient to justify the conclusion that

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 Contract Law Notes
an objective bystander would state that parties had reached a common understanding that the chose standard
terms would apply.

 Tekdata Interconnections Ltd v Amphenol Ltd – by applying traditional offer and acceptance rule, A’s terms and
conditions would apply because their terms was the last statement between two parties. Acceptance of the last shot
by conduct prevails.

 Clarke v Dunraven: C and D entered a yacht race pursuant to Yacht Racing Association rule according to which
the owner of a yacht disobeying any of rules was to be liable for “all damages arising therefrom”. D in breach of a
rule ran into and sank C’s yacht. IT was held that by entering the race on the yacht racing association terms, the
owners of yachts entered into an agreement with each other on those terms. D had to pay.

 New Zealand Shipping Co v Satterthwaite: C, holder of B/L, claimed D (stevedore) for cargo damages as a result
of D’s negligence, and claimed that D could not escape from liability by virtue of the exceptions and immunities
under B/L. It was held that the exception covered the whole carriage from loading to discharging by whoever it
had been performed, as D’s performance of service in discharging the cargo had sufficient consideration to
constitute a contract with C, thus D was entitled to assert the exemption.

 Trentham v Archital Luxfer : where both parties had partially or fully performed the agreement, it will be
unrealistic to argue that the transaction is void for vagueness or uncertainty. The fact that the transaction is
executed makes it easier to imply a term resolving any uncertainty.

6. Certainty
Even if there is sufficient correspondence between offer and acceptance, there is no enforceable contract if the agreement:

 Expressly anticipates the need for further agreement;

 Impliedly does so because it is too vague; or is silent on material points.

Conditional agreements

In general, agreements which are expressly ‘subject to contract’ indicate that there is no binding contract.

However, the court may enforce an agreement although it is expressed to be ‘subject to the signing of a mutual agreeable contract’
if:

 The expression is meaningless and can be severed because there is nothing left to be negotiated and no need for any
further formal contract, and both parties had proceeded on this basis.

o Storer v Manchester CC: A contract was formed on S’s return of the signed agreement although the Council
never signed and returned the agreement.

 There is a clear intention to be bound and the non-signing party’s subsequent words and conduct amount to a waiver of
the stipulated step.

Vagueness and incompleteness

When a contract is incomplete insofar as important terms are still to be agreed, it will be assumed that there is no intention to be
legally bound but, rather, that the parties are still in the negotiation process.

The pro-enforcement policies

Judges show a great willingness to cure uncertainty in order to uphold contracts. Four reasons support this pro-enforcement
stance:

(i) Imprecision in business practice: many business people refrain from insisting on precise terms for fear of losing the
deal.

(ii) The necessity and difficulty of building in flexibility: parties may try to agree terms that will allow some flexibility to
accommodate market fluctuations and other future unknowns (e.g. in a contract to supply goods over a 10-year
period).
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 Contract Law Notes
(iii) Protecting reliance: Courts are reluctant to deny the existence of a contract where the parties have commenced
performance.

(iv) Unmeritorious pleas of uncertainty: the court have little sympathy for parties who seek to escape from contracts for
unmeritorious reasons, particularly if they have already received benefits under them.

Overview of the techniques for overcoming uncertainty

Courts fill gaps and resolve vagueness by reference to:

(i) Any previous dealing, customs of the trade, and the standard of reasonableness;

(ii) The technique of severance;

(iii) The nature of the undertaking.

Previous dealing, custom, and reasonableness

The fact that the transaction is executed makes it easier to imply a term resolving any uncertainty, or, alternatively, it may make it
possible to treat a matter not finalized in negotiations as inessential’.

 Foley v Classique Coaches

While courts adopt a very pro-liability stance to uncertainty cases, sometimes they are driven to the conclusion that the uncertainty
is incurable:

 Baird Textile Holdings Ltd v Marks & Spencer plc

Severence

If essential aspects of the transaction are agreed, vague words therein can be severed as meaningless and redundant, and the
remaining agreement enforced.

 Storer v Manchester CC

Agreements to (or not to) negotiate

The parties may expressly agree to negotiate on a particular matter with a view to reaching agreement, or they may agree not to
negotiate with third parties over a particular matter.

 Agreements to negotiate (‘lock-in’ agreements) are unenforceable for uncertainty.

 Agreements not to negotiate with third parties (‘lock-out’ agreements) are enforceable if there is a time limit on their
duration.

 In Walford v Miles, the court held that agreements not to negotiate with third parties are enforceable only if there is a time
limit on their duration, otherwise the enforcement may indirectly impose a duty to negotiate in good faith with the
promisee. Three reasons not to impose a duty of good faith:

(i) A contract is about self-interest: parties are entitled to act self-interestedly. So long as he makes no
misrepresentations, a party can withdraw from the negotiations at any time and for any reason.

(ii) Difficulty in determining whether breach has occurred.

(iii) Damages for breach would be impossible to quantify: because no court could estimate the damages since no one
can tell whether the negotiations would be successful: or if successful, what the result would be.

7. Intention to create legal relations

The requirement and its justification
Two presumptions:

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 Contract Law Notes
 Parties do not intend to create legal relations in social and domestic agreements; and

 Parties do intend to create legal relations in commercial agreements.

Justifications

 Floodgates

 The concern is to avoid swamping the judicial system with social and domestic disputes (Balfour v Balfour).

 Promoting market transactions

 The presumption in favour of an intention to create legal relations in commercial contracts is consistent with the
view that contract law’s primary function is to facilitate transactions between people who may otherwise not
deal with each other.

 Freedom from contract

 The concern is to limit state intrusion in the private lives of its citizens.

Family and social agreements

(i) Husband and wife

 Balfour v Balfour: husband agreed to send maintenance payment while they are married. After they divorced,
the husband stopped making the payments. The ex-wife sued. [HELD] it was a purely social and domestic
agreement.

 However, the presumption does not apply when the parties ‘are not living in amity but are separated… they do
not rely on honourable understandings’ (Merritt v Merritt: agreement was reached after divorce).

(ii) Parents and children

 Jones v Padavatton (daughter and mother)

(iii) Social agreements: only oral discussion does not suffice to prove the existence of a binding contract, unless satisfying
the rule “on the balance of probabilities” and prove otherwise.

 Hadley v Kemp: dispute over the distribution of band income, while Kemp being the sole author of all songs.

Rebutting the presumption

(i) Reliance

 Courts are more willing to find intention to be bound where one party has detrimentally relied upon the
agreement.

o Parker v Clark: the letter sent by Clarks to invite Parkers live with them and bequeath their home to
Parkers indicated that both parties intended the agreement to have legal force. The letter was sufficient
to amount to a contractual offer. Thus, Parkers were allowed for damages.

(ii) The agreement is incidental to the parties’ relationship or symbolic of its ending, rather than a manifestation of it.

 Snelling v Snelling: brothers were directors of a family-owned business, to which the company owed a lot of
money. Brothers agreed that if anyone quit as director, they will forfeit the amount of money owed by the
company. C quitted as director and when he was denied the money he sued. IT was held that there was a binding
contract between the brothers and the company. Balfour v Balfour was distinguished.

Commercial agreements
There is a presumption of intention to create a legally enforceable agreement in the commercial context.

 Esso Petroleum Ltd v Commissioners of Customs and Excise (buy patrol for world cup coins, intend to create a legally
enforceable relationship)

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 Contract Law Notes
The presumption of enforceability is rebutted in two notable instances:

(i) Collective agreements between employers and trade unions are conclusively presumed not to have been intended to
create legal relations unless they are in writing and expressly provide to the contrary.

(ii) Agreements expressed to be without intention to create legal relations, such as transactions made ‘subject to
contract’, letters of intent, letters of comfort, and honour clauses, are generally unenforceable:

 Letter of comfort: Kleinwort Benson Ltd v Malaysia Mining Corp Berhad

 Letter of intent: British Steel Corp v Cleveland Bridge and Engineering Co Ltd

 ‘There was no contract because no agreement was reached on price and other essential matters… in the
vast majority of business transactions, particularly those of substantial size, the price will indeed be an
essential term’.

8. Non-contractual solutions
Restitution for unjust enrichment

A restitutionary remedy would be to restored the benefit to its “rightful owner” – either on the basis that there has been a total
failure of or via a quantum merit payment for the reasonable value of the performance.

 A restitutionary analysis was adopted in British Steel Corp v Cleveland Bridge and Engineering Co Ltd

Fact: C (supplier) and D (constructor) negotiated for the sale of steel. C had delivered all but one of the nodes and claimed
a quantum meruit for the work they had done.

Held: there was no contract formed between two parties, because the parties are still in negotiation and yet to agree on
critical terms such as the price and delivery dates. Also, both parties always expected a formal contract to follow, though it
never manifested. In consideration of non-binding contract, the work performed by C was not referable to any contract, C
therefore was entitled to quantum meruit.

By comparison: Regalian Properties plc v London Dockland Development Corporation [1995] 1 WLR 212

Fact: C had not carried out the work at the request of D; rather they had done it in order to be able to win the contract from
D. In addition, the negotiations had been conducted on a “subject to contract” basis, so that such expenditure was at C’s
own risk, conferred no benefit on D, and was not recoverable when they failed to obtain the anticipated contract.

 Restitution: quantum meruit in the absence of contract

 Craven-Ellis v Canons Ltd [1936] 2 KB 403: renumeration on the basis of quantum meruit may also be recovered
where performance is rendered under a contract, unknown to both parties, is void.

Fact: C was appointed as MD of a company without being appointed in the manner required by law. His contract was
void but he was able to recover the reasonable value of his work.

 Rover International Ltd v Cannon Film Sales Ltd [1989] 1 WLR 912

Fact: at the time at which the contract was made, the company had not been incorporated and so had no legal existence.
C can claim on the quantum meruit and recovered for the works done by the contract.

 Restitution despite the contract

GENERAL RULE: the court would uphold the contractual arrangement by which parties have defined and allocated and
their mutual obligations. The general rule reflects a sound legal policy, which acknowledge the parties’ autonomy to
configure the legal relations between them and provides certainty and so limits dispute and litigation.

Macdonald & Mackin (a firm) v Costello [2011] EWCA Civ 930

Fact: D was the sole shareholder and director of a company (A), and he obtained bank finance to build houses. For tax
reason, the funds were routed through A and A signed contract with C. A failed to pay C. C sued D for unjust enrichment.

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 Contract Law Notes
Held: the court held that the contractual obligations to pay for the building work was confined to A, the unjust enrichment
claim against D had to be fail because it would otherwise undermine the contractual position

Exception:

(i) Where the contract failed to provide for a payment to be made, a reasonable price is payable.

Statutes: Section 8 of Supply of Goods and Service Act 1982 (SGA 1979, SGA 1982) – B2B

Section 51 of Consumers Rights Act 2015) -B2C

Case: Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444

Fact: four lease agreements were entered into between lessee and lessor with a purchasing option to the lessee on
expiration of the lease agreements subject to the appointment of valuer for the assertation of the price of the
properties. On expiry, the lessor refused to appoint valuer and argued that option was valid because of uncertainty.

Held: The court upheld for the lessee. A contract is complete once the parties have agreed upon all its essential
terms. If the parties agree on an objective mechanism for determining the contract price, it will not be void for
uncertainty.

(ii) Where the injured party confers a benefit on the other party before the latter’s breach, the injured party may
recover the value of that benefit under a quantum meruit rather than bring a claim for damages

Case: Lodder v Slowey [1904] AC 442

Fact: a contractor has partially performed his contract before the breach which meat that the contractor was
wrongfully excluded from the land on which the work was taking place and therefore unable to complete the
contract. (Once terminated for repudiation the relevant contract had been rescind ab initio, as if it never existed.)

Held: PV upheld the right of the injured party to sue for work done on a quantum meruit instead of suing for
damages for breach of contract.

Reliance-based liability
A may induce B to act in reliance on the existence or future existence of an enforceable agreement. If the reliance does not result
in a readily identifiable benefit in A’s hands (thus no restitution for unjust enrichment may be granted), courts could award
damages measured by B’s reliance. For example:

(i) Unilateral contract device: This protects acts of reliance which precede any communication of acceptance. For
example, it prevents revocation of unilateral offers once performance has begun.

(ii) Two-contract analysis: Courts may also imply a unilateral contract collateral to the main contract to protect B’s
reliance on A’s representation (Shanklin).

 Shanklin Pier Ltd v Detel Products Ltd [1951]: P entered into a contract of repairing with a contractor. After
much persuasion with D, P amended contract with the contractor and allowed for the use of D’s paint in the
repair. The paint flaked off and did not last. P sued D.

Held: Despite nonexistence of contract, D was held liable for C’s damages. There was collateral damage
between C and D. C had given consideration for D’s warrant by instructing contractor to buy paint from D by
amending the main contract.

 In Blackpool Aero Club, the court implied a collateral unilateral contract under which the defendant undertook
to consider conforming tenders in exchange for the tenderer’s submission of conforming tenders.

(iii) Promissory estoppel: The idea is that where A has induced B to rely on A’s clear undertaking, it may be inequitable
for A to renege on that undertaking.

(iv) Negligence: Courts may impose tortious liability in negligence from one party’s ‘voluntary assumption of liability’ in
the context of the special relationship between the parties.

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 Contract Law Notes

BREACH OF CONTRACT AND TERMINATION

9. Breach of contract
A contract is breached when a party, without lawful excuse, fails to perform any of his contractual obligations.

The burden of proof is on the claimant alleging breach. The question is whether the claimant has received exact and precise
performance of the contract.

The defendant may be in:

 Anticipatory breach by (a) renunciation (expressly or impliedly refusing to perform) or (b) impossibility (disabling
himself from performing) before performance is due; or

 Actual breach by (c) failure to perform when performance is due.

Renunciation or repudiation
 Renunciation (also called repudiation) occurs when one party by words or conduct evinces an intention not to perform
part, or all, of the contract.

 The timing of renunciation and claim for damages: Renunciation before the time fixed for performance is a breach,
and if sufficiently ‘serious’, entitles the claimant to terminate the contract immediately and claim damages for the loss of
the contract, rather than waiting until a future date arrives.

o Hochster v De la Tour

 The extent of renunciation and termination: Where the defendant refuses to perform all his contractual obligations, the
claimant has the right to terminate the contract.

 The relevance of the contract-breaker’s mistake or good faith: A party’s words or conduct can amount to renunciation
even if he is only taking an honest view of his contractual rights. The question is whether A’s conduct signals to B:

(i) A genuine dispute about the proper construction of the contract, when the courts will lean against finding
renunciation by A; or

(ii) An intention not to perform the objectively correct interpretation of the contract, which constitutes renunciation
by A.

 Where B purports to terminate the contract for A’s alleged renunciation but gets it wrong, B’s unjustified termination will
itself amount to a wrongful repudiation entitling A to terminate.

 No renunciation was found in:

o Woodar Investment Development Ltd v Wimpey Construction UK Ltd

Fact: Wim (D) contracted with Wood(C) for the purchase of land, under which D was entitled to terminate the
contract in case of compulsory purchase. Local Secretary of State ordered compulsory purchase (before the
singing of purchase contract). D informed C for termination of contract.

Held: a party who acts on honest understanding of the terms of the contract without any ulterior intention to
abandon the contract cannot be treated as repudiating the contract (though it is still a breach of contract).
Whether the party has an improper intention is assessed objectively.

o Vaswani v Italian Motors Ltd: merely to assert a claim based on an erroneous, but good faith, interpretation of
the contract would not amount to a repudication.
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 Contract Law Notes
o CFW Architects (A Firm) v Cowlin Construction Limited

 Renunciation was found in:

o Federal Commerce and Navigation Co Ltd v Molena Alpha Inc (‘The Nanfri’): master was instructed not to sign
any B/L with indorsement “freight pre paid” or which did not contain an indorsement giving the shipowners a
lien over the cargo or freight. (This put charterers in an impossible position commercially.)

- If the breach is substantially to deprive the injured party of the benefit that it was intended to obtain under the
contract, the breach of the innominate term will be treated as repudiatory.

- if the injured party mistakenly thinks that the other party has repudiated the contract, its own purported
election to accept this action as discharging future obligations may itself amount to a repudiation, actual or
anticipatory.

Impossibility of performance
Impossibility of performance is a breach of contract by the party whose act or omission has disabled him from performance.

 This requires the claimant to show, on the balance of probabilities, that the defendant’s performance was impossible in
fact.

o Universal Cargo Carriers Corp v Citati: [Citati test] would reasonable person believe that the contract will
not be performed by party. IF an external event makes performance impossible, then the defence of
frustration may apply instead.

Fact: Charterparty under Gencon term. The vessel arrived 6 days after the ETA. Due to the sharp rise in the
material, supplier reneged contract with charterer, and no cargo can be provided to shipowner. Shipowner
rechartered the vessel at a substantial loss.

 The time at which performance becomes impossible: Impossibility occurring before performance is due amounts to
anticipatory breach.

 The extent of impossibility: A party is only entitled to terminate the contract if the part which is impossible to perform
would amount to a sufficiently ‘serious’ breach of contract.

 The contract-breaker’s good faith is irrelevant.

Failure of performance
Failure of performance entitles the claimant to sue for damages, and, if sufficiently serious, to terminate the contract.

10. Termination for breach

Termination discharges both parties from further performance of their primary obligations under the contract, but the contract-
breaker’s unperformed primary obligation is replaced by a secondary (remedial) obligation.

Advantages of termination:

 Termination is a self-help remedy: can end the contract without the inconvenience and cost of seeking the court’s
assistance.

 It is often preferable for the claimant to discontinue his own performance than to continue, only to claim unsecured
damages later.

 Termination can save the claimant from a bad bargain.

Disadvantages of termination for the contract-breaker:

 He may have incurred expenses in performance which will be wasted.

 His part-performance may have conferred benefits on the claimant.

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 Contract Law Notes
 He may lose the benefit of a good bargain.

When is termination allowed?

 Breaches of conditions allow the claimant to terminate;

 Breaches of mere warranties do not.

Trietel’s “‘Conditions’ and ‘Conditions Precedent’”

Level I: Contingent or promissory obligation?

 A contingent condition is one for which neither party is responsible, but upon which both parties’ obligations to perform
or keep performing depend. There is no question of breach, the obligation to perform the contract simply does not arise.

 A promissory condition refers to something which one party has an obligation to bring about. Termination is only
possible if the obligation is promissory.

Level II: Dependent or independent obligation?

 Where the promissory condition undertaken by A is independent of B’s performance, A cannot terminate the contract on
B’s failure to perform (e.g. a tenant’s covenant to pay rent is independent of the landlord’s covenant to repair).

 Contractual obligations are normally regarded as being dependent.

Level III: ‘Entire’ or ‘divisible’ obligation?

 An obligation is ‘entire’ when it must be completely performed before the other party is obliged to perform. However,
entire obligations may cause potential harshness (Cutter v Powell: payment is conditional upon the sailor’s full
performance of his duty. Death of the sailor deprive the wife of the sailor of any rights of compensation for wages).

 In order to avoid the problems associated with ‘entire’ obligations, courts lean towards finding obligations to be
‘divisible’. Breach gives the claimant an action for damages, but does not necessarily allow him to withhold his own
performance by terminating the contract. This depends on the status of term breached.

Level IV: The status of terms – whether the breach was serious enough to deprive the innocent party of substantial benefit under
the contract.

Repudiatory breach refers to breach of an important term entitling the innocent party to terminate the contract. In Decro-Wall
International SA v Practitioners in Marketing Ltd, ‘to constitute repudiation, the threatened breach must be such as to deprive the
injured party of a substantial part of the benefit to which he is entitled under the contract’.

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 Contract Law Notes

Conditions, warranties, and innominate terms

 Condition: An essential term, a breach of which gives the claimant the right to terminate and claim damages for losses up
to termination and beyond.

 Warranty: A non-essential or subsidiary term, the breach of which yields no right to termination; the claimant can only
claim damages for losses up to the time of the action.

 Innominate term: Depends on ‘waiting and seeing’ whether the actual consequences of breach are sufficiently grave for
the claimant.

o Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd

 Termination for breach of innominate terms is available when breach deprives the claimant ‘of substantially the whole
benefit which it was intended he should obtain’. The answer depends on the court’s balancing focused around:

(i) The claimant:

a. The seriousness of the losses caused or likely to be caused to the claimant;

b. The quantitative ratio that the breach bears to the whole contract;

c. The adequacy of damages to compensate the claimant; and

d. The value of performance already received by the claimant.

(ii) The contract-breaker:

a. The quantitative ratio of the obligation breached to the whole contract;

b. The possibility, cost, and willingness of the contract-breaker to remedy the breach; and

c. The likelihood of further breaches.

How are terms classified?

Terms may be classified by:

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 Contract Law Notes
(i) Statute;

(ii) The parties’ express agreement; or

(iii) The court applying binding precedents or finding the parties’ implied intentions.

Consideration of the relevant policies at the outset is important in understanding what is at stake. Policies favouring prior
determination (i.e. at formation) support classification as ‘conditions’ or ‘warranties’; policies favouring subsequent
determination (i.e. after breach) support classification as ‘innominate terms’.

(i) Commercial certainty: Prior determination is supported by the need for certainty. It enables commercial parties to know
how they are entitled to respond on the other party’s breach.

(ii) Freedom of contract: Contract parties should be free to determine in advance which breaches will entitle the claimant to
terminate.

(iii) Avoiding bad faith terminations: This would support subsequent classification.

 The potential unfairness of termination for unmeritorious reasons is instanced by Arcos Ltd v E A Ronaasen &
Son.

Fact: UK buyer contracted with Russia seller to buy woods and buyer listed out specifications of the woods.
Seller delivered the woods to buyer with the woods not fully satisfy the specification but commercially
equivalent to that specification.

Held: HL held that where goods do not match their description, buyers are entitled to reject them even if they
are commercially equivalent. No room for elasticity.

(iv) Upholding bargains: Courts should encourage performance rather than the termination of contracts unless the claimant
has been substantially deprived of the benefit of the contract. This leans towards the innominate term classification and
the claimant’s continuation with the contract.

Nevertheless, the default position is to treat terms as an innominate term unless a court is compelled to find otherwise by reference
to statute, the parties’ express provision, or binding precedent.

Classification by statute

Statute may classify terms as either conditions or warranties (e.g. Sale of Goods Ordinance Cap 26).

Conditions:

 The seller has title to sell the goods;

 Goods sold by description correspond with their description (s15);

 Goods sold by sample correspond with the sample (s17);

 Goods sold in the course of business are of satisfactory quality unless the buyer’s attention has been drawn to or the
buyer’s examination ought to have revealed any defects (s16);

 Goods sold in the course of business are reasonably fit for the purpose that the buyer has made known to the seller (s16).

Warranties:

 Goods are sold free from charges or encumbrances in favour of third parties not disclosed or known to the buyer before
the contract, and that the buyer will enjoy quiet possession of the goods subject to the disclosed or known rights of
others.

Classification by the parties

 It is always open to the parties to agree the status (i.e. consequences of breach) of particular terms ( Bunge Corp v
Tradax). Even apparently trivial terms can be classified as ‘conditions’.

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 Contract Law Notes
o Bunge Corp v Tradax: a term is stated as condition and thus should be treated as such, despite of the trivial
nature of the term

Fact: a contract for the sale of soya bean required the buyer to give 15-day notice of readiness of loading, which
was stated as a condition. Buyer gave a shorter notice and seller claimed termination of contract and claim
damages due to the drop of soya price.

Held: HL held that the term was stated as a condition and should be treated as such, for the need of certainty.
Also the innominate term approach should only be used where it was impossible to classify the term as a
condition or warranty by reference to the term itself.

o Lombard North Central plc v Butterworth: time being ‘of the essence’ of the contract

Fact: D contracted with C for the lease of computer and D agreed to pay by installment, failing of which would
entitle C to terminate the agreement. D got into arrears and C took possession of the computer and sold it, also
requesting D to make all future payments.

Held: the term relating to prompt payment was a condition, failing of which would entitle C to terminate the
contract and claim for damages.

 Thus, classification by the parties has the clear potential for unfairness. Courts have developed a number of techniques
for controlling the unreasonable creation of conditions and termination clauses:

(i) Courts may find that the parties used the labels ‘condition’ or ‘warranty’ in their non-technical sense (i.e. simply
meaning ‘terms’ and not in their technical sense of determining whether there is a right to termination on breach;
this leaves the court free to classify the term as innominate.

 The fact that a particular construction leads to a very unreasonable result must be a relevant
consideration (Shuler v Wickman: simply calling a term (make visit to listed shop during the contract
period) a condition did not necessarily make it so.).

(ii) Courts may treat termination under an agreed ‘termination clause’ as less potent than breach of a condition
proper.

 Financings Ltd v Baldock

Fact: D signed an offer-to-buy a car on hire-purchase from a finance company. The document had been
given to him by the car dealer, which contained a clause which said that the agreement would not
binding until it has been accepted by the finance company. D paid first instalment and took the car but
later returned the car to the dealer. The car was stolen from the dealer and damaged. Not knowing of
this finance company then accepted the written offer which had been sent to them. D refused to pay and
the finance company sued for breach.

Held: D’s offer was subject to an implied condition that the car should continue in its undamaged state
and the failure of that condition, the offer lapsed.

 Dalkia Utilities Services plc v Celtech Intl Ltd

(iii) Courts may read down agreed ‘termination clauses’ to restrict their scope of operation.

 Rice (t/a Garden Guardian) v Great Yarmouth BC: a small/trivial breach of a four-year agreement does
not justify any inference that the contractor would be depriving the council of a substantial benefit of
the totality of the 4-year contract, thus the local council had no right of repudiation.

 Schuler v Wickman: simply calling a term (make visit to listed shop during the contract period) a
condition did not necessarily make it so.

Classification by the courts

 Where a binding precedent classifies the term, certainty generally requires that to be followed (e.g. time clauses are
generally treated as conditions).

 Where a term is previously unclassified, the default position is to treat it as an innominate term unless this is contra-
indicated.
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 Contract Law Notes
 The court is making a value judgment about the commercial significance of a term, and different courts may reach
different conclusions. However, a classification as a condition is more likely if the term:

(i) Involves a single performance with clearly specified time limit and sequence of performance;
 Bunge Corp v Tradax

(ii) Can only be breached in one way;

(iii) Is vital to the contract; or

(iv) Is necessary for commercial certainty.

 A term is more likely to be innominate if:

(i) It can be breached in different ways with varying degrees of seriousness;

(ii) Performance is to take place over a long time and substantial performance has been given; or
(iii) The obligation is loosely framed.

 Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA

Electing termination
A repudiatory breach does not automatically bring a contract to an end. Rather, it gives the claimant a right of election to terminate
or to affirm the contract.

(i) Termination must be clear and unequivocal;

(ii) Termination must be after repudiatory breach;

 North Eastern Properties Ltd v Coleman & Quinn Conveyancing

(iii) The claimant is not bound to elect at once; he can wait for performance or negotiate in the hope of a settlement;

 However, in Stocznia Gdanska SA v Latvian Shipping Co, ‘if [the claimat] does nothing for too long, there
may come a time when the law will treat him as having affirmed’.

(iv) Election to terminate the contract must be communicated to the contract-breaker;

(v) The choice, once made, is irrevocable;

(vi) The claimant’s termination is valid if he is legally entitled to terminate even if his real motive is to escape a contract
which is no longer advantageous because of market fluctuations and even if the reason he puts forward is invalid (e.g.
being mistaken), dishonest (e.g. Arcos v Ronaasen), or he gives no reason because he was unaware of the good reason at
the time of termination (The Mihalis Angelos).

 The Mihalis Angelos: shipowner signed a C/P with D in which contained a condition clause, “the ship was
expected ready to load” on 1 July. In fact shipowner knew the ship could not be ready until 14 July. Due to
the bombing, D could not provide cargo on time and he proposed to cancel the C/P on 17 July. Shipowner
sued D. D argue that C was in breach of condition by not be ready to load on specific date. [Held]: D was
entitled to terminate the contract and is thus not liable for breach of contract.

Loss of the right to terminate

(i) His own conduct (in affirming the contract); by operation of ‘waiver by estoppel’; or by his own subsequent breach
making him liable for damages (Fercometal SARL v Mediterranean Shipping Co SA (The Simona));
 Fercometal SARL v Mediterranean Shipping Co SA (C/P agreement allowed the charterer an option to
terminate the contract if vessel was not ready to load by 9 July. Charterer repudiated the contract

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 Contract Law Notes
prematurely. Shipowner did not accept the termination and continued the loading, but later found the vessel
was not ready on 8 July. Shipowner claimed for wrongful repudiation.)
 Held: (1) in case of wrongful repudiation by one party, the non-repudiating party has the option of either accepting the
repudiation or affirming the contract by continuing to fulfill their obligations. If the innocent party affirms the
contract, he must continue tender performance thereof; (2) an unacceptable wrongful repudiation does not cancel a
contractual right of termination. Thus charterer’s unaccepted repudiation does not affect their right of termination if
the vessel was not ready on 9 July.
(ii) The defendant’s performance when it becomes due;
(iii) The operation of a rule of law, e.g. s13(3) of the Sale of Goods Ordinance (Cap 26) which derives the buyer of his right
to reject the goods if he has ‘accepted’ the goods even if he is ignorant of the breach. S37 states that the buyer is deemed
to have accepted the goods when (a) he so communicates to the seller, (b) the buyer’s conduct in relation to the goods
delivered are inconsistent with the seller’s ownership, or (c) by lapse of time.

The effect of termination

(i) Contract-breaker’s primary obligation replaced by secondary obligation: Termination of the contract discharges both
parties from further performance of their primary obligations.
(ii) Accrued and other continuing obligations remain enforceable: Terms in the terminated contract which specifically
relate to the post-termination situation (e.g. agreed damages) or restriction of otherwise available remedies for
breach continue to apply.
(iii) Claims for restitution: The claimant may, subject to the bar on double recovery, seek:
a. Restitution of any money paid under the contract if there has been total failure of consideration from the
contract-breaker
b. A quantum meruit or quantum valebat for the reasonable value of goods or services supplied but not yet paid for
under the contract (Planche v Colburn).
The contract-breaker may:
(i) Recover part-payments for goods or land for total failure of consideration (Dies v British and Intl Mining & Finance
Corp Ltd), or the contract price earned by performance subject to the entire obligation rule;
 Dies v British and Intl Mining & Finance Corp Ltd: C entered into a contract with D and paid part of the
purchase price in advance. C did not take delivery of the goods and D discharged the contract for breach. C
successfully recover the advance payment from D, subject to D’s claim for damage in respect of loss
suffered as a result of the breach.
(ii) Obtain relief from forfeiture (Workers Trust & Merchant Bank Ltd Dojap Investments Ltd).
 Workers Trust & Merchant Bank Ltd Dojap Investments Ltd: Purchaser paid 25% deposit to vendor and
later the purchaser failed to complete on time (time being of the essence for completion). The purchaser
successfully sought relief from forfeiture of the deposit.
[Held: in general, a provision that a party in default is to pay or forfeit a sum of money is unlawful penalty
unless the sum in question can be shown to be a genuine pre-estimate of damages. Deposit is an exemption
to this general rule, these can be forfeited even where they bear no relation to the anticipated loss of the
innocent party – being treated as penalty. The court ordered the vendor to repay the purchaser the entire sum
less the amount of any damage actually suffered by the vendor due to the breach.]
Affirmation
(i) The claimant must evince an unequivocal intention (expressly or impliedly) to continue with the contract, with
knowledge of (a) the facts giving rise to the breach; and (b) his legal right to elect (Peyman v Lanjani). The claimant
does not affirm the contract by mere inactivity (Perry v Davis).
 Tele2 International Card Co SA v KUB 2 Technology Ltd
 Cook v MSHK Ltd
(ii) Irrevocability: Once the claimant has communicated his affirmation to the contract-breaker it is irrevocable, even
without reliance by or detriment to the contract-breaker (Peyman v Lanjani).
(iii) The effect of affirmation: Both parties remain bound to perform their primary obligations, but the claimant can claim
damages for any loss flowing from the breach. The claimant may also seek specific performance come the time for
performance.

Restrictions on the right to affirm

White & Carter (Councils) Ltd v McGregor sets out two circumstances when the claimant will be barred from affirming the
contract (neither applied in that case):
The contract-breaker may:
(i) Need for cooperation: the claimant faced with a repudiatory breach will have no choice but to terminate the contract
because he cannot complete his own performance without the contract-breaker’s cooperation.

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 Contract Law Notes
 Vine v National Dock Labour Board: An employee who is wrongfully dismissed can only claim damages
and not his salary.
(ii) No ‘legitimate interest’: The claimant cannot affirm if he has ‘no legitimate interest’ in performing the contract
rather than claiming damages. In Ocean Marine Navigation Ltd v Koch Carbon Inc (The ‘Dynamic’), it was stated
that
a. The burden is on the contract-breaker to show that the claimant has no legitimate interest in performing the
contract rather than claiming damages.
b. This burden is not discharged merely by showing that the benefit of affirmation to the claimant is small in
comparison with the loss to the contract-breaker.
c. The exception to the general rule applies only in extreme cases where damages would be an adequate remedy.

Affirmation was allowed in:

 The Oldenfield

 Reichmann v Gauntlett

Affirmation was not allowed in:

 The Puerto Buitrago

 The Alaskan Trader

DAMAGES

11. Introduction
Policy considerations
The innocent claimant

 Protecting his expectation of performance and of what the performance was for;

 Acknowledging his real losses from the breach (including non-pecuniary or intangible loss such as pain and suffering);

 Protecting him from unfairness (e.g. by controlling exemption clauses); and

 Encouraging him to act and react sensibly in relation to the contract (e.g. by insuring losses which may be too ‘remote’
and by requiring mitigation of losses).

The defendant contract-breaker

 Avoiding unnecessary interference with his freedom (e.g. by restricting the availability of specific performance where
the claimant can be otherwise and adequately protected);

 Protecting him from the claimant’s unforeseeable and preventable losses from his breach (e.g. mitigation and
remoteness); and

 Signaling disapproval of the breach, especially where it is difficult to quantify the claimant’s loss (e.g. nominal damages,
the possibility of stripping the defendant’s profits from breach).

General considerations

 Upholding the sanctity of contracts;

 Avoiding evidential and quantification difficulties, and the potential for fraudulent claims (e.g. reluctance to give
damages for pain and suffering);

 Avoiding indeterminate liability and opening the floodgate to claims (in respect of pain and suffering); and

 Preventing waste (e.g. the requirement of mitigation, refusal of specific performance).

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 Contract Law Notes

Damages
The orthodox position is that the normal measure of damages in a contract action is the expectation measure.

(DIAGRAM 15A: DAMAGES FOR BREACH OF CONTRACT: EXPECTATION, RELIANCE, AND RESTITUTION)

12. Expectation damages for not receiving due performance

The compensatory aim
‘Where a party sustains loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation,
with respect to damages, as if the contract had been performed’ (Robinson v Harman).

The compensatory aim of contract damages is illustrated:

(1) Only nominal damages if no loss

(2) No protection from bad bargains

(3) No claim to the contract-breaker’s profits from breach

(4) No punishment of the contract-breaker

 Addis v Gramophone Co Ltd lays down the rule that punitive or exemplary damages cannot be awarded in a purely
contractual action.

 However, in the context of tort actions, punitive damages are available. The current position will push claimants
toward non-contractual actions.

 Punitive considerations cannot be entirely excluded: increasing recognition of non-pecuniary loss/non-economic loss
and the possibility of an account of profits or damages for loss of hypothetical bargain.

Basis of calculation: loss of expectation minus gains

The basis measure of the claimant’s expectation damages is his loss of expectation minus any ‘gains’ made under the contract.

A contract can give rise to two separate expectations:

(i) Receiving the promised performance

(ii) Consequential losses

a. Consequential loss in being made worse off

b. Consequential loss in not being made better off

 Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd - where the type of damage is reasonable at the time of
formation, then damages will be recoverable for losses consequent on breach, even if the specific
consequence could not have been foreseen.

(Diagram: 15B)

The measure of expectation damages

Minimum obligation undertaken

The expectation measure is assessed by the defendant’s minimal contractual obligations, by reference to the least that the claimant
could expect.

Diminution of value, cost of cure, or loss of amenity?

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The difference between these measures

 ‘Diminution of value’: the market value of the performance the defendant promised minus that actually given;
 ‘Cost of cure’: the cost of buying substitute performance from another party including undoing any defective
performance;
 ‘Loss of amenity’: the non-pecuniary loss to the claimant in the absence of pecuniary loss.

Diminution of value and the cost of cure may produce the same amount (e.g. in sales of goods). However, in some cases, the two
measures will produce very different results.

Loss of amenity: Ruxley Electronics and Construction Ltd v Forsyth (the proposed 7’6 depth swimming pool turned out to be 6’9,
nominal award)
Ruxley has sparked controversy about the permissible scope of compensable non-pecuniary loss and, more broadly, the extent to
which the case supports the protection of the performance interest.
 The narrower interpretation is that the case simply extends the category of contracts for enjoyment for which the law
exceptionally allows damages for non-pecuniary loss.
 A broader interpretation is that it supports the protection of the claimant’s right to performance itself, rather than his
consequential loss from not getting performance:
a. Lord Mustill justified the loss of amenity award by reference to the concept of ‘consumer surplus’, which is
triggered whenever ‘the value of the promise to the promise exceeds the financial enhancement of his position
which full performance will secure’.
b. xxxxxxxxxxxxxxx

The problem of non-pecuniary loss

The general approach

Leading case is Farley v Skinner: while purchasing a house, C instructed D to conduct a survey to make sure no flight noise
affected.
 Lord Styen said: ‘the general principle is that compensation is only awarded for financial losses resulting from breach. 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’ even if they are foreseeable consequences of breach.
 Such loss is only compensabe if it falls within an established exception.

The policies in play

(i) Problems of proof and quantification
 Claimants may fake or exaggerate their mental distress. This may give rise to real danger of indeterminacy
and of inconsistent awards.
 However, this should not bar recovery for losses which are proven, well recognized, and awarded in other
areas of the law such as in personal injuries actions.
(ii) ‘Floodgates’ and avoidance of hardship to the defendant
 Since mental distress is all too foreseeable and common consequence of breach, if damages were to be
available for it, claims would multiply.
 However, contractual liability for non-pecuniary loss can only be owed to one’s contract partner who must
prove damage, causation, mitigation, and remoteness.
(iii) Protection of the claimant’s non-pecuniary motive for contracting
 Failure to protect the claimant’s non-pecuniary interest in the performance of the contract contravenes the
compensatory principle.

Contracts for enjoyment or alleviation of distress

One exception is where the purpose of the contract or of an important term is to provide enjoyment, peace of mind, or freedom
from distress, damage may be awarded for the disappointment, distress, upside and frustration caused by a breach of contract in
failing to provide the enjoyment or entertainment. (Jarvis v Swan Tours)

Other illustrations
Damages for mental distress were also awarded where:
 A solicitor failed to take effective legal steps to protect the claimant from being harassed (Heywood v Wellers);
 A solicitor’s negligence resulted in the claimant’s twins being kidnapped by their father and taken to Tunisia where he
was awarded custody of them (Hamilton Jones v David & Snape);
 A photographer failed to turn up for the claimant’s wedding day (Diesen v Sampson);

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 Contract Law Notes
 A touring holiday was spoiled by a car purchased for the purpose from a seller who knew that it was not of merchantable
quality (Jackson v Chrysler Acceptances Ltd);
 An undertaker failed to inter a corpse properly (Lamm v Shingleton);
 A cemetery owner failed to grant the claimants burial plots adjacent to their parents (Reed v Madon).

The non-pecuniary purpose

 Ruxley can be seen as an application of this category because the stipulation as to the pool’s depth was for the claimant’s
enjoyment or peace of mind.
 It is enough if the purpose for enjoyment, peace of mind, or alleviation of distress represents ‘a distinct and important
obligation’ of the contract breached.
o Whether or not the provision of enjoyment is a ‘distinct and important obligation’ is less clear cut in Ruxley
(which rests on a distinction between a contract to build a swimming pool and to build on which brings
pleasurable amenity in its depth) and Farley (which necessitates a distinction between an ordinary survey and
one which ensures the prospective owner’s quiet enjoyment).
 Five factors restrict the scope of recovery for non-pecuniary loss:
(i) In general, commercial claimants are excluded.
(ii) In Farley v Skinner, Lord Hutton said that the non-pecuniary purpose must be:
1. Important to the claimant;
2. Made a specific term of the contract; and
3. Clearly communicated to the defendant.
(iii) The loss must have been caused by, and not be too remote a consequence of, the breach. In practice,
this requires that the defendant knows the importance of the claimant’s non-pecuniary purpose and so
foresees the loss from breach.
 Thus, damages were denied in Johnson v Gore Wood. (Fact: A company brought a claim of
negligence against its solicitors, and, after that claim was settled, the company’s owner brought a
separate claim in respect of the same subject-matter.)
(iv) The awards should be kept low.
(v) Other measures must be inappropriate or yield no substantial damages.
 In Farley, cure was impossible and there was no diminution of value.

Mental distress consequent on physical injury or inconvenience

Illustrations

Damages were recovered where:

 A railway company took a family to the wrong station, leaving them to walk four or five miles home on a rainy night
(Hobbs v London & South Western Railway Co);
 A man, his wife, and child were forced to live with his wife’s parents for two years when a solicitor failed to obtain
possession of a house (Bailey v Bullock); a distinction between mere annoyance or disappointment at the failure of other
party carrying out his contractual obligation and actual physical inconvenience and discomfort caused by the breach.
 The claimant bought a house in reliance on a negligent survey which failed to mention a leaking roof and an offensive-
smelling septic tank. Damages were awarded for the distress and discomfort living there (Perry v Sydney).

The scope of physical injury and inconvenience

 Farley v Skinner extends this category insofar as disturbance by aircraft noise was regarded as physical inconvenience.
But what constitutes physical inconvenience?
o Lord Scott explains that the issue is how disappointment was caused – ‘if the cause of the inconvenience or
discomfort is a sensory experience, damages can, subject to the remoteness rules, be recovered’.
o Lord Scott notes the evidence that many of the residents in the area were not troubled by the noise. This
increases the potential breadth of this exception.

Breach of employment contracts and loss of reputation

Where loss of reputation occasions financial loss to the claimant, damages may be recoverable.

Illustrations

 A bank wrongly dishonoured a cheque causing damage to the customer’s reputation and credit ranking (Kpohraror v
Woolwich Building Society);

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 Contract Law Notes
 Breach of contract to employ an actor caused loss of anticipated publicity (Clayton & Waller v Oliver).

No claim in employment contracts

 Addis v Gramophone (wrongful dismissal of a manager entitles wages and loss of commission during the contractual
notice period) established that, where an employee is wrongly dismissed, no damages are available for the employee’s:

o Mental distress; or

o Loss of employment prospects due to the harsh and humiliating manner of his dismissal.

Qualifications on Addis v Gramophone

(i) Causation

 In Malik v BCCI, Lord Steyn and Nicholls confine Addis to cases where the breach did not cause the loss of
reputation. The breach in Addis only comprised the employer’s failure to give the employee the requisite notice:
this is remedied by damages based on payment for the notice period. In Malik v BCCI, this was a case of
financial loss, caused by stigma. Loss of reputation is compensable where it is caused by the breach, not simply
the manner of the breach.

(ii) Nature of the term breached

 Addis was further confined to cases of breach by failing to give notice.

Loss of performance to a third party

The future scope of recoverable non-pecuniary loss

Factors limiting the protection of the expectation interest

The doctrines focused on the avoidability of the loss claimed are:

(i) Mitigation

(ii) Time for quantifying loss

Other doctrines focus on loss caused by other factors:

(iii) Intervening causes

(iv) The claimant’s contributory negligence

Other doctrines exclude loss which is too:

(v) Speculative

(vi) Remote

(vii) Long past (exceeding the time limit).

Mitigation

The mitigation rule

 The mitigation rule reduces the claimant’s recovery to the extent that he has failed to act reasonably to limit or reduce his
loss caused by the defendant’s breach.

 The duty to mitigate is not a duty which attracts liability on its breach; it merely reduces or negates the damages
otherwise recoverable by the claimant.

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 Contract Law Notes
 The desirability of mitigation explains why claimant cannot affirm if he has no legitimate interest in doing so.

The standard of reasonable mitigation

 The burden is on the defendant contract-breaker to prove the claimant’s failure to mitigate.

 The claimant need not ‘take any step which a reasonable and prudent man would not ordinarily take in the course of his
business’ (British Westinghouse).

The requirement of positive action

 The first limb of mitigation requires the claimant to take positive action to minimize the loss flowing from the breach.
For example,

o A claimant who fails to receive the goods contracted for must make reasonable efforts to buy substitute
performance.

o A wrongly dismissed employee must make reasonable efforts to obtain suitable alternative employment.

 Mitigation may even require the claimant to renegotiate the contract with the contract-breaker:

o Brace v Calder held that a wrongly dismissed employee could not claim damages that would cover the cost of
his earning as he had failed to take the opportunity to reduce his losses by accepting the offer of employment.

Refraining from unreasonable action

 The second limb of mitigation prevents the claimant from incurring unreasonable expenses in mitigation. For example,

o Advertising costs to mitigate the claimant’s loss of business;

o Hire charges to replace an asset damaged or not delivered.

Gains from mitigation

 Gains flowing directly from a claimant’s mitigation must be deducted from the claimant’s damages.

 But no reductions will be made if the gains are indirect, merely collateral, or accrue from acts which are independent of,
or too remote from, the act of mitigation.

o Damages were reduced by the savings achieved when a defective turbine was replaced by a more efficient one
which used less coal than the contractual turbine (British Westinghouse).

The time for measuring loss

 The amount of compensation will depend on when damages are assessed.

 Courts normally measure the loss at the earliest date that the claimant can be expected to mitigate.

The Golden Victory

 Fac: Charterer breached the C/P on the 4th year before it came to an end.14 months later, the Gulf War was broke out,
which would have entitled charterer to repudiate the contract lawfully. Shipowner claimed against Charterer for 4 years’
damages, but HL ruled that only 14 months’ worth of damages were payable, or it would award shipowner beyond their
losses.

 It seems that damages can be reduced by taking into account events subsequent to the breach which come to the
knowledge of the court before the date of the court hearing so as to reflect the actual loss suffered.

 However, even if subsequent factors are present, damages may be reduced if the claimant unreasonably drags his heels
through the courts (Malhotra v Choudhury).

Intervening causes

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 Contract Law Notes
The claimant cannot recover for loss which was not caused by the breach.

 Levicom International Holdings BV v Linklaters – solicitors negligence claims: shifted burden on solicitor negligence
claim so that a client is automatically assumed to follow their solicitor’s advice.

Provided that it can be shown that the breach is at least an actual cause of the loss, it will be irrelevant that there are other causes
contributing to the loss (Wroth v Tyler).

The casual link may also be broken by unforeseeable factors:

 Acts of independent third parties: This will negate the claim unless the defendant was contracted to guard against that
very event (London Joint Stock Bank Ltd v Macmillan & Arthur).

 Acts of God: natural or other unforeseeable external events.

 Unreasonable acts of the claimant: In Lambert v Lewis, the claimant continued to use a trailer coupling after it was
broken, which severed the chain of causation between the defendant’s breach.

Contributory negligence

 If the plaintiff’s own negligence is such as to break the chain of causation, then this will relieve the defendant from
having to pay damages at all.M

 Where the plaintiff’s negligence is only a contributing factor, the defendant will still have to pay damages but such
damages will be proportionately reduced to reflect the proportion to which the plaintiff himself has contributed to his
own loss.

o LARCO s21(1)

Under statute: In Vesta v Butcher, it seems that the ability of the defendant to have the damages payable by him reduced will
depend on the nature of the contractual obligation which the defendant breached.

Category 1: Strict contractual obligations (contractual obligations must be completely and precisely performed)

 Where the defendant has breached a strict contractual obligation, the damages he must pay cannot be reduced to take into
account the plaintiff’s own contributory negligence.

 Most contractual obligations are strict: the defendant warrants the truth of something or guarantees a particular result
irrespective of fault.

o Barclays Bank plc v Fairclough Building Ltd

Category 2: Qualified contractual obligations to exercise care and skill, but with no independent duty of care owed in the tort of
negligence

 Where the contract term broken imposes only an obligation to exercise reasonable care and skill, (qualified contractual
obligation), but there is no duty of care existing independently of the contract no apportionment of claimant’s
contributory negligence.

AB Marintrans v Comet Shipping Co., Ltd (the “Shinjitsu Maru no.5”) [1985]

Raflatac Ltd v Eade Ltd [1999]

Greenwich Millennium Village Ltd v Essex Services Group plc [2013]

Category 3: Qualified contractual obligations to exercise care and skill, but (additionally) with an independent duty of care owed
in the tort of negligence

 Where the defendant has breached a qualified contractual obligation to exercise reasonable care and skill, and this breach
also constitutes an independent tort, it would seem that a plaintiff’s damages would be reduced to take into account the
plaintiff’s own contributory negligence.

Vesta v Butcher [1986]

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 Contract Law Notes
Speculative loss

When is loss of a chance compensable?

 A claim will be excluded if it depends on very remote and hypothetical possibilities (i.e. loss of chance to obtain an
uncertain and merely possible benefit).

o McRae v Commonwealth Disposals Commission: only reliance damages were awarded.

o Anglia Television Ltd v Reed: Claimant entitlement of expenses incurred after the contract was concluded, the
expenses preliminary to the contract ought not to be allowed.

 Courts will award damage for loss of a certain and definite benefit.

o Chaplin v Hicks: C was awarded to recover damages for loss of a chance of gaining employment. The fact that
the damages cannot be assessed with certainty does not relieve the wrongdoer of the necessity of paying
damages for his breach of contract. [beaty contest, 12 of whom would be elected for employment. C received
the invitation late.]

 The distinction between loss of a real change and purely speculative lost expectation was confirmed in Allied Maples
Group v Simmons & Simmons

Allied Maples Group v Simmons & Simmons to cases where the causation of loss rests on the hypothetical actions of a
third party. C need not prove that third party would have acted in that way, only that there was c real and substantial
chance of obtaining he benefit. If C had been properly advised by D, it would have had the chance to negotiate a better
deal with third party during an acquisition.

How is loss of a chance quantified?

 Quantification of the loss of a chance depends on the value of the expected benefit and the likelihood of the claimant
actually getting it.

 In Chaplin v Hicks, the court seemed to proceed on the claimant’s statistical chance of winning.

Remoteness

Losses may be unrecoverable for being too remote.

Justifications for the remoteness limit

 It alleviates the potential harshness of the expectation measure which may impose crushing liability on a defendant.

 It is a rebuttable presumption of the liabilities that contract parties have undertaken to be responsible for.

 It encourages efficient risk allocation; if the claimant is barred from claiming remote losses unless its risk is disclosed to
the defendant, the defendant has the opportunity to exclude or restrict liability for them, and the claimant can insure
appropriately.

The rule of remoteness (Hadley v Baxendale)

C’s claim for four years’ worth of transaction against the bank was not too remote and therefore was allowed by HL. Whether the
loss was too remote or not is judged on the basis of contemplations (or knowledge) at the time of the contract, rather than at the
time of breach. (Jackson v Royal Bank of Scotland:)

Set out in Hadley v Baxendale, Recoverable loss is divided into two types:

(i) Those ‘arising naturally, that is, according to the usual course of things, from such breach of contract itself’:
knowledge of these losses is imputed to the defendant as a reasonable person even if he does not actually know it;
and

(ii) ‘Such [loss] as may reasonably be supposed to have been in the contemplation of both parties’: the claimant must
prove the defendant’s actual knowledge of the special circumstances aggravating the claimant’s loss.

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 Contract Law Notes
a. The court can increase the scope of recoverable loss under the second limb by being more willing to infer the
relevant knowledge from the circumstances (Simpson v London and North Western Railway: late delivery of
specimens for exhibition due to D’s fault, C claimed for damages for loss of profit. Held: D was liable as it had
the knowledge of the special circumstances.).

b. Conversely, the court may restrict liability by increasing the specificity of the loss which must be foreseeable
and finding such knowledge absent in the circumstances (Horne v Midland Railway Co: D contracted to carry
shoes to London on a particular date. Due to the late delivery, C lost opportunity of selling shoes at an
exceptional high price. Held D was not liable as he would not have expected C would loss an exceptional high
profit.).

Application of the two-limb test in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd

Fact: C ordered a large boiler from D in contemplation of dyeing contract. D was aware of the nature of C’s business, and it was
intended for the boiler to be put to use as soon as possible. The delivery was delayed by five months. C claimed for loss of profit
during the period the delivery was delayed, and they lost a particular lucrative contract.

Held: C could only recover losses which were in the reasonable contemplation of the parties which include the loss of profit due to
the lack of use of boiler, but C could not claim for the loss of the exceptionally lucrative contract during the delayed period, since
D was unaware of this contract.

However, Heron II disapproved the statement in Victoria Laundry: the ‘reasonable foreseeability’ test

Heron II: ship carrying sugar was late and charterer claimed against shipowner for the loss of profit due to the drop of sugar
price.

Held: in a case like Hadley v Baxendale, it is not enough that in fact C’s loss was directly caused by D’s breach of contract
causing delay in delivery. The crucial question is whether, on the information available to D when the contract was made, he
should, or the reasonable man in his position would, have realized that such a loss was sufficiently likely to result from the
breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should
have been within his contemplation.

The Achilleas modification

 The charterers returned a vessel late causing the owners to lose the profits on a lucrative following charter.

 The owners were denied the loss of profits (the follow-on charter) but only the damages for the compensation of
difference between the charter rate and the market rate. [Although the arbitrators and the courts below had found that this
loss was clearly foreseeable under the first rule in Hadley v Baxendale.]

 It was held (HL) that the real question is the contracting parties’ common intention in respect of loss occasioned by
relatively short delay in redelivery, rather than the entire follow-on charter, because they could neither control that loss or
quantify it.

 Their Lordships opined that the charterers would not have had this sort of loss in their mind or contemplation at the time
of contracting because (1) there was an unusually volatile market after the contract was made, and (2) the charterers had
no knowledge of the Cargill charter. The charterer could neither control that loss nor quantify it.

Time limit

The law draws a line beyond which a claimant cannot seek a remedy from the courts:

 Sections 5 and 8 of the Limitation Act 1980 provide an action founded on a simple contract must be brought within six
years.

 The cause of action accrues in a contract when the breach occurs, or when the claimant elects to terminate the contract
for an anticipatory breach.

 Time runs even if the claimant was unaware or could not have been aware of the existence of his cause of action until
after his time limit expired.

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o But where the claimant’s action is based on fraud or mistake, or where the defendant has deliberately concealed
facts relevant to the claimant’s right of action, time does not begin to run until the claimant discovers the fraud,
concealment, or mistake.

13. Reliance damages for breach of contract

Reliance loss refers to the claimant’s expenditure in preparing for or performing his contractual obligation which is wasted by the
breach.

Unavailable if the claimant made a bad bargain

 The claimant would normally prefer the expectation measure because his expectation of being made ‘better off’ includes
and normally exceeds his expectation not to be made ‘worse off’.

 The reliance measure is only preferable if a claimant has made a bad bargain (i.e. where his expenditure exceeds his
expected profits from the defendant’s full performance), but this is when he is barred from doing so – to allow him to
recover more for his reliance than his expectation would allow him to escape his bad bargain.

o C&P Haulage v Middleton: damages for breach of contract should not put the claimant in a better financial
position than if the contract had been properly performed.

 The defendant has the burden of proving that the claimant made a bad bargain. It is the defendant’s breach which
necessitates the assessment of damages, so any uncertainties should fall on him.

Unavailable where expectation loss is too speculative

The underlying assumption is that contract parties generally contract to improve their positions; where the extent of that
improvement is impossible to quantify, it is reasonable to assume that the claimant would at least have recovered his costs (and so
be no worse off) if the contract had been performed.

 Anglia Television Ltd Reed (This was rejected in The Mamola Challenger)

 McRae v Commonwealth Disposals Commission

It was held that reliance losses are a species of expectation losses. As such, damages for reliance loss can only be claimed if the
gross profit (revenue) from the contract would have at least equal. When the claimant’s loss was entirely mitigated there was no
other loss to be compensated. (The Mamola Challenger: charterer canceled a C/P with the hire price below the market price, no
damages incurred in case of termination of the C/P)

14. Restitution of benefits conferred

Whilst the expectation and reliance measures focus on the claimant’s loss, the restitutionary measure is primary concerned with
the defendant’s gain.

The claimant will prefer to recover the benefit he conferred on the defendant under the contract where:

(i) His expectation and reliance losses are too speculative to quantify;

(ii) The benefit conferred is substantially the claimant’s whole loss; or

(iii) The claimant has made a bad bargain.

Restitution is available for total failure of consideration. This recovery is subject to two limits:

(i) The contract must be terminated

 Restitution is only available if the contract is terminated for breach: the defendant’s enrichment is justified
by the contract until the contract ceases to govern the parties’ rights and remedies; only then does the
enrichment become unjust and liable for return.

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 However, if exceptionally, the contract does not govern the benefits transferred, restitution can be awarded
without termination of the contract since it would not undermine the contractual valuation and risk
allocation (Roxborough v Rothmans of Pall Mall Australia Ltd).

(ii) Total failure of consideration in money claims

 A claimant can only recover money if there has been a total failure of consideration in the sense that he has
received nothing of the performance he contracted for.

The restitution available to parties who are able to satisfy the requirements set out at (i) and (ii) above is described below:

(i) The innocent party’s claim for restitution of non-monetary benefits

 A party who has completed his non-monetary performance can sue for his expectation, the ‘agreed price’.

 If he has partially performed before terminating the contract for breach, he can claim a quantum valebat
(the reasonable value of the goods supplied) or a quantum meruit (the reasonable charge for the services
supplied).

o De Bernardy v Harding

(ii) The contract-breaker’s restitutionary claim for money and non-money performance

 The contract-breaker should also be able to claim for failure of consideration to recover money paid under
the contract once it is terminated.

o Dies v British and Intl Mining and Finance Co Ltd (prepayment not expressed to be deposit)

 The contract-breaker should also be able to recover non-money benefits for failure of consideration.

(iii) How much can be claimed?

 Restitution can be claimed alongside reliance if it does not amount to double recovery.

 Restitution cannot be combined with a claim for expectation damages since this would amount to double
recovery.

 Unlike claims for reliance damages on breach, claims for restitution on total failure of consideration are
available even if they allow claimants to escape from bad bargains.

o Bush v Canfield (flour price drop from 7 at the signing of contract to 5, the delivery date. C paid
deposit and D failed to make the delivery. Refund of the prepaid amount is enough for the breach)

o Wilkinson v Lloyd

NB: quantum valebat: an action to claim the value of goods that were sold without any price having been fixed, when there was an
implied promise to pay as much as they worth

Quantum meruit: “the amount one deserves” or “as much as one has earned”. In most cases, it denotes a claim for a reasonable
sum in respect of service or goods supplied to the defendant. Claim for quantum meruit may arise where the parties:

(i) have not agreed a contract/quasi-contract

(ii) Have not fixed a price for the service or goods supplied

(iii) Have an agreement to pay a reasonably sum for the service or goods supplied

(iv) Have agreed a scope of work under the original contract and the work carried out falls outside of that scope

DURESS

4 Categories of actionable duress:

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i) Duress to the person
ii) Duress to property
iii) Economic duress
iv) Unlawful act duress

1. The justification for duress

Inadequacy of the overborne will theory

Overborne will theory: the victim’s will is being overborne and his consent vitiated.

The theory is rejected in DPP v. Lynch as a victim of duress submits knowingly and intentionally. HoL recognised that duress does not make the
victim’s action involuntary but merely deflected. (The victim knows what he is agreeing to and very much wants to agree)

Contract procured by duress is voidable.

Duress is largely but not 100% about consent under pressure because valid consent does not require freedom from pressures. Ordinary pressures
(interest rates set by the lender) will not excuse the party from contractual responsibilities. Duress is about illegitimate pressures.

Illegitimate pressure
Universe Tankships Inc of Monrovia v. International Transport Workers Federation established that: illegitimate pressure occurs when the
victim’s intentional submission arising from the realisation that there is no other practical choice open to him but to submit the demands. The law
will deem the victim’s consent to be vitiated.

The illegitimate pressure view of duress explains why:

i) The enforcing party must be tainted in the sense that he has applied or knows of the pressure.
ii) Duress makes contract voidable analogous to misrepresentation but not void like mistake (focuses on the lack of consent)
iii) The standard of causation is less than the overborne will theory. The illegitimate pressure needs not to be the overwhelming cause
of the victim’s consent to qualify as duress.

2. What must be proved?

In Universe Tankships Inc of Monrovia v. International Transport Workers Federation, HoL held that the claimant must show that:

1) The pressure applied by the enforcing party is illegitimate

 Unlawful conducts of threats are generally regarded as illegitimate.
 Lawful conducts of threats are generally legitimate, unless they are ‘immoral or unconscionable’ when coupled with an
illegitimate demand.
 The more unfair the demand, the more likely that the threat used to back it up is illegitimate.
2) The illegitimate pressure induced the claimant to enter the contract
 The precise degree of causation varies.
3) [ONLY ECONOMIC DURESS REQUIRES] The claimant had no practicable alternative but to submit the demand.

3. Duress to the person and to property

Doing or threatening to do violence / detain you or someone in a close relationship with you to induce your consent to a contract, illegitimate
pressure has applied.

(Barton v. Armstrong); (Duke de Cadaval v. Collins)

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 Contract Law Notes
The threat against even a stranger should be enough if the claimant genuinely believed that submission is the only way to prevent the stranger
from being injured or worse.

The same applied if I threaten to damage, take, or keep your property (Asley v. Reynolds); (Maskell v. Horner)

OR your money (Crescendo Management Pty Ltd v. Moral Westpac Banking Corp)

In duress to person, it is enough if the threat to the person contributed in any way to his decision to contract. It only needs to be one cause of the
decision.

To enforce the contract, the enforcing party must show that the illegitimate had no effect whatsoever (has no influence AT ALL).

Key case: Barton v. Armstrong

In duress to goods, the claimant must show that the threat was a ‘significant cause’ of his consent to the contract. (Dimskal Shipping Co SA v.
ITWF) The requirement is easily met in practice.

e.g. In Astley v. Reynolds, the court was prepared to assume that A ‘might have such an immediate want of his property that would not do’, A
does not need to prove it.

4. Economic duress: threats to breach a contract

The most important application of economic duress is in the area of one-sided contract modifications: where one party threatens to breach an
existing contract unless the other agrees to i) pay more; or ii) accept less.

The traditional doctrine of consideration suggests that such renegotiation can never be enforced since there is no additional consideration to
support the promise. However:

1) The promissory estoppel doctrine can enforce the promises of the ‘same for less’ in limited circumstances, but not if the promisee had
applied illegitimate pressure since it would not be inequitable for the promisor to renege on the promise.
2) Williams v. Roffey Brothers has enlarged the consideration requirement to include “practical benefit’ and this covers the promise to
perform an existing contract. Economic duress can control the limits of renegotiations of ‘more for the same’.

2 considerations oppose the recognition of one-sided contract modifications induced by a threat to breach (pro-
duress):
1) Promoting certainty and security of contracts
 The party should not be allowed to threaten the other party with breach unless he pays more.
2) Preventing opportunistic exploitation
 The party should not be allowed to take advantages of:
o Need for timely performance
o Difficulty in finding substitute performance
o Remedial regime may not compensate adequately
 But renegotiations in the face of impending insolvency should warrant some recognition as the inadequacy of contractual
remedies is exacerbated if a party becomes insolvent and judgment-proof against any claim.

4 considerations support the recognition of one-sided renegotiations (anti-duress):

1) Significant change of circumstances subsequent to contract formation may make performance so difficult for one party that he must
seek some adjustment if he is to complete his performance while it is insufficient to frustrate the contract
 A party facing impending insolvency has no incentive to perform.
 Distinction between threats and warnings:
o Threats (illegitimate): where the threatening party has a choice whether to carry out.
o Warnings (legitimate): where the warning party is simply giving notice of his inevitable non-performance without
renegotiation.
2) Protect the recipient of performance when it is not viable without renegotiation
 A party in difficulty may be better off breaching a contract to cut his losses and he has no incentive to perform if the law
does not recognise the renegotiation. (Williams v. Roffey Brothers: promise of extra-payment to finish the decoration on time.

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 Contract Law Notes
Held: a promise to make bonus payment to complete work on time was enforceable if the promise obtained a practical
benefit and the promise was not given under duress of by fraud.)
3) Reasonable renegotiations to facilitate the completion of contractual performance may be economically efficient.
 It may be cheaper overall to pay more to get the job done and it may minimise the waste and inconvenience between parties
already embarked on a project.
 CONCERN: it may give parties the incentive to bid low in the hope of renegotiating later.
4) Values of cooperation and mutual accommodation also support contract renegotiations when one party gets into difficulty.
 This rests on a relational view of contract as an essentially cooperative enterprise in the nature of joint ventures.

The current causation-led approach

A threat to breach an existing contract is a threat of unlawful action and has generally been treated as illegitimate pressure. (Kolmar Group AG v.
Traxpo Enterprises Pty Ltd)

The causation requirement must be raised to prevent a finding of economic duress. In Huyton v. Cremer, it is established that economic duress is
less serious than duress to person or to property as there is a stronger causal connection required for economic duress.

The basic ‘but for’ test: ‘the illegitimate pressure must have actually caused the making of the agreement, in the sense that it would not otherwise
have been made either at all or in the terms in which it was made. The pressure must be decisive or clinching.’

Also, the claimant should show that he had no practicable alternative but to submit to the demand. (Not inflexible)

To decide whether sufficient causation is present, there are four elements set out in Pao On v. Lau Yiu Long (inconclusive).

Whether the victim:

a) protested
b) had a practicable alternative open to him such as an adequate legal remedy
c) was independently advised
d) acted promptly to avoid the renegotiation

Cases that have accepted economic duress (Appendix)

 Atlas Express v. Kafco (Importers and Distributors) Ltd
 The Atlantic Baron
 B&S Contracts and Design Ltd v. Victor Green Publications Ltd
 Adam Opel v. Mitras Automotive (UK) Ltd

Cases that have rejected economic duress (Appendix)

 The Siboen and the Sibotre
 Pao On v. Lau Yiu Long

The role of ‘no practicable alternative’

This is an independent and additional requirement of economic duress. The ‘but for’ test could lead too readily to relief being granted. It would
not cater for the obvious possibility that, although the innocent party would never have acted as he did, but for the illegitimate pressure, he had a
real choice to pursue alternative legal redress.

Economic duress: Adam Opel v. Mitras Automotive

No economic duress as the court found practical alternative: DSND Subsea v. Petroleum Geo-Services

The illegitimate pressure based approach

Instead of the causation-led approach to economic duress cases, the focus of the inquiry should switch to the illegitimacy of the pressure applied
with the causation requirement stabilized at the level of the ‘but for’ standard. Three variants have been suggested.

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 Contract Law Notes
1. The legitimacy of the threat can be made to depend on the presence or absence of good faith of the threatening party.
 Variations negotiated in bad faith (having no honest belief in the reasons advanced for the demand) are unenforceable.
 The concept of good faith is unstable.
 Burrow suggests that a threatened breach of contract should be regarded as illegitimate if aimed at exploiting the claimant’s
weakness rather than solving financial or other problems of the defendant, but not ‘if the treat is a reaction to circumstances
that almost constitute frustration or if it merely corrects what was always clearly a bad bargain.’
2. Treating all threats to breach as illegitimate pressure
 Only have to be ‘a’ reason for the claimant’s consent but no need to be an overwhelming one.
 Reasons:
o Courts should uphold the integrity of the original contract
o English law does not distinguish between good faith and bad faith threats to breach
 Case: South Caribbean Trading Ltd v Trafigura Beheer BV

The demand
The legitimacy of the pressure depends on the nature of the threat AND the nature of the demand. A similar question is to ask whether it was
commercially reasonable to seek renegotiation and whether the renegotiated terms are fair and equitable.

5. Other forms of economic duress

The court will take into account any relevant statutory background in determining the legitimacy of the threat.

e.g. A trade union’s threat to withdraw labour could taint any contract induced by the threat with duress (Universe Tankships v. International
Transport Workers), but the presence of statutes protecting trade unions from claims for the tor of intimidation may persuade courts not to find
duress.

6. Lawful act duress

A lawful threat may be illegitimate (CTN Cash and Carry v Gallaher Ltd), although it must ‘at least be immoral or unconscionable’ (Alf
Vaughan & Co Ltd v. Royscot Trust plc).

Legitimate lawful pressure

1) Threat not to contract
 Duress was rejected in Smith v. Charlick Ltd
2) Refusal to waive an existing contractual obligation
 Alec Lobb Garages Ltd v. Total Oil Ltd
 Duress was denied in Alf Vaughan v. Royscot Trust plc
3) Exercise of a right for legitimate purposes
 R v. Her Majesty’s Attorney-General for England and Wales (The right to transfer soldiers)
4) Threats to sue to enforce an honest and even mistaken claim
 CTN Cash and Carry v. Gallaher (no duress as it was in good faith)
 Lawful act duress would not be lightly found in arm’s length commercial dealings where certainty is paramount.

Illegitimate lawful pressure

First case for lawful act duress: Borrelli, Cornforth Hill, Christensen (Liquidators) v. James Ting

The court held that:

i) Economic duress can include unconscionable although lawful action for improper motive.
ii) T’s opposition ‘was not made in good faith, but for an improper motive’, and was ‘unconscionable’.
iii) The liquidators had no reasonable or practical alternative but to make a deal with T, who had them over a barrel.

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 Contract Law Notes
Three categories of cases can be interpreted as varieties of lawful act duress:

1. Blackmail
 Universe Tankships v. International Transport Workers
 Blackmail is often a demand supported by a threat to do what is lawful (e.g. to report criminal conduct to the police)
 Blackmail is unlawful under the Theft Act 1968 s 2(1)
2. Salvages cases
 Threats not to rescue life or property on ships unless extortionate terms are agreed.
 The Port Caledonia
3. Threatening prosecution to the threatened party or his loved one
 Historically decided as cases of actual undue influence but belong more naturally in the category of lawful act duress.
 Mutual Finance Ltd v. John Wetton & Sons Ltd
In a non-commercial context, a useful starting point in deciding whether it is illegitimate in the context of duress is to consider whether the
lawful act has been used to further a proper purpose.

The test for causation for lawful act duress should be the ‘but for’ test to be proved by the claimant.

Overview of duress: requirements and policies

ENFORCEABILITY: CONSIDERATION, FORMALITIES, PROMISSORY ESTOPPEL

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15. Consideration
The basic idea and its justification

In order to acquire the right to enforce another’s undertaking, a party must undertake to give, or actually give, something
stipulated by the other as the price for his undertaking.

Justifications

(i) Consideration as evidence of the existence and seriousness of the undertakings;

(ii) Welfare maximisation: Since exchanges tend to transfer property or services to those who value them most highly,
the consideration requirement is the best indicator of value-maximising transactions;

(iii) Reciprocity: The intuitive justice of exchange symbolizes an ideal of fairness;

(iv) Consideration marks the boundary of appropriate legal involvement;

The requirement of nexus

Consideration must move from the claimant

 X can claim Y* because he has paid X* for it.

 However, consideration need not move to the promisor. Y can stipulate that X* could go to Z (a third party) rather than Y
(the promisor).

 The privity rule: A party who has not provided consideration for a promise cannot enforce it.

Consideration must be requested by the promisor

 Consideration must be given in return for, not in reliance on, the promise.

o Combe v Combe

 However, the court was prepared to imply a request of forbearance in Alliance Bank v Broom – forbearance to sue
without waiving the right of action constituted sufficient consideration.

Past consideration is not good consideration

Since consideration must be given in response to the promise, it cannot logically be something given or done before the other’s
promise was made. Consideration is past when:

(i) It has already been given for a reciprocal promise and cannot buy additional promises from the same promisor.

 Roscorla v Thomas

(ii) Its performance pre-dates the promise sought to be enforced

 Eastwood v Kenyon

 Re McArdle

An exception would be when the doctrine of implied assumpsit applies: the promisee’s actions are part of the same overall
transaction.

 Lampleigh v Brathwait

In Pao On v Lau Yiu Long, the Privy Council held that a claimant must show that:

(a) He performed the act at the promisor’s request;

(b) It was clearly understood (implied) at the time of the request that he would be rewarded for the act;
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 Contract Law Notes
(c) The eventual promise is one which would have been enforceable if it had been made at the time of the act.

The requirement of ‘value’

The definitions of valuable consideration

(i) Benefit or detriment

(ii) Executed or executory consideration

(iii) Factual or legal

 Consideration may be denied although there is factual benefit or detriment, and consideration may be found
although there is no factual benefit or detriment.

 This finds the sharpest expression in the traditional rule that the promise confers no legal value by performing
his pre-existing contractual duty.

 This rule has been reversed by Williams v Roffey Brothers, although it is unclear how far this applies to other
contexts where courts have traditionally insisted on a legal value.

(iv) Request

 The defendant should ask for something in return for his promise, an act or a promise by the offeree.

 Value is subjective and, if a party requests something, then he must value, and be factually benefited by, its
receipt.

(v) Tangible and intangible value

 Performance with economic value readily qualifies as consideration, but the difficulty arises with non-
monetary performance of doubtful economic value to the promisor.

 Intangible value as consideration in Shadwell v Shadwell.

(vi) Good reason for enforcement

 Atiyah: ‘it seems highly probable that when the courts first used the word “consideration” they meant no
more than that there was a “reason” for the enforcement’.

(v) ‘Invented’ consideration

 Treitel argues the possibility of English courts ‘inventing’ consideration, by treating an act or forbearance as
consideration, although it was not the promisor’s purpose to obtain it (Chappel v Nestle), and although there
is no prejudice to the promisee (e.g. Shadwell v Shadwell).

The pros and cons for enforcement

Pro-enforcement factors:

(i) Recognizing performance actually bargained for (i.e. desired) when there is some technical obstacle to its qualifying
as consideration (e.g. ‘invented consideration’ in Chappell v Nestle, and ‘practical benefit’ in Williams and Roffey
Brothers);

(ii) Recognizing the subjectivity of values and respecting the parties’ intention (e.g. nominal consideration);

(iii) Protecting the promisee’s reliance (e.g. forbearance to sue);

(iv) Preventing the promisor’s enrichment at the promisee’s expense (e.g. the exception to the past consideration rule);

(v) Encouraging finality in dispute resolution (e.g. compromises and forbearnaces); and

(vi) Imposing responsibility otherwise regarded as just.

Anti-enforcement factors: The law is against enforcing:

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 Contract Law Notes
(i) Gifts and other transactions in the private domain, because the law’s involvement may do more harm than good (e.g.
the invalidity of motive and intangible benefits);

(ii) Wholly one-sided bargains (e.g. illusory consideration); and

(iii) Extorted promises (e.g. in exchange for performing an existing duty).

Consideration need not be adequate

Consideration must have some value but need not be of equivalent value to that which is promised in return. It is for the parties to
determine what they value and how much they value it.

The concept of freedom of contract, together with the practical inconvenience of proving adequacy, means that the court will not
inquire as to whether the value of the consideration adequately reflects that which is promised in return.

Trivial and nominal consideration

Nominal consideration was treated as sufficient consideration in:

 Chappell v Nestle

The rule that consideration need not be adequate can allow form to triumph over substance – gratuitous promises are enforceable
if they are ‘dressed up’ as bargains. As Atiyah observes: ‘a promise for nominal consideration is just about the clearest possible
indication that the promisor intended his promise seriously and intended to give the promisee a legally enforceable right’.

However, subject to two limits:

(i) If the consideration alleged is incontrovertibly less than the promise sought to be enforced, the promise is
unenforceable (e.g. I cannot enforce your promise to pay £500 in exchange for my paying you £1).

(ii) The contractual right purchased by nominal consideration is less secure.

Motive and other consideration valueless in law

Motive

The promisor’s mere wish to confer a benefit is unenforceable, since nothing comes back the other way in exchange for it. This is
also why past consideration is not good consideration.

 Thomas v Thomas

Conditional gifts

If the promise is to confer a benefit on the happening of an event which is indepdendent of the promisee’s action, there is only an
unenforceable conditional gift. But if the condition consists of some action by the promisee, it is likely to be regarded as good
consideration.

 Sending in chocolate wrappers in Chappel v Nestle

 Marrying a particular person in Shadwell v Shadwell

Intangible benefits

Intangible benefits are not consideration in the ‘eye of the law’. Thus, the following were held to be unenforceable:

 A father’s promise in consideration of a son’s ‘natural love and affection’ (Bret v JS);

 A father’s promise in exchange for his son’s promise not to annoy his father with complaints (White v Bluett).

However, intangible benefits are treated as consideration where the courts think just:

 Dunton v Dunton

 Ward v Byham

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 Hamer v Sideway

 Pitt v PHH Asset Management Ltd

Illusory consideration

Consideration may be illusory and invalid in cases of:

(i) Impossibility: at the time of contract formation, the promisee’s performance is known by both parties to be
physically or legally impossible (Clifford (Lord) v Watts); where the impossibility of performance is unknown to
both parties, the contract may be void for mistake.

(ii) Discretionary promises: where the promisee’s performance is entirely discretionary, as where the promises to do
something ‘if I still feel like it when the time comes’.

(iii) Un-induced performance by the promisee: consideration must be intended by the promisee (Arrale v Costain Civil
Engineering Ltd).

Compromise and forbearance to sue

Where X has a claim against Y, X provides consideration for Y’s promise if X:

 Forbears from suing on his claim (Alliance Bank v Broom);

 Compromises his claim.

Pre-existing duties
The question of whether pre-existing duties are treated as valid consideration depends on whether the promisee’s pre-existing duty
was imposed:

(i) By the general law;

(ii) By a contract with a third party; or

(iii) By an existing contract with the promisor.

The orthodox position is that, while (ii) is good consideration, (i) and (iii) are not.

Pre-existing duties imposed by public law

The general rule is that a promise to perform an existing public duty is no consideration for a reciprocal promise.

 Collins v Godefr l.oy

However, courts can circumvent the general bar by ‘finding’ that more was promised than was strictly owed under a pre-existing
legal duty.

 Glasbrook Bros v Glamorgan

 Ward v Byham

Pre-existing duties owed to a third party

The performance of an existing contractual duty owed to a third party is generally regarded as good consideration.

 Shadwell v Shadwell

Pre-existing duties owed to the other party

The traditional position that B’s promise of ‘the same’ is not good consideration for A’s promise to pay more has been overturned
by Williams v Roffey, where the promise to perform a pre-existing contractual duty was recognized as conferring ‘practical
benefit’ on the party promising to pay more of it.

Contract modifications
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Contract parties can make an enforceable agreement to end or vary their contract, so long as there is consideration for the
reciprocal promise to depart from the original contract.

Agreements to end the contract

Where both parties owe outstanding obligations to each other, each party provides consideration for the release from his own
obligation by releasing the other party from his.

Agreements to modify the contract

The parties may:

(i) End the existing contract and make a new contract: the existing contract can be ended by satisfying the requirements
of consideration and a new contract entered, on different terms, in relation to the same subject matter.

(ii) Modification supported by consideration on both sides: A modification is enforceable if each party gives
consideration by conferring a new benefit or assuming a new burden.

(iii) Modifications which can only benefit one contracting party:

a. The promisee gives ‘the same for more’;

b. The promisee gives ‘less for the same’.

‘The same for more’: pre-existing contractual duty owed to the other party

The traditional analysis: pre-existing contractual duty provides no consideration

 Stilk v Myrick

 Traditional exceptions to the traditional rule: a promise to pay more is enforceable if there is consideration in the ‘eye of
the law’ (i.e. legal consideration). This is satisfied where:

o The promisee gives something ‘more’ than he was obliged to under the original contract, as in Hartley v
Ponsonby.

o The parties agree to end the existing contract and make a new contract on different terms relating to the same
subject matter.

o A compromise is entered into, where there is any doubt about the parties’ obligations.

Reversal of the traditional analysis: practical benefit is valid consideration

 Williams v Roffey Brothers

o Consideration need not comprise of any legal benefits or detriments additional to those contained in the existing
contract. Additional practical benefit moving to the promisor is enough.

o Any concerns about the promisee applying improper pressure to induce the promisor’s agreement to pay more
should be dealt with by the doctrine of economic duress.

The scope of practical benefit

The court in Williams v Roffey identifies four practical benefits to RB:

 W’s continued performance;

 Avoiding the trouble and expense of obtaining a substitute;

 Avoiding the penalty payment for late performance under the main contract; and

 RB’s promise to pay more only as each flat was completed gave W the incentive to perform in a more orderly manner;
this allowed RB to coordinate its other subcontractors more effectively and efficiently towards timely completion of the
main contract.

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How far does practical benefit apply?

 The recognition of ‘practical benefit’ can logically extend beyond contract modification to contract formation.

 What are previously regarded as illusory consideration, bad faith compromise or forbearance, merely gratuitous options,
etc. could now support the enforcement of reciprocal promises.

 However, the Court of Appeal in Re Selectmove Ltd has refused to extend the finding of ‘practical benefit’ in promises of
‘the same for more’ to promises of ‘less for the same’.

The current status of Stilk

 Although Williams v Roffey explains the outcome in Stilk v Myrick in terms of preventing even the chance of duress (i.e.
a policy issue), this does not explain the different outcome in Williams v Roffey.

 In substance, while Williams v Roffey affirms the need for fresh consideration to enfore an additional promise, it has
overruled Stilk v Myrick as to what counts as fresh consideration.

Consideration and duress

 Before Williams v Roffey, the risk of improper pressure in inducing one-sided contact modifications did not arise because
the Stilk v Myrick rule automatically barred such obligations for lack of consideration.

 In The Alev, Hobhouse J said: ‘now that there is a properly developed doctrine of the avoidance of contracts on the
grounds of economic duress, there is no warrant for the Court to fail to recognize the existence of some consideration
even though it may be insignificant and even though there may have been no mutual bargain in any realistic use of the
phrase’.

‘Less for the same’: part performance

The rule in Foakes v Beer

The general rule is that a promise to accept part-payment of a debt in discharge of a whole debt is unenforceable because there is
no consideration.

Traditional exceptions to the rule in Foakes

Promises to accept less are enforceable if:

 I give something additional for the dispensation granted by you;

 I dispute your claim and the modification amounts to a compromise of your claim;

 Your claim is unliquidated (unquantified) and the new agreement merely fixes the sum I owe;

 The promise is made to third parties (e.g. you agree to accept less from a third party in exchange for not suing me).

Practical benefit is not good consideration for promise to accept less

 If the practical benefit from promises of ‘the same for more’ is good consideration, so should the practical benefit derived
from promises of ‘less for the same’. But this logic was rejected in Re Selectmove Ltd on the ground that Foakes v Beer
did not do so after considering this factor. Any extention of ‘practical benefit’ should be made by the House of Lords, ‘or
more appropriately, by Parliament after consideration by the Law Commission’.

The problem of pressure

 If Williams v Roffey were extended to counteract Foakes v Beer, the focus for controlling the enforceability of such
modifications would again shift to economic duress.

 But Treitel argues that ‘that concept may not go far enough’ – the justice of the outcome in Foakes v Beer may not be
achievable even by expanding the concept of duress.

 The same problems arise: (a) in determining the scope of economic duress (where does ‘practical benefit’ end and ‘no
practicable alternative’ begin?); and (b) of an ‘all or nothing’ response (the modification is totally unenforceable if tainted
by duress and wholly enforceable if it is not).
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The roles of consideration and promissory estoppel in modifications

 The doctrine of promissory estoppel allows the limited enforcement of relieving (i.e. ‘less for the same’) promises which,
absent consideration, induce reliance in qualifying circumstances.

 It undoubtedly undermines the rule in Foakes v Beer.

 The idea is that X should be held to his promise not to enforce his strict legal rights against Y to the extent that it would
be inequitable not to do so.

o D&C Builders v Rees

Consideration: an assessment
Criticisms of the doctrine:

 Over-inclusive: includes sentimental value, trivial value, bad faith compromises

 Under-inclusive: unenforceability of commercial modifications and options

 Lack of internal coherence: uncertain scope of ‘practical benefit’

 This gives an unsatisfactory picture of a doctrine plague by uncertainty and inconsistency, flowing from the court’s
liability to manipulate the abstract concept of ‘value’ in response to the perceived intention, reliance, pressure, and
fairness factors.

Future of consideration
 It might be suggested that mere reliance by the promisee could be enough (Antons Trawling Co Ltd v Smith found a
binding contract, by sole virtue that the promisee had relied on the promise).

o Nevertheless, if reliance replaces consideration as the test for enforceability then the remaining strict rules of
consideration may seem redundant.

 Intention may be considered to replace consideration. On this view, consideration is simply evidence of the primary
question about the intention of the parties.

o In White v Jones, ‘our law of contract is widely seen as deficient in the sense that it is perceived to be hampered
by the presence of an unnecessary doctrine of consideration’.

16. Promissory estoppel

Undertakings which induce reliance may have legal effect via doctrine of promissory estoppel, even absent consideration or
formality.

The protection of reliance in contract formation

By statute, tort, and unjust enrichment

 Where the pre-contractual negotiation is tainted by a misrepresentation which induces reliance, the misrepresentee may
have a claim under the MO or the common law torts of deceit and negligent misrepresentation.

 Restitution is required if one party’s reliance results in unjust enrichment to the other.

 The response to a tort is to remove the harm caused, whether by invalidating any resulting contract or awarding damages
to negate the effect of the tort.

By estoppel

 Reliance on promises unsupported by consideration on formality may generate independent liability via the doctrine of
promissory estoppel.

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 Promissory estoppel is based on the protection of reliance, but this is often achieved by holding the promisor to his
promise and so protecting the promisee’s expectation. On this view, estoppel is an alternative (to consideration) to the
contractual enforcement of undertakings.

The requirements of promissory estoppel

 The foundation was laid by the House of Lords in Hughes v Metropolitan Railway Co, and resurrected by Denning J in
Central London Property Ltd v High Trees House Ltd:

 The requirements of promissory estoppel are that:

(i) A makes a clear promise to B;

(ii) B acts in reliance on it; and

(iii) It would be inequitable for A to resile from the promise.

 The effect of promissory estoppel is:

(i) Suspensory and not extinctive (i.e. it only extinguishes A’s entitlement up to the end of A’s reasonable notice to
B of A’s intention to resume his rights, but not A’s future entitlements unless justice demands).

(ii) The application of promissory estoppel is generally restricted to relieving promises. It can only prevent A from
fully enforcing his previous rights against B; it cannot confer new or additional rights on B. The doctrine is a
‘shield, but not a sword’.

Comparison of promissory estoppel and consideration

A. Promissory estoppel B. Consideration

(1) Clear promise
(2) Reliance (or change of position) by promise; need
not be requested but must be foreseeable by or known
to promisor.
(3) Inequitable to resile: by reference to (1), (2)
above and subsequent events.
(4) Suspensory and not extinctive: i.e. not
necessarily given full expectation; the promisor can
resume his original rights on giving reasonable notice
to the extent that the promise can resume his original
position.
(5) Shield not sword: only operates as a defence to
enforce promises to accept less. Cannot create or add
new rights.
**Is reform desirable to allow the creation or addition
of new rights?
Clear promise
Promisee must have given consideration which may
consist of requested reliance. Promise enforceable
without reliance.
Irrelevant short of vitiating factors with high
thresholds.
Enforcement of full expectation (i.e. can be
extinctive).
Shield and sword: can operate as a defence to enforce
promises to accept less and to create or add new rights.

A clear promise

There must be a clear and unequivocal promise or a representation as to future conduct which indicates the promisor’s intention
not to insist on his strict legal rights against the promise (Woodhouse v Nigerian Produce Marketing Co Ltd).

 Hughes demonstrates that the promise need not be express but may be implied from the circumstances.

 In Baird Textile Holdings Ltd v Marks & Spencer, estoppel could not be established because the representation was not
sufficiently certain.

 The general rule is that promissory estoppel cannot be founded on silence (Allied Marine Transport), but silence could
amount to a representation giving rise to promissory estoppel where there was a legal duty on one party to make a
statement to the other but where they failed to do so.

Reliance: change of position

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The promisee must have relied on the promise or representation. This is conventionally understood to require detrimental reliance
so that, if the promise is revoked, the promisee will be worse off than if it had never been made. Harm to the promisee is the
reason why it may be inequitable for the promisor to resile.

 Hughes v Metropolitan Railway Co: the tenant relied on the landlord’s implied promise to ‘stop the clock’ during
negotiations by not carrying out timely repairs. If the landlord could renege on his promise, the tenant’s failure to make
timely repairs would have resulted in the forfeiture of its lease.

 High Trees shows that detrimental reliance might not be necessary; a change of position would be enough to justify
reliance.

o Thus, the lessee’s reliance in High Trees might have taken the form of not renegotiating the lease, seeking
alternative finance, or declaring itself bankrupt.

o Reliance can also take the form of dissipating the money saved on other expenses.

o The nub is the promisee’s inability to resume his original position due to the reliance.

 If the promisee can resume his original position, or can resume his liability on reasonable notice, there is no inequity in
resiling from the promise either completely or for the future.

o The Post Chaser

Inequitable to go back on the promise

The third requirement of promissory estoppel is that it must be ‘inequitable’ for the promisor to go back on his promise. This is
usually, but not always, satisfied by the promisee’s change of position. But inequity also considers other factors such as:

(i) The time lag before the promisor assets his original right and the degree of prejudice to the promisee: there was no
inequity in resiling in The Post Chaser where the promisor reasserted his strict legal right just two days after the
promise was made.

(ii) The circumstances surrounding the relieving promise: There was no inequity in resiling in D & C Builders v Rees,
because the promisee had extracted the promise to accept a lesser sum by threatening non-payment in bad faith.

(iii) Events subsequent to the making of the promise

 Williams v Stern

The extent of enforcement: suspensory or extinctive?

The effect of promissory estoppel is said to be suspensory but not extinctive of the promisor’s rights; the promise may, on giving
due notice, assert his original rights (Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd).

 Relief contained in the relieving promise may be temporary or may be terminated by notice, if the promisee can resume
his original position.

 Promissory estoppel can extinguish part or all of the promisor’s existing rights if the promisee cannot resume his position
(Ajayi v RT Briscoe (Nigeria)).

The question is not whether promissory estoppel suspends or extinguishes his original right, but rather what is necessary to ensure
that the promisee is not prejudiced by his reliance on the promise. This may require:

 Total extinction of the original right (Royal Bank of Scotland v Ludlum);

 Partial distinction of the original right (High Trees);

 No effect to be given to the promise (The Post Chaser, where the promisee can resume his original position).

Only operates defensively

Promissory estoppel cannot create a cause of action to enforce a new or additional right. It can only operate defensively against a
claim made by the promisor.

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The types of promise subject to promissory estoppel
It only applies where there is a pre-existing contractual or other legal relationship between the parties, and one party promises to
give up some of his rights under that relationship. In short, promissory estoppel:

 Can enforce promises of ‘same for less’;

 Cannot enforce promises of ‘more for the same’;

 Cannot create new legal rights independent of theparties’ pre-existing legal relationship.

The reason for these restrictions is to avoid undermining consideration as the primary test of contractual liability. If a promise
could be enforced simply because of the promisee’s reliance, this would blow a great hole in the boundary of contractual liability
put up by the doctrine of consideration.

Promises to accept less

 Relieving or ‘subtracting’ promises are enforceable only if supported by consideration in the form of legal (but not
practical) benefit or detriment. Even without consideration, a relieving promise may be enforceable operating as a
defence against the promisor’s action.

 Promissory estoppel undercuts the rule in Foakes v Beer that promises to accept the same for less are unenforceable for
want of legal consideration.

 The apparent tension would disappear if it is understood that consideration yields the full enforcement of the subtracting
promise, while promissory estoppel should only reduce the promisor’s original rights to the extent necessary to protect
the promisee’s reliance and when it would be inequitable for the promisor to renege on his promise.

Promises to give more

 Adding promises are enforceable if supported by consideration, in the sense of legal or practical benefit (Williams v
Roffey). In contrast, legal benefit is required to enforce subtracting promises.

 Adding promises cannot be enforced via promissory estoppel. In contrast, subtracting promises are enforceable via
promissory estoppel.

Promises which create or add more rights

Combe v Combe shows that promissory estoppel cannot extend further to enforce an entirely new cause of action.

However, if the nub of promissory estoppel is the promisor’s unconscionability, it should not atter whether or not there is a pre-
existing legal relationship between the parties.

Three reasons support the expansion of promissory estoppel to create new causes of action:

(i) Other estoppels can create new causes of action

 Where the parties to a transaction have acted upon a common assumption, estoppel by convention prevents
either party from denying that common assumption (Amalgamated Investment and Property Co v Texas
Commerce International Bank Ltd).

(ii) Differences in restriction unprincipled

 It is difficult to justify the inconsistent answers to the questions of whether estoppel can create a cause of action
and what the appropriate remedy should be.

(iii) Promissory estoppel and consideration rest on different basis

 The most convincing reason for preventing promissory estoppel from creating a new cause of action is to avoid
a direct clash with the requirement of consideration. However, there is no clash if we recognize that
consideration and promissory estoppel are two distinct types of liability:

o Consideration yields a contractual cause of action for the enforcement of the promisee’s full
expectation.

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 Contract Law Notes
o Promissory estoppel seeks to avoid the detriment arising from the promisee’s reliance on the promise,
if it would be inequitable for the promisor to renege.

Future development of promissory estoppel

Extension to promises to comply with formalities

The narrowest extension is to promises to comply with formalities requirements in respect of an agreement supported by
consideration.

Extension to promises to give more

A wider extension is to contract modifications which add to the promisee’s rights. On this view, promissory estoppel can fill a
consideration gap, but only in contract modifications.

The obvious counter is that the underlying problem of unconscionability may be present, whether the promise relates to the
formation or the modification of a contract, and whether it relates to rights in land or other subject matter.

Extension to creation of new actions

The widest option is to follow the more expansive interpretation of Walton Stores v Maher, and allow promissory estoppel to
create new causes of action. This would be in favour of a ‘duty to ensure the reliability of induced assumptions’.

If it is minded to do so, the concern not to undermine consideration can be met by:

(i) Clarifying the requirements for promissory estoppel: A clear and firm threshold should be maintained, for the lower
the threshold, the closer we get to simply saying that promises are enforceable without consideration.

(ii) Emphasising the reliance basis of enforcement: The crux of the distinction between consideration and estoppel is the
potential difference in the remedial response: between enforcement of the full expectation and enforcement as
necessary to negate detrimental reliance.

FRUSTRATION

17. Introduction
Frustration and mistake
The doctrines of frustration and common mistaken assumption deal with the same problem, i.e. how the law should respond when
the parties’ assumption are radically different from those which the parties assumed when they entered the contract.

(i) Only difference in timing:

a. If the parties’ common assumption is false at common formation, the law treats this as mistake. Common law
mistake voids the contract and equitable mistake makes the contract voidable.

b. If their common assumption is falsified after contract formation, the law treats this as a case of frustration.
Frustration discharges an otherwise valid contract on the occurrence of the frustrating event.

(ii) Two coronation cases:

a. Krell v Henry

b. Griffith v Brymer

(iii) Judicial recognition of similarity: The test for relief is reducible to a three-step inquiry:

a. Construction: was the risk of the change of circumstances expressly or impliedly allocated to one of the
parties?

b. Fault: was the frustration self-induced?

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 Contract Law Notes
c. Fundamentality: did the new circumstances render the obligation to perform radically or fundamentally
different from that originally undertaken?

Three main differences between mistake and frustration can be identified:

(i) Scope: The scope of frustration is wider than that for mistake;

(ii) Contracts discharged, not void or voidable: Mistake makes contracts void or voidable, while frustration
discharges the contract, automatically extinguishing both parties’ obligations;

(iii) Monetary adjustments: LARCO allows courts to adjust the gains and losses under the contract up to the point of
frustration. No analogous statutory power exists to sort out the aftermath of operative mistake.

Development of the frustration doctrine

 Prior to the development of the frustration doctrine, Paradine v Jane was authority for the rule of absolute contractual
liability: the contractor must perform it or pay damages for not doing it’.

 This extreme position was overturned by Taylor v Caldwell.

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 Contract Law Notes

18. Justification for relief

The main explanations put forward are:

(i) Implied terms;

(ii) Just and a reasonable solution; and

(iii) Lack of consent to a radical change in the obligations assumed at formation.

Implied terms

 Taylor v Caldwell justified the doctrine on the basis of an implied term to the effect that the contract will come to an end
on the occurrence of the subsequent event.

Just and reasonable solution

 The frustration doctrine has also been explained as ‘a device, by which the rules as to absolute contracts are reconciled
with a special exception which justice demands’ (Hirji Mulji v Cheong Yue SS).

Radical change in the obligations: lack of consent

 The ‘radical change’ test assumes that the parties only consent to perform in a limited (although wide) range of
circumstances.

 ‘The question is whether the contract made is, on its true construction, wide enough to apply to the new situation: if not,
the contract is at an end (Davis Contractors v Fareham).

Total failure of consideration

 The House of Lords has rejected this explanation for frustration based on total failure of consideration.

 This is a ground for recovering money paid when the defendant breaches the contract by total non-performance.

 But this rational does not explain why party incurs no contractual liability for its failure of consideration.

19. Frustrating circumstances

Frustration will only be found if literal performance in the changed circumstances would amount to the performance of a
fundamentally or radically different obligation from that originally undertaken.

The categories of impossibility:

(i) Legal impossibility;

(ii) Physical impossibility; and

(iii) Impossibility of purpose.

Legal impossibility
Contractual performance is sometimes made legally impossible by a change in the law, or by a change of circumstances triggering
the operation of pre-existing law. The law may:

(i) Prohibit the performance undertaken in the contract. For example:

 Trading with the enemy (Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd);
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 Contract Law Notes
 Continuing with a project (Metropolitan Water Board v Dick Kerr & Co Ltd), a certain type of trading
(Denny, Mott & Dickson v Fraser), or an employment (Reilly v R).

(ii) Deprive a party of control over the subject matter of the contract:

 Control over land (Baily v De Crespigny);

 Control over oil fields (BP Exploration Co (Libya) Ltd v Hunt (No 2)).

A supervening law will only frustrate a contract if it makes a radical difference to the contractual obligations originally undertaken
and not if it merely delays or hinder its operation in part.

Contracts have been frustrated in:

 Metropolitan Water Board v Dick Kerr

Contracts have not been frustrated in:

 Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd

 FA Tamplin Steamship v Anglo-Mexican Petroleum Products

Physical impossibility
Frustration occurs when the supervening event makes performance physically impossible. However,

(i) Impossibility of performance is insufficient: Even a wholly unforeseen catastrophe will not excuse a party if the
construction (risk allocation) of the contract shows that he has undertaken to pay damages anyway.

(ii) Impossibility of performance is unnecessary: Legal impossibility and impossibility of purpose may frustrate
contracts although they are still physically impossible to perform.

Death or incapacity in personal service contracts

A contract of personal service is frustrated if the death or incapacitating illness of one party renders its performance impossible or
radically different. Contracts have been frustrated where the performing party:

(i) Dies (Stubbs v Holywell Railway Co);

(ii) Is interned, conscripted, or imprisoned for all or the substantial remainder of the contract’s duration;

(iii) Is incapacitated by illnessness (Notcutt v Universal Equipment Co).

 Illness will not necessarily frustrate a contract of employment. The question is one of degree: whether
‘further performance of this obligations in the future would either be impossible or would be a thing
radically different from that undertaken by him and accepted by the employer under the agreed terms of this
employment’ (Marshall v Harland & Wolff Ltd).

 Relevant considerations include: (a) the terms of the contract; (b) the nature and duration of the
employment of the illness; (c) the period of past service; and (d) the prospect of recovery.

The contract is not necessarily frustrated by death or incapacity if performance is not of a personal character:

 Phillips v Alhambra Palace Co Ltd

Destruction of the subject matter

Destruction of something necessary for contractual performance may frustrate the contract.

 Taylor v Caldwell

 Appleby v Myers

The subject matter may only be partially destroyed. Again, frustration is a matter of degree:

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 Contract Law Notes
 Taylor v Caldwell

 Asfar v Blundell

 Jackson v Union Marine Insurance Co

Failure or disruption of supplies

 S9 of the Sales of Goods Ordinance (Cap 26) provides: ‘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’.

 Contracts for ascertained goods are rarely frustrated because, subject to physical or legal impossibility, the source of
supply is normally at the supplier’s risk.

 Where a particular source was only intended by one of the parties, failure of that source will not frustrate the contract
(Blackburn Bobbin Co Ltd v TW Allen Ltd).

 But a contract may be frustrated if the source of supply was intended by both parties and it fails without the fault of either
party:

o Howell v Coupland

o Re Badische Co Ltd

 Where the commonly intended source partially fails, a term will be implied requiring the supplier to deliver the smaller
quantity available. He is relieved only to the extent of the deficiency.

o Sainsbury v Street

Delay and hardship

‘Impracticability’ refers to ‘extreme and unreasonable difficulty, expense, injury or loss’ to one of the parties.

Charterparties may be affected by the ship being:

 Stranded (Jackson v Union Marine Insurance Co Ltd);

 Requisitions (FA Tamplin Steamship v Anglo-American Petroleum Products);

 Seized (WJ Tatern v Gamboa; The Adelfa); or

 Detained (Embiricos V Reid (Sydney) & Co).

Building contracts may be affected by:

 Shortage of labour and materials (Davis Contractors v Fareham); or

 War-time restrictions (Metropolitan Water Board v Dick Kerr).

The focus is not the cause of the delay or hardship, but the effect it has on the performance of the obligations undertaken (The
Nema). Three factors are particularly significant:

(i) The increased difficulty of performance is caused by a new and unforeseeable event and is not merely within the
commercial risks undertaken.

 In Davis Contractors v Fareham, the delay was not caused by any new or unforeseeable factor or event.

 Inflations and fluctuations in the value of currencies will not frustrate the contract.

 Bad weather conditions which delayed the performance of contract did not frustrate the contract in Thiis v
Byers.

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 Contract Law Notes
(ii) Parties are entitled to know where they stand.

 A party can claim frustration through delay before the expiry of the time for performance since parties
should be able to rearrange their affairs in response to the event and not be left in suspense.

 Judgment based upon all the evidence of what has occurred and what is likely thereafter to occur.

 The Nema

(iii) Performance in the new circumstances radically alters the original rights and obligations. Three categories can be
isolated:

a. If it is clear from the terms or nature of the contract that it was to be performed only at a specified time or within
a specified period, subsequent delayed performance may be of no use to the recipient and so frustrate the
contract.

 Jackson v Union Marine Insurance Ltd

b. Performance after the delay may be radically different because it would occur in a radically altered market.

 Metropolitan Water Board v Dick Kerr

c. A contract may be frustrated when the contemplated means of performance is made impossible by a supervening
event when: (a) it is the only method of complying with the contract, or (b) the alternative means radically alters
the obligations undertaken.

 The Eugenia

Impossibility of purpose
Two factors limit the scope of frustration of purpose:

(i) The purpose which has become impossible to achieve must be common to both parties and have expressly or
impliedly, ‘been assumed by the parties to be the foundation or basis of the contract’ (Krell v Henry).

(ii) The common purpose must be thwarted to a very high degree.

Non-occurrence of an event

The non-occurrence of an event which constitutes the basis of the contract can frustrate a contract:

 Krell v Henry

 Krell v Henry: there would be no frustration if a contract to hire a cab to go to Epson on Derby day at an enhanced price
was made pointless when the races are cancelled, because the purpose is only that of the hirer; ‘the cab had no special
qualifications for the purpose which led to the selection of the cab for this particular occasion’.

 Krell v Henry can be distinguished from Herne Bay Steamboat v Hutton in a sense that:

(i) Hutton’s purpose was not entirely thwarted: he could still ‘cruise round the fleet’.

(ii) The Court of Appeal regarded Hutton’s venture to charge passengers for the cruise as his own and at his own
risk.

20. Construction of the contract

Express provision: force majeure and hardship clauses
Force majeure and hardship clauses can specify:

(i) The circumstances excusing further performance of the contract;

(ii) The consequences of the triggering circumstances.

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However, the parties’ express provision for a supervening event must still be interpreted by the courts to determine whether
they actually cover the supervening event in a ‘full and complete’ way. Force majeure clauses are generally narrowly construed.

 Metropolitan Water Board v Dick Kerr

Implied allocations of risk: foresight

The court can infer from the parties’ silence that they have impliedly allocated the risk of the supervening event to the performing
party. For example:

 In Davis Contractors v Fareham, it was held that:

 A building contract allocates to the builder the risk that the soil conditions and the cost and availability of labour
and materials will make performance more onerous than anticipated.

 Fluctuations in prices or the value of currencies will not normally frustrate the contract.

How foreseeable must the supervening event be to oust the frustration doctrine?

The narrowness of the doctrine is often justified on the basis that it should only cover unforeseeable events for which the parties
could not be expected to provide.

The event or its consequences must be one which any person of ordinary intelligence would regard as likely to occur and,
moreover, one which is foreseeable in some detail.

21. Fault: self-induced frustration

Frustration is barred if the claimant’s own (1) deliberate or (2) negligent conduct has brought about the alleged frustrating event.

Super Servant Two set out three such categories: breach of contract, anticipatory breach of contract, and power to elect.

Breach of contract
A party cannot plead frustration if he has contributed to the alleged frustrating event by conduct amounting to a breach of the
contract.

Anticipatory breach of contract

A party is also disqualified from claimant frustration if his deliberate, voluntary, or negligent conduct has the effect of disabling
himself from performance of the contract, analogous to anticipatory breach by the party’s own act.

The issue is one of control; the test is whether the claimant had the means and opportunity to prevent the alleged frustrating event
from occurring, but nevertheless caused or permitted it to occur.

Power to elect

The fact that a party has exercised a choice not to perform a certain contract bars the frustration of that contract; his choice breaks
the chain of causation between the external event and his inability to perform.

However, frustration is permitted if: (a) the outside event completely destroys a party’s supplies, or (b) he had specified only one
mode of performance or allocated a specific supply to a particular contract, and that becomes impossible to perform due to the
outside event.

22. The effect of frustration

Automatic discharge
A contract is discharged for frustration, relieving both parties from further performance (or liability for non-performance).

Losses and gains under the contract

Overview

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Automatic discharge is straightforward where the contract is executory, but problems arise where the contract is partly executed
(performance has begun).

Money paid or payable before the frustrating event

(i) Common law

 Allows recovery of money paid for total failure of consideration.

o Fibrosa Spolka Ackcyjna v Fairebairn Lawson Combe Harbour Ltd

 Criticisms

o Advance payments are only recoverable where the failure of consideration is total.

 Not recoverable in Whincup v Hughes

o If the payor could recover all of the advance payment, it may cause injustice to the payee who may
have used the money to finance the initial stages of the contract.

(ii) Statute

 Since Fibrosa, there has been legislation passed in the form of LARCO.

 S16(2) sets out three rules:

a. Sums payable before the frustrating event cease to be payable;

b. Sums already paid before the frustrating event are prima facie recoverable; and

c. The payee may retain or recover a sum of money on account of any expenses he has incurred for
purposes of performance of the contract up until the time of the frustrating event.

 In s16(2), the ability to recover money paid is not restricted to total failure of consideration; rather, there is a
prima facie right of recovery even where only part of the consideration fails.

 Criticisms of s16(2)

o This section provides no protection for a party who incurs expenses but who did not require pre-
payment at all, or if he incurs more expenses than the amount of the pre-payment.

o Similarly, if his expenses were more than the monies paid or payable, he will not be able to claim for
expenses incurred over and above that claimant.

Non-money benefits provided before the frustrating event

(i) Common law

 Appleby v Myer: no monies in respect of the materials could be recovered because the plaintiffs were only
entitled to payment when performance was completed.

 Criticisms

o This common law approach can cause hardship. A party may have gone to considerable expense in
providing goods and services before the time of frustration but, unless payment was made or due
before the time of frustration, that party will receive nothing at common law to compensate him.

(ii) Statute

 LARCO s16(3):

a. Allows a party to recover a ‘just’ sum for a ‘valuable benefit’, conferred on the other party before the
time of discharge by frustration.

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b. The sum recoverable will be whatever the court considers ‘just’, having regard to all the circumstances
of the case, in particular to:

1. The amount of expenses incurred by the party obtaining the benefit, before the time of
discharge, and

2. The effect, in relation to the benefit obtained, of the circumstances giving rise to the
frustration of the contract.

 BP Exploration Co (Libya) Ltd v Hunt (No 2) breaks down such claim into two stages:

a. Stage I: identifying and valuing the benefit, and

b. Stage II: assessing the ‘just sum’.

 Stage I: Identifying and valuing the benefit

o ‘Benefit’ refers to the end product received by the defendant.

o In the case, the end product was identified as being the increase in the value of Mr. Hunt’s share in
the oil concession which resulted from BP’s work.

 Stage II: assessing the just sum (not exceeding the value of the benefit)

o Wide discretion of the court

 Criticisms of s16(s)

o S16(3) does not provide any protection for a party who has supplied goods and services which
does not result in an end product.

o Further, where the contract is an ‘entire obligations’ contract, no account will be taken of the work
carried out up to the point of discharge by frustration.

IDENTIFYING CONTRACTUAL TERMS

23. The problem of standard form contracts

The advantages of standard form contracting are clearly weighted in favour of the proffering party:

(i) It reduces the proffering party’s transaction costs when making many repeat transactions;

(ii) It allows the senior management in large operations to maintain control over the consistency of contractual
arrangements made by subordinate sales staff;

(iii) It allows the proffering party to set terms advantageous to itself.

The dangers of standard form contracts include:

(i) Lack of comprehension (unfair surprise);

(ii) Lack of negotiability due to the inequality of bargaining power;

(iii) Substantive unfairness in the serious imbalance in the parties’ rights and obligations to the detriment of the adhering
party.

24. What are terms?

Express terms
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Express terms are those specifically agreed by the parties. Implied terms are those which are added to the contract by the courts,
by custom, or by statute.

The parole evidence rule

A document is regarded as exclusively embodying the ‘four corners of the contract’ so that parties are generally barred from
adducing extrinsic evidence to add to, vary, or contradict that document (Jacobs v Batavia & General Plantations Trust Ltd).

Exceptions to the parole evidence rule:

(i) The contract is vitiated, e.g. for misrepresentation, mistake, non est factum, duress, and undue influence;

(ii) The contract includes terms additional to those included in the contract (express or implied);

(iii) The contract should be rectified because its wording does not accurately record the parties’ agreement.

The rule is an easily rebuttable presumption that a document purporting to be the contract contains the whole contract.

Collateral terms and collateral contracts

The existence of collateral terms depends on the parties’ intentions: the test is similar to that between terms and representations.
To prove a collateral term or contract, the claimant must show that the statement was so important to him that he would not have
contracted at all but for the assurance.

Collateral terms and collateral contracts perform the same functions:

(i) Circumventing the parole evidence rule: enabling a party to add to, vary, or contradict a contractual document.

(ii) Conferring the remedial advantages of an action for breach over that for misrepresentation.

(iii) Overriding the privity rule

 Shanklin Pier Ltd v Detel Products Ltd

(iv) Overriding inconsistent terms in the main written contract:

 Curtis v Chemical Cleaning & Dyeing Co Ltd

Entire agreement clauses can exclude liability for misrepresentation or breach of collateral agreements by denying legal effect or
exempting liability in respect of statements outside the written contact.

Lowe v Lombank held that for an ‘entirement agreement clause’ to raise an estoppel:

(i) The statement of non-reliance (the entire agreement clause) must be clear and unequivocal;

(ii) The maker of the statement intended the other party rely on it;

(iii) The recipient of the statement must have believed its veracity and acted upon it.

The incorporation of terms

A statement in a document can be ‘incorporated’ into the contract by:

(i) Signature;

(ii) Reasonable notice of the written term; or

(iii) Previous dealing or custom.

Signed documents

 The general rule is that a person is bound by the contents of a contractual document he has signed whether or not he
reads or understands it (Parker v South Eastern Railway Co).

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o Potential harshness: L’Estrange v Graucob Ltd

 The rule is subject to very narrow exceptions:

(i) Non est factum;

(ii) Misrepresentation;

(iii) Other vitiating factors (mistake, undue influence, unconscionability, duress, incapacity);

(iv) The signed document was non-contractual (Grogan v Robin Meredith Plant Hire).

Unsigned documents

The proffering party must show that he has given the other party adequate notice of them. The notice must be adequate in being
(1) given at or before contract formation, (2) in a document intended to have contractual effect, and (3) reasonable.

(i) Timing of notice: the notice must have been given at or before the time of contract formation.

 Notice given thereafter amounts to an impermissible unilateral variation of the contract and is not binding.

 Thus, incorporation was denied in:

o Olley v Marlborough Court Ltd – no exclusion liability clause when booking the room, but a notice of such
in the hotel room, exclusion liability clause not incorporated into the contract.

o Thornton v Shoe Lane Parking Ltd –the acceptance of C’s putting money into machine is an acceptance.
Exclusion liability clause contained in the ticket was not incorporated into the contract.

(ii) The notice must be in a document intended to have contractual effect, but not a ‘mere receipt’.

 Chapelton v Barry UDC- the exclusion clause not included in the notice could not be incorporated in the contract
despite of its inclusion into the ticket after payment.

(iii) Reasonable notice: the recipient of the statement is bound if he had reasonable notice that the document contains terms,
even if he remains ignorant of the term.

 Parker v SE Railway Co

 Thompson v LM & S Railway Co

 However, there was insufficient notice to incorporate a document where:

o A ticket made no reference to the existence of conditions on the back (Henderson v Stevenson;

o A ticket was folded over and the conditions partially obscured by a red ink stamp (Richardson, Spence &
Co Ltd v Rowntree);

o The relevant clause was obscured by a date stamp (Sugar v London, Midland and Scotland Railway);

o Reference to terms ‘on the back’ on a faxed document but that back page was not sent (Poseidon Freight
Forwarding Co Ltd v Davies Turner Southern Ltd).

 Where a party seeks to enforce an onerous or unusual term, it is not enough to merely give notice of its existence.
Additional steps as would reasonably bring their significance to the other party’s notice are required (Spurling Ltd v
Bradshaw).

o Thornson v Shoe Lane Parking Ltd

o Interfolo Picture Library Ltd v Stiletto Visual Programmes Ltd

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Previous dealing and custom

In the absence of signature or reasonable notice, a term in a printed document may be incorporated by a consistent course of
previous dealing between the parties or by the custom of the relevant trade.

The term was incorporated in:

 British Crane Hire Corp Ltd v Ipswich Plant Hire Ltd (incorporated by trade custom)

 Henry Kendall Ltd & Sons v William Lillico & Sons Ltd (incorporated by previous course of dealings)

In contrast, the term was not incorporated in:

 McCutcheon v David MacBrayne because the previous dealings were not sufficiently regular (4 times) or consistnet
(McC only sometimes asked to sign the contractual document);

 Hollier v Rambler Motors (AMC) [B2C cases are hard to establish the necessary consistency than in B2B cases.]

Implied terms
Parties’ expressed rights and liabilities can be implied:

(i) From custom;

(ii) From the facts of the particular contract; or

(iii) By law.

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Overview of implied terms

Implied by CUSTOM Implied in FACT Implied by LAW (common

law or statute)
Applies to Contracts in particular Any specific contract Contracts of certain types e.g.
trades or locality. employment, tenancy, sale of
goods (how narrowly can this
be defined?)
Test for Must be: Must be: Must be:
implication  Certain,  Meaning of contract  Provided for in statute; or
 Notorious, in context to  Established in precedents;
 Accepted as reasonable person or
binding, and  Otherwise reasonably
 reasonable ‘necessary’ in contracts of
that type
Contra-  Inconsistent with  Inconsistent with express  Inconsistent with express
indications for express term. term, unknown to one term, NB some implications
implication party, too vague, cannot be excluded in certain
complicated or novel or situations.
if unclear whether both
parties would have
agreed.
Justifications for  Presumed intention of the parties;
implying terms  Efficiency of providing default rules;
 Certainty and predictability;
 Protection of reasonable expectations;
 Reasonable and fair risk allocation;
 Correcting contractual imbalance.

Implication by custom

Terms may be implied by the custom of the market, trade, or locality in which the contract is made. The requirements were set out
by Cunliffe-Owen v Teather & Greenwood – the term so implied must be:

(i) Certain: clearly established in the case law or otherwise identifiable and consistent.

(ii) Notorious: well known by those doing business in the particular trade or place and such that an outside making
inquiries could discover.

(iii) Recognised as binding: compliance with it comes from a sense of legal obligation rather than as a matter of choice
or commercial convenience.

(iv) Reasonable.

(v) Not inconsistent with express terms or nature of the contract.

A term may be implied by custom even if it is unknown to one party or even both parties. An term was implied by trade custom in:

 Hutton v Warren

Implication in fact

Terms may be implied into the contracts from the factual context to give effect to the unexpressed intention of the parties. Terms
may be implied only where the contract would otherwise be incomplete (the ‘necessity’ test applies here).

The test for implication in fact

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(i) Business efficacy (derived from The Moorcock): the term sought to be implied must be necessary to give the
transaction such business efficacy as the parties must have intended.

(ii) ‘Officious bystander’ (derived from Shirlaw v Southern Foundries): a term implied in fact ‘is something so obvious
that it goes without saying’.

(iii) Cumulative test: BP Refinery (Westernport) Pty Ltd v Shire of Hasting combined and supplemented the above test,
requiring a term implied in fact to:

a. Be reasonable and equitable;

b. Be necessary to give business efficacy to the contract;

c. Be so obvious that ‘it goes without saying’;

d. Be capable of clear expression; and

e. Not contradict any express term of the contract.

A term will not be implied if:

 One of the parties is ignorant of the content of the alleged term (Spring v NASDS);

 It is unclear whether both parties would have agreed to the term (Luxor (Eastbourne) Ltd v Cooper);

 The parties have entered into a carefully drafted written contract containing detailed terms, raising a strong presumption
that this constitutes the complete agreement (Shell UK Ltd v Lostock Garages Ltd);

 The alleged term is too vague (Durham Tees Valley Airport Ltd v BMI Baby Ltd ) or too complicated (Ashmore v Corp of
Lloyd’s);

 The contract is a novel or risky one (Phillips Electronique v B Sky B); or

 It is inconsistent with an express term (Duke of Westminster v Guilder).

Implication by law

Common law

Although the courts have sometimes said that the test for implication by law is also ‘necessity’ rather than ‘reasonableness’ (same
test as terms implied by fact), it is clear that ‘necessity’ in terms implied in law is less stringent than is required for implication in
fact.

In Crossly v Faithful & Gould Holdings Ltd, the Court of Appeal approved the policy considerations that the courts should
consider:

 Whether the proposed term is consistent with the existing law;

 How it would affect the parties; and

 Wider issues of fairness in society.

Two cases illustrate the wider policy focus of implied terms in law:

 In Malik and Mahmud v BCCI SA, the House of Lords accepted the existence of an implied obligation of mutual trust and
confidence in employment contracts.

 In Crossley v Faithful & Gould Holdings Ltd, the Court of Appeal refused to imply a term requiring an employer to take
reasonable care for an employee’s economic well-being, as this will impose an unfair and unreasonable burden on
employers.

The imposed nature of terms implied by law is consistent with the following features of terms implied in law:

 Courts often rely exclusively on precedents rather than examine the intentions of the parties to the particular contract
(Yeoman Credit Ltd v Apps).
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 Terms implied may be very complex and unlikely to have been overlooked because they ‘go without saying’ ( Scally v
Southern Health and Social Services Board).

 Implied terms may necessitate a narrow interpretation of the express terms (Belize).

 The parties cannot agree to exclude some terms implied by law (Mali and Mahmud v BCCI).

The court’s power to imply terms by law is limited:

(i) The propose implication must fit the generality of contracts of that class and not only particular instances of it.

(ii) The relevant contract must approximate to a recognized class of contracts.

Examples of terms implied in common law:

In employment contracts:

 The employee will serve diligently, loyally, and with reasonable competence (Lister v Romford Ice & Cold Storage Co
Ltd);

 The employer will not require the employee to act unlawfully (Gregory v Ford);

 The employer and employee owe each other a duty of trust and confidence (Malik v Bank of Credit and Commerce Intl).

In building contracts:

 The work will be done in a good and workmanlike manner, the builder will use good and proper materials ( Miller v
Cannon Hill Estates Ltd).

Statute

Relevant terms include:

 Sale of Goods Ordinance (Cap 26), ss.14-17

 Supply of Services (Implied Terms) Ordinance (Cap 457), ss.5-7

INTERPRETATION OF TERMS

25. General principles of interpretation

From literal to contextual interpretation

Consistent with the parole evidence rule, the traditional method of interpretation adopted a literal stance toward documents
embodying an agreement without reference to extrinsic evidence. This approach aids certainty and administrative efficiency.

However, the change in emphasis to take the meaning of words from the context in which they are used was signaled in Prenn v
Simmonds. It was stated that agreements should not be seen in isolation ‘from the matrix of facts in which they were set and
interpreted purely on internal linguistic considerations’.

This development was consolidated in Investors Compensation Scheme v West Bromwich in which Lord Hoffmann stated the
principles on interpretation:

 The overall aim of interpretation is the ‘ascertainment of the meaning which the document would convey to a reasonable
person having all the background knowledge which would reasonable have been available to the parties in the situation in
which they were at the time of contract’.

 The scope of the contextual or background facts includes absolutely anything which a reasonable man would have
regarded as relevant.

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 The meaning of the document is what the parties using those words against the relevant background would reasonably
have been understood to mean.

 The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the proposition that we do not easily
accept that people have made linguistic mistakes.

 The fact that a particular construction leads to a very unreasonable result must be a relevant consideration.

Courts can depart from the natural or ordinary meaning to give effect to the ‘parties’ intention where that meaning:

(i) Is inconsistent with the parties’ intention as evinced by the context (Charterbook Ltd v Persimmon Homes);

(ii) Would render the contract ineffective (Steele v Hoe), inconsistent with the rest of the document (Watson v Haggit), or
absurd (Investors Compensation Scheme v West Bromwich);

(iii) Would lead to very unfair results.

The operation of this expansive approach is illustrated in:

 Mannai Investment Co Ltd v Eagle Star Life Investment Co

 Hartog v Colin & Shields

 Sirius International Insurance Co Ltd v FAI General Insurance Ltd

Inadmissible evidence

Exclusion of evidence of previous negotiations

 Lord Hoffman recognises that this exclusion undermines the general aim of contextual interpretation which must take
account of the object and purpose of the contract.

 However, since the parties are free to change their bargaining postures and their positions are unstable until the contract
is finalised by formal acceptance of the offer, a court can only decide what the final contract means.

 Nevertheless, in Charterbrook Ltd v Persimmon Homes Ltd, Lord Hoffman said that the exclusionary rule did not cover
evidence of negotiations as evidence ‘to establish that a fact which may be relevant as background known to the parties,
or to support a claim for rectification or estoppel.

Exclusion of evidence of subsequent conduct

 Evidence of conduct subsequent to contract formation is also inadmissible since, otherwise, the meaning of the contract
could change over time (Schuler AG v Wickman Machine Tool Sales).

 Post-formation conduct is already admissible to establish:

o Estoppel or variation of the contract,

o The content of an oral contract.

Specific maxims of interpretation

(i) Ut res magis valeat quam pereat

 Where the words used are ambiguous, the courts will prefer a construction which upholds the validity of the
contract rather than a construction which would render the contract void or too uncertain.

(ii) Contra proferentem

 Written words should be construed against the proferens.

(iii) Ejusdem generis

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 Where a contract includes a list of particular and similar items followed by words such as ‘or other [items]’,
these will be interpreted as being limited to items which are of the same kind, or similar, to the specifically
listed items.

(iv) Expressio unius

 Where specific items are listed without any general description, those specific items generally exclude
similar but distinct items.

26. Interpretation of exemption clauses

Courts have evolved special rules of interpretation to narrow the scope of exemption clauses, even if they are properly
incorporated (incorporation by (1) signature, (2) reasonable notice of the written term, or (3) previous dealing or custom).

The courts limit the scope of exemption clauses by taking into consideration ‘the true construction of the contract’. In George
Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd, Lord Denning: ‘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’.

Fundamental breach (not applicable anymore)

The fundamental breach doctrine stipulates that parties are barred from relying on clauses which excluded liability for breach
which ‘goes to the very root’ of the contract. However, the doctrine was eliminated in Photo Production Ltd v Securicor Transport
Ltd.

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Contra proferentem

Any ambiguity in a contractual term will be construed against the party who introduced it. Words alleged to shield the contract-
breaker from liability are given the narrowest possible interpretation, conferring the smallest possible protection from the liability
in question.

Terms were construed against the proferens in:

 Wallis, Son and Wells v Pratt and Haynes

 Andrew Bros (Bournemouth) Ltd v Singer and Co Ltd

 Houghton v Trafalgar Insurance Co Ltd

Exemptions of negligence liability

Courts have maintained their hostility towards exclusions of liability for negligence, on the basis that it is ‘inherently improbable’
that the innocent party would agree to it. They only apply if the exemptions cover the facts in question.

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Lord Morton has set out three rules in Canada Steamship Lines Ltd v The King:

(iv) Express exemption for negligence

 A clause covers negligence liability if it expressly exempts such liability: use of a word synonymous with
negligence may be effective.
 Exempting liability for ‘loss whatsoever or howsoever occasioned’ may not be sufficiently express.
(v) No express exemption for negligence
 In the absence of express words exempting negligence liability, the question is whether the words used are
wide enough in their ordinary meaning to cover negligence liability.
 If not, the clause will not exempt from negligence liability.
 If so, the clause only limits rather than excludes liability.
o Words held wide enough to exclude negligence liability include: ‘will not be liable for any
accident howsoever caused’, ‘shall not be liable under any circumstances whatsoever for theft’,
etc.
(vi) Can the exemption cover liability other than negligence?
 If not, and the contract-breaker’s only possible liability is in negligence then the exemption is effective.
 If the clause can apply to liability other than negligence, it will only shield from the non-negligence liability
and not the negligence liability.

Exemptions for ‘indirect and consequential loss’

Clauses which exclude liability for ‘indirect and consequential loss’ are also restrictively interpreted. Such exemptions are often
used in commercial contracts to confine potential liability for pure economic loss.

In Hotel Services Ltd v Hilton International Hotels (UK) Ltd, the court relied on the remoteness test set out in Hadley v
Baxendale, and interpreted ‘direct’ loss as that arising naturally from the breach and ‘indirect’ or consequential loss as that which
was reasonably contemplated in view of special known facts.

MISREPRESENTATION AND NON-DISCLOSURE

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1. What is an actionable misrepresentation?

An actionable misrepresentation is:

(vii) an unambiguous false statement of existing fact,

(viii) made to the claimant,
(ix) which induces him to enter the contract.

If the claimant wants to claim damages, the 4th element is required, or else he can only rescind the contract:

(x) the misrepresentation must have been made with the requisite state of mind.
 Common law requires the claimant to prove that the misrepresentor was dishonest or careless in making the statement;
 Statute now allows damages unless the defendant can prove his honesty and reasonableness.
(Honest misrepresentation with reasonable grounds yield no damages)

If the statement does not

induce a contract with
the addressee, the
claimant must rely on
the common law tort
actions of fraudulent or
negligent
misrepresentation and
the equitable action for
innocent
misrepresentation.

Representation
and terms

A term is an enforceable
contractual undertaking
to perform something or
to guarantee the truth of
something.

 Remedies: damages (expectation measure); specific performance; termination (sufficiently serious breach)

A representation is a statement which asserts the truth of a given state of affairs and invites reliance upon it. It does not give an enforceable
guarantee of its truth.

 Remedies: rescission; damages (reliance measure)

A party may be able to prove the statement as both a misrepresentation and a contractual term because:

(1) The statement’s contractual status yields better remedies than misrepresentation
a. E.g. if he prefers specific performance, expectation damages, or termination
b. Rescission is subject to bars
(2) The party can only meet the lower threshold of rescission for misrepresentation but not the one of termination for breach.

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(3) Any misrepresentation allows the claimant to rescind the contract, while only a serious breach allows the claimant to terminate the
contract. Before the Misrepresentation Act, if a statement was both a misrepresentation and a contract term, the claimant was confined
to his remedies for breach of contract.
a. Section 1(a) of the Misrepresentation Act grants the representee an option of treating the statement as a misrepresentation
and claiming rescission even if it was incorporated into the contract as a term.
b. Problem of inconsistencies: breaching a minor term cannot entitle the party to terminate the contract but it can if the term
appears to be a misrepresentation. It allows the party to escape from bad bargain.
c. Section 2(2) of the 1967 Act empowers courts to deny rescission by reference to equitable considerations.

How is the distinction made?

The distinction based on the objectively ascertained intention of the parties. However, the parties will often have no intention or their intentions
are likely to differ. Therefore, the real question is not whether the maker of the statement has agreed to bear contractual responsibility for the
truth of the statement, but whether he should.

The courts are guided by the following non-decisive criteria established in Heibut, Symons & Co v. Buckleton.

(i) Importance of the truth of the statement

o The more important the statement is to the representee, the more likely it is to be a term.
o Bannerman v. White
o Couchman v. Hill

(ii) Special Knowledge

o If the maker of the statement has special skill or knowledge in the subject matter of the statement, or is in a better position to
ascertain, or bears more responsibility for ascertaining, the accuracy of the statement than the other party, it is more likely to
be a term.
o Dick Bentley Productions Ltd v. Harold Smith (Motors) Ltd
o NOT A TERM: Oscar Chess Ltd v. Williams

(iii) Whether the addressee was asked to verify the truth of the statement
o It is unlikely to be a term when the maker of the statement tells the other party to verify its truth.
o Representation: Ecay v. Godfrey
o Term: Schawel v. Reade

(iv) Whether the speaker initiated or merely passed on the false statement
o In second-hand sales, unless the seller is the originator of the false statement, the other sellers are mere innocent passer-ons,
the statement would be treated as a representation. (Routledge v. McKay)
o Oscar Chess

(v) Formally recording

o If the contract is recorded in writing, the presumption is that the document records the complete terms, known as the parol
evidence rule. (Heibut Symons v. Buckleton) Anything not included therein is a representation.
o The court may find the statement outside the document to be a binding collateral term.

Identifying actionable statements

To be actionable, a representation outside the contract must be an unambiguous, false statement of existing fact. This includes:

(i) Overt statements of fact and law; and

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(ii) Implied statements of intention, opinion, law or ‘puffs’.
(iii) Omissions (silence) are actionable if there was an independent duty to disclose the information.

The objectionable conduct: Legal Category: Test of actionability: Actionable as:

If the statement is false.
Fact If the statement is true but: (i) misleading
(ii) falsified before contract formation

ACTS
Intention
Words or conduct amounting to Misrepresentation
If there is a false implied statement of fact
statements of:
that the representor: (i) is honest, or (ii) has
Opinion a reasonable basis for the statement

‘Puffs’
Contract uberrimae fidei
Fiduciary relationship
OMISSIONS
Doctrines indirectly
relieving non-disclosure
If there is a duty to disclose the fact Actionable non-disclosure
withheld Breach of fiduciary duty
Different tests according to the doctrine Different remedies according
invoked to the doctrine invoked

Statement of fact

Statement of fact can be made by words or by conduct. ‘a nod or a wink, or a shake of the head, or a smile from the purchaser intended to induce
the vendor to believe the existence of a non-existing fact’ is actionable. (Walters v. Morgan)

Misrepresentation by conduct: Spice Girls Ltd v. Aprilia World Service BV

Statement of law

Traditionally, the statement of law cannot give rise to an actionable misrepresentation. In Kleinwort Benson Ltd v. Lincoln CC, the law-fact
distinction was abolished.

Statements of intention

The speaker’s intention is not in itself a statement of fact. The representor’s failure to carry out his stated intention is not actionable; he is entitled
to change his mind. However, a statement of intention is actionable if:

(i) It is a term of the contract; or

(ii) It is dishonest: A statement of intention always implies a statement of fact to the effect that it reflects the speaker’s state of mind.
The representor is entitled to change his mind and his failure to carry out his stated intention is not actionable. (Wales v. Wadham)
Not actionable: Kleinwort Benson Ltd v. Malaysia Mining Corp Berhad

Actionable: Edgington v. Fitzmaurice

Statements of opinion
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 Contract Law Notes

Statements of opinion or belief are not statements of fact and are not actionable just because they turn out to be inaccurate. Such statements may
be actionable if they are:

(i) Dishonest
o Dishonesty in asserting an opinion not genuinely held is always a misstatement of fact regarding the state of his mind.

(ii) No reasonable ground

o If the representor is in a better position than the representee to know the truth, the court may imply a statement of fact that
the representor has reasonable ground for his opinion, making him liable if he does not. (Brown v. Raphael) (Smith v. Land
and House Property Corp)
 If the facts are not equally known to both sides, then a statement of opinion by the one who knows the facts best
involves very often a statement of a material fact, for he implied states that he knows facts which justify his
opinion.
o However, where a speaker without greater knowledge than the representee offers an honest opinion, he makes no actionable
misrepresentation
 Bisset v. Wilkinson
 Humming Bird Motors Ltd v. Hobbs

(iii) A contractual term

o An opinion made by one having superior knowledge and experience may amount to a contractual term. It confers no
remedial advantages over a claim for misrepresentation. Damages are measured by reference to the addressee’s loss flowing
from the speaker’s lack of skill and care in making the statement.
o Negligent misrepresentation and breach of contract: Esso Petroleum Ltd v. Mardon

Puffs

Puffs are neither terms nor representations because it would be unreasonable to rely on them. In Dimmock v. Hallett, it was held that a statement
that land was ‘fertile and improvable’ would only exceptionally be considered an actionable misrepresentation.

(i) However, the more resemblance the statement bears to a statement of opinion, the more likely it will be found to contain an
implied statement of fact. (Smith v. Land and House Property Corp)
(ii) The context and specificity of the statement may also elevate the statement to the status of a term. (Carlill v. Carbolic Smoke Ball
Co)

Silence

No general duty of disclosure

Contract law only responds to active misrepresentation and there is generally no liability for silence or non-disclosure, even it relates to
important facts that the silent party knows or should know that the other party is ignorant of or mistaken about (not induced by the party).
(Keates v Cadogan) (Smith v Hughes) Consistently, the 1976 Act only applies where the defendant makes a positive representation.

In contrast, the European Draft Common Frame of Reference recognises a general duty of disclosure which applies to all business and consumer
contracts. The information to be disclosed is such ‘as the other person can reasonably expect, taking into account the standards of quality and

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performance which would be normal under the circumstances…’. The business is liable for any losses caused to the other party by its failure to
disclose even if no contract is concluded.

Four arguments support the general denial of liability for non-disclosure

(i) Incentive to invest: the law should give parties the incentive to acquire such information.
(ii) Permissible self-interest: the traditional picture of contract negotiation is of steely-eyed businessmen dealing ‘at arm’s length’.
Parties are under no obligation to help one another.
(iii) No liability for omission: the common law does not generally impose liability for mere nonfeasance or pure omissions.
(iv) Uncertainty and floodgates: If a duty of disclosure were recognized, it would be very difficult to determine when the duty arises
and what its precise contents are.

In spite of the general bar, English law can protect the less knowledgeable party by:

i) Extending the catchment of actionable misrepresentation

ii) Imposing a duty to disclosure where parties are in special relationships
iii) Invoking other doctrines which can meet the problem of disclosure indirectly

Extending the scope of actionable misrepresentation

(i) Change of facts: falsification by later events

Change of circumstances can convert what was a true statement into an actionable misrepresentation, unless the representor corrects it. There is
an obligation on the vendor to disclose a change of circumstances, which would almost certainly put off the purchaser, either completely or on
the original terms. (With v O’Flanagan)

It seems only reasonable to expect the representor to disclose changes known to him (With v O’Flanagan), but the requirement of knowledge
amounts to imposing liability only for fraud. It contradicts the general position that a misrepresentation is defined by its veracity irrespective of
the representor’s state of mind.

For statements of intention, Trail v Baring requires the representor to disclose his change of intentions before the conclusion of the contract.

Wales v Wadham contradicts and the decision has been approved in Livesey v Jenkins. It is objectionable as the representee has an assumption
that the statement of intention holds hood at least up to the formation of the contract.

(ii) Half truths

A party is liable if he omits important qualifications that distort the representee’s assessment of the proper weight to be a attached to the
statement. (Mislead the party to draw wrong implications or imply the facts omitted do not exist)

 Nottingham Patent Brick and Tile Co v Butler

 Clinicare Ltd v Orchard Homes & Developments Ltd
 Trade Description Act 1968; Consumer Protection Act 1987

Exceptions to the no-liability rule based on special relationships

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 Contract Law Notes
There are exceptions to the no-liability rule: (1) defined by the nature of the contract or (2) defined by the relationship between the parties.
However, Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd held that the 1976 Act does not apply where there no active
representation is made at all.

(i) Contracts uberrimae fidei: contracts of utmost good faith

It concerns with the exclusive knowledge of one party and failure to disclose them. In such cases, the no-liability rule does not apply and failure
to disclose makes the contract voidable. The content of the duty of disclosure varies with the type of contract.

 Insurance: the insured party has a duty to disclose all facts which a reasonable or prudent insurer would regard as material to the risk
assessment. Failure to disclose will entitle the insurer to avoid the contract and deny claims under it (Pan Atlantic Insurance Co Ltd v
Pine Top Insurance Co). However, it assumes that the insured knows what information affects the insurer’s estimation of risk. The
Law Commission suggests that:
o The consumer should only have a duty to answer questions carefully and the insurer can only refuse to pay if the consumer is
fraudulent.
o Businesses have a duty to disclosure but only of facts that a reasonable insured in the circumstances would realise the Insurer
wants to know about. The parties can contract out of this limitation (reverting to full disclosure).
 Other types of contracts: contracts of partnership, contracts to subscribe to company shares, family settlements, and contracts of
guarantee. It is arguable that these instances can be generalised into a duty of disclosure whenever one party has knowledge which is
inaccessible to the other.

(ii) Fiduciary relationships

Fiduciary relationship (信託關係): A entrusts B to perform a specific job, or to hold or control A’s property, or A trusts in, depends on, or is
committed to B.

Where B abuses A’s trust to obtain an advantage at A’s expense, B will not be permitted to retain the advantage, although the transaction could
not have been impeached if no such confidential relation had existed. (Tate v Williamson)

Objections to disclosure duty:

i) The need to give incentives to acquire knowledge

ii) To allow self-interested behavior
iii) Concern about floodgates largely disappear
a. ‘Open the floodgates’: if a court recognizes some cause of action it will lead to a dramatic increase in litigation. [Google]

The following will vary with the precise nature of the fiduciary relationship:

i) Content of the duty

a. Make particular disclosures
b. Avoid conflicts of interests
c. Give disinterested advice
d. Suggest independent advice
ii) Appropriate remedies
a. Recession
b. Account of profits made
c. Liability for equitable compensation

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Indirect techniques of giving relief for non-disclosure

i) Mistake
a. Where A knows of B’s mistake as to the terms of the contract, the contract is void. (Therefore A must correct B’s mistake)
ii) Unconscionable bargain
a. A exploits B’s disability to extract a grossly unfair exchange (including ignorance of the value of the contract’s subject
matter)
b. Ayres v. Hazelgrove
iii) Non-commercial guarantees are only enforceable if lenders ensure that guarantors are independently advised of the material
features of the contract.
iv) Onerous terms in an unsigned document purporting to bind a party are only enforceable if that party had reasonable notice of the
terms.
v) Statutory duties of disclosure designed to mitigate the effects of inequality of bargaining power between consumers and traders.
a. e.g. Package travel, Package Holidays and Package Tours Regulation 1992
vi) Duty of care arising between parties in a ‘special relationship’
a. No general duty to rescue others from harm (Yuen Kun-Yeu v AG of Hong Kong)
b. Tortious duty to disclose information related to the contract
c. Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd (1990)
vii) Implied terms
a. Most effective for protecting the parties’ reasonable expectations
b. Implied terms make the expectations contractually enforceable unless the other party discloses deviations.
c. Exclusion of implied terms may be barred (Unfair Contract Terms Act)

Made to the claimant

It is established in Smith v Eric Bush that:

An actionable misrepresentation must have been addressed either to the claimant directly, or to a third party with the intention that it be passed
on to the claimant.

The third party may be a member of the public at large (Andrews v Mockford)

‘Spent’ misrepresentation: where a representation is made by a contracting party which is relied on by the other contracting party in entering the
contract, it becomes 'spent' such that it cannot then be relied on by third parties (Gross v Lewis Hillman Ltd)

In cases of indirect communication, the 1967 Act only applies to A’s misrepresentation communicated via B to C if it induces C to contract with
A. Otherwise, C’s actions lie in the torts of deceit or negligent misrepresentation.

Inducement and materiality

Inducement

The claimant must prove that the misrepresentation induced him to enter into the contract. The standard of causation required is low. It only
needs to be ‘one of’ his reasons for entering into the contract. It needs not to be the ‘but for’ reason. ( Edgington v Fitzmaurice) (Re Leeds Bank)

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Inducement is strongly inferable from the materiality of the misrepresentation. The claimant may not need to prove it affirmatively if the
material misstatement made to him from its nature induced him to enter into the contract. (Mathias v Yelts)

The fact that the claimant could have, but did not, verify the accuracy of the representation will not generally bar his claim. (Redgrave v Hurd)

‘The representation once made relieves the party from an investigation…’

However, if it would be reasonable for a representee to take an opportunity to discover the truth (or unreasonable for him to rely on), the claim
on negligent misrepresentation will fail. It will be the same position as wholly innocent misrepresentation. A failure to verify may lead to
contributory negligence hence reduces damages.

 Peekay Intermark Ltd v ANZ Banking Group Ltd

 Kyle Bay Ltd v Underwriters

There will not be requisite inducement if the claimant is:

i) Unaware of the representation (Horsfall v Thomas)

ii) Knows that the representation is untrue (Cooper v Tamms)
iii) Is unaffected by the representation because he relied on other information (Atwood v Small)
iv) Regards it as unimportant (Smith v Chadwick)

 JEB Fasteners v Masks Bloom and Co

Materiality

The immateriality of the misrepresentation will not defeat the claim if the representor was fraudulent, (Smith v Kay) or knows or ought to know
that his statement will influence the claimant (Nicholas v Thompson) (Goff v Gauthier).

If immateriality will defeat the claim, then there will be disagreements over whether the materiality requirement:

 Simply functions as evidence of inducement

o There is presumed inducement if the representation is material
o If it is not material, the claimant must prove affirmatively that he was induced into the contract (Museprime Properties Ltd v
Adhill Properties Ltd)
 Is separate from the inducement requirements (Smith v Chadwick)
o Making materiality an objective requirement which filters out trivial statements analogous to ‘mere puffs’.

2. Money Rewards for misrepresentation

2 principal remedies for actionable misrepresentation:

i) Rescission (allowed for every misrepresentation subject to the bars)

ii) Damages (succeeds under Misrepresentation Act unless the representor can show ‘purely’ innocent – not actionable)

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2 Complexities in Misrepresentation Act:

i) It widens the test for actionable misrepresentation, but links the measure of damages to the common law action of deceit,
necessitating reference to the common law actions.
ii) Other money claims may be available. (Column III, IV, V above)

Damages under section 2(1) Misrepresentation Act 1967

The common law claims are ‘out-gunned’ by the section 2(1) action which:

 Lowers the qualifying threshold

 Yields the most generous measure of damages via ‘fiction of fraud’

B must resort to common law actions if there was no contract between A and B. This can occur where:

 A’s misrepresentation induces B into a contract with C.

o Hedley Byrne v Heller

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 A’s misrepresentation induces B into a contract with A, but the contract is void, as for mistake or illegality.

Lowering the qualifying threshold: comparing fraudulent, negligent, and section 2(1) misrepresentation

Section 2(1) of the 1967 Act prescribes:

(a) ‘Fiction of fraud’: The measure of damages – a representor is liable for damages as if he had made a fraudulent misrepresentation even
though ‘the misrepresentation was not made fraudulently’.
(b) The qualifying threshold – the representor is liable 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’.

The reversal of burden of proof is a radical departure from the common law actions. It aims to eliminate obstacles of proof in the common law
actions for fraudulent and negligent misrepresentations.

1. Fraudulent misrepresentation (deceit)

Fraudulent misrepresentation under common law

To succeed in common law deceit, the representee must prove that the representor made his false statement (Derry v Peek):

(ii) Knowingly
(iii) Without belief in its truth; or
(iv) Recklessly
 Careless of whether it be true or not, even if his motive is worthy (Polhill v Walter)
 Require a gross carelessness justifying an inference of fraud (Angus Clifford)

At common law, it is difficult to prove fraud but the Misrepresentation Act gives generous deceit measure.

Fraudulent misrepresentation under section 2(1)

Under this section, the claimant:

 Needs NOT show fraud (needs not show that the representor made the statement (1) knowingly, (2) without belief in its truth, and (3)
recklessly);
 Needs to show:
 The representor made a false statement, which
 Induced him into a contract with the representor

The representor:

 Needs to show that he honestly believe on the reasonable grounds that his statement was true.
 If he cannot show it, then the default position is that there is fraudulent misrepresentation.

2. Negligent misrepresentation

Negligent misrepresentation: statements made carelessly or without reasonable grounds for believing their truth.

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Negligent misrepresentation under common law

To succeed in common law negligent misrepresentation,

 The claimant needs to show that statements made by misrepresentors are made carelessly or without reasonable grounds for believing
their truth.
 Hedley Byrne v Heller recognised ‘special relationships’ including fiduciary relationship (Nocton v Lord Ashburton) that can trigger a
duty to take care in making statements. According to Hedley, a special relationship requires: (3-fold test):
1) That the representor reasonably foresaw that the representee would rely on the statement;
2) That there was sufficient proximity between the parties; and
3) That it is fair, just and reasonable for the law to impose such a duty of care.
 Hedley Byrne v Heller widened the scope of damages-yielding misrepresentations, but the damages for negligence is less generous
than for deceit because it is vulnerable to two reductions from which deceit claims are immune:
1) The rule on remoteness of damages limits damages to losses that the representor could reasonably foresee as flowing from
the misrepresentation. (The Wagon Mound)
2) Damages can be further reduced by the representee’s contributory negligence. (Gran Gelato Ltd v Richcliff (Group) Ltd)

The liability is confined by the requirement that the claimant be in a ‘special relationship’ with the representor such that the latter owes him a
duty to take reasonable care in making the statement.

The uncertainty of the notion of ‘special relationship’ is reflected in Hedley Byrne v Heller (‘reliance’, ‘assumption of responsibility’,
‘undertaking’)

Negligent misrepresentation under section 2(1)

Since section 2(1) of the 1967 Act invokes the ‘fiction of fraud’, it would seem to be immune from the reductions by remoteness and
contributory negligence.

Under this section, the claimant:

 Needs NOT prove representor’s negligence

 Needs NOT prove a special relationship which triggers misrepresentor’s duty of care;
 Needs to show:
 The representor made a false statement, which
 Induced him into a contract with the representor

The representor:

 Needs to show that he honestly believe on the reasonable grounds that his statement was true.
 The claimant will be entitled to generous measure of damages as for fraud, unless the representor can prove his honesty and
reasonableness in making the statement.

The impact of section 2(1) can be seen in Howard Marine and Dredging Co v A Ogden & Sons.

3. Innocent misrepresentation

Innocent misrepresentation under common law

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At common law, only rescission and indemnity are available but no damages for innocent misrepresentation.

The court can circumvent this by classifying the false statement as a term of the contract and awarding expectation damages. (De Lassalle v
Guildford)

Innocent misrepresentation under section 2(1)

There is less need to do this after Hedley Byrne v Heller and The 1967 Act. The reversal of burden of proof means that a misrepresentation,
which is ‘innocent’ (fail to prove fraud or negligence) at common law may still attract liability under section 2(1). Only if the representor can
prove otherwise is his representation ‘innocent’. We can call this ‘purely innocent’.

4. Non-disclosure

Section 2(1) does not apply to pure non-disclosures since an active misrepresentation is required under the Act. (Banque Financiere de la Cite
SA v Westgate Insurance Co)

The remedial advantage of a section 2(1) claim: the fiction of fraud

(i) The basic measure of damages under the 1967 Act is reliance measure (Royscot Trust Ltd v Rogerson); (Sharneyford Supplied Ltd
v Edge Barrington Black and Co)

(ii) The starting point is that the representee can recover for:
a. Reduction in property value at the time of contracting; and
b. Consequential loss: The representee can recover damages for other ‘out of pocket’ losses such as for personal injury, loss of
damage to property, and wasted expenses.

(iii) The ‘fiction of fraud’

 It has been criticized for yielding an unjustifiably favourable measure of damages where the representor was merely negligent
or simply unable to prove that he was not negligent.

The remedial advantages of fiction of fraud

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Doyle v Olby (Ironmongers) Ltd and Smith New Court Securities Ltd v Scrimgeour Vickers set out the main principles in assessing damages for
fraud:

1. Causation
 Under the Act and in cases of fraud, there is an assumption that the ‘but for’ test is satisfied. However, in cases of negligent
misrepresentation, it is relevant that the representee might have entered the contract anyway, even if on different terms, since
this affects the causal connection between the misrepresentation and the loss claimed. (South Australia Asset Management Corp
v York Montague Ltd)

2. No remoteness limit
 Whilst only foreseeable losses (not too remote) can be claimed under negligent misrepresentation, damages for deceit are not so
limited. The claimant can recover all losses flowing from the fraud regardless of the foreseeability.

3. Existing flaws and loss in value after contractual formation

 In general, the representee is entitled to the difference between the price paid and the market value of the property at the time
the purchase was made.
 In cases of fraud, Smith New Court v Scrimgeour Vickers established that the representee can also claim for falls in the value of
the property after contract formation if either:
o The misrepresentation has continued to operate after the date of the acquisition of the asset so as to induce the
claimant to retain the asset, or
o The circumstances of the case are such that the plaintiff is, by reason of the fraud, locked into the property.
 SV’s fraudulent misrepresentation about the presence of rival bidders induced SNCS to buy shares for £23 million when the
market price at the time was £21.8 million. In addition to the difference between them, the court also allowed SNCS’s claim for:
o Loss due to ‘existing flaws’ in the property: the subsequent discovery of another unconnected and unknown fraud
in the company meant the value of the shares at the time of the contract was only £12.25 million. SNCS could
recover the entire price paid.
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o Loss due to being ‘locked into’ the property: Since it was not commercially feasible for SNCS to resell the shares
immediately on discovering the fraud, it suffered further losses from a general fall in the share market. The shares
were evevntually sold for £11.75 million.
 Thus,
o £23.00 million = price paid
o £21.80 million = devaluation due to fraud
o £12.25 million = further devaluation due to existing flaw
o £11.75 million = price sold (further devaluation due to being locked into property)
o Damages = £23 million - £11.75 million = £11.25 million.
 This is not applicable in negligent misrepresentation. (South Australia Asset Management v York Montague)

4. Loss of opportunity
 In practice, damages for fraud and damages for breach can yield the same sum if reliance loss includes ‘loss of opportunity’ to
make another similarly profitable contract.
 To restore the representee to the position he would have been if he had not entered into the contract, damages must include the
loss of profits that he would have made from entering another similar contract.
 The defendant can even recover loss to reflect the fact that, but for the misrepresentation, he would have made a more profitable
contract (ie on better terms) with the representor (Clef Aquitaine SARL v Laporte Materials Ltd)
 Example from East v Maurer:
o E was induced to buy a hairdressing business for £20,000 by M’s fraudulent misrepresentation that he had no intention
of working regularly in another hairdressing salon in the same town. In fact, M did so and many of his clients followed
him, resulting in significant trading losses to E, who eventually sold the business for £5,000. The court awarded E:
 The difference between what E paid and what he received;
 E’s wasted expenditure, e.g. in trying to improve the business;
 £10,000 representing the loss of profits which E would have made from buying another similar hairdressing
business.
 4Eng Ltd v Harper

5. Contributory negligence
 Damages from fraud are immune from the reduction (Alliance & Leicester BS v Edgestop Ltd) while damages for negligent
misrepresentation can be reduced if the loss was partly the representee’s fault. The ‘fiction of fraud’ under section 2(1) makes the
claims being likewise immune.
 In Gran Gelato v Richcliff, it was held that contributory negligence is available where there are concurrent claims in negligence in
tort and under the Act. Ironically, it would be the representor who will have the incentive to argue that he owes and has breached a
tortious duty in order to bring contributory negligence into account.

6. Exemplary damages:
It is arguable that exemplary damages may be available for fraudulent misrepresentation.

Criticism for the generosity of ‘fiction of fraud’

1. Liability versus measure

 Some argued that the ‘fiction of fraud’ should only be used to establish liability rather than measure of damages.
 Royscot Trust v Rogerson expressly supports fiction of fraud but it did not mention this point as the loss claimed was
foreseeable and would have been recovered without the fiction.
 The fraud measure is supported by the literal wording of the Act and by the Law Reform Committee Report.

2. Section 2(1) claims do not tract deceit claims exactly

 There is a small potential for contributory negligence to bite in section 2(1) claims.
 Garden Neptune Shipping Ltd v Occidental World Wide Investment Corp suggests an extended limitation period for fraud (6
years from discovery). However, this may not apply under section 2(1)

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3. ‘Fools should not be treated as if they were rogues’
 It is widely thought to be undesirable and unjustifiable to treat non-fraudulent misrepresentation as if they were fraudulent.
 Section 2(1) is said to be out of step with modern developments. Brown and Chandler argue that it is unlikely that the
legislature really intended unintentional misrepresentation to attract the same moral opprobrium as deceit.
 The law has come to reflect the relative degree of moral fault in damages award (The Wagon Mound). Hedley Byrne v Heller
recognised lesser liability for negligent misrepresentation than for deceit. Section 2(1) is out of line with this approach.
 Smith New Court Securities v Scrimgeour Vickers notes the ‘trenchant academic criticisms’ of the fiction of fraud.
 Rex J suggests that courts may be inclined not to find a misrepresentation at all to avoid having to award fraud-like damages.
(Avon Insurance v Swire)

4. Counterpoint to above
 The aim of the 1967 Act was to simplify and enhance protection for the victims of misrepresentation by lowering and
qualifying conditions for damages in tandem with awarding the most advantageous measure of damages.
 Dispensing the representee from proving fraud or negligence, but still awarding fraud damages straightforwardly achieves
simplification and greater protection for the representee.
 If the default measure for section 2(1) claims is the negligence measure, the representee would revert to the position of
having to prove fraud to access the fraud damages, so undermining the aims of the 1967 Act.
 The fraud measure merely compensates the representee for his provable losses and this does not seem inherently unjust.

Other money claims: expectation damages, restitution, and indemnity

Possible claims are:

(i) Damages on the contract measure

a. Damages on the contract measure where the representation is incorporated as a term of the contract.
(ii) Restitution on rescission
a. Where the contract is rescinded for misrepresentation the representor must return any benefit received under the contract as
part of the mutual giving-back required for rescission.
(iii) Indemnity on rescission
a. The representee can recover any costs incurred in discharging legal obligations necessitated by the rescinded contract.
b. These costs are part of the ‘price’ the representee pays for the contract, which the representor should ‘give back’ on the
contract’s rescission.
c. Newbigging v Adam
(iv) Damages in lieu of rescission
a. Section 2(2) of the 1967 Act gives the court a discretionary power to substitute any right the representee has to rescind the
contract with a money award.

Distinguishing reliance damages, restitution, and indemnity

They all claim to restore the representee to his ‘pre-contractual’ position.

 Restitution returns to the representee what he paid under the contract and an indemnity compensates him for the additional costs and
liabilities directly imposed on him by the contract.
 Reliance damages include consequential loss from entering the contract that does not enrich the misrepresentor (e.g. personal injury,
damaged goods, and wasted expenditure), and loss of opportunity where fraud is present (not available for innocent misrepresentation
or ‘purely innocent’ under the Act.

The differences are illustrated by Whittington v Seale-Hayne. [Refer to Mindy for details]

Combination of Claims

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Any item of loss can only be claimed once. The claimant must choose between going ‘forwards’ and ‘backwards’ but cannot do the both at the
same time.

The claimants can:

 Go ‘backwards’
o Claim restitution and indemnity on rescission (or damages in lieu of rescission) in addition to reliance (excluding
devaluation of the property), aggravated and exemplary damages.
 Go ‘forwards’
o Claim remedies for breach of contract.

The claimants cannot:

 Simultaneously claiming expectation damages and either reliance damages or rescission.

 Go backwards in money and in kind by claiming rescission, and either damages in lieu of rescission or devaluation of the property
acquired under the contract.

3. Rescission for misrepresentation

What is Rescission?

(i) The effect

 It operates to set aside the contract.
 It is conditional on mutual restoration of any benefits received under it.
o Each party gives back and gets back.
 The aim is to prevent unjust enrichment (MacKenzie v Royal Bank of Canada)

(ii) Availability
 Available for all types of misrepresentation subject to the bars.

(iii) How and when?

 Rescission is only effective once it is communicated to the other party. The timing is important if the representee wants to recover
property transferred under the voidable contract.
 Rescission may be a judicial remedy (awarded by the court) or a self-help remedy (effected by the representee’s own action).
 If it is a judicial remedy, it is communicated when the representee resists a claim for specific performance by counterclaiming for
rescission, or when the representee applies directly to the court to set aside the contract.
 If it is a self-help remedy, it is communicated when the representee notifies the representor.
 A representee may be able to rescind by taking all possible steps to recover the goods, without actually notifying the representor.
o Car and Universal Finance Co Ltd v Caldwell

(iv) Rescission vs. termination

 Rescission for misrepresentation and other vitiating factors is often described as ‘rescission ab initio’ (the contract is set aside
from the beginning). Although property rights can pass under a voidable contract up to the time of rescission, as against the
misrepresentor, rescission nullifies the contract prospectively and retrospectively. Any obligations yet to be performed are
cancelled and any benefits transferred are treated as if they were never due and so must be returned.
 Termination of contracts for breach recognizes an undoubtedly valid contract between the parties. In limited circumstances, the
contract may be terminated by the innocent party, thereby dispensing both parties from further performance of their primary
obligations. Termination is only prospective, ‘rescission de futuro’ (for the future). Anything transferred under the contract up to

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the point of termination is generally not recoverable by the claimant (cannot go backwards) but is taken into account in
calculating his damages, which are designed to take him ‘forwads’ to his expectation position.

The ‘bars’ to rescission

There are 5 ‘bars’ to rescission finalised by the 1967 Act (may be lowered or removed where there is fraud):

(i) Affirmation; (ii) lapse of time; (iii) third party rights; (iv) impossibility of mutual restitution; (v) inequity.

How the bars to rescission apply to different types of misrepresentation

Removal of bars by Misrepresentation Act

The Act preserves the representee’s right to rescission even if the representation becomes incorporated as a term of the contract. The problem is
that is deprives the representee of his former right to contractual damages (since one cannot go ‘backwards’ and ‘forwards’).

Where a claimant’s contractual damages exceed his reliance damages (i.e. good bargain), the court has to decide whether the refusal to continue
the contract amounts to rescission (reliance damages) or termination (expectation damages). Another complication is that a claimant may not
qualify for termination (only available for ‘serious’ breaches).

The Act removes the former bar to rescission where contracts for the sale of property induced by non-fraudulent misrepresentation have been
performed. (Angel v Jay)

It often operated unjustly because it may be impossible to discover the truth before the property is transferred.

Affirmation

Misrepresentation makes the contract voidable therefore the claimant can choose to rescind or affirm the contract.

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1. Affirmation requires knowledge of the facts giving rise to the right to rescind.
 However, a representee without the relevant knowledge may still be estopped from denying affirmation if the representor
has detrimentally relied on the representee’s unequivocal conduct indicating his intention to affirm. ( Peyman v Lanjani)

2. Affirmation can be express or implied from conduct.

 Rescission has been barred where after discovering the misrepresentation, the claimant continues using the goods bought
(United Shoe Machinery Co of Canada v Brunet), accepts dividends, votes at meetings, attempts to sell the shares bought
(Scholey v Central Rly Co of Venezuela), or continues to reside and pay rent on the premises leased (Kennard v Ashman).
 However, the mere use of property, or delay in rescinding, in order to verify the suspicion of misrepresentation does not
amount to an affirmation. (Long v Lloyd).
 The court will take into account the nature of the contract, any lapse of time, any change of position by the representor in
reliance on the absence of protest by the representee, and whether third parties have been affected, (Clough v London & NW
Rly) (BCCI v Ali)

3. Affirmation does not bar rescission if the representor has not been prejudiced by the affirmation. (Habib Bank Ltd v Nasira Tufail)

Lapse of time

Where the misrepresentation is fraudulent, lapse of time cannot bar rescission whilst the representee remains ignorant of the misrepresentation
(Armstrong v Jackson).

With non-fraudulent misrepresentations, a representee who fails to rescind the contract within a reasonable time of discovering the truth may be
held to have affirmed the contract. (Clough v London & NW Rly)

Even if the representee remains ignorant of the non-fraudulent misrepresentation, a substantial passage of time may bar rescission. (i.e. lapse of
time either operates as evidence of affirmation or as an independent bar. (Leaf v International Galleries) [The contracts cannot be kept open and
subject to the possibility of rescission indefinitely.]

Third party rights

Rescission will be barred if an innocent third party has given consideration to acquire an interest in the subject matter of the contract (White v
Garden).

e.g. Rescission of a contract for shares is barred once the company goes into liquidation, since this fixes the creditor’s rights to share in the
company’s assets.

The voidable status of contracts means that the contract’s ability to transfer rights is effective until the contract is rescinded. Moreover, if a third
party has acquired property rights in the subject matter of the contract, it is obviously impossible for the representor to return the precise property
to the representee as part of rescission.

Impossibility of mutual restitution

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Rescission involves the ‘giving back and taking back of the obligations which the contract has created as well as the advantages’. (Newbigging v
Adam)

Where the contract is partially or wholly executed, rescission is barred if it is impossible to return the benefits transferred under the contract.
This is the main bar to rescission.

Rescission has been barred where return in kind:

 To the representee was never possible, as with services (Boyd & Forrest v Glasgow & South Western Railway); or has become
impossible, as where the property is substantially dissipated through use, consumption, or selling-on to a third party. (White v Garden)
 To the representor is not substantially possible, as where the claimant bough a mine and sought to rescind after it had been worked out.
(Vigers v Pike)

This bar has shown some signs of relaxation by allowing monetary substitution:

 O’Sullivan v Management Agency & Music Ltd

 Erlanger v New Sombrero Phosphate Co
 Spence v Crawford (fraud increases the courts’ willingness to make adjustments to allow rescission)

However, the bar retains much of its force by requiring ‘substantial’ restitution if not precise. (Smith New Court Securities Ltd v Scrimgeour
Vickers)

Inequity: section 2(2) Misrepresentation Act 1967

The Act empowers courts to deny rescission, awarding the claimant damages in lieu for non-fraudulent misrepresentations, where ‘it would be
equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as
well as to the loss that rescission would cause to the other party.’

The motive is pro-representor. While termination is only available for a serious breach of contract, rescission is prima facie available for any
misrepresentation. The Act irons out this anomaly in two moves:

1. Section 1(a) liberalises access to rescission

 Preserving the representee’s right to rescind even if the representation is incorporated only as a warranty.

2. Section 2(2) restricts access to rescission by giving courts the discretion to protect a non-fraudulent representor from being deprived of
his entire bargain for a relatively trivial misrepresentation and to prevent the representee from escaping a bad bargain. In return, the
representee is awarded damages.

 William Sindall plc v Cambridgeshire CC

o Minor impact on the buyer
o Relative unimportance of the representation
o Colossal loss to the seller
Damages in lieu of rescission under Section 2(2)

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Measure of damages

If rescission is barred under section 2(2), what is the measure of damages? There are two concerns over the award of damages:

 Section 2(2) damages cannot replicate the reliance damages as it would deprive section 2(2) of any effect and would make nonsense of
section 2(3), which recognises the possibility of concurrent claims under both and requires section 2(1) awards to take account of any
section 2(2) awards.
 ‘In lieu of rescission’ should not mean that the measure should be the moneys worth of actual rescission of the contract as it would
totally undermine the reason for denying rescission to prevent the hardship to the representor of being deprived of the whole bargain
because of some minor misrepresentation). [See William Sindall case above]
The measure of damages in lieu of rescission should be on the basis that the misrepresentation is a term of the contract that has been breached,
although the representation has not promised the truth of the statement.

In William Sindall, the court held that the correct measure is the difference in value between what the representee believed he was acquiring and
what he in fact acquired. Section 2(2) is concerned with damage caused by the property not being what is was presented to be.

Availability of section 2(2) damages

(i) Govt of Zanzibar v British Aerospace has confirmed that the representee must have a good claim for rescission to be eligible for damages ‘in
lieu of’ rescission (rescission cannot be barred). There must be something value to ‘trade in’ for the damages.

(ii) Section 2(2) is not an independent route to previously available damages. The representee can only obtain damages ‘in lieu’ where the he has
sought but been denied rescission by the court.

4. Exemption of liability for misrepresentation

The main types of clauses

Clauses inserted into a contract to prevent claims for misrepresentation may take various forms:

(i) Exclusions of liability for misrepresentation

 These clauses seek to exempt the defendant from liability for an otherwise actionable misrepresentation.
(ii) ‘No representation’ or ‘no reliance’ clauses
 These clauses seek to prevent the claimant from establishing one of the ingredients of an actionable misrepresentation by agreement to a
state of affairs that may not actually be true. (i.e. that the defendant did not make any representation or that the claimant did not rely
upon any representation made.)
(iii) Entire agreement clauses
 These clauses state that the written contract constitutes the ‘entire agreement’ between them. They prevent the claimant from arguing
that there was a collateral term (i.e. a term outside the main contract), which the defendant has breached.

Evidential and contractual estoppel

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Traditionally, courts have denied effect to no-representation and no-reliance clauses by treating the clause itself as a representation rather than a
contractual term. (Lowe v Lombank) Consequently, the defendant in a misrepresentation claim would need to establish an evidential estoppel by
showing that he believed in the truth of the no-reliance clause.

However, Springwell Navigation Corporation v JP Morgan reversed this in practice. The court held that there is nothing in principle to prevent
parties from contractually agreeing upon the existence of a fictitious state of affairs.

Evidential estoppel

Evidential estoppel aims to prevent a party (B) from alleging that facts represented by him are actually untrue.

Lord Justice Chadwick in EA Grimstead & Son Ltd v McGarrigan stated that A will have to show:

(1) A clear and unequivocal representation by the other party (B) that B has not relied on any pre-contractual statements;
(2) That B intended A to act on the declaration; and
(3) That A believed the declaration to be true and acted or relied on it.

Contractual estoppel

This attempts to preclude a party from denying an agreed or common assumption of fact or as to the meaning of the contractual document.

Construction

No-representation and no-reliance clauses are nevertheless subject to construction and statutory control, like any other term.

General ‘themes’ of construction:

An exclusion of liability for misrepresentation must be clearly stated either by express exclusions of liability, or by no-representation or no-
reliance clauses. Talk of the contract superseding prior ‘representations’ will not by itself absolve the defendant of misrepresentation.

Statutory controls

Section 3 of Misrepresentation Act

A term which excludes or restricts liability or the available remedies for misrepresentation ‘shall be of no effect except insofar as it satisfies the
requirement of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977’.

2 questions to consider:

1) Does it exclude or restrict liability or the available remedies for misrepresentation?

2) Does it satisfy the requirement of reasonableness?

The court’s comment in Springwell Navigation has the following effects:

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(i) Exclusions of liability or of an otherwise available remedy for misrepresentation are clearly within the scope of section 3. (Walker
v Boyle)
(ii) ‘No representation’ or ‘no reliance’ clauses are both within the scope of the section 3. (Springwell Navigation)
(iii) An entire agreement clause which merely prevents the establishment of any collateral warranty relating to the subject matter of
the main agreement is outside the scope of section 3. (Watford Electronics v Sanderson)

The reasonableness requirement is determined in accordance with section 11 UCTA. ( Cleaver v Schyde Investment)

The Unfair Contract Terms Act 1977

Section 3(2)(b)(i) UCTA controls terms which purport to allow one party the discretion to give no, only partial, or substantially different
performance from that which was reasonably expected by the other party. Thus, a clause preventing any collateral warranties could
exceptionally, be subject to section 3(2)(b)(i).

The Unfair Terms in Consumer Contracts Regulations 1999

UTCCR applies a requirement of fairness to all non-core non-negotiated terms in consumer contracts. Two points suffice here:

(i) The test of ‘unfairness’ under UTCCR and the test of ‘reasonableness’ under UCTA are unlikely to yield different results in the
context of a clause attempting to avoid liability for misrepresentation.
(ii) Although entire agreement clauses fall outside the scope of section 3, they will nevertheless fall inside the control of UTCCR.
4. The justification for remedying misrepresentation

 Rescission and damages for fraudulent or negligent misrepresentations are readily explicable in terms of the representor’s wrong.
 The wider scope of liability under section 2(1) of the Act can be explained by the concern to raise the standard of care in pre-contractual
negotiations.
 Something beyond the representor’s wrongdoing or lack of care is required to explain rescission for purely innocent misrepresentations.
 Although Jessel MR in Redgrave v Hurd refers to the innocent misrepresentor’s ‘moral delinquency’ in enforcing a
beneficial contract obtained by a statement ‘which he knows now to be false’, this sort of constructive unconscientiousness
is unhelpful in pinpointing the exact reason for invalidating the contract.

MISTAKEN ASSUMPTIONS

27. Common (shared) mistake at common law

Common mistake refers to when both parties make the same mistakes.

General principles
As laid out in Great Peace v Tsavliris, a claimant can only void a contract by showing that:

(i) Construction: The risk of the mistake was not allocated to either party,

(ii) Fault: he was not at fault (e.g. by making a very unreasonable mistake or inducing the other party’s mistake),

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(iii) Fundamentality: the mistaken common assumption was so serious as to make performance ‘impossible’.

The contractual allocation of risk: construction

Step 1 of the three-step approach is to ask whether as a matter of construction the contract has allocated the risk of the mistake to
one or other party, or has made the contract conditional on the accuracy of the assumptions which were mistaken, either expressly
or impliedly.

Risk allocation to either party

 Courts usually find that a party has assumed the risk of the ordinary uncertainties existing at the time of contract
formation.

 If so, the party to whom the risk is allocated must perform his contractual obligations or be liable for its non-
performance. No relief is available for the mistake.

 McRae v Commonwealth Disposals Commission

Condition precedent

 The contract may provide, expressly or impliedly, that the parties’ obligations will only arise if an assumed state of affairs
is true, so that no obligations arise if this contingent precedent is not satisfied.

 Associated Japanese Bank v Credit du Nord

Fault

Step 2 is to ask whether the party relying on the mistake was at fault in the sense of inducing the other party’s mistake by its own
careless mistake.

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 ‘A party cannot be allowed to rely on a common mistake where the mistake consists of a belief which is entertained by
him without any reasonable grounds for such belief’(Associated Japanese Bank v Credit du Nord)

 McRae v Commonwealth Disposals Commission

Fundamentality

Step 3 is to ask whether the mistaken assumption is fundamental. The following mistakes may (but not necessarily will) be
operative:

(i) Mistakes as to the existence of the contract’s subject matter;

(ii) Mistakenly acquiring one’s own property;

(iii) Mistake as to the essential quality of the contract’s subject matter; and

(iv) Mistake as to an essential background assumption.

Justifications for the mistake doctrine

The implied term analysis

Those denying the existence of a mistake jurisdiction say that contract construction can provide the complete answer to the relief
granted in the name of mistake – problems of contractual mistake can be dealt with by the law on contract formation on implied
terms. However, opinions diverge.

The implied terms analysis

 Implied condition precedent: No contract comes into effect if the parties’ common assumption is incorrect.

 Implied condition subsequent: Explains the doctrine of frustration.

 McRae v Commonwealth Disposals Commission was reasoned solely on contractual construction.

However, the view that the implied term analysis provides a complete explanation for all cases where contracts are voided for
mistake can be criticised:

(i) Contradicted by weight of authority:

 In Bell v Lever Brothers, Lord Atkins said ‘if the contract expressly or impliedly contains a term that a
particular assumption is a condition of the contract, the contract is avoided if the assumption is not true’. He
also said that this was merely ‘an alternative mode of expressing the result of a mutual mistake’.

 Thus, the expression ‘condition precedent’ is merely a synonym for common mistake.

(ii) Odd reasoning:

 Odd in saying that the contract is void because an implied term inside that void contract says so.

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(iii) Uncertain

 The concept of an implied condition precedent tells us little about when such a condition will be implied.

(iv) Over-inclusive:

 Coverage of implied conditions precedent is potentially wider than that of mistake since there is no
necessity in restricting it to very serious (fundamental) mistakes.

Impossibility of performance

Mistake is said to operate by refusing to recognise any contractual obligations ‘if It transpires that one or both of the parties have
agreed to do something which it is impossible to perform’ (Great Peace v Tsavliris).

What does ‘impossibility of performance’ mean?

In McRae v Commonwealth Disposals Commission,

 Physical impossibility is insufficient to void a contract if the risk of such impossibility is allocated to a party, or the
claimant’s mistake is unreasonable.

 Physical impossibility is unnecessary to void a contract.

 It is enough if the ‘substance’ of the contract is deemed to be ‘impossible’ to achieve (i.e. the actual state of affairs is
radically different from that supposed by the parties at formation).

Consent nullified (i.e. the ‘no consent’ view)

Five reasons:

(i) Impossibility, essential context, and lack of consent

 The parties’ consent is vitiated if the falsification of their essential contextual assumption makes
performance of the substance of the contract impossible.

(ii) Meaningful consent

 Defective consent voiding contracts is the logical corollary of the positive argument for enforcing contracts
in the first place, i.e. the voluntary assumption of obligations.

(iii) Threshold of consent is fixed by the law

 It is for the law to decide what the entry requirements are for making an enforceable contract.

 The law proceeds on the basis that the objective consent giving rise to prima facie contractual liability can
be negated by a mistake going to the root of the contract.

(iv) Explains the effect of voidness

 The ‘no consent’ view explains why contracts tainted by mistake are void (no effect from the beginning)
rather than voidable (good until the climant rescinds).

(v) Connects the categories of operative mistake

 This approach enables us to see the traditional categories of operative mistake not as a list of qualifying
‘impossibilities’, but merely as illustrations of mistake which can (but not necessarily will) undermine the
substance of the contract.

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Actionable common mistake at common law
An actionable common mistake at common law must be: (i) shared; and (ii) of fundamental importance.

Mistake must be shared

 The explanation is that the law must uphold contractual certainty and avoid giving contract parties an easy escape
route – this necessitates a very narrow scope for operative mistakes.

Mistake must be fundamental

 Operative common mistake ‘must render the subject matter of the contract essentially and radically different from
the subject matter which the parties believed to exist’ (Associated Japanese Bank v Credit du Nord)

Illustrations of operative mistaken assumptions

Judgment in Great Peace v Tsavliris yields the traditional categories of common mistake:

(i) Mistake as to the existence of the subject matter;

(ii) Mistakenly acquiring one’s own property;

(iii) Mistake as to the essential quality of the thing contracted for; and

(iv) Mistake as to an essential background assumption.

Mistake as to the existence of the subject matter

The non-existence of the subject matter of the contract which is mistakenly thought to exist will normally negate the essential
purpose of a contract or the means for achieving it.

 Couturier v Hastie

Mistakenly acquiring one’s own property

Where the parties contract to transfer some interest in property which, unknown to them, already belongs to the buyer, the contract
is void.

 Cooper v Phibbs

Mistake as to an essential quality of the subject matter

In this category of mistake, ‘impossibility’ of perfmance is measured by the extent of deviation from the ‘substance of the
contract’, determined by the parties’ common purpose. This test can be variously stated as:

(i) A mistake about ‘the existence of some quality which makes the thing without the quality essentially different from
the thing as it was believed to be’ (Bell v Lever Brothers);

(ii) A mistake which ‘relates to something which both must necessarily have accepted in their minds as an essential and
integral element of the subject matter’ (Bell v Lever Brothers);

(iii) A mistake as to ‘a vital attribute, of the consideration to be provided’ (Great Peace v Tsavliris).

*Note: Mistake as to ‘quality’ will not void the contract; mistake as to ‘substance’ will.

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Mistake as to an essential background assumption

Mistake as to a background assumption may void a contract if it relates to an essential point of a contract, i.e. they are
‘circumstances which must subsist if performance of the contractual adventure is to be possible’ (Great Peace v Tsavliris).

 Gallaway v Gallaway

 Scott v Coulson

 Sheikh Brothers Ltd v Ochsner

 Griffith v Brymer

 Great Peace v Tsavliris

o Toulson J said that, if there was five days’ sailing distance between the ships, the contract would be void
since its purpose would be unachievable.

No mistake as to essential background assumption in:

 Bell v Lever

o Lord Atkin explains that: ‘The contract released is the identical contract in both cases, and the party paying for
release gets exactly what he bargains for’.

The effect of common mistake

 Operative common mistake at common law voids the contract for all purposes.

 This contrasts with the more flexible equitable remedies of rescission, refusal of specific performance for unilateral
mistake, and rectification of the contract.

28. Common (shared) mistake at equity

Rescission (on terms)
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An equitable doctrine of common mistake confers a wider scope of relief and greater remedial flexibility.

 Solle v Butcher

 Grist v Bailey

Rejection of the jurisdiction

The Court of Appeal in Great Peace v Tsavliris rejected an equitable jurisdiction which would set aside contracts not void at
common law. Four reasons:

(i) Contradiction of Bell v Lever

 Solle v Butcher was not readily reconcilable with the result in Bell v Lever.

(ii) Lack of precedent

 No clear authority for a more expansive equitable jurisdiction in Bell v Lever.

(iii) Uncertainty

 Subsequent cases applying Solle v Butcher have not identified ‘the test of mistake that gives rise to the
equitable jurisdiction to rescind in a manner that distinguishes this from the test of a mistake that renders a
contract void in law’.

(iv) Illegitimacy

 It was not the court’s role to dissolve or vary contracts thought to eb harsh on the basis on so-called
equitable principles.

 Some of the post- Solle v Butcher cases were dismissed as muddled, confused, and failing to take account of
contractual allocations of risk.

29. Unilateral mistake at common law

Two types of unilateral mistake can void contracts at common law: (1) mistake as to the identity of the other party and (2) mistake
as to the nature of the document.

Mistake as to identity

The nature of the problem

The problem

Can A recover his property from D?

1. A makes an apparent contract with B believing B to be C

2. A passes property to B under this contract

3. B then passes on to D in a subsequent transaction before B disappears or is not worth suing.

A  B(C)  D

The legal response

In two-party cases, B’s fraud or knowledge that A only intends to contract with someone else is usually enough to deny B the
contract.

In three-party cases, the law must allocate the risk of B’s fraud as between A and D.

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 Where the A-B transaction is void

o No legal title passes with the physical transfer of the property to B.

o B then cannot pass title to D (since B can give no better title than he has).

o The legal title to the property remains with A, allowing A to recover possession from D, who is left unprotected.

 Where the A-B transaction is voidable

o The contract is valid until A rescinds it.

o Until that point, B obtains good legal title from A and can validly pass it on to D.

o A cannot recover the property from D; his only action is against B for reliance damages, if B can be found and is
worth suing.

o However, if A rescinds the voidable contract before B transfers the property to D as a bona fide purchaser, this
revests title to the property in A.

Identity versus attributes

The general rule is that mistake as to the identity of the other party will only void a contract if it goes to the party’s ‘identity’ as
opposed to merely the ‘attributes’ (analogous to the distinction between ‘substance’ and ‘qualities’ in common mistake).

Four ‘rules’ guide the courts in making the identity-attribute distinction:

(i) Objectivity

(ii) Written contracts

(iii) Non-existence of the identity assumed

(iv) Face-to-face dealings

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Objectivity: you cannot accept someone else’s offer

 The objective test of formation prevents a party from accepting an offer knowing that it was not intended to be made to
him.

o Bolton v Jones

 Likewise, there is no valid contract if the offeror knows that the offeree has accepted an offer reasonably believing it to
have come from someone else.

 However, the identity of the other contract party must be vital to the claimant.

o The actioneer is not concerned about the identity of the bidder (Dennants v Skinner)

Written contracts

Where a contract is reduced to writing, it can only be between the persons named in a written contract as the parties to the
contract.

 Cundy v Linsay

 Shogun Finance v Hudson

Non-existence of the identity assumed

 A’s mistake as to B’s identity will only void their contract if A mistook B for another existing and identifiable party, C.

 If A merely believes that B is C who is non-existent or unidentifiable, the contract is only voidable.

o King’s Norton Metal Co Ltd v Edridge: mistaken only as to attributes, i.e. solvency and respectability.

The rule is subject to two exceptions:

(i) A contract may be voided if A makes the additional mistake that C exists, even if C does not exist.

 Lake v Simmons

(ii) It is enough to void a contract when A merely believes that B who pretends to be C was not B (whether C exists or
not), so long as there is an implied term that B is not B (Said v Butt), as where:

 An offer is made only to persons fitting particular descriptions which excludes B (e.g. ‘current students of a
particular university’, or being ‘over 18 years’ to buy alcohol); or

 B may know from pervious dealings that A is unwilling to contract with him (e.g. B is barred from a pub or
soccer match).

Face-to-face dealings

 Where the parties deal with each other face to face, the law presumes that each intends to deal with the ‘person present,
and identified by sight and hearing’.

 The contract is only voidable and bona fide third party purchasers who obtain title before the contract is rescinded are
protected.

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 Held voidable in:

o Phillips v Brooks Ltd

o Lewis v Averay

 However, held void in:

o Ingram v Little

o Lake v Simmons

 The different results are impossible to reconcile – all the sellers (other than Lake) took steps to check the alleged identity
of the buyers.

 The conflicts seems now to have been resolved in favour of voidability (i.e. more likely to be voidable) unless the
contract is in writing.

o The presumption that a party intends to deal with the person in front of him is a strong one (Shogun Finance v
Hudson).

Fundamental mistake about the nature of the document: non est factum
The nature of the problem

A person is normally bound by his signature to a contractual document irrespective of his knowledge or understanding of its
contents. The doctrine of non est factum (‘this is not my deed’) is an exception which can void a contract and any transfers of
rights under it.

In two-party cases, where A signs or executes a document being mistaken as to its real nature and effect, relief is available without
resort to non est factum:

(i) As a misrepresentation, if B’s misrepresentation has induced A’s mistake;

(ii) Under Scriven v Hindley, if B has negligently induced A’s mistake; or

(iii) Under Smith v Hughes, if B knows of A’s mistake as to terms.

In three-party cases, A’s relief is much weaker. The situation can arise where A is induced by B’s misrepresentation:

(i) To contract with B under which rights are transferred from A to B, which B then transfers to D;

(ii) To contract with D who is ignorant of B’s misrepresentation.

The law resolves such cases by reference to the void-voidable distinction (See below).

How serious must the mistake be?

A fundamental or essential difference between the nature of the actual document and the document as it is believed to be is
required.

 Foster v Mackinnon

 Clay v Lewis

Non est facutm was rejected where:

 The purpose of the contract was not fundamentally undermined.

o Saunders v Anglia Building Society

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 There is no positive mistake but mere ignorance.

o Gillman v Gillman

Who qualifies for relief?

 Non est factum normally cannot be relied upon by literate persons of full capacity.

 Applies to those who are unable through no fault of their own to have any real understanding of the purport of a
particular document, e.g. defective education, illness, innate incapacity, or from being tricked.

 However, a claimant who is disadvantaged must still take such care as could be expected of him.

o Saunders v Anglia Building Society

 In two-party cases, the claimant’s carelessness is irrelevant.

 In three-party cases, the claimant’s carelessness is directly relevant to the question of who should bear the loss.

30. Unilateral mistake at equity

All kinds of unilateral mistakes may trigger equitable relief when it would be unconscionable for the other party to take advantage
of it.

(i) Fraud or misrepresentation

 Rescission is available if B’s misrepresentation has induced A’s mistake although the mistake is not serious
enough to void the contract.

 Exceptionally allowed for unilateral mistakes as to the subject matter or the terms of the contract.

(ii) Contribution to the mistake made

 Torrance v Bolton

 Denny v Hancock

(iii) Knowledge that the other party was contracting under a mistake

 Riverlate Properties Ltd v Paul

 Webster v Cecil

(iv) The mistaken party would suffer ‘a hardship amounting to injustice’

 Malins v Freeman

The court will generally deny relief where a mistake was entirely the product of the mistaken party’s own carelessness.

 Tamplin v James

31. Mutual mistaken assumption

If each party makes a different mistaken assumption about the same matter, the problem should be treated as two unilateral
mistakes: the contract should be voided if the claimant’s mistake is sufficiently fundamental.

 Raffles v Wichelhaus

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32. Mistake in recording the contract: rectification

Parties who wrongly record their agreement can apply for rectification to make the contract conform to their actual agreement.

 What an objective observer would have thought were the parties’ intentions.

 The claimant must offer convincing proof that the written contract deviates from the parties’ common intention which
continued right up to the conclusion of the written contract – there must be an ‘outward expression of accord’.

o Joscelyne v Nissen

o Munt v Beasley

 The mistake must be in the recording of the contract and not in the making of it.

 Not available if there is:

(i) Any confusion over what was agreed (Cambro Contractors Ltd v John Kennely Sales);

(ii) Merely an omission to deal with some matter (Kemp v Neptune Concrete);

(iii) No literal disparity between the terms used in the parties’ agreement and the document purporting to record it
(Frederick E Rose v William H Pim Junior);

(iv) No shared mistake, only a unilateral mistake (Riverlate Properties v Paul);

 However, rectification may be allowed for a unilateral mistake in recording the contract if it would be inequitable for the
unmistaken party to object because he:

(i) Knows of the mistake and of the mistaken party’s real intentions;

(ii) Fails to draw the mistaken party’s attention to the mistake;

(iii) The mistake results in benefit to the unmistaken party or detriment to the mistaken party.

PRIVITY

33. Conferring benefits on third parties

The doctrine of privity restricts the parties who can sue or be sued on a contract.

The general rule

The orthodox rule, established by Tweddle v Atkinson, is that a party seeking to enforce a contractual promise must:

(i) Be the promisee; and

(ii) Have provided consideration for that promise.

The two requirements were agreed by the House of Lords in Dunlop Pneumatic Tyre Co Ltd v Selfridge.

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Justifications for the privity rule

(i) Exclusivity: If contractual liability derives from voluntary undertaking, it follows that only a person to whom the
undertaking is addressed (the promisee) can enforce it.

(ii) The priority of buyers: English law prioritises undertakings which are part of bargains over those which are given
without reciprocal payment.

(iii) Floodgates: Any suggestion that the privity rule can be abolished is absurd. Without it, anyone could potentially
enforce any contract.

 However, the Contracts (Rights of Third Parties) Act 199 [Contract (Rights of Third Parties) Ordinance Cap
623] expands the range of liability to include:

a. Third parties expressly given the right to sue in the contract, as in s4(1)(a);

b. Third parties on whom the contract purports to confer a benefit, as in s4(1)(b);

Contracts (Rights of Third Parties) Act 1999 – Contracts (Rights of Third Parties) Ordinance Cap 623

Reasons for the Act

(i) The privity rule defeats the intention of the contracting parties by preventing third parties from suing when the
contract parties intend them to be able to sue;

(ii) The rule is unjust to third parties because it defeats their: (a) expectation interest, and (b) reliance interest;

(iii) The rule creates difficulty in commercial life;

(iv) The rule creates a legal black hole into which contractual rights and liabilities simply disappear because: (a) the
promisee can sue but can obtain no effective remedy for breach since he suffers no loss, and (b) the third party who
suffers the ‘loss’ cannot sue;

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(v) The exceptions to the privity rule are uncertain.

Third party action under the Contracts (Rights of Third Parties) Act 1999

(1) The test of enforceability by a third party: Does TP satisfy the standing requirements?

 Section 1(1)(a) [s4(1)(a) of the Ordinance] allows a third party to enforce a contractual term where the contract
‘expressly provides that he may’.

 Section 1(1)(b) [s4(1)(b)] allows a third party to enforce a contractual term where the contract ‘purports to
confer a benefit on him’.

o Nisshin Shipping Co Ltd v Cleaves & Co Ltd

o The Laemthong Glory

o Beswick v Beswick

 Section 1(3) [s4(3)] requires the third party to be expressly identified in the contract ‘by name, as a member of a
class or as answering a particular description’.

o Requirement was not satisfied in Avaraamides v Colwill.

 The presumption in favour of third party enforcement is a strong one, which is only rebutted by positive
evidence that ‘the parties did not intend the term to be enforceable by the third party’ (s1(2) [s4(3)]).

o The presumption is rebutted in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd.

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(2) Variation and rescission by the contract parties: Has TP’s right to sue crystallised before the contract parties’ attempt to
vary or rescind it?

Section 2 of the Act [s(6)] attempts to reconcile the potential conflict between the contract parties’ ability to modify their
contract and the third party’s reliance on or expectation from the original contract. Contract parties cannot vary or rescind
the contract without the third party’s consent if:

(i) The third party has communicated his assent to the promisor [s6(2)(a)];

(ii) The third party has relied on the term [s6(2)(b)] and

(i) The promisor is aware of the reliance [s6(2)(b)(i)], or

(ii) The promisor can reasonably be expected to have foreseen that the third party would rely on the term [s6(2)
(b)(ii)].

However, contract parties can vary or rescind the contract if an express term of the contract states:

(i) Contract parties can rescind or vary the contract without the third party’s consent [s6(3)(a)], or

(ii) The specific circumstances (other than those spelt out in section 2(1) [s6(2)(a) and (b)] in which the third party’s
consent is required.

(3) Restrictions on the third party’s action: Is TP’s claim weakened or negated?

A qualifying third party can enforce a contractual term and claim any remedy that would have been available to him in
action for breach of contract if he had been a party to the contract [s8(2)(c)].

However, the promisor may incur greater liability to a third party than to the promise in three aspects:

(i) The promisor can rely on an otherwise effective defence or set-off where it arises ‘from or in connection with the
contract and is relevant to the term’ (s3(2)(a) [s8(2)(a)(i)].

(ii) The promisor cannot bring any counterclaim against the promissee into the calculation.

(iii) The promisor may be exposed to double liability.

Enforcement by the promisee

Specific performance

 The promise can ask the court to compel the promisor to perform his promise. This compels the promisor to benefit the
third party as he contracted to do so, so that the interests of the promise and the third party are satisfied simultaneously.

o Beswick v Beswick

 If the relevant promise was to refrain from suing the third party, the promisee could ask the court to exercise its discretion
to stay the proceedings against the third party, where the promisee has a sufficient interest in doing so.

o Snelling v Snelling

Damages for the loss of the third party

 The orthodox position (as in Alfred McAlpine Construction Ltd v Panatown Ltd) is that a promisee cannot sue for a third
party’s loss of expectation.

 However, a number of avenues exist for a promise to sue on behalf of the third party, handing over any damages to the
third party:

(i) A promisee who is also a bailee in respect of the subject matter of the promise can recover for damage to the bailor’s
goods even though he is not liable to the bailor for the damage.
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(ii) A promisee who is also a trustee in respect of the subject matter of the promise can recover damages for the
beneficiary’s loss flowing from breach.

(iii) A promise who is also an agent in respect of the subject matterof the promise can recover damages for the loss of his
principal.

(iv) Quasi-agency in domestic and social situations may also entitle the promisee to sue on behalf of third party
beneficiaries.

 Jackson v Horizon Holidays

 Woodar Investment Development Ltd v Winpey Construction UK Ltd

(v) ‘The Albazero exception’ (Albacruz v Albazero) which allows the promisee to recover damages for the third party’s
loss, held in trust for the third party.

 The original requirement of damage to or loss of property in carriage by sea contracts was extended to
allow claims for incomplete or defective performance in building contracts (Linden Gardens)

 The original requirement of a contemplated transfer of ownership from the promisee to the third party was
oblished to allow recovery without such a transfer (Darlington BC v Wiltshire Nothern Ltd)

 However, it is still necessary for the third party to show that (1) the third party is identifiable at the time of
contract formation as likely to suffer damage on breach, and (2) the third party has no claim of its own
against the promisor.

Damages for the promisee’s own loss

The traditional approach is to deny any compensatable loss on the promisee’s part in contracts to benefit third parties. However,
three exceptions:

(i) The promise can claim if he suffers direct pecuniary loss, as where breach results in his own obligation to the third
party not being discharged or brings him under a legal or factual obligation to the third party (Panatown).

(ii) Absent direct pecuniary loss, the promise may have a claim for substantial damages under the ‘broad ground’ in
Panatown. The decision on the ‘narrow ground’ (i.e. on The Albazero exception) was that it was inapplicable since
the ‘duty of care deed’ gave the third party a direct action against the promisor.

(iii) The promisee’s claim may be for his own loss of amenity (i.e. his loss of satisfaction) from the promisor’s failure to
confer the benefit on the third party.

o Jackson v Horizon Holidays

o Woodar Investment Development Ltd v Winpey Construction UK Ltd

o The requirements for loss of amenity: (1) that the promisee’s non-pecuniary purpose should be distinct,
important, and communicated to the promisor, and will be relatively easy to meet where the contract is for a
third party’s benefit; (2) that damages should take account of ‘reasonableness’.

Getting around the privity rule: third party enforcement without the 1999 Act
Common law techniques allow third parties to circumvent the privity rule and sue the promisor.

The first three operate by promoting the third party into a ‘first’ party with a direct right to sue as:

(i) A promisee in a separate contract with the promisor (via agency or collateral contract);

(ii) A party to whom the promisor owes a duty of care in tort; or

(iii) A beneficiary of trust of the promise.

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Other genuine exceptions:

(i) Assignment;

(ii) Negotiable instruments; and

(iii) Statutory exceptions.

Contractual devices

(i) Agency

 An agent is someone who acts on behalf of his principal: Where A makes a contract with B who acts on
behalf of C, C is not really a third party, but is a contract party in his own right  C can sue.

(ii) Collateral contract

 A party can enforce the benefit of a promise if the court is prepared to find (or create) a collateral contract
between him and the promisor.

 Shanklin Pier Ltd v Detel Products Ltd

(iii) Exemption of third parties from liability

 E.g. in NZ Shipping Co Ltd v A M Satterthwaite & Co Ltd (The Eurymedon), S (the stevedore) working for
CC (the cargo carrier) was protected against a claim by CO (the cargo owner) where CO had agreed to
exempt CC from liability.

 The template (a ‘Himalaya clause’), set out in Midland Silicones Ltd v Scrutton’s Ltd suggests that the
contract (a ‘bill of lading’ in carriage of goods by sea) must stipulate that:

1. CC acts as S’s agent

2. when concluding a collateral contract with CO

3. in which CO exempts S from liability in exchange for S’s consideration of (a) performing or (b)
agreeing to perform services in relation to the cargo which S already owes under a contract with CC.

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Tort of negligence

Two questions:

1. Can a contract confer a tortious action on the third party against a contract party? (Whether A’s breach of his contractual
duty owed to B might amount also to a breach of A’s duty of care owed to C)

 C’s claim is straightforward where the loss involves physical injury or property damage. Courts are more
reluctant where loss is purely economic.

 Exceptions:

o Junior Books v Veitchi Co Ltd (assumed responsibility)

o White v Jones (practical justice)

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 Where a third party can sue in negligence,

(i) The third party must be owed a duty of care;

(ii) The promisor must breach this duty;

(iii) The claimant’s reliance, not expectation, is protected (Muirhead v Industrial Tank Specialties Ltd)

2. Can a contract negate the third party’s tortious liability to a contract party? (Whether C can benefit from an exemption of
liability contained in the contract of others)

 Where A agrees with B to exempt B’s subcontractor C from tortious liability, this may negate any duty of care
(whether physical or purely economic) that C would otherwise owe A.

Trust of the contractual right

 A third party has a direct action against the promisor if the court construes the promisee as holding his contractual right
to sue the promisor on trust for the third party.

 As a beneficiary of the trust, the third party acquires a property right enforceable against the promisor: If A promises a
sum to C in exchange for B’s transfer of a benefit to A, C can sue A for the sum if the trust device can be invoked (Les
Affreteurs Reunis v Walford).

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Assignment

 Although contract parties cannot confer a directly enforceable benefit on the third party, the promisee can subsequently assign his
contractual rights to the third party: if A makes an enforceable promise to B to pay B a sum of money, B can assign the benefit of that
promise to C, enabling C to enforce the promise against A.

 One party can assign his right without the other party’s consent unless:

(i) The contract forbids such assignment;

(ii) The assignee has no genuine or commercial interest in taking the assignment;

(iii) The relationship between the contract parties is personal (e.g. where contractual performance involves personal skill). The rights
against the promisor should only be assignable where it makes no difference to the promisor whom he performs for.

Negotiable instruments

 Example: a cheque – the writer of the cheque (the drawer) instructs the bank (the drawee) to pay a specified sum to the named third
party (the payee). The cheque gives the third party the secure right to demand payment.

34. Imposing burdens on third parties

The general rule that contract parties cannot (1) impose positive burdens on third parties (i.e. to do something) and (2) deprive
third parties of some right or restrict their freedom of action i.e. not to do something, is subject to a number of exceptions.

Inducing breach of contract

 A contract imposes an obligation on third parties not to intentionally or recklessly induce one party to breach.

 To do so would incur liability to the innocent contract party for the tort of inducing or procuring breach of contract.

o Lumley v Gye

Sub-bailment contracts

 Where C (the bailor) entrusts property to A (the bailee) for A to hold for or at the direction of C, and A then entrusts the
property to B (the sub-bailee), C is bound by the terms of the sub-bailment between A and B to which he has consented,
whether expressly or impliedly.

o Morris v Martin & Sons Ltd

Restrictions on property acquired

Where A makes a contract (1) with B regarding the use of B’s property, and B then transfers the property to C via transaction (2),
is C bound by the terms of (1)?

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Respect for proprietary rights

 A has acquired a proprietary interest from contract (1) with B (e.g. the contract may create a lien, a lease, an equitable
proprietary interest, or a constructive trust which ‘runs with’ the property). A’s proprietary rights attach to the property
(which may physically remain with B) and can prejudice the rights of third parties C who later acquire the property from
B.

SPECIFIC AND AGREED REMEDIES

35. The agreed sum

A contract may require the defendant to pay a specific sum on full performance by the claimant. An action for the agreed sum (or
price) is a common law remedy and has many advantages for the claimant:

(i) Availability of summary judgment: The claimant can take advantage of a quick and truncated legal process with
procedural advantages.

(ii) The claimant can also seek damages: for loss flowing from the defendant’s failure to pay on time (Overstone Ltd v
Shipway).

(iii) Avoidance of restrictions on damages claims: In a debt action the claimant need not prove any specific loss caused
by the defendant’s breach. Moreover, his claim cannot be reduced for being too remote or for his failure to mitigate
loss (Jervis v Harris).

(iv) Avoidance of restrictions on other specific remedies : such as the penalty rule which restricts the enforceability of
agreed damages clauses.

On the other hand, the defendant’s interests are protected by:

(i) Strict interpretation of the pre-condition for payment: the claimant must still give ‘substantial’ performance to trigger
the defendant’s obligation to pay.

 Bolton v Mahadeva

(ii) Allowing the defendant’s set-off: The defendant can deduct what the claimant owes him from the sum to be paid,
where it would be unjust not to follow it.

(iii) Restricting the claimant’s right to affirm: Where the contract is repudiated, the claimant will be barred from
rendering the performance no longer wanted by the defendant (and earning his right to the agreed sum) if he needs
the defendant’s cooperation to complete his obligations under the contract or if he has no legitimate interest in
wholly unreasonable and wasteful completion.

36. Specific enforcement

The claimant may prefer an order for specific performance where, for example, (1) the damages recoverable may be limited
because the loss suffered is recognised, (2) is too remote, or (3) was not sufficiently mitigated by the claimant.

Specific performance
In Beswick v Beswick, the House of Lords held that specific performance should be ordered if it would ‘do more perfect and
complete justice’ than an award of damages.

Overview of limits on the availability of specific performance (Cooperative Insurance Society Ltd v Agryll Stores (Holdings)
Ltd

Claimants-sided considerations:

(i) Adequacy of damages;

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(ii) Lack of clean hands; and

(iii) Delay.

Defendant-sided considerations:

(i) Contracts for personal services or to carry on an activity;

(ii) Impossibility and hardship; and

(iii) Want of mutuality.

Impracticability / Unsuitability:

(i) Uncertainty;

(ii) The need for constant supervision; and

(iii) Avoidance of waste.

Specific performance in Cooperative Insurance Society Ltd v Agryll Stores (Holdings) Ltd was granted by the Court of Appeal but
denied by the House of Lords.

Claimant-sided considerations

Adequacy of damages

 Damages will generally be regarded as adequate where the claimant can buy substitute performance in the market.

 Damages are inadequate in the following situations:

(i) Unique goods: the subject matter is physically ‘unique’ if it has strong sentimental value or significance for the
claimant and so is not replaceable in the market.

 Damages will almost always be considered adequate in relation to the sale of goods.

 S54 of the Sale of Goods Ordinance (Cap 26) gives courts the discretion to award specific performance for
the delivery of ‘specific or ascertained’ goods.

 This bar to specific performance typically does not apply to contracts that transfer interests in land: the
seller can obtain specific performance where the land is readily resaleable because and can be explained in
terms of:

a. The court deeming interests in land to be unique;

b. Land contracts confer an immediate equitable proprietary interest on buyers; and

c. The mutuality of granting the seller the same remedy as the buyer is entitled to.

 Specific performance is also available where the subject matter is ‘commercially unique’.

o Sky Petroleum Ltd v VIP Petroleum Ltd

(ii) Non-conforming goods supplied to consumers: Specific performance may be awarded to compel the commercial
seller to repair or replace non-conforming goods sold to consumers, since damages are likely to be inadequate for a
consumer who buys a defective appliance.

(iii) No other substantial remedy available

 Beswick v Beswick

The claimant’s ‘lack of clean hands’

Specific performance has been denied where the claimant:

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 Unfairly hurried the defendant into granting a mining lease in ignorance of the value of the property (Walters v Morgan);

 Took advantage of the defendant’s drunkenness (Malins v Freeman);

 Took advantage of the defendant’s mistake in making his offer (Webster v Cecil);

 Etc.

Delay, acquiescence, and termination

 Traditionally, a claimant must show himself ‘ready, desirous, prompt and eager’ to perform (Milward v Earl of Thanet).

 Acquiescence occurs when the claimant leads the defendant to believe that he will not object to the defendant’s breach.
This will bar specific performance, particularly if the defendant has detrimentally relied on this belief.

 Specific performance is barred by the claimant’s termination of the contract even in the absence of detrimental reliance
by the defendant (Johnson v Agnew).

Defendant-sided considerations

Contracts for personal services or to carry on an activity

 Cooperative Insurance v Argyll Stores shows that courts will generally deny specific enforcement of contracts to carry
on an activity because of:

(i) The potential for continuing conflicts over compliance which require court resources to resolve;

(ii) The oppressiveness of compelling the defendant to carry on the activity.

 The bar is limited to services which are personal in nature. Thus, specific performance has been ordered in building
contracts and repairing covenants where (a) the work is capable of sufficiently precise definition; (b) damages will be
inadequate to compensate the claimant; and (c) the defendant has possession of the land on which work is to be done so
that the claimant cannot employ someone else to do it (Wolverhampton Corp v Emmons).

Impossibility and hardship

 Specific enforcement will be denied where performance is physically or legally impossible, as where:

o The defendant contracts to sell land which he does not own and cannot obtain (Castle v Wilkinson);

o The defendant assigns a lease without the necessary consent of the landlord (Wilmot v Barber); or

o The defendant agrees to sublet to the claimant, although his head lease prohibits subletting (Warmington v
Miller).

 Specific enforcement may also be denied where it would cause the defendant severe hardship.

o Patel v Ali

o Denne v Light

o Wroth v Tyler

o Cooperative Insurance v Argyll Stores

 It was emphasised that ‘mere pecuniary difficulties’ are insufficient.

Want of mutuality

 Specific performance would not be ordered for the claimant unless it could also have been ordered against him at the
time the contract was made.

o Prince v Strange

Impracticality and unsuitability

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Uncertainty

 The defendant should not be compelled to perform when it is unclear exactly what he has to do.

 Uncertainty increases the likelihood of further litigation.

Constant supervision

 Specific performance would be denied if it involves a continuous act (Ryan v Mutual Tontine Westminster Chambers
Association).

 ‘Constant supervision’ bar refers to the likelihood of repeated and costly litigation over compliance (Cooperative
Insurance v Argyll Stores).

Avoidance of waste

 Specific enforcement may be denied where it would entail a significant waste of resources.

o Cooperative Insurance v Argyll Stores

o Tito v Waddell

Injunctions
A prohibitory injunction specifically enforces a contractual obligation not to do something.

A mandatory injunction compels the defendant to undo the effects of breaching a negative undertaking.

Mandatory injunction

 Courts are more reluctant to compel positive action by mandatory injunctions than to restrain some action by granting
prohibitory injunctions.

 A court will generally deny a mandatory injunction and award damages (in lieu) unless the defendant has ‘trodden
roughshod over the plaintiff’s rights’.

o Wrotham Park Estate Co v Parkside Homes Ltd

o Sharp v Harrison

Prohibitory injunction

 Prohibitory injunctions are the main remedy to restrain threatened or future breaches or negative undertakings (e.g.
Lumley v Wagner).

 This is because granting a prohibitory injunction (rather than compelling positive action):

(i) Seems less restrictive of the defendant’s individual liberty;

(ii) Is less likely to run up against the claimant’s duty to mitigate and the problem of constant supervision;

(iii) Avoids the difficulty of assessing loss from breach of a negative undertaking.

No indirect specific performance

 The main argument against granting a prohibitory injunction is that it will amount to indirect specific performance of a
contract for personal service.

 Injunctions to enforce undertakings to refrain only from particular activities will be granted if they will not in practice
force the defendant to perform his positive obligations.

Indirect specific performance was found in:

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 Mortimer v Beckett

 Page One Records Ltd v Britton

 Warren v Mendy

Injunction was granted in:

 Lumley v Wagner

 Warner Brothers Pictures Inc v Nelson

Should specific enforcement be more widely available?

Inadequacy of damages

 Damages are under-compensatory in many cases where specific performance is currently available;

 Promisees have economic incentives to sue for damages if they are likely to be fully compensatory; ‘a breaching
promisor is reluctant to perform and may be hostile’. Thus, if he chooses specific performance he should be able to have
it.

 Promisees should be able to choose between damages and specific performance because they have better information
than courts as to the adequacy of damages and the difficulties of coercing performance.

Protection of the claimant’s performance interest

 The argument that ‘the essence of contract is performance. Contracts are made in order to be performed’.

 If the bars of specific performance do not prevent the formation of contracts, they should not bar specific performance
either.

Efficient breach

 The argument that contract law should be aimed at maximising overall wealth and this is facilitated if the law permits
‘efficient’ breaches of contract to enable commodities to move to those who value them the most.

 This is only possible if damages rather than specific performance are the primary remedy for breach.

37. Agreed remedies

Policy considerations

Policies against the enforcement of agreed remedy clauses

 The automatic enforcement of agreed remedies may entail undue harshness to contract-breakers where there was
inequality of bargaining power.

Policies favouring the enforcement of agreed remedy clauses

 Freedom of contract;

 Certainty (parties know where they stand);

 Avoiding the costs of resolving disputes through the courts;

 Facilitating certain transactions (e.g. lenders will be reluctant to lend without some guarantee of payments);

 Agreed remedies ensure that an innocent party obtains adequate remedies on breach.

Payments on breach: liquidated damages and penalties

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The penalty rule

The general rule is that an agreed damage clause is:

 Enforceable if it amounts to ‘liquidated damages’, that is, if the sum represents a genuine pre-estimate of the actual loss
likely to be caused by the breach; but

 Unenforceable if it amounts to a ‘penalty’, that is, ‘if the sum stipulated for is extravagant and unconscionable in amount
in comparison with the greatest loss that could conceivably be proved to have followed from the breach’ (Dunlop
Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd).

The reasonableness of the agreed damages clauses, stated in Dunlop Penumatic Tyre, depends on:

(i) Proportionality: A clause is more likely to be penal if there is a lack of proportionality between the sum payable and
the seriousness of the breach.

(ii) The extent of deviation from the actual loss or damages accessible: The more unreasonable the estimate of loss, the
less likely it is that it will be regarded as genuine.

(iii) The relative bargaining power of the parties: In Phillips Hong Kong v Attorney General of Hong Kong , the question
depends on the nature of the relationship between the contracting parties, a factor relevant to the unconscionability
of the plaintiff’s conduct in seeking to enforce the term.

(iv) The more difficult it is to estimate the consequences of breach, the more reluctant the courts should be to second-
guess the parties’ estimation.

 In Phillips Hong Kong, it was stressed that the courts should adopt a ‘hands off’ approach unless the sums
stipulated were obviously extravagant or there was significant inequality of bargaining power.

Examples of unenforceable penalties:

 Phillips Hong Kong v Attorney General of Hong Kong

 CMC Group plc v Michael Zhang

Examples of enforceable liquidated damages:

 Murray v Leisureplace

 Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd

The justification for the penalty rule

(i) Preventing over-compensation

 Agreed damages should only compensate the claimant for failure to receive due performance of primary
terms.

(ii) Prevention of punishment

 The law should not punish breach of contract;

 The parties should not be permitted to punish each other;

 Compensation in express of what a court would award constitutes punishment.

(iii) Prevention of indirect specific enforcement

 Parties should not fetter the court’s discretion to grant specific performance by stipulating such a punitive
payment that it practically coerces performance.

(iv) Prevention of unfairness

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 In Philips Hong Kong: ‘equity and the common law have long maintained a supervisory jurisdiction… to
relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than
compensatory’.

The scope of the penalty rule: the jurisdictional question

The most troublesome aspect of the penalty rule is that it only applies to payments on breach. It does not apply to other common
provisions which have the same effect as penalty clauses. Hence, the penalty rule can be easily evaded by redrafting the term in
the following ways.

(i) Stipulating sums payable on events other than breach

 Alder v Moore

(ii) Varying the payment due on events other than breach

 Clauses which have the same effect as penalties include those which: accelerate payment, give discounts for
prompt payment, or provide for payment on an event not amounting to a breach.

 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd

Forfeitures of payments
Deposits and part-payments

 An advance payment is:

o Not recoverable if it is a deposit, that is, a sum paid as ‘a guarantee that the contract shall be performed’ ( Howe
v Smith), but

o Recoverable if it is a part-payment of the contract price, subject to the contract-breaker’s liability to pay
damages (Dies v British and International Mining and Finance Co)

 The nature of the payment is said to be a matter of construction of the contract.

 A jurisdiction to control unreasonable deposits was recognized in Workers Trust & Merchant Bank Ltd v Dojap
Investments Ltd:

o A payment is not a valid deposit unless the ‘sum is reasonable as earnest money’.

o Reasonableness may depend on (a) trade custom or (b) the presence of any ‘special circumstances’ justifying its
retention.

 Deposit was forfeited in Union Eagle Ltd v Golden Achievement Ltd

Instalments

A contract may allow the price to be paid in instalments and stipulate the forfeiture of all the payments made if there is default on
any one instalment.

 Where the contract is for services rendered over time in return for periodic payments, the sums paid are not recoverable
on the payee’s breach.

 Where a contract for the sale of property is terminated for the buyer’s breach and the subject matter remains the property
of, or is returned to, the seller, forfeiture of instalment payments presents a clear danger of unfairness to the buyer.

(i) Where the buyer is ready and willing to resume performance, the court can relieve against forfeiture by granting
extra time for payment (Re Dagenham (Thames))

(ii) Where the buyer is not ready and willing to perform, the instalments are still recoverable if retention would be
unconscionable (Stockloser v Johnson), while Romer LJ limited recoverability to cases of procedural unfairness
in the form of fraud, sharp practice, or other unconscionable conduct.

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UNFAIRNESS: UNDUE INFLUENCE, NON-COMMERCIAL GUARANTEES,
UNCONSCIONABLE BARGAINS

38. Introduction
Undue influence deals with the abuse of relationships of trust and confidence.

Non-commercial guarantee protects non-commercial parties who guarantee another’s debts.

Unconscionable bargains deals with the exploitation of bargaining weaknesses for excessive gain.

The traditional justification for the doctrines is anchored in procedural unfairness. They focus on the process of contract
formation and are ‘content-independent’ reasons for invalidity:

(xi) the defective consent of the ‘weaker’ claimant,

(xii) the reprehensible conduct of the ‘stronger’ claimant.
A third justification that is ‘content-dependent’ focuses on substantive unfairness:
(xiii) relief from improvident transactions granted to the bargaining impairment.

39. Undue Influence

Undue influence is concerned with the exploitation of a relationship of influence to obtain an undue advantage.

Basis of the doctrine

Unconscientious conduct
 The dominant view: Undue influence is about the stronger party’s reprehensible conduct in inducing another’s agreement
to the transaction: to ensure that the influence of one person over another is not abused.
 Royal Bank of Scotland plc v Etridge.

Defective consent
 Undue influence is concerned with the claimant’s defective consent: this explains why the presumption of undue
influence is only rebutted by showing the claimant’s consent was ‘full, free, and informed’.
 It is unnecessary to show the defendant behaved unconscionably because this can be dealt under duress.

Failure to protect
 Undue influence is concerned with the failure by the defendant to protect the claimant’s interest as the parties’
relationship require.
 Allcard v Skinner

Overview and burden of proof

The traditional categories of undue influence

Allcard v Skinner sets out two categories:
(i) Class 1 Actual undue influence
o Where the claimant can prove the defendant’s positive application of pressure inducing his consent to the
contract.
(ii) Class 2 Presumed undue influence – From the claimant’s proof that:
(1) He was in a ‘relationship of trust and confidence’ with the defendant:
a. Class 2A covers specified relationships where the influence is automatically presumed.
b. Class 2B describes relationships outside Class 2A where the existence of influence must be proved.
(2) The resulting transaction is manifestly disadvantageous to the claimant.

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This raises a presumption of undue influence which can be rebutted by the defendant’s proof that the claimant nevertheless entered
the transaction freely (i.e. once a confidential relationship has been proved, the burden then shifts to the defendant to prove that
the claimant entered into the transaction freely).

The restatement by Etridge

Two aspects of the House of Lords’ restatement:
(iii) The two categories are merely different ways of proving one category of undue influence.
(iv) The burden of proof for undue influence lies on the claimant throughout.

PRE-ETRIDGE
Two classes of undue influence
Class 1 Actual undue influence:
(a) Pressure cases (belongs in duress)
(b) Relational cases
POST-ETRIDGE
One class of undue influence provable in two ways
1. By proof of overt pressure
(necessity of relationship of influence?
Inexplicable transaction?)

2. By failure to protect inferred from

Class 2 Presumed undue influence (legal (evidential presumption raised by the
presumption?) from: claimant):
(i) Relationship of influence (i) Relationship of influence
2A automatic legal presumption
2B proved
+ +
(ii) Transaction is manifestly (ii) A ‘transaction calling for
disadvantageous to C explanation’
= =
Over to D to rebut the presumption of Over to D to rebut the
undue influence presumption of undue influence

Failure to protect by overt pressure (old actual undue influence)

Relational pressure
Involve the defendants’ overt exploitation of the claimant’s relational motivation for consenting.
(i) Threats to abandon
o Langton v Langton
o Bank of Scotland v Bennett
(ii) Excessive control, secrecy and exclusion of others
o Morley v Loughan
o Re Killick v Pountney and another
(iii) Bullying, confrontation and harassment
o Clarke v Prus
o Drew v Daniel
o Re Craig

Relationship of influence and manifest disadvantage

Proof of actual undue influence is thought to dispense with the need for two elements necessary for the interference of undue
influence:
(i) The existence of a relationship of influence between the parties
(ii) Manifest disadvantage of the transaction to the claimant

Failure to protect by omission (old presumed undue influence)

The burden of proof

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In Etridge, Lord Nicholls: Proof of the following by the claimant will normally be sufficient for the Court to infer that, in the
absence of a satisfactory explanation, the transaction can only have been procured by undue influence:
(i) The claimant placed trust and confidence in the other party
(ii) The transaction which calls for explanation

The ‘rebuttal of the presumption’

 Refers to a shift of the evidential onus to the defendant to displace the evidential interference raised by the claimant in
the first place; the burden of proof is not reversed.
 The presumption is not that the defendant has exerted undue pressure on the claimant, but merely that he has preferred
his own interests and failed to safeguard the claimant’s.

Relationship of influence: automatic presumption (old Class 2A)

 The types of relationships in which one party (automatically) acquires influence over another who is vulnerable and
dependent, e.g. doctor and patient, parent and child, trustee and beneficiary.
 For these types of relationships, the claimant need only prove the existence of the specified relationship, not that he
actually reposed trust and confidence in the other party.
*Note: the presumption is not that the designated relationships raised a presumption of undue influence, but that the
relationship is one of influence over the claimant. To raise a presumption of undue influence, the claimant must show that
their transaction called for an explanation.

Proved relationship of influence (old Class 2B)

To establish a relationship of influence:
(i) The claimant expects that the defendant will give conscientious advice in the claimant’s interest. The defendant
knows of this relationship, raises an obligation to have regard to the claimant’s interest.
(ii) It is unnecessary to prove blind trust or dominating influence. It is enough that in past dealings the claimant
generally reposed trust and confidence in the defendant.
(iii) Reliance may be exacerbated by the claimant’s illness or frailty, incompetence or inexperience.
(iv) A relationship of influence may arise in a one-off dealing.
o Tufton v Sperni
(v) The unfairness of the transaction provides strong evidence of a relationship of influence.
o Credit Lyonnais v Burch: Direct evidence of a potentially exploitative relationship of influence.
o However, no inference will be drawn if an apparently disadvantageous transaction is explicable (Re
Brocklehurst’s Estate)

A transaction calling for explanation

The improvidence of the transaction for the claimant is evidence of the defendant’s failure to safeguard the claimant’s interests.
The inference of undue influence arises when the transaction is ‘not readily explicable by the parties’ relationship’.

When does a transaction ‘call for explanation’?

It must entail a disadvantage that would ‘have been obvious as such to any independent and reasonable person who considered the
transaction at the time with knowledge of all the relevant facts’. Four relevant considerations:
(i) Impact of the claimant’s future autonomy
o Allcard v Skinner: the gift substantially undermined the novice’s future autonomy because it failed to
provide for the contingency that she may later choose a different life and need some resources.
o Cheese v Thomas: Cheese had committed all his resources in exchange for a very insecure right.
o Hammond v Osborn
o Macklin v Dowsett

(ii) Inconsistency with the nature of the parties’ relationship

o A transaction which is disproportionate to the gratitude, love or affection evinced by the evolution of the
party’s relationship will ‘call for an explanation’.
o Credit Lyonnais v Burch
o Hammond v Osborn
o Cases where the parties’ relationship did not ‘call for an explanation’:
o Portman Building Society v Dusangh
o Wife’s guarantee of her husband’s debts (Etridge)
(iii) Undermining the claimant’s relationship with others who have claims on this bounty
o Randall v Randall

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o Humphreys v Humphreys
o Pesticcio v Huet

(iv) The explicability of any apparent improvidence

o Transactions which appear very improvident may not be so on closer examination, or may otherwise be
satisfactorily explained.
o Dailey v Dailey
o National Commercial Bank (Jamaica) Ltd v Hew
o R v Attorney-General for England and Wales
o Re Brocklehurst’s Estate
o Campbell v Campbell
o Glanville v Glanville

Rebutting the presumption

To rebut the evidential presumption of undue influenced raised by the claimant’s proof of (1) a relationship of influence and (2) a
transaction calling for explanation, the defendant must show that the claimant’s consent to the transaction was ‘full, free and
informed’.
 Usually by showing that the claimant received adequate independent advice (necessary, but not always sufficient).
 A question of fact

One piece of evidence is the extent of unfairness (inexplicability) in the transaction:

(i) The claimant’s refusal to get or follow independent advice indicates the continuing impact of undue influence.
o Bank of Montreal v Stuart
(ii) Any advice received by the claimant was inadequate: it failed to emancipate him from the defendant’s undue
influence.
o In Inche Norial v Omar, the requirements of adequacy: the advice should be:
 Independent;
 Given with knowledge of the claimant’s vulnerability and the material aspects of the negotiation;
 Effectively communicated to the claimant;
 Competent in only supporting transactions that can sensibly be entered into by a party free of
influence.
(iii) The claimant did not adequately understand the transaction.
o Hammond v Osborn
(iv) The stronger party’s failure to protect the claimant’s interests.
o Hammond v Osborn

Rescission for undue influence

The bars to rescission

Contracts and gifts tainted by undue influence are voidable and may be rescinded at the claimant’s option. However, rescission
may be barred:
(i) By the claimant’s affirmation of the contract,
o Mitchell v Homfray
(ii) By lapse of time after the cessation of the influence,
o Allcard v Skinner
(iii) If a third party acquires an interest in the subject matter of the contracts as a good faith purchaser,
o Bainbrigge v Brown
o Bridgeman v Green
(iv) If it is impossible to effect mutual restoration of benefits received under the transaction.

The defence of change of position

 This defence reduces the claimant’s recovery on rescission to protect a good faith defendant’s expenditure in reliance on
the security of his receipt.
o Cheese v Thomas: great-uncle was only awarded what was left of his share.

No partial rescission
 Relief for undue influence: either the transaction stands as it is, or it is set aside in its entirety.
o Glanville v Glanville
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40. Non-commercial guarantees

The problem and the policies

Problem: Where a wife is induced to guarantee the debts of her husband by the husband’s undue influence, misrepresentation, or
pressure, can the lender enforce the guarantee against his wife?

Policies: Arguments supporting enforcement

 The wife should take responsibility for her agreement.

 The wife may stand to benefit from the loan to her husband.

 It is the primary debtor and not the lender who has behaved reprehensibly.

 Lenders will be reluctant to lend if they lack confidence in the enforceability of their securities.

Policies: Arguments against enforcement

 The marriage relationship provides scope for abuse.

 The guarantor is usually peripheral to the loan negotiations.

 The lender is, or ought to be, aware of the risk of abuse.

 The guarantor’s economic interests may not be identical with the primary debtor’s.

The legal response

The legal response evolved in three stages:

o Pre- Barclays Bank v O’Brien: Guarantee was only voidable if:

 The debtor acted as the lender’s agent in procuring the guarantor’s consent, or

 The lender had actual notice of the debtor’s unconscientious conduct.

o O’Brien:

 Extended the rule on notice to include constructive knowledge, unless the lender has taken reasonable steps
to ensure that the guarantor’s consent was properly obtained.

o Post- O’Brien: In Royal Bank of Scotland v Etridge:

 Clarified steps laid down in O’Brien (See diagram below)

1. Vitiation by the primary debtor

2. Lender’s notice

3. Lender’s failure to take reasonable steps

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Vitiation by the primary debtor

 The claimant (guarantor) must show that the guarantee was vitiated by the debtor’s misrepresentation, undue influence,
or other legal or equitable wrongdoing.

Lender’s notice

 Etridge recognizes that talk of constructive notice (as outlined in O’Brien) is ‘a misnomer’. Etridge clarifies the
knowledge that must be proved:

(i) Since relationships of influence are various, and lenders cannot be expected to evaluate the emotional
relationship between debtor and guarantor. The only practical way is to regard banks as ‘put on inquiry’ (i.e. the
requirement to take reasonable steps).

(ii) The lender has notice that the transaction is for the debtor’s benefit.

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Lender’s failure to take reasonable steps

 To take reasonable steps is to let the guarantor understand the nature and effect of the transaction.

House of Lords in Etridge accepts that it is enough for the lenders to:

(i) Communicate directly with the guarantor

o The lender will require a confirmation from a solicitor acting for the guarantor:

1. That she has been duly advised,

2. That this will prevent her from later challenging the guarantee,

3. That the solicitor may be the same solicitor as her husband’s or the lender’s.

(ii) Disclose the necessary financial information to her solicitor

o This includes:

1. The purpose of the loan,

2. The debtor’s current indebtedness and overdraft facility,

3. The terms of the new loan.

(iii) Obtain a confirmation from her solicitor

o To the effect that she has been advised about the nature and effect of the transaction.

The advising solicitor should:

(i) Explain the nature and effect of the guarantee,

(ii) Emphasise the seriousness of the risk,

(iii) Discuss her financial means, the value of the property being charged, and the availability of other assets out of which
repayment may be met,

(iv) State that she has a choice whether to proceed and ask whether she wishes him to negotiate particular terms.

The lender may have to take further steps if:

 The lender knows facts that heighten the risk of undue influence, duress or misrepresentation.

 Lord Hobhouse in Etridge: The presence of particularly onerous features of the transaction (i.e. the lender is aware of
facts which make the transaction improvident, e.g. the guarantee being unlimited)

o However, Lord Nicholls: Not the solicitor’s job to veto a disadvantageous transaction to the guarantor so long as
he gives reasoned advice to that effect.

o Nevertheless, he insists that the solicitor should act if it was ‘glaring obvious that the wife is being grievously
wronged’.

 Further steps might include:

o Informing the guarantor,

o Insisting on legal advice which is independent of the debtor or lender,

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o Informing the debtor’s solicitor of facts giving rise to the lender’s heightened suspicion that the guarantor’s
consent may be improperly obtained.

The remedy
Primary relief

 Rescission

 Subject to bars to rescission

The defence of change of position

 The defence will operate to qualify the claimant’s right to rescission.

No partial rescission

 The courts have no power to award partial rescission.

o TSB Bank plc v Camfield

41. Unconscionable bargains

General principles

Requirements for relief for unconscionable bargains stated in Boustany v Pigott:

(i) The claimant must be under an operative bargaining impairment, placing it at a serious disadvantage vis-à-vis the
other party.

(ii) The defendant must have exploited the claimant’s weakness in a morally culpable manner.

(iii) The resulting transaction is manifestly improvident to the claimant.

(iv) The claimant lacked adequate advice.

Contracts were set aside in the following cases:

 Evans v Llewelin

 Fry v Lane

 Clark v Malpas

 Backhouse v Backhouse

 Ayres v Hazelgrove

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Basis of the doctrine

The prevailing view (Boustany v Pigott)

 Prevention of unconscionable conduct

 Prevention of unequal bargaining power or objectively unreasonable terms

What must be proved?

Improvident transaction

A contract may be:

(i) Objectively unfair

o In its extreme deviation from the market value of the subject matter transacted.

(ii) Subjectively unfair

o Contract may be totally inappropriate for the claimant in his particular circumstances.

o Gaertner v Fiesta Dance Studios

(iii) Socially inappropriate

o Contracts which fall outside the range of transactions that rational and self-interested individuals are
normally expected to make.

o Credit Lyonnais v Burch

o Bridgewater v Leahy

o However, no relief granted in Portman Building Society v Dusangh

*Note: This category may overlap with undue influence / non-commercial guarantees.

Bargaining impairment

Condition of contract parties that warrant the protection of the doctrine (examples):

 Those with mental incapacity (Earl of Aylesford v Morris)

 The poor and ignorant (Fry v Lane)

 Members of the lower income group (Cresswell v Potter)

 The less highly educated (Cresswell v Potter)

 Those in great emotional strain (Backhouse v Backhouse)

Unconscionable conduct

 What is required is that ‘one of the parties to [the contract] has imposed the objectionable terms in a morally
reprehensible manner… in a way which affects his conscience’ (Boustany v Pigott).

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 Actual fraud is unnecessary; constructive fraud is enough.

 Earl of Aylesford v Morris: ‘it is the victimization which can consist either of the active extortion of a benefit or the
passive acceptance of a benefit in unconscionable circumstances’.

o Active victimization includes

1. Taking the initiative in the transaction,

2. Haste in concluding it,

3. Contributing to a misapprehension without creating it, and

4. Low-level pressure on the claimant to agree.

o Passive victimization:

1. The acceptance of a highly advantageous bargain at the expense of a claimant known to be impaired,

2. Without bringing to the notice of that other party of the true nature of the transaction.

3. Knowledge of impairment by the defendant may be actual or constructive.

o Boustany v Pigott

Absence of adequate advice

Like, undue influence, absence of adequate advice is likely to be found where:

 The claimant refuses to obtain advice, as this is interpreted by the court as evidence of the seriousness of his impairment
(Bank of Montreal v Stuart).

 Advice is found by the court to be inadequate, usually from the harshness of the transaction (Fry v Lane, Grealish v
Murphy).

 The severity of the claimant’s impairment rendered him incapable of benefiting from it (Boustany v Pigott).

 In Credit Lyonnais v Burch: it is not enough simply to take reasonable steps to meet the suspicion that the claimant may
have been impaired, ‘the result of the steps which it took much be such as would reasonably allay any such suspicion’.

o Defendant should have disclosed the extent of the claimant’s liability, and insisted, not merely recommended,
that she obtain independent legal advice.

A general doctrine of unfairness?

The English law recognizes no ‘overriding principle’ that parties must act in good faith, but it has ‘developed piecemeal solutions
in response to demonstrated problems of unfairness’. Reasons:

(i) The common law prefers cautious incremental extensions by analogy to existing categories over the recognition of a
general broad principle.

(ii) A general doctrine would create uncertainty and instability in contractual dealings.

(iii) It is not the court’s role to redistribute wealth.

(iv) It is Parliament’s job to regulate contractual fairness and not the judiciary’s.

(v) A general principle against unfairness would undermine freedom of contract.

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