THE LAW OF

CONTRACT
Unit 1: DEFINITION

A contract may be defined as a legally binding agreement or, in the words of

Sir Frederick Pollock: "A promise or set of promises which the law will
enforce".
The agreement will create rights and obligations that may be enforced in the
courts. The normal method of enforcement is an action for damages for
breach of contract, though in some cases the court may order performance
by the party in default.

CLASSIFICATION
Contracts may be divided into two broad classes:
1. Contracts by deed
A deed is a formal legal document signed, witnessed and delivered to affect
a conveyance or transfer of property or to create a legal obligation or
contract.
Deed-document: a signed document that outlines the terms of an agreement, especially one that
details a change in ownership of property

2. Simple contracts
Contracts which are not deeds are known as simple contracts. They are
informal contracts and may be made in any way
in writing,
orally or
they may be implied from conduct.
Another way of classifying contracts is according to whether they are
"bilateral" or "unilateral".
1. Bilateral contracts
A bilateral contract is one where a promise by one party is exchanged for a
promise by the other. The exchange of promises is enough to render them
both enforceable. Thus in a contract for the sale of goods, the buyer
promises to pay the price and the seller promises to deliver the goods.
2. Unilateral contracts
A unilateral contract is one where one party promises to do something in
return for an act of the other party, as opposed to a promise, e.g., where X
promises a reward to anyone who will find his lost wallet. The essence of the
unilateral contract is that only one party, X, is bound to do anything. No one
is bound to search for the lost wallet, but if Y, having seen the offer, recovers
the wallet and returns it, he/she is entitled to the reward.
ELEMENTS
The essential elements of a contract are:
1. Agreement
An agreement is formed when one party accepts the offer of another and
involves a "meeting of the minds".
2. Consideration
Both parties must have provided consideration, i.e., each side must promise
to give or do something for the other.
3. Intention to create legal relations
The parties must have intended their agreement to have legal
consequences. The law will not concern itself with purely domestic or social
agreements.

4. Form
In some cases, certain formalities (that is, writing) must be observed.
5. Capacity
The parties must be legally capable of entering into a contract.
6. Consent
The agreement must have been entered into freely. Consent may be vitiated
by duress or undue influence.
7. Legality
The purpose of the agreement must not be illegal or contrary to public policy.

A contract which possesses all these requirements is said to be valid. The

absence of an essential element will render the contract void, voidable or
unenforceable (as to which see below).
In addition, a contract consists of various terms, both express and implied. A
term may be inserted into the contract to exclude or limit one party's liability
(the so-called "small print"). A term may also be regarded as unfair. A
contract may be invalidated by a mistake and where the contract has been
induced by misrepresentation the innocent party may have the right to set it
aside. As a general rule, third parties have no rights under a contract but
there are exceptions to the doctrine of privity. There are different ways of
discharging a contract and remedies are available for breach of contract at
common law and in equity.

ENFORCEABILITY

i. Valid
A valid contract is one which is binding in all material aspects. All the parties
are required to perform in accordance with the contract. Any deviation from
the terms of the contract amounts to breach of that contract.
 ii. Void (not legally valid) contracts
A "void contract" is one where the whole transaction is regarded as a nullity
(legal invalidity). It means that at no time has there been a contract
between the parties. Any goods or money obtained under the agreement
must be returned. Where items have been resold to a third party, they may
be recovered by the original owner.
iii. Void able contracts
A contract which is voidable operates in every respect as a valid contract
unless and until one of the parties takes steps to avoid it. Anything obtained
under the contract must be returned, insofar as this is possible. If goods
have been resold before the contract was avoided, the original owner will not
be able to reclaim them.
iv. Unenforceable contractsAn unenforceable contract is a valid
contract but it cannot be enforced in the courts if one of the parties
refuses to carry out its terms. Items received under the contract
cannot generally be reclaimed.

REQUIREMENT FOR A CONTRACT TO

EXIST

1 AGREEMENT

Offer and Acceptance

The first requisite of any contract is an agreement (consisting of an offer and

acceptance). At least two parties are required; one of them, the offeror,
makes an offer which the other, the offeree, accepts.

(A) OFFER

An offer is an expression of willingness to contract made with the intention

that it shall become binding on the offeror as soon as it is accepted by the
offeree.
A genuine offer is different from what is known as an "invitation to treat",
i.e. where a party is merely inviting offers, which he is then free to accept
or reject. The following are examples of invitations to treat:

Invitation to Treat
1. AUCTIONS ( sale by bidding: a sale of goods or property at which intending buyers bid against one
another for individual items, each of which is sold to the bidder offering the highest price )
(Bid -offer money at auction: to offer an amount of money for something at an auction)
In an auction, the auctioneer's call for bids is an invitation to treat, a request
for offers. The bids made by persons at the auction are offers, which the
auctioneer can accept or reject as he chooses. Similarly, the bidder may
retract (withdraw) his bid before it is accepted. See:
Payne v Cave (1789) 3 Term Rep 148
The plaintiff wanted to bid in an auction, but before he could bid the
defendant withdrew the bid. It was held that this was an invitation to treat
and not an offer.

2. DISPLAY OF GOODS
The display of goods with a price ticket attached in a shop window or on a
supermarket shelf is not an offer to sell but an invitation for customers to
make an offer to buy. See:
Fisher v Bell [1960] 3 All ER 731
P.S.G.B. v Boots Chemists [1953] 1 All ER 482.

3. ADVERTISEMENTS
Advertisements of goods for sale are normally interpreted as invitations to
treat. See:
Partridge v Crittenden [1968] 2 All ER 421.
In
Partridge v Crittenden 31
The appellate had inserted a notice in a periodical entitled Cage and Aviary
Birds which read Bramble finch cocks and hens, 25s each. It appeared
under the general heading of Classified Advertisements and the words offer
for sale were not used. He was charged with unlawfully offering for sale a
wild live bird contrary to the provisions of the Protection of Birds Act 1954
and was convicted. The divisional court quashed ( declare null and void) the
conviction. There had been no offer for sale. Lord Parker said:32
I think that when one is dealing with advertisements and circulars, unless
they indeed come from manufacturers, there is business sense in their being
construed as invitations to treat and not offers for sale.

However, advertisements may be construed as offers if they are unilateral,

i.e., open to the entire world to accept (e.g., offers for rewards). See:
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256.
4. MERE STATEMENTS OF PRICE
A statement of the minimum price at which a party may be willing to sell will
not amount to an offer. See:
Harvey v Facey [1893] AC 552
Harvey v Facey
. . . the plaintiffs telegraphed to the defendants, Will you sell us Bumper Hall
Pen?( a piece of land)
Telegraph (reply) lowest cash price. The defendants telegraphed, We agree
to buy Bumper Hall Pen for 900
asked by you. Please send us your title-deeds. The rest was silence.
It was held by the Judicial Committee of Privy Council that there was no
contract.
The second telegram was not an offer, but only an indication of the minimum
price if
the defendants ultimately resolved to sell, and the third telegram was
therefore not an acceptance. c 4tocopy
Gibson v Manchester County Council [1979] 1 All ER 972. (n/buk)
The council sent a letter to Gibson stating the the corporation may be willing
to sell to you the house at the purchase price of E2, 725...
Held; this was not an offer capable of Gibsons acceptance but an invitation
to treat-the first step in a negotiation.
5. TENDERS
Where goods are advertised for sale by tender, the statement is not an offer,
but an invitation to treat; that is, it is a request by the owner of the goods for
offers to purchase them. The process of competitive tendering came under
scrutiny in the following cases:
Harvela Investments v Royal Trust Co. of Canada [1985] 2 All ER 966
Blackpool Aero Club v Blackpool Borough Council [1990] 3 All ER 25.

(B) ACCEPTANCE
An acceptance is a final and unqualified acceptance of the terms of an offer.
To make a binding contract the acceptance must exactly match the offer. The
offeree must accept all the terms of the offer.
However, in certain cases it is possible to have a binding contract without a
matching offer and acceptance. See:
Brogden v Metropolitan Railway Co. (1877) 2 App Cas 666
Brogden v. Metropolitan Railway Co. (1877)
Mr Brogden had supplied coal to the company without any formal agreement. It was then
suggested that the parties should have a written contract. So, the companys agent drew up a
draft which he sent to Mr Brogden with a request to fill in certain blanks. Mr Brogden duly did
this, and signed and returned the draft but after having made certain alterations. The agent
put the agreement in a drawer, and forgot about it. Coal was supplied on the stated terms
then a dispute arose.
HELD: The return of the draft as altered was a counter-offer. The acceptance of this counteroffer
was never communicated to Mr Brogden so prima facie, no contract was formed.
However, acceptance could, on the facts, be inferred, as the subsequent supply of coal on the
terms of the document amounted to acceptance by conduct.

Lord Denning in Gibson v Manchester City Council [1979] above

Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd's Rep 25.

The Following Rules Have Been Developed By The Courts With

Regard To Acceptance:

1. COUNTER OFFERS
If in his reply to an offer, the offeree introduces a new term or varies the
terms of the offer, then that reply cannot amount to an acceptance. Instead,
the reply is treated as a "counter offer", which the original offeror is free to
accept or reject. A counter-offer also amounts to a rejection of the original
offer which cannot then be subsequently accepted. See:
Hyde v Wrench (1840) 3 Beav 334.

Hyde v. Wrench (1840)

A offered to sell a farm for 1,000. B said he would pay 950, which A refused. B then agreed to
pay 1,000. A then refused this.
HELD: The original offer having been refused, Bs purported acceptance to pay 1,000
amounted to a counter-offer, which was validly rejected by A.
We can see from this case that alteration not only constitutes a rejection followed by a
counteroffer but that it also serves to destroy the original offer.
A counter-offer should be distinguished from a mere request for information.
See:
Stevenson v McLean (1880) 5 QBD 346.

If A makes an offer on his standard document and B accepts on a document

containing his conflicting standard terms, a contract will be made on B's
terms if A acts upon B's communication, e.g. by delivering goods. This
situation is known as the "battle of the forms". See:
Butler Machine Tool v Excell-o-Corp [1979] 1 All ER 965.
Butler Machine Tool Co. Ltd v. Ex-Cell-O Corporation (England) Ltd (1979)
In this case, the sequence of events went very much as outlined above. In the Court of Appeal,
Lord Denning MR had this to say:

There are yet other cases where the battle depends on the shots fired on
both sides. There is a concluded contract but the forms vary. The terms
and conditions of both parties are to be construed together. If they can be
reconciled so as to give a harmonious result, all well and good. If the
differences are irreconcilable, so that they are mutually contradictory, then
the conflicting terms may have to be scrapped and replaced by a reasonable
implication.... But I think the documents have to be considered as a whole.
And, as a matter of construction, I think the acknowledgement of the 5th
June 1969 is the decisive document. It makes it clear that the contract was
on the buyers terms and not the sellers terms.
(The acknowledgement referred to by Lord Denning was a tear-off acknowledgement of
order slip attached to the buyers standard order form.)

8. CROSS-OFFERS
A writes to B offering to sell certain property at a stated price. B writes to A
offering to buy the same property at the same price. The letters cross in the
post. Is there (a) an offer and acceptance, (b) a contract? This problem was
discussed, obiter, by the Court in Tinn v Hoffman (1873) 29 LT 271. Five
judges said that cross-offers do not make a binding contract. One judge said
they do.

2. CONDITIONAL ACCEPTANCE
If the offeree puts a condition in the acceptance, then it will not be binding.

3. TENDERS
A tender is an offer, the acceptance of which leads to the formation of a
contract. However, difficulties arise where tenders are invited for the
periodical supply of goods:
(a) Where X advertises for offers to supply a specified quantity of goods, to
be supplied during a specified time, and Y offers to supply, acceptance of Y's
tender creates a contract, under which Y is bound to supply the goods and
the buyer X is bound to accept them and pay for them.
(b) Where X advertises for offers to supply goods up to a stated maximum,
during a certain period, the goods to be supplied as and when demanded,
acceptance by X of a tender received from Y does not create a contract.
Instead, X's acceptance converts Y's tender into a standing offer to supply
the goods up to the stated maximum at the stated price as and when
requested to do so by X. The standing offer is accepted each time X places
an order, so that there are a series of separate contracts for the supply of
goods. See:
Great Northern Railway Co. v Witham (1873) LR 9 CP 1

4. COMMUNICATION OF ACCEPTANCE

The general rule is that an acceptance must be communicated to the offeror.

Until and unless the acceptance is so communicated, no contract comes into
existence:
Lord Denning in Entores v Miles Far East Corp. [1955] 2 All ER 493.

The acceptance must be communicated by the offeree or someone

authorised by the offeree. If someone accepts on behalf of the offeree,
without authorisation, this will not be a valid acceptance:
Powell v Lee (1908) 99 LT 284.

The offeror cannot impose a contract on the offeree against his wishes by
deeming that his silence should amount to an acceptance:
Felthouse v Bindley (1862) 11 CBNS 869.

Felthouse v. Bindley (1862)

F offered, in a letter, to buy his nephews horse. He added: If I hear nothing, I shall consider
the horse mine. The nephew did not reply but, by mistake, Bindley, an auctioneer sold the
horse at auction.
HELD: As the nephew had not signified his acceptance, no contract for the sale of the horse to
F arose. Bindley was not, therefore, liable for conversion (conversion is dealing wrongfully
with the goods of another).
Where an instantaneous method of communication is used, e.g. telex, it will
take effect when and where it is received. See:
Entores v Miles Far East Corp [1955] 2 QB 327
The Brimnes [1975] QB 929
Brinkibon v Stahag Stahl [1983] 2 AC 34.

5. EXCEPTIONS TO THE COMMUNICATION RULE

(The general rule is that an acceptance must be communicated to the
offeror. Until and unless the acceptance is so communicated, no contract
comes into existence)

i. In unilateral contracts the normal rule for communication of

acceptance to the offeror does not apply. Carrying out the stipulated
task is enough to constitute acceptance of the offer See Carlill V
Carbonic Smoke Ball
ii. The offeror may expressly or impliedly waive the need for
communication of acceptance by the offeree, e.g., where goods are
dispatched in response to an offer to buy.
iii. The Postal Rule - Where acceptance by post has been requested or
where it is an appropriate and reasonable means of communication
between the parties, then acceptance is complete as soon as the letter
of acceptance is posted, even if the letter is delayed, destroyed or lost
in the post so that it never reaches the offeror. See:
Adams v Lindsell (1818) 1 B & Ald 681.
Household Fire Insurance Co. v Grant (1879) 4 Ex D 216.
Grant applied for shares in he household fire insurance co. The co. Allotted
the shares to the defendant and duly addressed to him and posted a letter of
allotment, but the letter never was received by him. When the co. went
bankrupt, the liquidator sued Mr. Grant for the outstanding payment o the
shares, the question was whether Mr. Grants offer for shares had been
vividly accepted, and whether there was a valid contract for to pay.
Held: there was a valid contract, because the rule for the post is that
acceptance is effective even if the letter never arrives.
The postal rule applies to communications of acceptance by cable, including
telegram, but not to instantaneous modes such as telephone, telex and fax.
The postal rule will not apply:
(I) Where the letter of acceptance has not been properly posted, as in Re
London and Northern Bank (1900), where the letter of acceptance was
handed to a postman only authorised to deliver mail and not to collect it.
(ii) Where the letter is not properly addressed. There is no authority on this
point.
(iii) Where the express terms of the offer exclude the postal rule, i.e. if the
offer specifies that the acceptance must reach the offeror. In Holwell
Securities v Hughes (1974, below), the postal rule was held not to apply
where the offer was to be accepted by "notice in writing". Actual
communication was required.
(iv) It was said in Holwell Securities that the rule would not be applied where
it would produce a "manifest inconvenience or absurdity".

Revocation of posted acceptance.

Can an offeree withdraw his acceptance, after it has been posted, by a later
communication, which reaches the offeror before the acceptance? There is
no clear authority in English law. The Scottish case of Dunmore v Alexander
(1830) appears to permit such a revocation but it is an unclear decision. A
strict application of the postal rule would not permit such withdrawal. This
view is supported by decisions in: New Zealand in Wenkheim v Arndt (1873)
and South Africa in A-Z Bazaars v Ministry of Agriculture (1974). However,
such an approach is regarded as inflexible.

6. METHOD OF ACCEPTANCE

The offer may specify that acceptance must reach the offeror in which case
actual communication will be required. See:
Holwell Securities v Hughes [1974] 1 All ER 161.
If a method is prescribed without it being made clear that no other method
will suffice then it seems that an equally advantageous method would
suffice. See:
Tinn v Hoffman (1873) 29 LT 271
Yates Building Co. v Pulleyn Ltd (1975) 119 SJ 370.

7. KNOWLEDGE OF THE OFFER

An offeree may perform the act that constitutes acceptance of an offer, with
knowledge of that offer, but for a motive other than accepting the offer. The
question that then arises is whether his act amounts to a valid acceptance.
The position seems to be that:
(a) An acceptance which is wholly motivated by factors other than the
existence of the offer has no effect.
R v Clarke (1927) 40 CLR 227
The government of Western Australia gave free pardon to accomplices of
certain murderers if they gave evidence that would lead to their arrest and
conviction. Clarke provided the information but admitted that he was not
aware of the reward at the time he gave information to the authorities.
Held: he could not claim the reward because he was not aware of the offer.
(b) Where, however, the existence of the offer plays some part, however
small, in inducing a person to do the required act, there is a valid acceptance
of the offer. See:
Williams v Carwardine (1833) 5 Car & P 566.

TERMINATION OF THE OFFER

1. Acceptance
Once an offer has been accepted, a binding contract is made and the offer
ends.
2. Rejection
If the offeree rejects the offer that is the end of it.
3. Revocation
The offer may be revoked by the offeror at any time until it is accepted.
However, the revocation of the offer must be communicated to the
offeree(s). Unless and until the revocation is so communicated, it is
ineffective. See:
Byrne v Van Tienhoven (1880) 5 CPD 344.
The revocation need not be communicated by the offeror personally, it is
sufficient if it is done through a reliable third party. See:
Dickinson v Dodds (1876) 2 ChD 463.
The defendant on 10 June gave the claimant a written offer to sell the house
for E800 to be left over until 9:00 am 12 June. On 11 June the defendant
sold the house to the third party and the defendants brother in law told the
claimant of the sale. Before 9:00am hrs the next day the claimant accepted
the offer.
Held: as the claimant knew that the defendant was no longer in the position
to sell the house to him, the defendant had vividly withdrawn his
offer.
Where an offer is made to the whole world, it appears that it may be revoked
by taking reasonable steps. See:
Shuey v United States [1875] 92 US 73.
Once the offeree has commenced performance of a unilateral offer, the
offeror may not revoke the offer. See:
Errington v Errington [1952] 1 All ER 149
Daulia v Four Millbank Nominees [1978] 2 All ER 557.
4. Counter Offer
See above for Hyde v Wrench (1840).
5. Lapse of Time
Where an offer is stated to be open for a specific length of time, then the
offer automatically terminates when that time limit expires. Where there is
no express time limit, an offer is normally open only for a reasonable time.
See:
Ramsgate Victoria Hotel v Montefiore (1866) LR 1 Ex 109.
6. Failure of a Condition
An offer may be made subject to conditions. Such a condition may be stated
expressly by the offeror or implied by the courts from the circumstances. If
the condition is not satisfied the offer is not capable of being accepted. See:
Financings Ltd v Stimson [1962] 3 All ER 386.
7. Death
The offeree cannot accept an offer after notice of the offeror's death.
However, if the offeree does not know of the offeror's death, and there is no
personal element involved, then he may accept the offer. See:
Bradbury v Morgan (1862) 1 H&C 249.
The case of Bradbury v Morgan,176 however, suggests that, in principle at
least, this
opinion does not represent the law:
X had written to the plaintiffs, requesting them to give credit to Y and
guaranteeing
payment up to 100. The plaintiffs gave credit to Y. X then died, and the
plaintiffs,
in ignorance of this fact, continued the credit to Y. The plaintiffs now sued Xs
executors on the guarantee.
It was held that the defendants were liable. In the words of Pollock CB:
This is a contract, and the question is whether it is put an end to by death of
the guarantor.
There is no direct authority to that effect; and I think that all reason and
authority, such as
there is, are against that proposition.
2 CONSIDERATION

INTRODUCTION
The mere fact of agreement alone does not make a contract. Both parties to
the contract must provide consideration if they wish to sue on the contract.
This means that each side must promise to give or do something for the
other. (Note: if a contract is made by deed, then consideration is not
needed.)
For example, if one party, A (the promisor) promises to mow the lawn of
another, B (the promisee), A's promise will only be enforceable by B as a
contract if B has provided consideration. The consideration from B might
normally take the form of a payment of money but could consist of some
other service to which A might agree. Further, the promise of a money
payment or service in the future is just as sufficient a consideration as
payment itself or the actual rendering of the service. Thus the promisee has
to give something in return for the promise of the promisor in order to
convert a bare promise made in his favour into a binding contract.

DEFINITION
Lush J. in Currie v Misa (1875) LR 10 Exch 153 referred to consideration as
consisting of a detriment to the promisee or a benefit to the promisor:
" some right, interest, profit or benefit accruing to one party, or some
forbearance, detriment, loss or responsibility given, suffered or undertaken
by the other."
The definition given by Sir Frederick Pollock, approved by Lord Dunedin in
Dunlop v Selfridge Ltd [1915] AC 847, is as follows:
"An act or forbearance of one party, or the promise thereof, is the price for
which the promise of the other is bought, and the promise thus given for
value is enforceable."

TYPES OF CONSIDERATION

1. Executory Consideration
Consideration is called "executory" where there is an exchange of promises
to perform acts in the future, e.g. a bilateral contract for the supply of goods
whereby A promises to deliver goods to B at a future date and B promises to
pay on delivery. If A does not deliver them, this is a breach of contract and B
can sue. If A delivers the goods his consideration then becomes executed.
( standing offer djb) [executory means coming into effect later.]
2. Executed Consideration
If one party makes a promise in exchange for an act by the other party, when
that act is completed, it is executed consideration, e.g. in a unilateral
contract where A offers 50 reward for the return of her lost handbag, if B
finds the bag and returns it, B's consideration is executed.

RULES GOVERNING CONSIDERATION

1. Consideration Must Not Be Past

If one party voluntarily performs an act, and the other party then makes a
promise, the consideration for the promise is said to be in the past. The rule
is that past consideration is no consideration, so it is not valid and cannot be
used to sue on a contract. For example, A gives B a lift home in his car. On
arrival B promises to give A 5 towards the petrol. A cannot enforce this
promise as his consideration, giving B a lift, is past. See:
Re McArdle [1951] 1 All ER 905.
A wife and her 3 grown up children lived in the same house. The wife of one
of the children did some decorations and later the children promised to pay
her E488 and they signed a document to this effect.
It was held that the promise was unenforceable as all the work have been
done before the promise was made and was therefore past consideration.

EXCEPTIONS TO THIS RULE:

(A) PREVIOUS REQUEST
If the promisor has previously asked the other party to provide goods or
services, then a promise made after they are provided will be treated as
binding. See:
Lampleigh v Braithwait (1615) Hob 105.
Braithwait killed someone and then asked Lambleigh to get him a pardon.
Lambleigh got the pardon and gave it to Braithwaith who promised to pay
Lampleigh E100 for his trouble.it was held that although Lambleiths
consideration was past (he had got the pardon). Bs promise to pay could be
linked to Bs earlier request and treated as one agreement, so It could be
implied at the time of the of the request that L would be paid.
(B) BUSINESS SITUATIONS
If something is done in a business context and it is clearly understood by
both sides that it will be paid for, then past consideration will be valid. See:
Re Casey's Patents [1892] 1 Ch 104.
Note: The principles in Lampleigh v Braithwait as interpreted in Re Casey's
Patents were applied by the Privy Council in:
Pao On v Lau Yiu Long [1980] AC 614+
(C) THE BILLS OF EXCHANGE ACT 1882
Under section 27 subsection (1) it is provided that any antecedent debt or
liability is valid consideration for a bill of exchange. For example, A mows B's
lawn and a week later B gives A cheque for 10. A's work is valid
consideration in exchange for the cheque.
2. Consideration Must Be Sufficient but Need Not Be Adequate
Providing consideration has some value, the courts will not investigate its
adequacy. Where consideration is recognised by the law as having some
value, it is described as "real" or "sufficient" consideration. The courts will
not investigate contracts to see if the parties have got equal value. See:
Chappell & Co Ltd v Nestle Co Ltd [1959] 2 All ER 701.

3. Consideration Must Move From the Promisee

The person who wishes to enforce the contract must show that they provided
consideration; it is not enough to show that someone else provided
consideration. The promisee must show that consideration "moved from"
(i.e., was provided by) him. The consideration does not have to move to the
promisor. If there are three parties involved, problems may arise. See:
Price v Easton (1833) 4 B & Ad 433

4. Forebearance To Sue
If one person has a valid claim against another (in contract or tort) but
promises to forbear from enforcing it, that will constitute valid consideration
if made in return for a promise by the other to settle the claim. See:
Alliance Bank v Broom (1864) 2 Dr & Sm 289.

5. Existing Public Duty

If someone is under a public duty to do a particular task, then agreeing to do
that task is not sufficient consideration for a contract. See:
Collins v Godefroy (1831) 1 B & Ad 950.
If someone exceeds their public duty, then this may be valid consideration.
See:
Glassbrooke Bros v Glamorgan County Council [1925] AC 270.

6. Existing Contractual Duty

If someone promises to do something they are already bound to do under a
contract that is not valid consideration. Contrast:
Stilk v Myrick (1809) 2 Camp 317.
Hartley v Ponsonby (1857) 7 E & B 872.
The principle set out in Stilk v Myrick was amended by the following case.
Now, if the performance of an existing contractual duty confers a practical
benefit on the other party this can constitute valid consideration. See:
Williams v Roffey Bros Ltd [1990] 1 All ER 512.

7. Existing Contractual Duty Owed To A Third Party

If a party promises to do something for a second party, but is already bound
by a contract to do this for a third party, this is good consideration. See:
Scotson v Pegg (1861) 6 H & N 295.

8. Part Payment of a Debt

Is not valid consideration for a promise to forbear the balance unless at the
prosees request, part payment is made?

3 INTENTIONS TO CREATE LEGAL RELATIONS (read class notes)

Many agreements are plainly never intended by the parties to be legally

binding; there is no intention to take any dispute to a court of law.
In the case of agreements of a friendly, social or domestic nature there is a
strong presumption that the parties did not intend to create a legal
relationship. If friends agree to come to tea and they fail to run up, or if a
husband agrees to meet his wife and forgets, there can be no action for
breach of contract, even though the complaining party may have-incurred
certain expenses.
In Balfour v. Balfour (1919), a husband promised his wife an allowance before
he left to take up a post abroad. When he stopped the payments, an action
by the wife failed on the ground that this was not a binding contract but
merely domestic agreement with any legal obligations attached to it.

Conversely, in Simpkins v. Pays (1955), three people sharing a house, the

owner, her grand-daughter and paying lodger, regularly entered a
competition in a Sunday newspaper. The entries were sent in the name of
the grandmother, but all three contributed. When an entry won, the
grandmother refused to share the prize of 750. It was held that the others
were entitled to share, because their agreement to this effect was, in the
view of the court, intended to be legally binding.
On the other hand, there is a strong presumption that business agreements
are intended to create legal relations. This presumption can be rebutted, but
only by very strong evidence such as clear statement in a written contract.
In Rose and Frank v. Crompton Bros. Ltd (1925), an English company agreed
to sell carbon paper in America THROUGH A New York firm. This marketing
arrangement was for renewable period of three years and provided that This
arrangement is not entered into . . . as a formal or legal agreement, and shall
not be subject to legal jurisdiction in the Law Courts . . . . Therefore, when
the English company withdrew, it was not liable for breach of contract,
although it was held liable to honour orders placed before withdrawal.
Similarly, in Appleson v. Littlewood Ltd (1939), the plaintiff to recover money
which he claimed to have won on a football pool. His action failed, because
the printed entry form contained a statement that the transaction was
binding in honour only.
Most collective agreements between employers and trade unions as to
wages and other terms of employment will not be legally binding. The
parties are assumed to have intended the agreement to be no more than a
broad working arrangement, not a binding contract to be subject to detailed
scrutiny in the courts.

4 CAPACITY TO CONTRACT

In general, a valid contract may be made by any person recognised by law as

having legal personality that is natural persons, corporations and the Crown.
It is now generally possible to sue the Crown as of right for breach of
contract: see the Crown Proceedings Act 1947 s 1. But see Crown Lands
Comrs v Page [1960] 2 QB 274, [1960] 2 All ER 726, CA; Cudgen Rutile (No 2)
Pty Ltd v Chalk, Queensland Titanium Mines Pty Ltd v Chalk [1975] AC 520,
PC, [1975] 2 WLR 1.

However, the following classes of persons are in law incompetent to

contract, or are only capable of contracting to a limited extent or in a
particular manner:
(1) bankrupts - A bankrupt's property vests on adjudication in the trustee in
bankruptcy: see the Insolvency Act 1986.
(2) minors - The age of majority is 18 years (see the Family Law Reform Act
1969 s 1); and the contractual incapacity of minors was much reduced by the
Minors' Contracts Act 1987.
(3) persons of unsound mind - the original rule of law was that a contract
with a person of unsound mind was void, because there could be no
consensus ad idem. This was later qualified by a rule that a person could not
plead his own unsoundness of mind to avoid a contract he had made. This in
turn gave way to a further rule that such a plea was permissible if it could be
shown that the other contracting party knew of the insanity (Hart v O'Connor
[1985] AC 1000 at 10181019, [1985] 2 All ER 880 at 888, PC; Irvani v Irvani
[2000] 1 Lloyd's Rep 412, CA)
(4) alien enemies; The rights and liabilities of an alien to sue and be sued in
respect of a contract generally depend on whether he is an alien friend or an
alien enemy. An alien friend can sue and be sued in the same manner as a
British citizen.
(5) drunkards - the fact that a party was drunk when he purported to enter
into a contract may be a defense to an action on the contract; and it has
been said that drunkenness is in this respect on the same footing as
unsoundness of mind.
(6) corporations - there are specific rules which govern contracts made by
registered companies with: (1) members; (2) third parties (including pre-
incorporation contracts)
(7) companies;
(8) partnerships; and
(9) receivers of companies.
Provision is also made to exclude from the courts of the United Kingdom
proceedings with regard to the pay or service of members of certain visiting
forces. Such incapacity might be seen in some cases in terms of a lack of
good faith on the part of the other party.

INCAPACITY

Extract from JC Smith, Smith & Thomas: A Casebook on Contract, Eleventh

Edition, 2000, Chapter 17.

The general rule of English law is that any person is competent to bind
himself to any contract he chooses to make, provided that it is not illegal
or void for reasons of public policy. (See below, Chapter 19.) At common law
there are exceptions to this rule in the case of corporations, minors,
and married women, mentally incompetent and intoxicated persons.
The exceptions are now greatly reduced in scope. A series of statutes from
1870 to 1949 abolished the married woman's disabilities and she now enjoys
full contractual capacity. The present state of the other exceptions requires a
little further explanation.

(a) CORPORATIONS
A corporation created by Royal Charter has always had the same contractual
capacity as an ordinary person but a company incorporated under the
Companies Act could, until recently, only make such contracts as were within
the scope of the objects set out in its memorandum of association. Anything
beyond that was ultra vires and void. [Ultra vires- Beyond legal capacity:
beyond the legal capacity of a person, company, or other legal entity]

In the leading case of Ashbury Railway Carriage and Iron Co. Ltd v. Riche
(1875) L.R. 7 H.L. 653 the objects set out in the company's memorandum
were:
"to make and sell,
or lend on hire, railway carriages and wagons,
and all kinds of railway plant, fittings,
machinery and rolling stock;
to carry on the business of mechanical
engineers and general contractors;
 to purchase, lease, work and sell mines,
minerals, land and buildings;
to purchase and sell as merchants, timber,
coal, metals, or other materials, and
to buy any such materials on commission or as
agents."
The directors purchased a concession for making a railway in Belgium and
purported (intended) to contract with Riche that he should have the
construction of the line. Riche's action for breach of the alleged contract
failed since the House of Lords held that the construction of a railway, as
distinct from rolling stock, was ultra vires the company and that therefore
the contract was void. Even if every shareholder of the company had
expressed his approval of the act, it would have made no difference, for it
was an act which the company had no power, in law, to do. Important
changes were made by section 108 of the Companies Act 1989,
substituting a new section 35 of the Companies Act 1985. Under that new
section it remains the duty of the directors to observe any limitations on
their powers flowing from the company's memorandum (section 35(3))
and a member of a company may bring proceedings to restrain the doing
of an act in excess of those powers .
"The validity of an act done by a company shall not be called into question
on the ground of lack of capacity by reason of anything in the company's
memorandum."
So, by applying the modern law to the Ashbury case, the directors committed
a breach of duty by making the contract and might have been restrained by
action by a member; but once the contract was made its validity could not
be questioned provided that the making of the contract was "an act done by
the company." It might be objected that it was not such an act because the
directors had no power to make the contract. This objection is met by section
35A(1):
"In favour of a person dealing with a company in good faith, the power of the
board of directors to bind the company, or authorise others to do so, shall be
deemed to be free of any limitation under the company's constitution."
A person is presumed to have acted in good faith unless the contrary is
proved and is not to be regarded as acting in bad faith merely because he
knows the act is beyond the directors' powers. An ultra vires act by the
directors may now be ratified, but only by special resolution which does not
affect any liability incurred by the directors or any other person-any such
relief must be agreed to separately by special resolution.
Formerly a corporation's contracts were invalid unless made under the
corporate seal but, since the Corporate Bodies' Contracts Act 1960, a
corporation may make contracts in the same manner as a natural person-
that is the contract may be made orally unless a special rule requires a
written contract-as in contracts for the sale or disposition of an interest in
land-or evidence in writing-as in the case of a guarantee within section 4 of
the Statute of Frauds 1677.

(b) MINORS
At common law persons under the age of 21 were designated "infants" and
had only a limited capacity to contract. From January 1, 1970, the Family Law
Reform Act 1969 reduced the age of majority to 18 and authorised the term
"minor" as an alternative to "infant." "Minor" is now the preferred term. The
capacity of a minor to contract is still regulated by the common law, modified
by the Minors' Contracts Act 1987 which repealed a troublesome statute, the
Infants Relief Act 1874.
The general principle is that a contract made by a minor with an
adult is binding on the adult but not on the minor. If, after attaining his
majority, he ratifies it by an act confirming the promise he made when a
minor, he is bound. There need be no consideration for the act of ratification.
A contract by a minor is not void and any money or property transferred by
him under the contract can be recovered only if there has been a total failure
of consideration.

THREE EXCEPTIONAL CASES WHERE A MINOR IS TO SOME EXTENT

BOUND.

i. Necessaries. A minor is bound to pay for necessaries supplied to him

under a contract. The Sale of Goods Act 1979 s.3, re-enacting the Act
of 1893, provides:
" where necessaries are sold and delivered to an infant (or minor) he
must pay a reasonable price therefore.
'Necessaries' in this section means goods suitable to the condition of life of
such infant (or minor) and to his actual requirements at the time of sale
and delivery."
"Necessaries" are those things without which a person cannot reasonably
exist and include food, clothing, lodging, education or training in a trade and
essential services. The "condition of life" of the minor means his social status
and his wealth. What is regarded as necessary for the minor residing in a
stately home may be unnecessary for the resident of a council flat. Whatever
the minor's status, the goods must be suitable to his actual requirements-if
he already has enough fancy waistcoats, more cannot be necessary: Nash v.
Inman [1908] 2 KB 1, CA.
However, contracts for necessaries are binding on a minor. Necessaries are those things a
person immediately needs, such as food; drink; clothing; accommodation; medicines.
Necessaries are not confined to those things which are absolutely required to keep him alive but
they extend to all such things as are reasonably necessary for him in the station in life to which
he belongs. They exclude luxuries, and also a surplus of necessary items (e.g. a contract to buy
two shirts would, probably, be binding but one for a dozen would not be.)
In Nash v. Inman (1908) the complainant was a West End tailor and the defendant was a minor
undergraduate at Trinity College, Cambridge. The complainant sued the minor for the price of
various items of clothing, including eleven fancy waistcoats. It was proved that the defendant
was well supplied with such clothes when the complainant delivered the clothing in question.
Accordingly, the complainants action failed because he had not established that the clothes
supplied were necessaries.
Other contracts binding on a minor are those which are beneficial for him, such as:
1. Contracts of apprenticeship or service
2. Education

The nature of the minor's liability for necessary goods is uncertain. The fact
that the Sale of Goods Act makes him liable only for goods "sold and
delivered" and to pay, not any agreed price, but a reasonable price, suggests
quasi-contractual liability-he must pay, not because he has contracted to do
so, but because the law requires him to recompense the seller for a benefit
conferred and accepted. Some dicta support this view but others treat the
minor's liability as contractual.
In Roberts v Gray [1913] KB 520, CA,
a minor was held liable for his failure to perform a contract for a tour with
the plaintiff, a noted billiards player (game of hitting balls with cue). It was a
contract for the instruction of the minor. The contract was wholly
executory and but it was held that the contract was binding on him from its
formation.
It may be thought that there is a distinction between necessary goods and
necessary services but this is difficult to justify logically or historically.
Perhaps the contract in Roberts v. Gray belongs more properly to the
category of beneficial contracts of service, below.
A contract is not binding on a minor merely because it is proved to be for the
minor's benefit; but a contract which would otherwise be binding as a
contract for necessaries is not so if it contains harsh and onerous terms.

ii. Beneficial contracts of service.

It is for the minor's benefit that he should be able to obtain employment
which would be difficult if he could not make a binding contract. The law
allows him to do so, provided that the contract, taken as a whole, is
manifestly for his benefit. So where a young railway porter agreed to join
an insurance scheme and to forgo any claims he might have under the
Employers' Liability Act, he had forfeited his rights under the Act, the
contract as a whole being for his benefit: Clements v London & North
Western Railway [1894] 2 QB 482, CA. Contracts enabling a minor to
pursue a career as a professional boxer and as an author have been held
binding as being for their benefit.
iii. Acquisition of property with obligations.
 When a minor acquires "a subject of a permanent nature with certain
obligations attached to it"-such as a leasehold, or shares in a company-he
is bound by the obligations as long as he retains the subject. He must pay
the rent or calls on the shares: The contract is void able by the minor-he
may repudiate it any time during his minority or within a reasonable time
thereafter. It is uncertain whether avoidance here means rescission ab
initio or avoidance of only future obligations; but, whether it is
retrospective or not, it seems that the minor cannot recover money which
he has already paid unless there has been a total failure of consideration:.
Restitution by a minor.
Restitution
1. giving back: the return of something to its rightful owner
2. paying back: compensation for a loss, damage, or injury
3. restoration: the return of something to the condition it was in before it was
changed

Where a minor has obtained property under a contract which is not

enforceable against him, the adult party who can neither sue for the price
nor get the property back may suffer an injustice. Even where the minor has
lied about his age, no action in deceit will lie because this would, in effect,
enable the contract to be enforced against him; and for the same reason it is
improbable that the minor would be estopped from asserting his true age.
The Minors' Contracts Act 1987, s3, now affords a limited measure of redress.
Where a contract made after the commencement of the Act is unenforceable
against a defendant because he was a minor when it was made:
" the court may, if it is just and equitable to do so, require the defendant to
transfer to the plaintiff any property acquired by the defendant under the
contract or any property representing it."
This may assist the plaintiff where the property is identifiable but where the
plaintiff has loaned the money it will usually not be. The plaintiff will then be
able to recover in equity only if he is able to prove that he loaned the money
for the express purpose of enabling the minor to buy necessaries and that he
in fact did so. The 1987 Act, s3, provides "Nothing in this section shall be
taken to prejudice any other remedy available to the plaintiff." The plaintiff
might rely on the equitable doctrine which required a fraudulent minor to
return property which he had obtained by deception and which was still
identifiable in his possession: R. Leslie Ltd v. Shiell [1914] 3 KB 607, CA; but
it is not clear that there would be any advantage in doing so, since the
remedy under section 3 appears to overlap the equitable remedy and does
not require proof of fraud.
Guarantee of a minor's contract. Section 2 of the 1987 Act provides that
a guarantee of a minor's contract is not unenforceable against the guarantor
merely because the contract made by the minor is unenforceable against
him on the ground that he is a minor. The section does not apply if the
contract made by the minor is unenforceable against him for some other
reason, for example misrepresentation or duress by the adult party. In such a
case the guarantor would not be bound.

(C) Persons of Unsound Mind/ Mental Incompetents

The ancient rule of the common law was that a lunatic could not set up his
own insanity (though his heir might) so as to avoid an obligation which he
had undertaken. But by 1847 Pollock C.B. was able to say, in delivering the
judgment of the Court of Exchequer Chamber in Moulton v. Camroux, 2 Ex
487, that "the rule had in modern times been relaxed, and unsoundness of
mind would now be a good defense to an action upon a contract, if it could
be shown that the defendant was not of the capacity to contract 'and the
plaintiff knew it."

A lunatic so found by inquisition was held to be incapable of making a valid

inter vivo disposition of property (although he could make a valid will) since
this would be inconsistent with the position of the Crown under the Lunacy
Acts: Re Walker [1905] 1 Ch 160. Presumably the position of a lunatic so
found with respect to contracts not effecting inter vivo dispositions of his
property was the same as that of a lunatic not so found; that is, he would be
bound unless he could show that he was not in fact of capacity to contract
and that the plaintiff knew it.

(d) INTOXICATED PERSONS

The authorities are scanty; but in Gore v. Gibson (1845) 13 M & W 621; 153
ER 260, it was held that a contract made by a person so intoxicated as not to
know the consequences of his act is not binding on him if his condition is
known to the other party. It appears, however, that such a contract is not
void but merely void able, for it was held in Matthews v. Baxter (1873) LR 8
Ex 132 that if the drunken party, upon coming to his senses, ratifies (formally
approves) the contract, he is bound by it.
Section 3 of the Sale of Goods Act 1979 makes the same provision for
persons who are incompetent to contract by reason of "drunkenness" as for
minors and the mentally incompetent. No doubt, the same rule would be
applied to persons intoxicated by drugs other than alcoholic drink, either by
a broad interpretation of "drunkenness," or at common law.

5LEGALITY OF CONTRACTS (NOTES MISSING)

Simple contracts are frequently classified as express and implied.
An express contract is one entered into on terms expressed in spoken or written words.
Express terms are statement actually made by one of the parties with the intention that they
become part of the contract and thus binding and enforceable through court if necessary.
An implied contract is one that is inferred from the acts or conduct of the parties.
Implied terms however, are not actually stated or expressly included into the contract, but
are introduced into the contract by implication.

Unit 4: THE GENERAL RULE

If one person owes a sum of money to another and agrees to pay part of this
in full settlement, the rule at common law (the rule in Pinnel's Case (1602) 5
CoRep 117a) is that part-payment of a debt is not good consideration for a
promise to forgo the balance. Thus, if A owes B 50 and B accepts 25 in full
satisfaction on the due date, there is nothing to prevent B from claiming the
balance at a later date, since there is no consideration proceeding from A to
enforce the promise of B to accept part-payment. This is because he is
already bound to pay the full amount, an agreement based on the same
principle as Stilk v Myrick (1809). It also protects a creditor from the
economic duress of his debtor.
In Pinnel's Case (1602), Cole owed Pinnel 8-10s-0d (8.50) which was due
on 11 November. At Pinnel's request, Cole paid 5-2s-2d (5.11) on 1
October, which Pinnel accepted in full settlement of the debt. Pinnel sued
Cole for the amount owed. It was held that part-payment in itself was not
consideration. However, it was held that the agreement to accept part-
payment would be binding if the debtor, at the creditor's request, provided
some fresh consideration. Consideration might be provided if the creditor
agrees to accept:
* part-payment on an earlier date than the due date (i.e., as in Pinnel's Case
itself); or
* chattel instead of money (a "horse, hawk or robe" may be more beneficial
than money); or
* part-payment in a different place to that originally specified.
Despite its harshness the rule in Pinnel's Case was affirmed by the House of
Lords and still represents the law:
In Foakes v Beer (1884) 9 App Cas 605, Mrs. Beer had obtained judgment for
a debt against Dr Foakes, who subsequently asked for time to pay. She
agreed that she would take no further action in the matter provided that
Foakes paid 500 immediately and the rest by half-yearly installments of
150. Foakes duly kept to his side of the agreement. Judgment debts,
however, carry interest. The House of Lords held that Mrs. Beer was entitled
to the 360 interest which had accrued. Foakes had not "bought" her
promise to take no further action on the judgment. He had not provided any
consideration.
The rule was recently applied by the Court of Appeal:
In Re Selectmove [1995] 2 All ER 531, Selectmove owed arrears of tax to the
Inland Revenue. The IR was in a position to put Selectmove into liquidation
because it was unable to meet its liabilities. There was a meeting at which
Selectmove proposed to pay all future tax as and when it fell due and that it
would pay off the arrears at the rate of 1,000 a month commencing the
following February. The Collector of Taxes informed Selectmove that this
proposal would need approval of his superiors; and that he would get back to
them if it was not acceptable. Sometime later the IR commenced liquidation
proceedings which Selectmove resisted, relying upon the agreement made at
the meeting in July.
The Court of Appeal held, dismissing the defense (1) that a promise to pay a
sum which the debtor was already bound to pay was not good consideration;
(2) any promise made by the Collector of Taxes was made without actual or
ostensible authority. Selectmove's attempt to use the notion in Williams v
Roffey Bros (1990) failed as it was held that it was applicable only where the
existing obligation which is pre-promised is one to supply goods or services,
not where it is an obligation to pay money.
More recent cases include:
Ferguson v Davies (1996) The Independent December 12th 1996
Re C (a Debtor) [1996] BPLR 535

EXCEPTIONS TO THE RULE

Apart from the exceptions to the rule mentioned in Pinnel's Case itself, there
are two others at common law and one exception in equity.

A) PART-PAYMENT OF THE DEBT BY A THIRD PARTY

A promise to accept a smaller sum in full satisfaction will be binding on a
creditor where the part-payment is made by a third party on condition that
the debtor is released from the obligation to pay the full amount. See:
Hirachand Punamchand v Temple [1911] 2 KB 330 - A father paid a smaller
sum to a money lender to pay his son's debts, which the money lender
accepted in full settlement. Later the money lender sued for the balance. It
was held that the part-payment was valid consideration, and that to allow
the moneylender's claim would be a fraud on the father.

B) COMPOSITION AGREEMENTS
The rule does not apply to composition agreements. This is an agreement
between a debtor and a group of creditors, under which the creditors agree
to accept a percentage of their debts (e.g., 50p in the pound) in full
settlement. Despite the absence of consideration, the courts will not allow an
individual creditor to sue the debtor for the balance: Wood v Robarts (1818).
The reason usually advanced for this rule is that to allow an individual
creditor to claim the balance would amount to a fraud on the other creditors
who had all agreed to the percentage.

C) PROMISSORY ESTOPPEL
This is the name that has been given to the equitable doctrine which has as
its principal source the obiter dicta of Denning J in High Trees House Ltd
[1947] (see below)
PROMISSORY ESTOPPEL
A further exception to the rule in Pinnel's Case is to be found in the equitable
doctrine of promissory estoppel. The doctrine provides a means of making a
promise binding, in certain circumstances, in the absence of consideration.
The principle is that if someone (the promisor) makes a promise, which
another person acts on, the promisor is stopped (or estopped) from going
back on the promise, even though the other person did not provide
consideration (in so far as is it is inequitable to do so).
DEVELOPMENT
The modern doctrine is largely based on dicta of Denning J in Central London
Property Trust Ltd v High Trees House Ltd [1947] 1 KB 130 and on the
decision of the House of Lords in Tool Metal Manufacturing Co Ltd v Tungsten
Electric Co Ltd [1955] 1 WLR 761 and can be traced to Hughes v
Metropolitan Railway (1877) 2 App Cas 439.
(a) Hughes Case (1877) - In October a landlord gave his tenant six months
notice to repair and in the event of a failure to repair, the lease would be
forfeited. In November the landlord opened negotiations for the sale of the
premises, but these ended in December without agreement. Meanwhile the
tenant had not done the repairs and when the six months period was up, the
landlord sought possession.
The House of Lords held that the landlord could not do so. The landlord had,
by his conduct, led the tenant to suppose that as long as negotiations went
on, the landlord would not enforce the notice. He could not subsequently
take advantage of the tenant relying on this. Therefore, the notice did not
run during the period of negotiations. However, the six month period would
begin to run again from the date of the breakdown of negotiations.
(b) High Trees (1947) - In 1937 the Ps granted a 99 year lease on a block of
flats in London to the Ds at an annual rent of 2500. Because of the outbreak
of war in 1939, the Ds could not get enough tenants and in 1940 the Ps
agreed in writing to reduce the rent to 1250. After the war in 1945 all the
flats were occupied and the Ps sued to recover the arrears of rent as fixed by
the 1937 agreement for the last two quarters of 1945.
Denning J held that they were entitled to recover this money as their promise
to accept only half was intended to apply during war conditions. This is the
ratio decidendi of the case. He stated obiter, that if the Ps sued for the
arrears from 1940-45, the 1940 agreement would have defeated their claim.
Even though the Ds did not provide consideration for the Ps' promise to
accept half rent, this promise was intended to be binding and was acted on
by the Ds. Therefore the Plaintiffs were estopped from going back on their
promise and could not claim the full rent for 1940-45.
(c) Tool Metal Case (1955) - see below.
Thus it seems that if a person promises that he will not insist on his strict
legal rights, and the promise is acted upon, then the law will require the
promise to be honoured even though it is not supported by consideration.

REQUIREMENTS
The exact scope of the doctrine of promissory estoppel is a matter of debate
but it is clear that certain requirements must be satisfied before the doctrine
can come into play:
(A) CONTRACTUAL/LEGAL RELATIONSHIP
All the cases relied on by Denning J in High Trees House were cases of
contract. However, in Durham Fancy Goods v Michael Jackson (Fancy Goods)
[1968] 2 QB 839, Donaldson J said that an existing contractual relationship
was not necessary providing there was "a pre-existing legal relationship
which could, in certain circumstances, give rise to liabilities and penalties".
(B) PROMISE
There must be a clear and unambiguous statement by the promisor that his
strict legal rights will not be enforced, i.e. one party must make a promise
which is intended to be binding: The Scaptrade [1983] QB 529. However, it
can be implied or made by conduct as in the Hughes Case (1877).
(C) RELIANCE
The promisee must have acted in reliance on the promise. There is some
uncertainty as to whether the promisee (i) should have relied on the promise
by changing his position to their detriment (i.e., so that he is put in a worse
position if the promise is revoked): Ajayi v Briscoe [1964] 1 WLR 1326, or (ii)
whether they should have merely altered their position in some way, not
necessarily for the worse.
In Alan Co Ltd v El Nasr Export & Import Co [1972] 2 QB 189, Lord Denning
disclaimed detriment as an element of promissory estoppel, saying it was
sufficient if the debtor acted on the promise by paying the lower sum. He
said that "he must have been led to act differently from what he otherwise
would have done".
(D) INEQUITABLE TO REVERT
It must be inequitable for the promisor to go back on his promise and revert
to his strict legal rights. If the promisor's promise has been extracted by
improper pressure it will not be inequitable for the promisor to go back on his
promise. See:
D & C Builders v Rees [1965] 2 QB 617 - The Ps, a small building company,
had completed some work for Mr. Rees for which he owed the company
482. For months the company, which was in severe financial difficulties,
pressed for payment. Eventually, Mrs. Rees, who had become aware of the
company's problems, contacted the company and offered 300 in full
settlement. She added that if the company refused this offer they would get
nothing. The company reluctantly accepted a cheque for 300 "in completion
of the account" and later sued for the balance. The Court of Appeal held that
the company was entitled to succeed. Lord Denning was of the view that it
was not inequitable for the creditors to go back on their word and claim the
balance as the debtor had acted inequitably by exerting improper pressure.
(E) A SHIELD OR A SWORD?
At one point it was said in Coombe v Coombe [1951] 2 KB 215 that the
doctrine may only be raised as a defense: "as a shield and not a sword". It
was held that the doctrine cannot be raised as a cause of action. This means
that the doctrine only operates as a defense to a claim and cannot be used
as the basis for a case. However, this was doubted in Re Wyven
Developments [1974] 1 WLR 1097 by Templeman J, who appeared to think
that this was no longer the case and that it could create rights. Lord Denning
in Evenden v Guildford City AFC [1975] QB 917 also adopted this approach.
(F) EXTINCTIVE OR SUSPENSIVE OF RIGHTS?
Another question raised by this doctrine is whether it extinguishes rights or
merely suspends them. The prevalent authorities are in favour of it merely
suspending rights, which can be revived by giving reasonable notice or by
conditions changing.
(a) Where the debtor's contractual obligation is to make periodic payments,
the creditor's right to receive payments during the period of suspension may
be permanently extinguished, but the creditor may revert to their strict
contractual rights either upon giving reasonable notice, or where the
circumstances which gave rise to the promise have changed as in High Trees.
See:
Tool Metal Case (1955) - Patent owners promised to suspend periodic
payments of compensation due to them from manufacturers from the
outbreak of war. It was held by the House of Lords that the promise was
binding during the period of suspension, but the owners could, on giving
reasonable notice to the other party, revert to their legal entitlement to
receive the compensation payments.
(b) It is not settled law that there can be no such resumption of payments in
relation to a promise to forgo a single sum. In D & C Builders, which
concerned liability for a single lump sum, Lord Denning expressed obiter that
the court would not permit the promisor to revert to his strict legal right and
that the estoppel would be final and permanent if the promise was intended
and understood to be permanent in effect.
The preferred approach is to look at the nature of the promise: if as in High
Trees and Tool Metal, it is intended to be temporary in application and to
reserve to the promisor the right subsequently to reassert his strict legal
rights, the effect will be suspensive only; and if on the other hand, it is
intended to be permanent (as envisaged in D & C Builders), then there is no
reason why in principle or authority the promise should not be given its full
effect so as to extinguish the promisor's right.

Unit 4: PRIVITY OF CONTRACT

1. The Privity of Contract Doctrine

The privity of contract doctrine dictates that only persons who are parties to
a contract are entitled to take action to enforce it. A person who stands to
gain a benefit from the contract (a third party beneficiary) is not entitled to
take any enforcement action if he or she is denied the promised benefit.

Example:

A promises B, for consideration moving from B, to pay C $ 100.

Here A and B are parties to the contract privy to the contract and can sue
each other if there is a breach by the other. C is not a party to the contract
and cannot sue A is A fails to pay C the sum of $ 100.

A classic authority for the doctrine is Dunlop Pneumatic Tyre Co Ltd v

Selfridge & Co [1915] AC 847, where at 853, Viscount Haldane said:

My Lords, in the law of England certain principles are fundamental. One is

that only a person who was party to a contract can sue on it. Our law knows
nothing of a jus quaesitum tertio [third party right of action] arising by way
of contract.

See also Coulls v Bagots Executor & Trustee Co Ltd (1967) 119 CLR 460, at
478, per Barwick CJ.

2. Privity and its Relationship to the Doctrine of Consideration

When looking at the doctrine of consideration we observed the rule that

consideration must move from a promisee, or, in other words, that only a
person who has provided consideration can enforce a promise. In the above
example one could have argued that C could not sue on the basis that C had
not provided any consideration for As promise to pay C the sum of $ 100.

This raises the question of whether there is a distinction between the privity
and consideration rules. This question has generated considerable discussion
in academic circles and there is a division of opinion between those who say
the rules are in fact one rule differently expressed and those who argue that
the two rules are distinct.

In the cases, the relatively scant references to the question tend to support
the two separate rules approach.

See Coulls v Bagots Executor, at 478, Barwick CJ and, at 494, per Windeyer
J; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR
107, at 115-116, Mason CJ, Wilson J and at 164, per Toohey J.

3. Remedies Against a Promisor in Breach of Obligations to a Third Party

Here we are concerned with the remedies that can be pursued against a
promisor who is in breach of his or her obligations to a third party. In our
example above, who can sue A, and what remedies are available?

Because C is a third party and not privy to the contract, C has no right of
action against A.

However, B as the promisee under the contract and a party to the contract
can sue A. Two possible remedies arise, namely, damages at common law
and specific performance in equity.

Can C require B to sue A? See Coulls, at 502, per Windeyer J.

(a) Damages at Common Law

Because the remedy of common law damages for breach of contract will
always be granted to a plaintiff, B will always succeed. However, the critical
issue is the measure of damages that will be recovered.

Critical to an understanding of the position of B in this context is the basic

principle for the assessment of damages for breach of contract. As will be
explored in more detail in the lectures on remedies, damages seeks to
compensate the plaintiff for the loss suffered as a result of the breach. If no
loss is suffered then a nominal (or token) award of damages is made in
favour of the plaintiff. If real loss is suffered, an award of substantial
damages is made in favour of the plaintiff.

In our example it is likely to be the case that the measure of damages to be

recovered by B would be nominal because B suffers no loss as a result of the
breach by A. Put another way, Bs position is the same irrespective of
whether or not A pays the sum of $ 100 to C. In special circumstances it may
be that B will suffer a real loss, in which case substantial damages which
reflect the value of Bs loss not Cs loss - will be awarded. See Coulls, at
501-502, where Windeyer J.

Because in most cases the measure of damages recovered will be nominal,

there is little reason for B to pursue common law damages.

The fact that B cannot sue to recover as damages the measure of Cs loss
from As breach of contract was recently confirmed by four members of the
House of Lords in Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1
AC 518, at 522, 563, 575 and 580. The fifth Law Lord, Lord Goff was, at 538-
539, 544, more skeptical, suggesting that it was an extraordinary defect in
the law that B should have no remedy for common law damages against A.
(b) Specific Performance in Equity

Unlike common law damages, specific performance will not always be

granted to a plaintiff upon proof of a breach of contract. There are various
grounds upon which a court will refuse specific performance. A particularly
important one in the present context is that the remedy will be refused if
common law damages would be an adequate remedy. The critical decision in
this respect is Beswick v Beswick [1968] AC 58. From this case set out:

The facts
The issue that had to be determined by the House of Lords
The decision and reasoning of the House of Lords as to why damages were
an inadequate remedy on the facts of the case?

See also Coulls, at 503, per Windeyer J.

4.The Case of Trident General Insurance v McNiece Bros

The most significant High Court decision on privity has been Trident General
Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. From this case
set out:

The facts
The different views on the status of the doctrine of privity set out by the
judges of the High Court.
What reasons did Mason CJ & Wilson J give for their radical approach to
privity and how did they compare and contrast with those of the other
radical approach given by Toohey J?
What was the approach of the conservative judges, Brennan, Deane &
Dawson JJ to the status of privity?
To which of the above two approaches does the judgment of Gaudron J
belong?

In Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR
363, Gummow J, after a long analysis of Trident, concluded, at 368, with the
following observation:

At best ... there is support by three only of their Honours for the
proposition ... that the old rules do not apply in their full vigour.

His Honour was, of course, referring to Mason CJ, Wilson, Toohey JJ.

Unit 5:
5. General Law Exceptions to the Doctrine of Privity
There are a number of general law principles which enable a third party, such
as C in our example, to overcome the doctrine of privity. Because they rely
upon establishing the elements of other established legal doctrines and
institutions, they are not true exceptions. Rather they constitute means of
circumventing the doctrine of privity because these other legal principles
apply on the facts of the given case. Some of the key exceptions are
discussed below.

(a) Agency
The rule here is that if one of the contracting parties contracts as an agent,
then either the agent or the principal, but not both, can sue to enforce the
contract. In our example, if B is Cs agent then either B or C can enforce the
contract against A. In these cases it is immaterial as to whether A knew that
B was Cs agent.
A particular situation where agency principles arise is with contracts for the
carriage of goods. Typically the situation will be where a carrier includes in
the contract an exclusion clause and the exclusion clause is expressed to be
for the benefit of not only the carrier but third parties that might be engaged
by the carrier for the purpose of transporting the goods. A common example
in the cases is in shipping contracts, where the third party is the stevedore
who unloads the goods at the port of destination.
In such cases, can the stevedore rely on the benefit of the exclusion clause
when the stevedore causes damage to the goods? See elements that have to
be satisfied in Midland Silicones Ltd v Scruttons [1962] AC 446, at 474, per
Lord Reid.
Originally these principles were only applied to contracts for carriage of
goods by sea. However, they have been applied to road carriage cases: Life
Savers (Australasia) Pty Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431.
Presumably they would also apply to contracts for carriage of goods by rail or
air.
It may even be the case that these principles could apply to exclusion
clauses in any context where it is intended to extend their protection to third
parties.
An illustration of the application of the principles is in New Zealand Shipping
Co v A M Satterthwaite & Co Ltd (The Eurymedon) [1975] AC 154. From this
case set out:
The facts
The issue that had to be determined by the Privy Council
The decision and reasoning of the Privy Council as to how the elements of
Midland Silicones were satisfied in this case.
In The Eurymedon, the close relationship between the carrier and the third
party was crucial to establishing the third element in Midland Silicones. It
now appears that if the third party simply pleads the exclusion emption when
sued for damages that will be enough: Life Savers v Frigmobile.
If all the elements in Midland Silicones are met a contract arises between the
owner of the goods and the third party. There is, thus, no privity issue. The
third party becomes a contracting party in a later contract that was
anticipated by the principal contract between the cargo owner and the
carrier. In this respect in Homburg Houtimport BV v Agrosin Private Ltd (The
Starsin) [2003] 2 All ER 785, at 851-852, Lord Millett said:
It is well established by the authorities that the Himalaya clause has the
effect of bringing into being a separate or collateral contract between the
cargo owner and a third party, usually an independent contractor such as a
stevedore, under which the third party enjoys exemption from liability to the
cargo owner. They also establish that the contract is a unilateral or 'if'
contract by which the third party undertakes no obligation to the cargo
owner of any kind, but the cargo owner promises that if the third party does
anything in the course of its employment which damages the cargo it will
have the benefit of the protective provisions of the clause. ... Such a contract
is a promise for an act, not a promise for a promise. If in the course of its
employment the third party performs an act in relation to the goods, which it
is under no obligation to the cargo owner to perform, it will at the one and
same time bring the contract with the cargo owner into existence and supply
the consideration for the cargo owner's promise of exemption from liability.
In relation to the contract between the owner of the goods and the third
party Lord Millet went on to say, at 853:
Such a contract cannot properly be characterised as a contract of carriage. It
is rather a contract of exemption which is ancillary or collateral to other
contractual arrangements (the time charter and the bill of lading) which were
necessary to achieve the carriage of the goods on the chosen vessel.

(b) Trusts
The law of trusts can enable a third party beneficiary to initiate action that
will enforce the promisors obligation. Using the above example, if B had
contracted with A in the capacity of trustee for C, C as beneficiary under the
trust has enforceable rights. These rights arise because the law of trusts
gives a beneficiary certain rights against a trustee.

In the context of privity, if C is a beneficiary under a trust, C can bring an

action against B, the trustee that has the effect of compelling B to sue A for
breach of contract. In formal procedural terms C sues in an action in which B
and A are joined as defendants.
The use of trust law here does not give rise, in the strict sense, to an
exception to the doctrine of privity. In conceptual terms, the action against A
is pursued by B, albeit at Cs insistence.
For the trust relationship to arise 2 points need to be examined.
First, for a trust to exist their must be property that is held on trust. There
can be no trust without a trustee holding property on trust for the
beneficiary. The law a trusts has a broad and flexible definition of property. In
this case the property is the promise made by the promisor. In other words,
the contract between A and B, it is the promise made by A to B that is held
on trust by B for C.
Second, for the trust to arise in this context, it must be established that there
is an intention, at the time of the contract between A and B, that B was
contracting in the capacity of trustee. On intention in this context see
Trident, at 149, per Deane J.
In ascertaining whether the intention is present, a court will look to the
language in the contract, the nature of the transaction and relevant
circumstances attending the relationship between the parties: Winterton
Constructions v Hambros at 370. Certain types of contracts may be more
readily amenable to finding a trust intention than others.
Could a trust be found in the context of Trident? See Trident at 148, per
Deane and at 155-157, per Dawson J. What were the reasons why Deane J
found in favour of McNiece Bros on the basis of trusts but Dawson J did not?
When the trust exception is pursued and B sues for damages, the measure of
damages that is recovered reflect the loss to C, the beneficiary of the trust.
The damages that are recovered are held by B on trust for C: Lloyds v
Harper (1880) LR 16 ChD 290; Eslea Holdings Ltd v Butts (1986) 6 NSWLR
175.

(c) Estoppel
Following the decision in Waltons Stores (Interstate) Ltd v Maher (1988) 164
CLR 387, a third party may be able to seek relief against a promisor on the
basis of promissory estoppel principles. To succeed the third party would
need to establish the elements of promissory estoppel. See Trident, at 145,
per Deane J.
In Trident, Mason CJ, Wilson J, at 123-124, were of the view that it was likely
that estoppel could be established on the facts of the case, but it was not
necessary for them to determine the issue on the basis that they had
decided the case on other grounds.

(d) Unjust Enrichment

When we examine the remedy of quantum meruit later in this course, we
shall see that the principle of unjust enrichment is the principle that
underpins the remedy. The essence of the principle is that it requires a
defendant to make fair and just restitution derived at the expense of a
plaintiff: Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256-257,
per Deane J.
In Trident, Deane J, at 145-146, indicated that the principle could possibly be
the basis for a third party to seek relief. However, it was Gaudron J, especially
at 176, in Trident who based her decision in favour of McNiece Bros on the
basis of the principle of unjust enrichment.
The action based upon unjust enrichment is not based on the contract but
independent of it. However, usually it will correspond in content and duration
with the promisors obligation.

6. Statutory Exceptions to the Doctrine of Privity

Insurance Contracts Act 1985 (Cth), s. 48
Bills of Exchange Act 1909 (Cth), ss. 36-43
Cheques Act 1986 (Cth), s. 73
Motor Vehicles (Third Party Insurance) Act 1942 (NSW), s. 10(7)

Unit 6: ASCERTAINING CONTRACT TERMS

REPRESENTATIONS AND TERMS

The first step in determining the terms of a contract is to establish what the
parties said or wrote. Statements made during the course of negotiations
may traditionally be classed as representations or terms and if one turns out
to be wrong, the plaintiffs remedy will depend on how the statement is
classified:
A representation is a statement of fact made by one party which
induces the other to enter into the contract. If it turns out to be incorrect the
innocent party may sue for misrepresentation.
Breach of a term of the contract entitles the injured party to claim
damages and, if he has been deprived substantially what he bargained for,
he will also be able to repudiate the contract.
If a statement is not a term of the principal contract, it is possible that
it may be enforced as a collateral contract (which has developed rapidly in
the twentieth century as a significant means by which the difficulties of fixing
a statement with contractual force may be circumvented).
How can the courts decide whether a statement is a term or a mere
representation? It was established in Heilbut, Symons & Co v Buckleton
[1913] AC 30, that intention is the overall guide as to whether a statement is
a term of the contract. In seeking to implement the parties' intentions and
decide whether a statement is a term or a mere representation, the courts
will consider the following four factors.

(A) TIMING
The court will consider the lapse of time between the making of the
statement and the contract's conclusion: if the interval is short the
statement is more likely to be a term. See:
Routledge v McKay [1954] 1 WLR 615 Schawel v Reade [1913] 2 IR 6

B) IMPORTANCE OF THE STATEMENT

The court will consider the importance of the truth of the statement as a
pivotal factor in finalising the contract. The statement may be of such
importance that if it had not been made the injured party would not have
entered into the contract at all. See:
Bannerman v White (1861) CB(NS) 844 Couchman v Hill [1947] 1 All ER 103.

(C) REDUCTION OF TERMS TO WRITING

The court will consider whether the statement was omitted in a later, formal
contract in writing. If the written contract does not incorporate the
statement, this would suggest that the parties did not intend the statement
to be a contractual term. See:
Roof/edge v McKay [1954] 1 WLR 615 Birch v Paramount Estates (1956) 167.

(D) SPECIAL KNOWLEDGE/SKILLS

The court will consider whether the maker of the statement had specialist
knowledge or was in a better position than the other party to verify the
statement's accuracy. See:
Marling v Eddy [1951] 2 KB 739
Oscar Chess v Williams [1957] 1 All ER 325
Dick Bentley Productions v Harold Smith Motors [1965] 2 All ER 65.

CONDITIONS AND WARRANTIES

Traditionally terms have been divided into two categories: conditions and
warranties.

(A) CONDITIONS
A condition is a major term which is vital to the main purpose of the contract.
A breach of condition will entitle the injured party to repudiate( reject as
invalid) the contract and claim damages. The injured party may also choose
to go on with the contract, despite the breach, and recover damages instead.
See:
(Note: The word 'condition' also has another meaning. It may mean a
stipulation that a contract should not be enforceable except on the
happening of a given event, or should be brought to an end on the
happening of a given event. The condition is then properly called a 'condition
precedent', or a 'condition subsequent1 respectively

(B) WARRANTIES
A warranty is a less important term: it does not go to the root of the contract.
A breach of warranty will only give the injured party the right to claim
damages; he cannot repudiate the contract.
(C) INTERMEDIATE TERMS
It may be impossible to classify a term neatly in advance as either a
condition or a warranty. Some undertakings may occupy an intermediate
position, in that the term can be assessed only in the light of the
consequences of a breach. If a breach of the term results in severe loss and
damage, the injured party will be entitled to repudiate the contract; where
the breach involves minor loss, the injured party's remedies will be restricted
to damages. These intermediate terms have also become known as
innominate terms. See:
Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha [1962] 1 All ER 474
The Mihalis Angelos [1971] 1 QB 164
The Hansa Nord [1976] QB 44
Reardon Smith Line v Hansen-Tangen [1976] 3 All ER 570
Bunge Corporation v Tradax Export [1981] 2 All ER 513.
NOTE
If the term is described in the contract as a 'condition that will not be
conclusive. See:
Schuler v Wickman Machine Tools [1974] AC 235.

3. IMPLIED TERMS
In most contracts the primary obligations of the parties are contained in
express terms. In addition there are various circumstances in which extra
terms may be implied into the agreement.

A) TERMS IMPLIED BY CUSTOM

The terms of a contract may have been negotiated against the background
of the customs of a particular locality or trade. The parties automatically
assume that their contract will be subject to such customs and so do not deal
specifically with the matter in their contract. See:
Mutton v Warren (1836) 1 M&W 466.

B) TERMS IMPLIED BY THE COURT

(i) Intention of the Parties/Terms Implied as Fact
The courts will be prepared to imply a term into a contract in order to give
effect to the obvious intentions of the parties. Sometimes the point at issue
has been overlooked or the parties have failed to express their intention
clearly. In these circumstances, the court will supply a term in the interests of
'business efficacy' so that the contract makes commercial sense. See:
The Moorcock (1889) 14 PD 64.
A more recent test is the 'officious bystander test' used to incorporate
implied obvious terms (Shirlaw v Southern Foundries [1940] AC 701). If while
the parties were making their contract, an officious bystander were to
suggest some express provision, they would both reply, "oh, of course." See,
e.g.:
Wilson v Best Travel [1993] 1 All ER 353.
(it) Relationship Between the Parties/Terms Implied by Law
In certain relationships and contracts the law seeks to impose a model or
standardised set of terms as a form of regulation. Such terms arising from
the relationship between the parties will be implied as of law. See:
Liverpool City Council v Irwin [1976] 2 All ER 39.

C) TERMS IMPLIED BY STATUTE

See Sections 12, 13, 14 and 15 of the Sale of Goods Act 1979 for examples
of terms implied under statute
THE PAROL EVIDENCE RULE
The parol evidence rule is that where the record of a transaction is embodied
in a document, extrinsic evidence is not generally admissible to vary or
interpret the document or as a substitute for it.
According to GH Treitel, The Law of Contract, 9th ed. p176, there are obvious
grounds of convenience for the application of the parol evidence rule to
contracts: certainty is promoted by holding that parties who have reduced a
contract to writing should be bound by the writing and by the writing alone.
On the other hand, the parol evidence rule will commonly be invoked where
a dispute arises after the time of contracting as to what was actually said at
that time; and in such cases one of the parties could feel aggrieved if
evidence on the point were excluded merely because the disputed term was
not set out in the contractual document. Evidence extrinsic to the document
is therefore admitted in a number of situations which fall outside the scope
of the rule.

EXCEPTIONS TO THE PAROL EVIDENCE RULE:

(A) Written Agreement Not the Whole Agreement

If the written agreement was not intended to be the whole contract on which
the parties had actually agreed, parol evidence is admissible. See:
Evans v Andrea Merzario [1976] 2 All ER 930.
(B) Validity
Parol evidence may be given about the validity of the contract, e.g. to
establish the presence or absence of consideration or of contractual
intention, or some invalidating cause such as incapacity, misrepresentation,
mistake or non est factum.
(C) Implied Terms
Where the contract is silent on a matter on which a term is normally implied
by law, parol evidence may be given to support, or to rebut, the usual
implication. See:
Surges v Wickham (1836) 3 B & S 669
(D) Operation Of The Contract
Parol evidence can be used to show that the contract does not yet operate,
or that it has ceased to operate. See:
Pym v Campbell (1856) 6 E & B 370.
(E) Evidence As To Parties
Parol evidence can be used to show in what capacities the parties
contracted, e.g. where a person contracts ostensibly as principal, evidence is
admissible to prove that he really acted as another's agent so as to entitle
the latter to sue (Humfrey v Dale (1857) 7 E & B 266).
(F) Aid To Construction
Where the words of the contract are clear, parol evidence cannot be used to
explain their meaning, unless they have a special meaning by custom. Parol
evidence can, on the other hand, be used to explain words or phrases which
are ambiguous, or which, if taken literally, make no sense, as well as
technical terms.
(G) To Prove Custom
Evidence of custom is admissible "to annex incidents to written contracts in
matters with respect to which they are silent." Sutton v Warren (1836).
Custom can also be used as an aid to construction, e.g. in Smith v Wilson
(1832) evidence was admitted of a local custom to show that "1,000 rabbits"
meant "1,200 rabbits."
(H) Rectification
A document may fail in accurately recording the true agreement. Equity
allows such a written contract to be rectified by parol evidence. (See handout
on Mistake)
(I) Collateral Contract
Even though parol evidence cannot be used to vary or add to the terms of a
written contract, it may be possible to show that the parties made two
related contracts, one written and the other oral, i.e. a collateral contract.
See:
City & Westminster Properties v Mudd [1959] Ch 129.
The Law Commission (1976) recommended that the rule should be
abolished, but by 1986 concluded that it did not stop the courts accepting
parol evidence if this was consistent with the intention of the parties.

Unit 7: EXCLUSION AND LIMITING CLAUSES

INTRODUCTION

A clause may be inserted into a contract which aims to exclude or limit one
party's liability for breach of contract or negligence. However, the party may
only rely on such a clause if (a) it has been incorporated into the contract,
and if, (b) as a matter of interpretation, it extends to the loss in question. Its
validity will then be tested under (c) the Unfair Contract Terms Act 1977 and
(d) the Unfair Terms in Consumer Contracts Regulations 1999.

A. INCORPORATION
The person wishing to rely on the exclusion clause must show that it formed
part of the contract. An exclusion clause can be incorporated in the contract
by signature, by notice, or by a course of dealing.

1. SIGNED DOCUMENTS
If the plaintiff signs a document having contractual effect containing an
exclusion clause, it will automatically form part of the contract, and he is
bound by its terms. This is so even if he has not read the document and
regardless of whether he understands it or not. See:
L'Estrange v Graucob [1934] 2 KB 394.
However, even a signed document can be rendered wholly or partly
ineffective if the other party has made a misrepresentation as to its effect.
See:
Curtis v Chemical Cleaning Co [1951] 1 KB 805.

2. UNSIGNED DOCUMENTS
The exclusion clause may be contained in an unsigned document such as a
ticket or a notice. In such a case, reasonable and sufficient notice of the
existence of the exclusion clause should be given. For this requirement to be
satisfied:
(i) The clause must be contained in a contractual document, i.e. one which
the reasonable person would assume to contain contractual terms, and not in
a document which merely acknowledges payment such as a receipt. See:
Parker v SE Railway Co (1877) 2 CPD 416
Chappleton v Barry UDC [1940].
(ii) The existence of the exclusion clause must be brought to the notice of the
other party before or at the time the contract is entered into. See:
Olley v Marlborough Court [1949] 1 KB 532.
(iii) Reasonably sufficient notice of the clause must be given. It should be
noted that reasonable, not actual notice is required. See:
Thompson v LMS Railway [1930] 1 KB 41.
What is reasonable is a question of fact depending on all the circumstances
and the situation of the parties. The courts have repeatedly held that
attention should be drawn to the existence of exclusion clauses by clear
words on the front of any document delivered to the plaintiff, e.g. "For
conditions, see back". It seems that the degree of notice required may
increase according to the gravity or unusualness of the clause in question.
See:
Thornton v Shoe Lane Parking [1971] 1 All ER 686
Interfoto v Stiletto Ltd [1988] 1 All ER 348.

3. PREVIOUS DEALINGS
Even where there has been insufficient notice, an exclusion clause may
nevertheless be incorporated where there has been a previous consistent
course of dealing between the parties on the same terms. Contrast:
Spurling v Bradshaw [1956] 2 All ER 121
McCutcheon v MacBrayne [1964] 1 WLR 125.
As against a private consumer, a considerable number of past transactions
may be required. See:
Hollier v Rambler Motors [1972] 2 AB 71.
Even if there is no course of dealing, an exclusion clause may still become
part of the contract through trade usage or custom. See:
British Crane Hire v Ipswich Plant Hire [1974] QB 303.

4. PRIVITY OF CONTRACT
As a result of the doctrine of privity of contract, the courts held that a person
who is not a party to the contract (a third party) was not protected by an
exclusion clause in that contract, even if the clause purported to extend to
him. Employees are regarded in this context as third parties. See:
Adler v Dickinson [1954] 3 All ER 396
Scruttons v Midland Silicones [1962] AC 446.

Now see the provisions in the Contracts (Rights of Third Parties) Act 1999
(Handout on Privity of Contract).

5. COLLATERAL CONTRACTS
Even where an exclusion clause has been incorporated into a contract, it
may not have been incorporated in a collateral contract. See:
Andrews v Hopkinson [1957] 1 QB 229.

6. THE BATTLE OF THE FORMS

A problem arises if one party sends a form saying that the contract is made
on those terms but the second party accepts by sending a form with their
own terms on and stating that the contract is on the second party's terms.
The "rule of thumb" here is that the contract will be made on the last set of
terms sent. See:
British Road Services v Arthur Crutchley Ltd [1968] 1 All ER 811.

B. INTERPRETATION

Once it is established that an exclusion clause is incorporated, the whole

contract will be construed (i.e., interpreted) to see whether the clause covers
the breach that has occurred. The basic approach is that liability can only be
excluded by clear words. The main rules of construction are as follows:

1. CONTRA PROFERENTEM
If there is any ambiguity or uncertainty as to the meaning of an exclusion
clause the court will construe it contra proferentem, i.e. against the party
who inserted it in the contract. See:
Baldry v Marshall [1925] 1 KB 260
Houghton v Trafalgar Insurance Co (1954).
Very clear words are needed in a contract to exclude liability for negligence.
See:
White v John Warwick [1953] 1 WLR 1285.

2. THE MAIN PURPOSE RULE

Under this rule, a court can strike out an exemption clause which is
inconsistent with or repugnant to the main purpose of the contract. See:
Glynn v Margetson [1893] AC 351
Evans Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078.
3. THE DOCTRINE OF FUNDAMENTAL BREACH
Prior to 1964, the common law considered that a fundamental breach could
not be excluded or restricted in any circumstances as this would amount to
giving with one hand and taking with the other. This became elevated to a
rule of law.
However, the rule of law approach was rejected in UGS Finance v National
Mortgage Bank of Greece [1964] 1 Lloyd's Rep 446, on the basis that it
conflicted with freedom of contract and the intention of the parties. The
question of whether a clause could exclude liability for a fundamental breach
was held to be a question of construction.
The UGS case was unanimously approved by the House of Lords in the Suisse
Atlantique case [1967] 1 AC 361, and Photo Production Ltd v Securicor
Transport [1980] AC 827.

UNIT 8: MATTERS WHICH AFFECT THE VALIDITY OF CONTRACTS

Some contracts, which appear perfectly valid, may nevertheless be wholly or

partly ineffective because of some defect when they were formed.

The vitiating factors discussed in this

unit are:
mistake,
misrepresentation,
duress,
undue influence, and
lack of capacity in the formation of the contract.

(A) MISTAKE

The general rule is that mistake does not affect the validity of a contract. For
example, if a man is mistaken as to the nature or value of what he buys, this
is simply the misfortune. The law will not help him unless he has been
misled by the other party (see Misrepresentation, page 135).

In leaf v. International Galleries (1950), a picture was sold which both seller
and buyer believed to be Constable. In fact it was not. The contract was not
affected by this mistake, because each side intended to deal with the
physical thing sold; they were simply mistaken as to its quality and value.

A further preliminary point is that mistake of law will never affect the validity
of a contract. Ignorance of the law is no defense! In certain circumstances,
mistake of fact may affect the contract and, if sufficiently serious, render the
contract void.
Mistakes of fact that render a contract void

Mistakes concerning the subject matter of the contract, for example

the property sold, can render the contract void if sufficiently serious. A mere
mistake as to the nature or value of the subject matter will not be enough
(see above).
A mutual mistake as to the identity of the subject matter will render the
contract void. A mutual mistake will occur where the parties are, unknown to
each other, thinking about different things. Neither is right, neither wrong;
they are simply at cross-purposes and have never really agreed.
In Raffles v. Wichelhaus (1864), a cargo of cotton was described as being on
the SS Peerless from Bombay. There were in fact two ships of that name
sailing from the cargo on the second ship, while the buyer expected it on the
first. The contract was held void.
A Fundamental common mistake about the subject matter may,
exceptionally, also render the contract void. A common mistake occurs
where both parties are under the same misapprehension: both wrong. The
clearest instance of this is where; unknown to both parties, the subject-
matter does not exist.
In Associated Japanese Bank Limited v. Credit du Nord S.A. (1988), Mr. B
fraudulently sold some machinery to Associated Japanese bank (AJB) and
leased it back. Credit du Nord (CDN) contracted with AJB to guarantee that
Mr. B would per rent. In fact, unknown to both AJB and CDN, there was no
machinery. The contract of guarantee was held void for common mistake.
In Couturier v. Hastile (1856), the action was based on a contract to sell a
cargo of wheat, which, unknown to both seller and buyer, no longer existed.
The action failed.
Similarly, in Galloway v.Galloway (1914),a separation agreement between
husband and wife, disposing of property between them, was held void
when it was discovered that they had never legally been married.
In Bell v. Lever Brothers Ltd (1932), however, the common mistake was not
sufficiently fundamental, Agreements to make large severance payments to
senior employees who were losing their jobs wee made on the assumption by
all parties that the men were entitled to some payment. In fact, they could
have been sacked for misconduct and without compensation. Nevertheless
the compensation agreements were held valid. The mistake only affected
the value of the old contacts of employment.
Mistaken signing of written documents may, exceptionally, be a nullity.
Three elements must be present if the contract is to be void: the signing
must have been fraudulently induced, the mistake must be fundamental, and
the signer must prove that he or she has not been negligent. A person
attempting to avoid liability under a contract on these grounds is said to
plead non est factum (it is not my act).
In Foster v. MacKinnon (1869), a rogue induced Makinnon, an old gentleman
with weak sight, to sign a document which Mackinnon thought to be a
guarantee. In fact he was endorsing a bill of exchange for 3000 thereby
incurring a personal liability for this amount. It was held that, so long as he
had not been negligent, he was not liable on the bill.

Conversely, in Saunders v. Anglia Building Society (1971), a Mrs. Gallie

intended to assign the lease of her house so as to enable her nephew to
borrow money. The assignment was prepared fraudulently by a rogue, Lee,
who had promised to arrange the loan. The document that she signed
transferred the lease to Lee himself, who mortgaged it to the building society
and departed with the proceeds. Mrs. Gallie and her nephew received
nothing. Mrs. Gallie claimed that the original assignment was void for
mistake; she had not read it because her glasses were broken, and she had
not realized its effect. Her plea failed. She had intended to assign her lease,
and her mistake as to the way in which she was assigning it was not so
fundamental as to avoid the contract.
A mistake by one party as to the identify of the other may
sometimes invalidate the contract. If a contracts with B under the
impression that he is really dealing with C, the contract will be void if A can
prove that his mistake was material; he intended to deal with C and would
not have dealt with anyone dealt else. It may be very difficult for A to prove
this, particularly where the parties dealt with each other face to face.
In Phillips v. Brooks (1919), a rogue brought a ring in a jewelers shop. He
then persuaded the jeweler that he was Sir George Bullough, and was,
therefore, allowed taking away the ring in return for a cheque. The cheque
was dishonored and the ring was eventually traced to a pawnbroker. The
jeweler claimed that his contract with the rogue was void for mistake, but his
claim failed. The jeweler had dealt with the man facing him; the question of
identity was only raised when it came to payment.
Again, in Lewis v. Averay (1972), Lewis sold and parted with his car to rogue
who pretended to be Richard Greene, the film actor. The rogue paid by
cheque, which was dishonoured, and then re-sold the car to Averay. The
contract between Lewis and the rogue was not void; Lewis could not prove
that he was willing to sell only to Richard Greene and to no one else.
Where the parties did not deal with each other face to face, it may be easier
for A to
prove that the mistake was material.
In Cundy v. Lindsay (1878), a rogue called Blenkarn ordered linen by post
from Lindsay & Co. by pretending to be Blenkiron, a reputable dealer.
Blenkarn re-sold the linen to Cundy. Lindsay & Co. was able to recover it (or
its value) because the contract with Blenkarn was void. They satisfied the
court that they intended to deal only with Blenkiron.
In Kingss Norton Metal Co. Ltd v. Edridge, Merret & Co. Ltd (1897), on the
other hand, the plaintiffs sold goods to a firm called Hallam & Co. which
placed an order by post. Hallam & Co. turned out to be a complete fiction;
the real buyer was a rogue called Wallis. The contract was not void. If the
plaintiffs were willing to deal with an unknown company, without checking,
then the identity of the buyer was clearly not sufficiently material .
It will be apparent that most of the cases on mistake of identity are actions
between two innocent parties. A will have parted with the goods to a rogue,
who will have re-sold to X and departed with the proceeds. If the contracts
between A and the rogue was void for mistake, A can recover the goods or
their value from X by an action for the tort of conversion (Unit 10); otherwise
X will normally be entitled to keep the property.

Other consequences of mistake

Where there is a mistake as to the subject-matter, but the mistake is not so
fundamental as to render the contract void, the court may nevertheless allow
one party the equitable remedy of rescission, that is, the right to have the
contract set aside if he so wishes. The party claiming this remedy must
show that he has not been at fault in any way, and the court may impose
certain conditions on granting the remedy.
In Cooper v. phibbs (1987), Cooper agreed to lease a fishery from Phibbs. It
later turned out that, unknown to both, the fishery already belonged to
Cooper. The court allowed Cooper to rescind the lease, on condition that he
compensate Phibbs for improvements, which the latter had made.
In Grist v. Bailey (1967), Grist contracted to buy Baileys house for 850.
Both parties believed that the house was occupied by a tenant protected
under the Rent Acts. In fact, unknown to both, the tenant had died. This
increased the value of the house to about 2250, and Bailey refused to carry
out the contract, claiming that it was void for mistake. The contract was held
not to be void at common law, but the court exercised its equitable power to
set the original contract aside on condition that Bailey would now sell for the
true value.
When an equitable remedy is claimed, mistake may exceptionally persuade
the court to refuse the remedy. For example, specific performance of a
contract may be refused if the defendant has made a mistake, which renders
it unfair and inequitable to enforce the agreement against him, as in Malins
v. Freeman (Unit 15).
Where, by mistake, the terms of a written document do not represent
accurately what the parties agreed orally, the court may, at its discretion,
order the rectification of the document so that it does express what was
agreed.

(B) MISREPRESENTATION

The conclusion of a contract is often preceded by negotiations, in the course

of which one party makes statements of fact intended to induce the other to
enter into the contract. If any such statement is false, it is called a
misrepresentation. A misrepresentation, then, may be defined as a false
statement of fact, made by one party to the contract to the other before the
contract, with a view to inducing the other to enter into it. The statement
must have been intended to be acted upon, and it must actually have
induced the other party to make the agreement.
It must be a representation of fact, not law. A mere boast is not regarded as
a statement of fact (otherwise advertisers might incur substantial liabilities).
A distinction is also made between a statement of fact and a mere
expression of opinion, although this can prove difficult. Statements about a
car such as beautiful condition and superb condition have been held in
criminal cases to be statements of fact, not mere expressions of opinion.
The statements must be one party to the contract to the other. A statement
by the manufacturer, which induces a customer to buy from a retail shop, will
not give the customer any remedy for misrepresentation against either
retailer or manufacturer.
The false statement must actually have deceived the other party and
induced him to make the contract. Obviously it must be false, but even a
misleading half-truth can be false.

In London Assurance v. Mansel (1879), a person seeking life assurance was

asked on the proposal form what other proposals for cover he had made. He
answered, truthfully, that he had made two proposals the previous year, both
accepted. He did not mention, however, that he had also had several
proposals rejected. This half-truth was held to be a misrepresentation. (See
also non-disclosure, page 138).
Many misrepresentations also amount to promises, which are actually
incorporated into the contract. In this event, the party deceived will
normally sue for breach of contract rather than for misrepresentation
because once breach of contract is proved, damages will automatically be
awarded. Where mere misrepresentation is proved, the person liable may
still have a defense to an action for damages if he can prove that he
reasonably believed himself to be telling the truth. The distinction between
mere representations and contractual promises can be difficult, but in
contracts of sale the court will normally hold that statements by a seller who
is a dealer are contractual promises, whereas statements by a seller who is
not a dealer are mere representations.
In Oscar Chess Ltd v. Williams (1957), the defendant was a private car
owner, trading in his vehicle in part-exchange for another. He falsely stated
that it was a 1948 model, whereas in fact it was a 1939 car. This statement
was quite innocent, because the registration book had been falsified by a
previous owner. It was held that his statement was a mere presentation, so
that his innocence was a defense.
On the other hand, in Dick Bentley Productions Ltd v. Harold Smith (Motors)
Ltd (1965), a dealer sold a car which appeared from the instruments to have
travelled only 20 000 miles. In fact it had done about 100 000. This was
held to be breach of contract, not a mere misrepresentation, so that the
buyer automatically was entitled to damages. A dealer, who knows more
about the goods than his customers do, is readily assumed to promise that
his statements are true.
Remedies for misrepresentation

1. Damages. Under the Misrepresentation Act 1967, section 2(1), a

party to the contract can recover damages for loss arising from a
misrepresentation; but the other party has a defense if he can prove that, up
to the time of the contract, he believed that his statements were true, and
had reasonable cause so to believe. This can be difficult to prove, and it
should be noted that the onus of proving it is on the defendant.
In Howard Marine Ltd v. Ogden Ltd (1978), the owners made false
statements about the capacity of two barges to a company negotiating to
hire them. The owners themselves were mistaken, basing their claims on
incorrect entries in the official Lloyds Register. Nevertheless the owners
were liable to the company, which hired the barges. Damages were awarded
under section 2(1) because the owners should have known the correct
capacity, and therefore could not prove that they had reasonable cause to
believe their misrepresentations.
In Corner v. Mundy (1988), the vendor of a house told a would-be
purchaser that the central heating was in good order. At the time, this was
true. However, before the contract was eventually made, the pipes froze and
burst, and the purchaser was not told this. The vendor was liable for
damages under section 2(1), because he could not prove that he had
reasonable cause to believe up to the time the contract was made that his
statement was true.

Under section 2(2), damages may also be awarded as an alternative to

rescission at the courts discretion and, in this event, even the defendants
innocence may be no defense.
If the misrepresentation was made fraudulently, the party deceived can,
alternatively, sue for damages for the tort of deceit (Unit 10), but since the
onus of proving fraud is on the plaintiff, this will rarely be done.
2. Rescission. Any misrepresentation, even innocent, will give the other
party a right to rescind the contract, that is, to end it if he so wishes. Each
party must be restored to his original position; for example, the property
must be returned to the seller and the price to the buyer. The contract is
said to be void able (Unit 11).
Since rescission is an equitable right, it must be exercised reasonably
promptly. It is undesirable for a contract to remain void able for too long,
because this lads to uncertainty as to the ownership of the property. If he
delays unduly, therefore, the innocent party will lose his right to rescind, and
be left to sue for damages. What is a reasonable time is a question of fact,
and may in some cases be only a matter of days or hours.
In Leaf v. International Galleries (1950), which was mentioned earlier,
the picture was sold in 1944. The plaintiff only discovered in 1949 that it was
not by Constable. Although the contract was not void for mistake, the
plaintiff claimed the right to rescind for innocent misrepresentation. It was
held that, after a lapse of five years, any right to rescind had been lost. (The
plaintiff could have claimed damages for breach of contract, but did not in
fact do so.)
Time may not run against the plaintiff, however, until he could with
reasonable diligence have discovered the error.
Normally, rescission will only be effective from the moment when it is
communicated to the party at fault. This would cause injustice; however,
where the misrepresentation was fraudulent and the rogue has disappeared.
In this event, therefore, the rule is relaxed.
In Car and Universal Finance Co. Ltd v. Caldwell (1965), Caldwell was
persuaded by a rogue to part with his car in return for a cheque, which was
dishonored. On discovering this, Caldwell immediately told the police, but
could do no more to rescind the contract because the rogue could not be
found. It was held that, in the circumstances, Caldwell had done everything
possible to make public his intention to rescind, and the rescission was,
therefore, effective.
Finally, the right to rescind will be lost if the innocent party affirms the
contract, that is, elects to go on with it knowing of the misrepresentation. He
cannot blow hot and cold, and once he had decided to go on, he cannot
change his mind.
Section 3 of the Misrepresentation Act makes it very difficult for a party to
exclude his liability for misrepresentation (Unit 14). A term in the contract
which would exclude or restrict any liability or remedy for misrepresentation
will be of no effect unless the defendant can show that the clause is
reasonable within the meaning of the Unfair Contract Terms Act 1977.

Unit 9: Duty to disclose

There is, in general, no duty to disclose facts. Silence cannot normally
constitute misrepresentation even when the silent party knows that the other
is deceiving himself and does nothing about it. Each party must find out the
truth as best he can, and in contracts of sale this rule is known as caveat
emptor let the buyer beware.
There is, however, a duty correct statements, which, although originally true,
have subsequently become false before the contract was made. The facts
have changed, and it would be unfair to let the original statement stand.
In With v. OFlanagan (1936), at the start of negotiations for the sale of a
doctors practice, the seller stated, truthfully, that the annual income was
2000. The seller then fell ill, and by the time that the sale took place some
months later, the profits had fallen drastically. It was held that the early
statement should have been corrected, and the fall disclosed.
Silence is also not enough in contracts of the utmost good faith (uberrimae
fidei). These are, for the most part, contracts where one party alone has full
knowledge of the material facts and therefore, the law does impose on him a
duty to disclose. The main examples are:
1. Contracts of insurance. There is a duty on the insured person to
disclose to the insurance firm any circumstances, which might influence it in
fixing the premium or deciding whether to insure the risk. Failure to do this
will render the contract void able at the option of the insurance firm.
2. In contracts for the sale of land, the vendor must disclose all defects in
title, but not in the property itself.
3. Contracts to subscribe for share in a company. A prospectus issued by
a company, inviting the public to make an offer to buy shares in the
company, must disclose various matters set out in detail under the
Companies Act. If it does not, the contract may be rescinded.
4. In contracts of family arrangement, each member of the family must
disclose all material facts within his knowledge.

D. Duress and undue influence

At common law, duress arose when a party was induced to enter a contract
by force. His consent was not freely given. Today, economic coercion can
also be duress
In Universe Tankships Inc. v. ITWF (1982), a trade dispute arose
involving a ship, The Universe Sentinel. The union stopped it from leaving
port, and eventually only allowed it to do so on condition that the owners
paid money into a welfare fund. This agreement was held void able for
duress, and the owners recovered the money.
However, the economic pressure must be such that the courts regard it as
improper. There can be a narrow line between economic duress and
legitimate commercial pressure.
In D & C Builders Ltd v. Rees (1966) (Unit 11), it was suggested, obiter,
that even if there had been a valid contract, it would have been void able for
duress. Mr. and Mrs. Rees almost held the builders to ransom; the builders
needed the money quickly, and the Rees family (who owed 482) said in
effect, either agree to accept to accept only 300 or we delay still further.
In Atlas Express Ltd v. Kafco Ltd (1989), K, a small manufacturer,
received a good order from are tail chain, Woolworths. K contracted with
Atlas, a road carrier, to deliver the goods at an agreed fee. After the firs
load, Atlas realized that it had miscalculated the delivery costs, and therefore
told K that it would not make any further deliveries unless K almost doubled
the agreed fee. K, desperate to fulfill its Woolworths order and unable to
find another carrier in time, had to agree but later refused to pay the extra.
It was held that k was not liable for the extra charge, which had been
extorted from it by duress. (Moreover, there was no consideration for its
promise to increase the fee; contrast Williams v. Roffey, Unit 11).
On the other hand, in Pao On v. Lau Yiu Long (1979) (Unit 11), the
defendant was the major shareholder in Fu Chip Ltd. He was persuaded to
give a guarantee to Pao. On by the latters threat to break his contract with
Fu Chip Ltd. This could have harmed the defendant. Nevertheless the
guarantee was held valid. The full facts were complex, and Pao Ons threat
was ultimately regarded as legitimate commercial pressure.
Equity has long recognized less direct pressures, particularly where
confidential or professional relationships are abused. Generally, improper
pressure has to be proved.
In Williams v. Bayley (1866), a father was induced to give security for
his sons debts to the bank by the banks threats to prosecute the son. On
proof of this, the father was held not to be bound.

In some instances equity goes further and presumes undue influence unless
the contrary is proved. This will occur where the relationship between the
parties was doctor and patient, solicitor and client, religious adviser and
disciple, parent and child (but not husband and wife). The presumption of
undue influence can only be rebutted in these cases by proof that the weaker
party had had independent advice or used his own free will. There are also
situations where, although the relationship does not necessarily suggest
undue influence, the circumstances do. It depends upon the facts.
In Lloyds Bank Ltd v. Bundy (1975), a son was in financial difficulty.
The bank manager visited the father and persuaded him to give the bank a
guarantee of the sons debts and a mortgage of the fathers house as
security. The father was old and was given no warning or opportunity to seek
independent advice (which might have been against the contracts). Undue
influence by the bank was presumed from the circumstances, and the
contracts were set aside when the bank could not rebut the presumption.
In National Westminster bank p l c v. Morgan (1985), a couple in
financial difficulty mortgaged their home to the bank. The house was jointly
owned, and the bank manager had to visit the wife to persuade her to sign.
She did not realize that the mortgage could also cover her husbands
business debts. Nevertheless it was binding on her. She herself wanted the
loan and, in spite of the misunderstanding, she knew basically what she was
doing. The court did not presume undue influence just because the lender
was a bank.
In OSullivan v. MAM Ltd (1985), a young singer and composer (Gilbert
OSullivan) made several contracts with a management company at a time
when he had no business experience. Many of the contracts were unduly
harsh, and they were later set aside as being obtained by undue influence.
Where undue influence is deemed to exist, either by proof or presumption,
the contract is void able, but the right to rescind must be exercised within a
reasonable time of the influence being withdrawn.
In Allcard v. Skinner (1887), Miss Allcard joined a religious order and, in
accordance with its rule of poverty, gave about 7000 to the head of the
order during the eight years that she was a member. After leaving the order
she waited six years and then sued to recover the money. It was held that,
while the money had been obtained from her by undue religious influence,
her action failed because she had waited too long before suing.
Unit 10: ILLEGALITY OF CONTRACT AND CONTRACTS IN RESTRAINT
OF TRADE

Illegality and public policy

The law does not allow us to contract about this

The illegality doctrine relates to contracts which are illegal or contrary to

public policy (hereafter illegal contracts). Contracts may be tainted by
illegality because making such contracts is itself prohibited or, more usually,
because its means (the method of performance) or ends (purpose) are
illegal. Contracts which become illegal by changes in
the law subsequent to formation are dealt with by the doctrine of
frustration (see chapter 7). On one view, the illegality doctrine represents
the most open and direct interference with contract parties freedom to
determine the substance of their contracts. An alternative view is that it
designates the class of unworthy contracts to which the law will not lend its
support or force (see 12.9). As Lord Mansfield explains in Holman v. Johnson
(1775), courts will not assist one whose cause of action is founded upon an
immoral or an illegal act (ex dolo malo non oritur actio). Thus, with
exceptions, courts will generally refuse to enforce an illegal contract even
though the contract meets all the requirements of formation (Part I) and is
otherwise untainted by any vitiating factor (Part II). Furthermore, with
exceptions, courts will generally refuse to award restitution of any money or
property transferred under it. Thus, no remedy was given in:
Parkinson v. College of Ambulance Ltd (1925) where P donated 3,000 to
C on the promise of Cs secretary to procure a knighthood which failed to
eventuate, and
Pearce v. Brooks (1866) where P hired out an ornamental carriage to B, a
prostitute, for use in her trade but which B returned in a damaged condition
and refused to pay for.

The questions to be considered are:

(1) What are illegal contracts?
(2) When are contracts exceptionally enforceable despite their illegality?
(3) When will restitution exceptionally be allowed of the benefits transferred
under an illegal contract?

The case law is vast and the answers are far from simple. The distinction is
sometimes made between illegal and void contracts. However, the
distinction is apt to confuse since their consequences are not clearly
distinguishable and courts sometimes use the terms interchangeably. Thus,
illegality is used to refer to the whole range of cases where contract law
denies a contract its ordinary legal consequences because of some
prohibition, breach of duty, or contravention of public policy. We will see that
the consequences of illegality vary according to factors such as:
 the nature and seriousness of the illegality,
how far the contract was carried through,
the parties states of mind, and
the intricacies of certain rules of property and trust law.

Types of illegality.

Statutory illegality
A contracts may be illegal because its formation, purpose, or performance
contravenes
some statute or the common law. It is difficult to generalize about the wide
range of
statutory prohibitions although they are often designed to secure fair trading
conditions, safeguard property and personal safety, and prevent competitive
markets from being undermined. Some examples are the prohibition on the
marketing or sale of certain knives (Restriction of Offensive Weapons Act
1959; Offensive Weapons Act 1996; Knives Act 1997) and the sale of body
parts (Human Organ Transplants Act 1989).
Many of the common law illegalities have become the subject of statutory
control or prohibitions. The relevant statute may:

expressly prohibit the making of the contract (courts are reluctant to imply
a prohibition) barring enforcement by or restitution to either
only bar enforcement by one of the parties (e.g. Consumer Credit Act 1974,
s 40,
Sex Discrimination Act 1975, s 77, Race Relations Act 1976, s 72, Financial
Services
and Markets Act 2000, ss 26, 27);
permit enforcement by either party because the statutory intent is only to
impose a penalty and not to deny contractual enforcement (St John Shipping
Corporation v. Joseph Rank Ltd (1957)); or
render the contract void and unenforceable but not bar restitution.
Where statutes are silent (as they often are) on the effect of the illegality on
the contract
while setting out the administrative and penal sanctions, courts must decide
the consequences on the same general principles as are applicable to
common law illegality. One area of statutory invalidity is gaming, wagering,
and related contracts.
The law bars enforcement of such contracts and denies recovery of property
transferred under them (Gaming Act 1845, s 18). The aim here is not to
discourage betting; an enormous betting industry thrives without the ability
to sue for unpaid bets. The law here expresses the attitude that courts have
more important matters to attend to, than to compel parties to perform
betting contracts.
Common law illegality
With statutory illegality, courts discern and apply the conception of public
policy contained therein. However, where courts refuse to recognize a
contract as contravening public policy at common law, they are vulnerable to
the usual charges of:
usurping the function of Parliament;
giving effect to their subjective opinions on matters of morality and the
public good; and,
undermining the freedom, sanctity, and stability of contracts.
Burroughs J saw public policy as a very unruly horse, and when once you get
astride it
you never know where it will carry you (Richardson v. Mellish (1824) at 252).
Lord Dennings predictable response is that with a good man in the saddle,
the unruly horse can be kept in control. It can jump over obstacles. It can
leap the fences put up by fictions and come down on the side of justice
(Enderby Town Football Club Ltd v. The Football Association Ltd (1970) at
1026).
The categories of public policy are often said to be closed. Characteristically,
the picture presented is of general respect for the sanctity of contract,
subject to a series of exceptions established by precedents. While it is still
not open to courts to reject a contract unless it falls within one of the well-
established heads of illegality, courts have been willing to extend existing
categories to reflect changing social and moral values. As Dankwerts LJ said
in Nagle v. Feilden (1966 at 650): [T]he law relating to public policy cannot
remain immutable. It must change with the passage of time. The wind of
change blows upon it. Chitty concludes (at Para 16-004) that the difference
between extending an existing principle as opposed to creating a new one
will often be wafer thin. In a system of law which evolves (albeit gradually),
like the common law, the content of the public policy (which reinforces the
law) cannot remain immutable, but must change with the evolution of public
opinion, morality, and legislative policies.
Writers disagree on how to categorize the heads of public policy, but the
differences are largely in exposition and not substance. A detailed account of
each category is not proposed here (see further Treitel, 43080; Beatson,
34895); the law of restraint of Pause for reflection
The law fails if it does not reflect a societys changing values changes over
time. For example, the older cases reflect a preoccupation with gambling,
marriage brokerage, and unmarried cohabitation. Today we may be more
concerned with the commercialization of babies, child labor, body parts,
reproductive services, sex, weapons, and addictive drugs. Other
contemporary examples of objectionable or unworthy contracts are
mentioned above (see 12.9). We will see that unmarried cohabitation
presented no obstacle in Tinsley v. Milligan (1993) involving lesbian
cohabitees and that the scope of impermissible restraint of trade has been
modified in response to changing economic conditions, trade, for example,
fills whole books. What follows is a brief overview of the kinds of contracts
held at common law to contravene public policy.

Contracts to commit a crime

This is the most obvious category of illegal contracts. Examples include
contracts which:
breach building license regulations (Bostel Bros Ltd v. Hurlock (1949));
breach exchange controls (Bigos v. Bousted (1951));
defraud the revenue (Miller v. Karlinski (1945));
defraud the rating authority (Alexander v. Rayson (1936)).
This public policy also taints any contract which:
enriches someone for acting unlawfully (in Beresford v. Royal Insurance Co
Ltd (1938), a person insured his own life for 50,000 and then committed
suicide (then a criminal offence); his estate could not claim although the
policy expressly covered suicide);
although lawful in itself, is made to further a criminal or civil wrong (in
Langton v. Hughes (1813) juices and spices were sold to be used illegally for
flavoring beer).
An offence committed in the course of an otherwise legal contract will not
necessarily
taint the contract.

Contracts made for the deliberate commission of a civil wrong

Examples include contracts to:
beat up another person (Allen v. Rescous (1676));
publish a libel (Clay v. Yates (1856));
perpetrate a fraud (Willis v. Baldwin (1780));
indemnify a person against loss resulting from his own deliberate criminal
or tortious act (Brown Jenkinson & Co Ltd v. Percy Dalton (London) Ltd
(1957)).

Contracts interfering with the administration of justice

Contracts which amount to a conspiracy to pervert the course of justice
include agreements:
to stifle a prosecution (R v. Andreas Panayiotou (1973), for rape);
to refrain from disclosing misconduct which ought to be disclosed to those
with a proper interest to receive it (Initial Services Ltd v. Putterill (1968),
unregistered price-fixing agreement and see AG v. Guardian Newspapers Ltd
(No. 2) [1990] 1AC 109;
to give false evidence in criminal proceedings (R v. Andrews (1973));
to obstruct bankruptcy proceedings (Elliott v. Richardson (1870));
to maintain or support the litigation of a case in which the supporter has
no direct and legitimate interest in it and no just cause or excuse (Hill v.
Archbold (1968)); although just cause and excuse is now widely interpreted
(Giles v. Thompson (1993) at 32833) to permit litigation supported by
unions or insurance companies;
 of champerty (i.e. financing anothers litigation with a view to taking a
share in its proceeds) which amounts to an aggravated form of maintenance
(Giles v.Thompson); but section 58 of the Courts and Legal Services Act 1990
and section 27 of the Access to Justice Act 1999 permit certain no win, no
fees and other conditional fee agreements between lawyers and their clients
in the interest of increasing access to justice.

Contracts to oust the jurisdiction of the courts

It is contrary to public policy to deny the important constitutional principle of
access to the courts for redress against legal injuries. However, the law must
balance this with the competing interest of facilitating speedy, convenient,
and inexpensive dispute resolution. Thus, parties can agree not to resort to
the courts until they have gone to arbitration (Scott v. Avery (1855)). Under
the Arbitration Act 1996 (s 45, 87), although parties can still appeal to the
courts on questions of law, the scope of judicial control is much reduced. For
example, an appeal requires both parties agreement or leave of the court,
and parties can exclude the courts jurisdiction in non-domestic arbitration
agreements and in domestic arbitration agreements if entered into during
the arbitration proceedings. Separation agreements in which a wife agrees
not to apply for maintenance in return for the husbands payments are
unenforceable. The courts power to award maintenance cannot be ousted
(Hyman v. Hyman (1929), although wives can enforce the promised
payments if the agreement is in writing (Matrimonial Causes Act 1973, s 34).
Contract clauses which make claims more difficult to prove are controlled by
the Unfair Contract Terms Act (s 13(1)). Standard terms in consumer
contracts which hinder a consumers right to take legal action are
presumptively unfair and unenforceable under the Unfair Terms in Consumer
Contracts Regulations 1999 (Schedule 2 Para 1(q)).

Contracts prejudicial to the state

A wide range of cases are included. Examples are:
contracts to commit illegal acts in friendly foreign countries (e.g. to
facilitate the forceful overthrow of the government of a friendly country: De
Wutz v. Hendricks (1824));
trading with the enemy in wartime, thus aiding the enemys economy
(Potts v. Bell (1800), now Trading with the Enemy Act 1939);
contracts which corrupt public life (e.g. buying public offices or honors,
Parkinson v. College of Ambulance Ltd (1925), now prohibited by the Honours
(Prevention of Abuses) Act 1925);
contracts whereby a public official is paid a commission to use his position
to procure benefits for another (Montefiore v. Menday Motor Components Co
(1918); Lemenda Trading Co Ltd v. African Middle East Petroleum Co Ltd
(1988)) or to vote in a certain way (Osborne v. ASRS (1910)).

Contracts which further sexually immoral purposes

Although it is sometimes said that contracts against good morals are void,
traditionally this means contracts perceived to promote extra-marital sexual
intercourse. In the past, courts have refused to enforce:
a promise to pay a woman to be a mistress (Franco v. Bolton (1797));
a promise to pay rent on premises known to accommodate the promisors
mistress (Upfill v. Wright (1911)); and
contracts between unmarried cohabiting couples.
The same results are unlikely to be reached today. Parliament and courts
have conferred some rights on unmarried cohabitees analogous to that of
married couples and judicial attitude reflects the growing incidence of extra-
marital relationships and changing social mores. In Tinsley v. Milligan (1994),
illegality was not advanced on the basis that the parties to the agreement
were lesbian lovers. And, in Armhouse Lee Ltd v. Chappell, (1996) the Court
of Appeal denied that an agreement to advertise telephone sex lines was
unenforceable for immorality; indeed, the court criticized Cs brazen
cynicism in attempting to avoid payment for As work which generated
enormous profits for C by pleading his own immorality.
However, agreements involving prostitution are likely to remain
unenforceable (e.g. rent for premises knowingly let for prostitution in Girardy
v. Richardson (1793) or hire for an ornamental carriage knowingly let to
further a prostitutes trade in Pearce v. Brooks (1866)). Where a contract of
employment requires an employee to procure prostitutes for the employers
customers, this would be unenforceable for illegality (Coral Leisure Group Ltd
v. Barnett (1981)).

Contracts prejudicial to family life

This covers two types of cases. First, it invalidates contracts prejudicial to the
institution
of marriage, for example:
contracts not to marry (Lowe v. Peers (1768)), or to pay a sum on marriage
(Baker v. White (1690));
paying someone to procure marriage (Hermann v. Charlesworth (1905)),
although the need to condemn such contracts in modern times is
questionable when dating agencies are common place;
separation agreements entered while spouses are living together, since
they may induce parties not to perform their matrimonial duties (Cartwright
v. Cartwright (1863)), but such agreements are valid if made in anticipation
of immediate separation.
Secondly, it invalidates attempts by parents to contract away their parental
rights and duties in relation to their child, subject to the Adoption Act 1976. A
surrogacy agreement, by which a woman agrees to carry and bear a child for
another who will assume the parental role, is unenforceable (Human
Fertilization and Embryology Act 1990, See Eves v. Eves (1975) and Part IV of
the Family Law Act 1996. Parents cannot by agreement oust the courts
inherent jurisdiction to make orders regarding the upbringing and
maintenance of children.
Contracts unduly restrictive of personal liberty
The most obvious example is the prohibition against self-enslavement, but
even employment contracts must not contain servile elements. A loan
agreement was struck down in Horwood v. Millars Timber & Trading Co Ltd
(1917) where Lord Cozens-Hardy MR described it as: the worst example to
allow a money-lender to get his clutches round a clerk and to put him in a
position in which he is not allowed to move to another district and become a
clerk elsewhere, not allowed to leave his house, however unhealthy it may
be, and not allowed to deal with any part of his unencumbered [sic] furniture
or other property without the leave of the money-lender. His lordship
observed that the agreement could prevent the debtor from raising money
for the maintenance, education or medical treatment of his family. He
commented that Possibly slavery is too strong a word, but it certainly seems
. . . to savor of serfdom. Warrington LJ added (at 314) that: The man has put
himself . . . almost body and soul in the power of this money-lender. Even in
the most trivial incidents of life he cannot do as he pleases.

Unit 11: Contracts in restraint of trade

In practice, this is the most important head of illegality in modern time. A
contract or covenant in restraint of trade is an undertaking whereby one
party agrees:
to restrict his freedom to trade or conduct his profession or business (what)
in a particular locality (where)
for a specified period of time (when).
Such restraints are only valid if they are reasonable. The common law is
inclined against agreements that prohibit or restrain a person from earning a
living. Here, the law appears to impose a substantive limit on contractual
freedom in order to preserve it. In Nordenfelt v. Maxim Nordenfelt (1894) it
was said (at 565):
The public have an interest in every persons carrying on his trade freely: so
has the individual. All interference with individual liberty of action in trading,
and all restraints of trade of themselves, if there is nothing more, are
contrary to public policy, and therefore void. That is the general rule. But
there are exceptions: . . . [it] may be justified by the special circumstances of
a particular case. It is a sufficient justification . . . if the restriction is
reasonable . . . in reference to the interests of the parties concerned and
reasonable in reference to the interests of public, so framed and so guarded
as to afford adequate protection to the party in whose favour it is imposed,
while at the same time it is in no way injurious to the public.

The doctrine applies to three principal types of contracts:

(i) employment: where an employee covenants not to compete with his

employer during or after his employment;
(ii) sales of businesses: where the seller of a business and its goodwill
covenants not
to carry on competing businesses; and
(iii) exclusive dealing agreements: as where a garage agrees to buy all its
petrol
from one supplier for a lengthy period (Esso Petroleum Co Ltd v. Harpers
Garage (Stourport) Ltd (1967) hereafter Esso v. Harper).
In a sense, all contracts involve some restrictions on future freedom of action
and it may
be a moot point in any particular case whether a contract does involves a
restraint of
trade. Atiyah observes that:

it would certainly be wrong to conclude that all contracts containing

restrictions are now
open to challenge as contracts in restraint of trade, and must be shown to be
reasonable if they are to be valid. Many customary and accepted forms of
business agreement are probably still unchallengeable (at any rate under the
common law rules), even though they may strictly involve some degree of
business restraint. In particular, it has been held that a person who buys land
(or a building) may validly enter into some restrictions on how the land is to
be used without falling foul of the restraint of trade doctrine.
The general test of enforceability is whether the restrictions on the relevant
activity (in terms of scope, time and locality), are no more than what is
reasonably necessary to protect the legitimate interests of the party
imposing the restraint (Esso v. Harper). The onus of proving reasonableness
is on the party imposing the restraint. This test must balance:
the pro-enforcement considerations, such as the legitimate interests of
purchasers of businesses to prevent competition by vendors, or of an
employer by a former
employee,
against the anti-enforcement considerations, such as the public interest in
free competition, an employees interest in retaining reasonable freedom to
pursue a vocation and the concern to protect employees from unfairness
resulting from their weaker bargaining power vis--vis their employers.

(i) Employment contracts

Employers are generally permitted more protection against the subsequent

activities of
senior employees (Nordenfelt Ltd v. Maxim Nordenfelt Guns and Ammunition
Co Ltd
(1894)) than of junior or temporary employees (M&S Drapers Ltd v. Reynolds
(1957)).
The employer must satisfy two aspects of reasonableness in the particular
circumstances of the case. First, the employer must show his legitimate
interest in imposing the restraint; that is, that he has some proprietary right,
whether in the nature of trade connection or in the nature of trade secrets,
for the protection of which such a restraint is . . . reasonably necessary
(Herbert Morris Ltd v. Saxelby (1916) at 710). Thus, it was held to be
reasonable to restrain employees:
who have acquired influence over the employers customers and may
entice them away (e.g. Fitch v. Dewes (1921), a solicitors managing clerk;
Marion White v. Francis (1972), a hairdresser); or
who have acquired trade secrets (which are protected even without an
express restraint) or confidential information belonging to the employers
(Forster and Sons Ltd v. Suggett (1918), involving glass-making techniques).
But employers cannot protect themselves against their former employees
personal skill and knowledge even if acquired in the course of the employers
business. This belongs to the employees who are free to exploit them in the
market place (Faccenda Chicken Ltd v. Fowler (1986)). Second, the employer
must show that the scope of the restraint is reasonable in:
the scope of the activity banned: it must be confined to the business of the
employment; thus, a covenant not to carry on any business whatsoever is
void (Baker v. Hedgecock (1888));
the extent of the locality: the restraint should cover no wider an area than
is necessary to protect the employers particular interest (this may not justify
a restraint covering a 25-mile radius of London (Mason v. Provident Clothing
and Supply Co Ltd (1913), involving a canvasser for a clothing company), but
may, in other circumstances justify one covering the whole of the United
Kingdom (Forster & Sons Ltd v. Suggett, taking into account the secrecy of
the glass production methods and the area in which the employer traded));
and
the duration: even restraints of unlimited duration may be reasonable if it
does not exceed what is reasonably required for the protection of the
convenantee and is not against the public interest (Fitch v. Dewes (1921)).
In addition to reasonableness between the parties, an enforceable restraint
must not contravene the public interest, particularly that of depriving the
community of the employees skills and services (Wyatt v. Kreglinger and
Fernau (1933), Bull v. Pitney-Bowes Ltd (1967)). In practice, reasonableness
between the parties and compliance with the public interest tend to go hand
in hand.

(ii) Sales of businesses

The same tests of reasonableness and consistency with the public interest
are applied to
restraints in contracts for the sale of businesses, although wider latitude is
permitted here since inequality of bargaining positions is less obvious. A
purchaser of a business and its goodwill are entitled to protect the value of
the purchase by an appropriate restraint clause; sellers would command
lower prices if such restraints were unenforceable. The wider the restraint,
the larger the legitimate interest required to justify it. In one extreme case, a
buyer of an armament business for a vast sum was permitted to restrain the
seller from competing with this business anywhere in the world for 25 years,
in view of the world-wide operation of the business sold and the fact that its
main customers were governments (Nordenfelt Ltd v. Maxim Nordenfelt Guns
and Ammunition Co Ltd (1894)).

(iii) Exclusive dealing agreements

In Esso v. Harper the owner of two garages entered into a solus agreements
to buy all its petrol from Esso, to keep the garages open at all reasonable
hours, and not to sell them
without securing the purchasers agreement to enter similar arrangements
with Esso. In exchange, Esso gave a discount on the petrol and provided a
loan. The House of Lords held that the contract lasting 4 years was onerous
but reasonably necessary to protect Essos interests, but not the contract
lasting 21 years, which was invalid as an unreasonable restraint of trade.
However, the Court of Appeal upheld a 21-year solus agreement in Alec
Lobb Garages v. Total Oil (GB) Ltd (1985) where the restrained party
had received a substantial sum from the restraining party. The court applied
the dicta in Nordenfelt that the quantum of consideration may enter into the
question of the reasonableness of the contract.
Schroeder Music Publishing Co Ltd v. Macaulay (1974) shows how
substantive imbalance in the contract can invalidate a restraint of trade
clause. There a young unknown song-writer entered an exclusive services
agreement by which he agreed to assign the full copyright to all his present
and future works to the publisher for 5 years, renewable at the latters option
for another 5 years, in return for royalties. The publisher had no obligation to
publish the works, could terminate the contract on a months notice, and was
free to assign its rights. The song-writer was a great success and obtained a
declaration that the agreement was void as an unreasonable restraint of
trade. As Trebilcock observes, the contract was produced within a
competitive market so there could be no market failure justification for
upsetting the terms of the contract, nor any alternative set of terms to be
discovered by the technique of market transference.
Nevertheless, the House of Lords was clearly influenced by the one-
sidedness of the agreement (the publisher giving minimal commitment in
exchange for the song-writers total commitment) in setting aside the
restraint on the writer. As Lord Reid said: Normally the doctrine of restraint
of trade has no application to such restrictions. . . . But if contractual
restrictions appear to be unnecessary or to be reasonably capable of
enforcement in an oppressive manner, then they must be justified before
they can be enforced.

Restrictive trading and analogous agreements

Cartels are agreements to regulate the production, marketing, sale price, and
standards of commodities produced. The concern with cartels is not so much
unreasonableness between the parties as their anti-competitive effect in
reducing overall competition in a particular commodity. The common laws
role in controlling such agreements has been inhibited for a number of
reasons. Courts are less adept at considering the broad public interest and
economic issues raised by these anti-competitive arrangements than in
judging reasonableness between particular specific parties. The latter, after
all, are represented in court while the public interest is assumed to be within
the knowledge of judges and not specifically represented. Moreover, courts
can only adjudicate on such agreements in the unlikely event that an
affected party challenges its validity before the courts (Courage Ltd v.
Crehan (2001)). Consequently, the policing of anticompetitive agreements is
largely left to detailed legislative regulation. This is usually studied as a
distinct subject under the heading of competition law. Legislation subjects
such agreements to a public interest test applied by specialist administrative
bodies.

Illegality and unfairness

The illegality doctrine invalidates contracts which are undesirable in the
public interest or otherwise unworthy of the courts assistance because they
do not help individuals to achieve well-being and so realize fulfilling lives.
While this does not directly address the question of contractual imbalance, it
is consistent with the idea that contracts which are grossly unbalanced or
which seriously harm the interests of one party may be undesirable in the
public interest or unworthy of the courts assistance. Although the courts
present an all but static picture of the scope of public policy, we have seen
that the existing categories of illegality can be extended and the doctrine
applied instrumentally to deny the enforcement of substantively unfair
terms. In Schroeder v. Macaulay (1974) Lord Diplock said candidly that:

[W]hat your Lordships have in fact been doing has been to assess the
relative bargaining
power of [the parties] . . . to decide whether the publisher had used his
superior bargaining power to extract from the song writer promises that were
unfairly onerous to him. . . . Under the influence of Bentham and of laissez-
faire the courts in the 19th century abandoned the practice of applying the
public policy against unconscionable bargains to contracts generally, as they
had formerly done . . . but the policy survived in its application to penalty
clauses and to relief against forfeiture and also to . . . restraint[s] of trade. If
one looks at the reasoning of 19th century judges in cases about contracts in
restraint of trade one finds lip service paid to the current economic theories,
but if one looks at what they said in the light of what they did, one finds that
they struck down a bargain if they thought it was unconscionable as between
the parties to it and upheld it if they thought that it was not. So I would hold
that the question to be answered . . . is: was the bargain fair?
We have seen that substantively unfair contracts can also be invalidated by
other doctrines such as undue influence (see 9.2); incapacity;
unconscionable bargains and the special rules applicable to exemption
penalty, and forfeiture clauses. As Treitel observes, these and others can be
seen as disguised extensions or applications of the doctrine of public policy.
In this context the doctrine on non-commercial guarantees can be
understood as a recently created head of public policy. Our discussions of
these doctrines and rules reveal the extent of their concern with procedural
and substantive unfairness. Collins locates the real objection to the contract
in Schroeder v. Macaulay in terms of power, fairness, and co-operation. He
explains:

Because the composers career was completely dependent upon the

publishers discretion for a period up to ten years, his degree of
subordination to another represented an unjustifiable form of domination.
The absence of an undertaking on the part of the publisher to publish any of
his songs rendered the exchange too one-side to be fair. In addition, because
the composer could not terminate the agreement during its fixed period, he
had no effective sanctions against the publisher to ensure that at least it
made reasonable efforts to bring the venture to fruition by publishing and
promoting his work. . . [T]he concern about unjustifiable domination, the
equivalence of the exchange, and the need to ensure cooperation . .
.motivate the decision in Schroeder Music Publishing Co Ltd v Macaulay.

The effects of illegality

The general rule and starting point is that courts will not help parties enforce
illegal contracts or obtain restitution of benefits conferred under them.
However, this is subject to complex and uncertain exceptions which, to some
extent, reflect the conflicting policies in this area. The policies against
assisting parties to illegal contracts are that:

(i) courts should not help parties who deliberately enter illegal contracts;
(ii) justice would be tainted and the dignity of the court offended; and
(iii) people should be deterred from entering illegal contracts.

On the other hand, these policies are not offended and some judicial
assistance is justifiable, whether by way of enforcement or restitution,
where:
(i) parties are ignorant of the illegality involved or have been wrongfully
induced
to contract;
(ii) the relevant illegality does not involve gross moral turpitude, such as
robbery or
terrorism, but merely the infringement of technical regulations;
(iii) a party has withdrawn from the illegality; or
(iv) a party would be unjustly enriched at the expense of the other.

These policies are reflected in the law, albeit imperfectly. The public
conscience test used in evaluating the impact of illegality in tort claims
permits an open balancing of these policies. Such a test has been rejected in
the contractual context by the House of Lords in Tinsley v. Milligan. However,
its substance is preserved in the Law Commissions proposal based on a
structured discretion. As Chitty observes:
Much difficulty would be avoided, if whenever a plea of illegality or public
policy were raised as a defense to a contractual claim, the test were applied:
does public policy require that this claimant, in the circumstances which
have occurred, should be refused relief to which he would otherwise have
been entitled with respect to all or part of his claim? In addition, once the
court finds that the contract is illegal and unenforceable, a second question
should be posed which would also lead to greater clarity: do the facts justify
the granting of some consequential relief. . .to either of the parties to the
contract.

The enforceability of the contract

The laws approach to the enforceability of illegal contracts can be divided
into three principal categories:
(i) contracts which are illegal per se (at formation);
(ii) contracts which are not illegal per se, but further an illegal purpose;
and
(iii) contracts which are not illegal per se, but involve some illegality in
their
performance.

Illegality per se
The law adopts the strictest attitude to contracts which are illegal per se.
Contract which are expressly or impliedly forbidden by statute or by public
policy are void and unenforceable even if both parties are ignorant of the
facts constituting the illegality and had no intention of breaking the law. Re
Mahmoud and Ispahani (1921) provides an example of statutory prohibition.
When the parties bought and sold linseed oil without the required licenses
the seller could not recover damages for the buyers non-acceptance
although the buyer had misrepresented that he had a license. Scrutton LJ left
open the question of whether the seller would have a remedy for deceit.
In Quereshi v. Circle Properties and others (2004) Q was denied an order to
freeze Cs assets to enforce a commission agreement because, at the time
the agreement was made,
was an undischarged bankrupt and could not engage in estate agency work.
Section 23 of the Estate Agents Act 1979 Act rendered any commission
agreement with the claimant invalid or unenforceable. An example of
common law prohibition is a contract which involves trading with alien
enemies in wartime.
It may be very difficult to decide whether a statute or head of public policy
renders the contract unlawful per se and bars enforcement by either party,
or merely bars enforcement by a guilty party (i.e. one who knows of the
illegality). The question is whether, having regard to the mischief against
which the illegality is directed and the circumstances in which the contract
was made and is to be performed, it would be contrary to public policy to
enforce it (Shaw v. Groom (1970)). In view of the potential harshness of
unenforceability, the modern tendency is to prefer the latter unless the
former is very clearly demanded by the statute or public policy. The
harshness is clear enough where both parties are ignorant of the illegality for
it may afford one party with an unmeritorious and technical defense to an
action for breach. The potential unfairness is all the more glaring where the
contract breaker either knows of the illegality or wrongly induces an innocent
party into the illegal contract. In such cases, a court may assist the innocent
party by:

(i) Finding and enforcing a collateral contract not tainted by illegality: In

Strongman (1945) Ltd v. Sincock (1955), the defendant promised to but did
not obtain the necessary
licenses to enable the plaintiff builders to lawfully modernize his house. The
defendant then refused to pay for some of the plaintiffs work relying on the
illegality of the contract. The Court of Appeal held that while the contract is
absolutely prohibited by statute and unenforceable, the plaintiff could
enforce a collateral warranty that the defendant would obtain the necessary
licenses.

(ii) Awarding damages for fraudulent misrepresentation: In Shelley v.

Paddock (1980) P
fraudulently induced S to buy land in Spain that P did not own in a contract
which breached the Exchange Control regulation. P sought to retain Ss
purchase money by relying on the illegality. The Court of Appeal held that the
illegality did not bar an action in the tort of deceit; this allowed S to recover
her money and an additional sum
for distress. P could not retain the profits of its own fraud.

Intention to achieve illegal purpose or perform illegally

A contract which is not illegal per se, but which is intended to further an
improper purpose or to be performed in an illegal way is generally
unenforceable by the party contracting with such an intention, or knowing of
the other partys intention to this effect.
Unit 12; REMEDIES FOR BREACH

Breach of contract can occur in several ways. For example, one party may
expressly repudiate his liabilities and refuse to perform his side of the
bargain. This can happen either at or before the time when performance was
due. If a party renounces his obligations in advance, this is known as an
anticipatory breach. A person can impliedly renounce his obligations by
rendering himself incapable of performing them; for example, if he had
contracted to sell a specific painting, he would renounce the contract by
selling the painting elsewhere. Alternatively, one party may simply fail to
perform the contract. He may fail altogether to perform his bargain or he
may merely fail to perform one, or some, of his many obligations under the
agreement. If the obligation broken was a major part of the contract, there
will be breach of condition', if only a minor part, there will be breach of
warranty.
Sometimes the courts have classified a breach according to whether or not it
is 'fundamental', but this classification has been used mainly in relation to
exemption clauses.

Effects of breach
L Every breach of contract will give the injured party the right to recover
damages (see below).
2. If the breach is sufficiently serious, it also gives the injured party a right to
avoid the contract and bring it to an end. This right arises if the contract has
been repudiated, or if there is breach of condition. It will not arise for breach
of warranty.
The consequences of breach can be so serious that the injured party has no
choice. He may have to treat the contract as ended if, for example, the
property is destroyed. Subject to this, however, he need not end the contract
unless he wants to. He can either avoid the agreement and no longer
perform his side; or he can go on with it and either be content with defective
performance from the other (but recover damages) or, sometimes, continue
to press for performance. If he does wish to end the contract, he must do so
reasonably promptly and, as with rescission for misrepresentation (Unit 13),
the right is lost if he 'affirms' the agreement.
If a term is so wide that it is not possible to classify it in advance as a
condition or a mere warranty, then the right to avoid the contract will depend
upon the seriousness of the breach; see Hong Kong Fir Shipping Co. Ltd v.
Kawasaki Kisen Kaisha Ltd. Often, however, commercial requirements
demand that terms should be classified in advance, so that the parties will
be sure of what their rights are in the event of breach.
In Bunge Corporation v. Tradax Export SA (1981), the seller contracted to
deliver goods to the buyer's ship provided that the buyer gave at least 15
days' notice that the ship was ready. This notice requirement was held to be
a condition, which the buyer then broke by giving shorter notice. The seller
could, therefore, refuse delivery.
Terms implied by statute are almost invariably classified in advance. For
example the terms implied by sections 13 to 15 of the Sale of Goods Act are
all conditions, and breach entitles the buyer to withdraw from the contract.
On the other hand, late payment does not entitle the seller to avoid, unless
the parties had specifically agreed otherwise. A time set for delivery of the
goods is almost invariably a condition, and lateness entitles the buyer to
reject the goods and end the contract. The buyer can, alternatively, waive
failure to deliver on time, but impose a new deadline, breach of which will
again entitle him to set the contract aside.
In Charles Rickards Ltd. v. Oppenheim (1950), the buyer ordered a new car
body, to be ready in seven months' time. It was not, but the buyer agreed to
wait a further three months. When it was still not completed, he indicated
that he would cancel the order unless it was ready within a further four
weeks. He was held entitled to do so, and to refuse the car body when it was
finally tendered months later.
3. If one party renounces his obligations and commits an anticipatory breach,
the injured party may have two possible course of action. He may treat the
contract as at an end and opt either for damages for breach or for
reasonable remuneration for the work which he has performed.
In Holster v. De La Tour (1853), the defendant agreed in April to employ the
plaintiff as a courier on a European tour as from 1 June. In May, the
defendant repudiated this agreement, and the plaintiff was held entitled to
commence proceedings immediately, before waiting for 1 June.
The plaintiff may, in fact, be forced to adopt this course if the defendant has
made it impossible to go on with the contract, perhaps by destroying the
subject-matter. In any event, when the contract ends, the plaintiff must try to
mitigate his loss immediately, for example by seeking another job.
Alternatively, since renunciation does not generally discharge a contract
automatically, the injured party can often continue to press for performance
until the due date arrives. If this is done, the contract continues to exist, for
the benefit and at the risk of both parties, until the final date for
performance. If, before that date, performance becomes impossible, this will
discharge the contract without the party who renounced it having to pay
damages.
In Avery v. Bowden (1855), a ship arrived at Odessa for a cargo of wheat and
was met by a refusal to load. This renunciation was not accepted and, before
the last date for performance arrived, war broke out between England and
Russia. This discharged the contract, and the ship-owner was unable to
recover damages.

Damages for breach of contract

Whenever one person has broken a contract, the other can recover damages
which are assessed according to the following principles:
1. The basic rule is that the plaintiff should be compensated, but no more
than compensated, for loss which he has suffered as a result of the breach.
Loss can be financial, damage to property, personal injuries or even distress
to the plaintiff, as where a holiday firm defaults on its obligations; see Jarvis
v. Swan Tours Ltd (1973). Where no loss has been suffered, as where a seller
fails to deliver the goods but the buyer is able to purchase elsewhere at no
extra cost, the court may award nominal damages, a nominal sum, perhaps
of 2, to mark the breach.
Exemplary or punitive damages, which exceed the actual loss suffered by an
amount intended to punish the offending party, are not normally awarded for
breach of contract, although they have been awarded in the past against
banks who have dishonored traders' cheques when the account had
sufficient funds to meet them.
2. The plaintiff, however, cannot be compensated for all of the consequences
which might logically 'result' from the defendant's breach, otherwise there
might be no end to liability. Some loss, therefore, will be too remote.
In Hadley v. Baxendale (1854), a mill owner entrusted a broken crankshaft to
a carrier, for delivery to an engineer who would replace it. Delivery was
delayed through the fault of the carrier, and the mill stood idle longer than
was necessary. The mill owner recovered damages against the carrier, but
the claim for loss of profits was disallowed, because it was not shown that
the carrier knew that the mill would have to stand idle.
The court suggested two tests which still form the basis of the rules covering
remoteness of damage. The damage or loss treated as resulting from the
breach should only include:
(a) such damage as may fairly and reasonably be considered as arising
naturally, that is, according to the usual course of things, from the breach;
and
(b) such other loss as may reasonably be supposed to have been in the
contemplation of both parties at the time they made the contract, so that the
defendant in effect accepted responsibility for it.
The working of these rules can best be illustrated by some of the cases
which have arisen.
In Home v. Midland Railway Co. (1873), Home had a contract to manufacture
boots for the French army at a price higher than the normal market price,
provided that he could deliver by a certain date. The boots were consigned
to the railway company, which was informed of the importance of the
delivery date but not the special price. Delivery was delayed, the boots were
rejected and had to be sold elsewhere at below the normal market price.
Home only recovered the difference between his re-sale price and the market
price. His claim for the difference between the contract price and the price
on re-sale failed, because the carriers did not know of the original contract
price.
In Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd (1949), a laundry
firm ordered a new boiler which arrived late. The firm was held entitled to
recover damages for normal loss of profits, because the supplier should have
anticipated this. It was not, however, entitled to recover for further losses
due to losing an exceptionally profitable contract of which the suppliers did
not know.
In The Heror II (1969), a ship-owner was late in delivering a cargo of sugar to
Basrah, and by the time of delivery the market price had fallen. It was held
that the loss of profits could be recovered, because this possibility must
reasonably have been in the contemplation of the parties. (Basrah was a
major trading centre where it could be expected that the buyer might want
to re-sell quickly.)
3. At least when the contract is ended, the injured party must try to mitigate
or minimize his loss, that is, take all reasonable steps to reduce it. A worker
who is wrongly dismissed must attempt to find other work; a seller whose
goods are rejected must attempt to get the best price for them elsewhere; a
buyer of goods which are not delivered must attempt to buy as cheaply as
possible elsewhere. Loss arising from failure to take such steps will not be
recovered. On the other hand, only reasonable steps need to be taken to
mitigate; the buyer, for example, need not tour the globe looking for the
cheapest alternative supplier.
.
4 Damages for breach of contract will not normally be reduced for the
plaintiffs contributory negligence, unlike in tort (see page 106). The only
circumstances in which the Law Reform (Contributory Negligence) Act 1945
can apply are for breach of a contractual duty of care, where the victim could
have recovered his loss either for breach of contract or in tort.
In Savers v Harlow UDC (Unit 10), the plaintiff had to put money into the
door slot to gain access to the public lavatory. She therefore had a contract
with the local authority and could have sued them for breach of this as well
as for the tort of negligence. Her damages could be reduced for her
contributory negligence in either case.
The 1945 Act will not apply to breach of a strict contractual duty, where
negligence need not be proved (as in Frost v. Aylesbury Dairy Co. Ltd.
earlier); nor if the plaintiffs loss is purely financial and therefore irrecoverable
for the tort of negligence, as is very often the case.
5. In some cases, the parties, foreseeing the possibility of breach, make an
attempt in the original contract to assess in advance the damages which will
be payable on breach. Such provision for liquidated damages will be
perfectly valid if it is a genuine attempt to pre-estimate the likely loss. If it is
not a genuine pre-estimate, however, but an attempt to impose punitive
damages where none would otherwise be awarded, then the liquidated
damages clause will be void as a penalty. The essence of a penalty is that it
was inserted in error, to frighten the potential defaulter. Such clauses often
used to appear in hire-purchase agreements, so that if a hirer returned the
goods after paying only one installment, he might have to bring his
payments under the agreement up to half or more of the original hire-
purchase price. The courts held such performance, because the employer
can usually suspend the man on full pay if the employee's presence is an
embarrassment.
In Hill v. C. A. Parsons & Co. Ltd (1972), the plaintiff was dismissed with
inadequate notice as a result of trade union pressure to maintain a 'closed
shop'.
The court granted an injunction restraining Parsons Ltd from dismissing Hill
until
adequate notice had been given.
As will be seen, injunctions are sometimes granted to enforce lawful
restraints on trade; see cases such as Home Counties Dairies Ltd v. Skilton.
The remedy may be granted to enforce negative promises in contracts
relating to land; for example, a purchaser may be restrained from breaking
his contractual promise not to build on the land sold. In exceptional
circumstances, injunctions may even issue to order the seller of goods not to
withhold delivery.
In Sky Petroleum Ltd v. VIP Petroleum Ltd (1974), the parties made a 10-year
agreement in 1970 that VIP would supply all Sky Ltd's petrol requirements. In
November 1973 a dispute arose between the parties, and VIP withheld
supplies. In the oil crisis then existing, Sky Ltd could not get supplies from
any other source (contrast Cohen v. Roche, page 163). The court granted a
temporary injunction restraining VIP from withholding reasonable supplies,
even though this was equivalent to a temporary order of specific
performance.

2. A decree for specific performance is an equitable remedy which is

sometimes granted where damages would not be an adequate remedy. It is
an order of the court directing the party in breach to carry out his promises,
on pain of penalties for contempt of court. Since it is equitable, it is
discretionary; in particular, it will not be granted in the following
circumstances:
(a) It will not be awarded where damages would be enough and, for this
reason, it will rarely be granted in commercial transactions. Monetary
compensation will usually enable a disappointed buyer to obtain similar
commodities elsewhere. In the sale of goods, the seller will normally only be
ordered to hand over the article specifically where it is unique, such as an
original painting.
In Cohen v. Roche (1927), the court refused to order specific performance of
a contract to sell some Hepplewhite chairs which were rare, but not unique.
Similar chairs could be bought elsewhere, albeit with difficulty.
On the other hand, each piece of land is unique, and the main use of the
remedy today is in contracts for the sale of land.
(b) The court must be sure that it can adequately supervise enforcement.
Therefore contracts of a personal nature, such as employment, which depend
upon good faith which the court cannot ensure, will not be specifically
enforced. Similarly, building contracts will not be enforced.
(c) Specific performance will not be awarded either to or against a minor.
(d) The court may exercise its discretion to refuse specific performance in
any other situation where it is not felt just or equitable to grant it.
In Malms v. Freeman (1837), the remedy was refused where a bidder
foolishly bought property at an auction in the belief that he was bidding for
an entirely different lot. It would have been harsh to compel him to take the
property; the seller could still sue for damages if he so wished.

3. An injunction is an order of the court directing a person not to break his

contract. It is normally appropriate to enforce a negative provision in the
agreement and, being an equitable remedy, is only awarded on the same
principles as specific performance. It can, however, be awarded to enforce a
negative stipulation in a contract for services or employment.
In Warner Brothers Pictures Incorporated v. Nelson (1937), an actress had
contracted with the film company not to work as an actress for anyone else
during her present contract. It was held that she could be restrained by
injunction from breaking this undertaking.
On the other hand, an injunction will not be granted in contracts of employ-
ment if it would operate as an indirect way of specifically enforcing the
agreement; thus, Nelson could only be restrained from working elsewhere as
an actress, otherwise she might be faced with the alternatives of either
working for Warner Brothers or starving. An employer, however, may
temporarily be restrained from dismissing an employee; this is not
tantamount to specific performance.

D. Other remedies for breach

1. Claims on a quantum meruit. In some situations a claim for damages

may not be the appropriate financial remedy. This may happen where the
plaintiff is prevented from completing his side of the bargain by the
defendant's conduct and repudiation. The plaintiff may have done a lot of
work, but not yet earned any fee. He may be entitled to claim on a quantum
meruit basis (for so much as he deserves) for what he had done.
In Plancht v. Colburn (1831) the plaintiff was commissioned by a publisher to
write a book for 100. After he had done the necessary research and written
part of the book, the publisher repudiated the contract. It was held that the
plaintiff could recover 50 on a quantum meruit.
A claim on this basis may also be made where work has been done under a
void contract. The plaintiff cannot recover damages for breach, because no
contract exists, but he may recover a quantum meruit.
In Craven-Ellis v. Canons Ltd (1936), the plaintiff .recovered reasonable
remuneration for work which he had done as managing director of the
company, when it transpired that his appointment was void.
In British Steel Corporation v. Cleveland Bridge & Engineering Co. Ltd (1984),
BSC supplied steel to the defendants while still negotiating terms.
Negotiations failed and there was, therefore, no contract. BSC was entitled to
a quantum meruit payment for what it had supplied and Cleveland had used.
A contract may be discharged, that is, come to an end, in four main ways.
Two of these, namely performance and discharge as a result of breach, arise
directly out of the terms of the original contract, and were discussed in the
last unit. The present unit is concerned with methods of discharge which do
not necessarily arise out of what was originally agreed, but from extraneous
events. These methods of discharge are new agreement and frustration. Two
other matters which affect the right to sue on a contract will also be
discussed here, namely the time limits affecting when actions must be
brought, and the rules of privity affecting who can sue or be sued.

UNIT 13: DISCHARGE OF A CONTRACT

A. Discharge by Agreement
There are three main ways in which a contract can be discharged by
agreement. 1. The parties may have made provision for discharge in their
original contract. For example, the parties may have agreed at the outset
that the contract should end automatically on some determining event or on
the expiration of a fixed time. Thus goods may be hired, premises may be
leased, or a person employed for a fixed term. On the expiration of the term,
the contract will cease.
Alternatively, the contract may contain a provision entitling one or both
parties to terminate it if they so wish. Thus a contract of employment can
normally be brought to an end by either party on reasonable notice to the
other (subject only to statutory minimum periods of notice laid down by the
Employment Protection (Consolidation) Act 1978). Hire-purchase contracts
usually give the hirer a contractual right to end the agreement and return
the goods at any time; where the Consumer Credit Act 1974 applies, there is
also a statutory right to do this. Discharge in these ways does arise out of
the terms of the original agreement.
Discharge can also arise, not out of the original agreement, but by reason of
a new, extraneous contract. In order that the new agreement should
discharge the -old one, however, the new contract must be valid; for
example, there must be consideration. Where neither side of the original
contract has yet been performed, there will be no difficulty; each side still
owes duties, and the consideration for one party waiving his rights is the
waiver of rights by the other. Thus the buyer and seller may agree to cancel
an order; the seller need no longer supply the goods, and the buyer no
longer has to pay.
The position is more complicated where one party has completely performed
his original obligations. The agreement for discharge will only be binding if, in
return for the release, the other party does or promises something which he
is not already bound to do, such as paying earlier than he was bound to do or
in a different manner.
In Re Charge Card Services Ltd (1986), a garage agreed to accept payment
for petrol by a charge card instead of cash. This was held to discharge the
customer s obligation to pay cash so that, when the card company became
insolvent, the customer did not have to pay again.
In the absence of such new consideration, the agreement for release will not
be binding, and the original contract will stand; D & C Builders Ltd v. Rees
(1966) (Unit 11). For this reason discharge by new agreement is sometimes
called discharge by accord (agreement) and satisfaction (consideration). 3.
Finally, one party can release the other unilaterally, without consideration,
but only if he does so by deed.

B. Discharge by Frustration
Until the last century, the obligation to perform a contractual duty was
absolute. If it became physically impossible for a party to perform his
bargain, he nevertheless had to pay damages for breach, and if extraneous
events took away the whole purpose of the contract without the fault of
either party, the parties still had to continue with the agreement.
In Paradine v. Jane (1647), a lessee was evicted during the Civil War. It was
held that he still had to pay the rent; the fact that he could not enjoy the
property because of events beyond his control was of no concern to the
lessor, and was no excuse.
Starting with the case of Taylor v. Caldwell in 1863 (see below), the courts
have developed the doctrine of frustration as an exception to this absolute
rule. If some outside event occurs, for which neither party is responsible and
which makes total nonsense of the original agreement, then the contract will
be discharged by frustration. A radical change in circumstances can
sometimes, therefore, he pleaded by a party as a valid excuse for not
performing his side of the bargain. This doctrine must be approached with
caution, however, because the courts have understandably been reluctant to
accept anything but the most fundamental changes as frustrating events.
The following are the main examples.

Subsequent physical impossibility.

This will occur where, after the contract was made, it becomes physically
impossible or impracticable to perform it. (If this was already impossible
when the contract was made, the agreement would be void from the outset.)
In Taylor v. Caldwell (1863), a music hall hired for a series of concerts was
burnt down before the date for the first performance. This was held to
frustrate the contract, because there was no longer any hall to hire. The
hirer, therefore, no longer had to pay.
In Robinson v. Davison (1871), a pianist, who was engaged to give a concert
on a specified date, became ill and was incapable of appearing. It was held
that this frustrated the contract.

Subsequent illegality.
This will occur where, after the contract was made, a change in the law or in
the circumstances renders it illegal to perform the agreement.
In Avery v. Bow den (1855), the contract to load a cargo at Odessa was
eventually discharged by the outbreak of the Crimean War, which made it
thenceforth an illegal contract of trading with the enemy.

Basis of the contract removed.

The contract may be frustrated where both parties made it on the basis of a
future event which does not take place.
In Chandler v. Webster'(1904) the contract was for the hire of a room in Pall
Mall for the day of the coronation procession. The rent was over 140,
because the procession would pass directly beneath the window.
Unfortunately the coronation was postponed when the King became ill. This
was held to frustrate the contract.

Frustration of the commercial purpose of the contract.

A change may occur which makes a total nonsense of what was originally
agreed, so that what the parties would have to perform bears no relation to
what was originally intended. This change must be radical; an event which
merely makes it more difficult or expensive for a party to perform the
contract will be no excuse. It is rare that a contract will be frustrated on this
ground.
In Metropolitan Water Board v. Dick, Kerr & Co. (1918), a firm of contractors
agreed in 1914 to build a reservoir. In 1916, under wartime emergency
powers, the Government ordered the contractor to stop work and sell the
plant. This was held to frustrate the contract. Although it might eventually be
possible to start work again after the war, the enforced hold-up for an
indefinite period made nonsense of the contract.
On the other hand, in Tsakiroglou Ltd v. Noblee & Thorl G.m.b.H (1962), the
sellers agreed to deliver groundnuts from Port Sudan to the buyers in
Hamburg, and to ship them in November or December 1956. In November
1956, the Suez Canal was closed, and the sellers would now have had to ship
the goods round the Cape of Good Hope, a much longer and more expensive
journey. It was held that this did not frustrate the contract, but merely made
it more difficult to perform. If a seller wishes to protect himself against
liability to the buyer for delays due to such matters as strikes or non-delivery
of raw materials, he should make special provision for this in the contract. If
one party, makes a promise which he fails to perform, the court is reluctant
to allow him to say, in effect, 'Oh, but it's not my fault'.

The effects of frustration

Frustration automatically brings the contract to an end and renders it void.
As a general rule, all sums paid by either party in pursuance of the contract
before it was discharged are recoverable, and all sums not yet paid cease to
be due.
In the Fibrosa Case (1943), an English company agreed in 1939 to make
some machinery for a Polish buyer at a price of 4800. The buyer paid an
initial sum of 1000. When war broke out, Poland was occupied by the
German army, and the contract was, therefore, frustrated by subsequent
illegality. It was held that the London agent of the Polish buyer had no further
liability, and could recover the 1000 already paid. This was rather harsh to
the seller, who had already done considerable work and incurred expense in
manufacturing the goods. The Law Reform (Frustrated Con- ' tracts) Act
1943, therefore, restated the general rule, but introduced two exceptions to
it.
1. If one party has, before the time of discharge, incurred expenses in
performing it, the court may in its discretion allow him to keep or recover all
or part of sums already paid or due under the contract.
2. If one party has, by reason of anything done by the other, obtained a
valuable benefit (other than the payment of money), then the other may
recover such sum as the court considers just.
The Law Reform (Frustrated Contracts) Act applies to all contracts except (a)
contracts for the carriage of goods by sea, (b) contracts of insurance, (c)
contracts containing special provisions to meet the case of frustration (such
as force majeure clause), and (d) contracts for the sale of specific goods
where the agreement is frustrated because the goods perish before risk
passes to the buyer. This last category is covered by the Sale of Goods Act
1979, section 7.

Limitation of actions
Contractual obligations are not enforceable for ever. Apart from other
considerations, evidence becomes less reliable with the passage of time, and
therefore, after a certain period, the law bars any remedy. The Limitation Act
1980 lays down the general periods within which an action must be brought.
These are as follows:
1. Actions based on a simple contract will be barred after six years from the
date when the cause of action accrued.
2. Where the contract is made by deed, actions can be brought up to 12
years from the date when the cause of action accrued.
3. Actions to recover land can be brought up to 12 years from the date when
the cause of action accrued.
A right of action 'accrues' when breach occurs. Thus, if a loan is made for a
fixed time, the right will accrue when this time expires. If no time is agreed it
will be when a written demand for payment is made.
If, when the cause of action accrues, the plaintiff is under a disability by
reason of infancy or unsoundness of mind, the period will not run until the
disability has ended or until his death, whichever comes first. Once the
period has started to run, subsequent insanity will have no effect.
If the plaintiff is the victim of fraud or acts under a mistake or if the
defendant deliberately conceals relevant facts, the limitation period will not
begin until the true state of affairs is discovered or should reasonably have
been discovered.
In Lynn v. Bamber (1930), some plum trees were sold in 1921 with an
undertaking by the seller that they were of a particular type. Not until they
matured in 1928 was it discovered that they were of inferior quality. It was
held that an action for damages could still be brought, since the fraudulent
misrepresentations by the seller had postponed the operation of the period
of limitation.
Provided that the limitation period has not already expired, the period may
be extended where the party in breach either acknowledges his liability in
writing, signed by him or his agent, or makes part payment in respect of the
debt or claim. Time will then begin to run afresh from the date of
acknowledgement or part payment. Property obtained by theft may be
recovered at any time unless it has passed to a bona fide purchaser who is
protected after six years.
Equitable remedies such as rescission, specific performance or an injunction,
are not covered by the ordinary limitation periods, but will almost invariably
be barred much earlier under general equitable principles. An equitable
remedy must be sought reasonably promptly, because 'equity aids the
vigilant, not the indolent'. A short delay, of weeks or even days, may bar the
remedy; see Bernstein v. Pamson Motors Ltd.

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