LICENCE DROIT 3ème ANNÉE

Faculté de droit
Université de MONTPELLIER

PART I : MAKING THE CONTRACT

Introduction

Contract law provides the framework within which all commercial transactions, from the smallest
consumer purchase to the most complex business deal, take place.

The same framework of rules and principles governs contracts as diverse as buying a cup of coffee,
or a holiday, or the services of a solicitor or garage mechanic, or negotiating a multi million pound
business deal.

Contract is essentially a case law subject and certainly the early law developed almost exclusively
through the cases, many of which are still considered to be significant.

One of the most important 19th century developments was the "consensus theory of contract",
based on the notion that contractual obligations are self-imposed.

The courts saw their role to be that of upholding contracts, not setting them aside, and this laissez
faire philosophy still underlies Contract Law, but has been somewhat qualified by important statutes
of the 20th century which have sought to ensure a fair trading environment, and by judicial
decisions.

This intervention by Parliament and the courts has mainly been aimed at ensuring that in situations
where there is some "inequality of bargaining power", the stronger party is not able to take
advantage of the weaker party (for example consumers).

It is now recognised that different considerations may apply to commercial deals on the one hand
and consumer transactions on the other.

So what, then, are the conditions to enter into a valid contract ?

It must be clear that the parties have concluded an agreement.

The vast majority of contracts are "simple" contracts, that is contracts not made under seal.

A simple contract will be enforced if fit can be shown to be a bargain - both parties must give
consideration as the law will not enforce gratuitous promises (that is, a promise for which nothing
is given in return).

The parties must intend the agreement to be legally binding.

Where appropriate, the proper formalities must be followed.

Each party must have the capacity to contract.

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The contract must be made with the full consent of both parties.

Generally, only the parties to the contract have any rights and obligations under it.

1. Agreement

A contract is often described as an agreement which is enforceable by the law.

Agreement is usually reached by a process of negotiation, which will culminate in one party (called
the offeror) making an offer which the other party (called the offeree) accepts.

An important requirement of a contract is that: the terms must be certain.

In Scammell v Ouston (1941) Ouston agreed to purchase a van from Scammell on "his purchase
terms".

Before the precise nature of the terms were agreed between the parties, Scammell decided not to
go ahead and the court had to decide whether a contract existed between the parties.

The House of Lords held that there was no contract since the phrase "on hire purchase terms"
could be interpreted in a number of different ways and the pat-ties had therefore not reached an
agreement which was sufficiently certain to constitute a contract.

The Offer : definition

Once an offer bas been accepted the parties will be bound by the terms of the contract, as long as
all the essential elements of a contract are present.

It is therefore necessary to know at what point in the negotiations the parties are legally bound, so
the process must be analysed in order to determine when an offer was made and when it was
accepted.

What then, is an offer?

An offer, capable of being converted into an agreement by acceptance, must consist of a

definite promise to be bound provided that certain specified terms are accepted"

Several rules relating to offers were established in the famous case of Carlill v Carbolic Smoke Ball
Company (1891).

The defendants had issued an advertisement for their product in which they had claimed that it
would prevent influenza if it were inhaled three times a day over a period of two weeks.

They further promised that if anyone could show that they had bought and used the smokeball and
still contracted flu, then the company would give that person £100.

£1000 was deposited in the bank to show the company's "sincerity in the maker". Mrs Carlill bought
and used the smokeball as prescribed and developed influenza in the course of treatment.

When the company refused to pay her the £100, she brought an action against them.

A number of issues were raised before the court.

The company's defense was that the advertisement was an advertising "puff" and there was no
intention to create legal relations. They argued that the advertisement could not be construed as an
offer because it was too vague - no time limit had been stipulated in which the user was to contract

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influenza, there had been no communication of acceptance, nor had the plaintiff supplied
consideration, and that it was impossible to contract with the whole world.

The court rejected these arguments.

They held that the deposit of £1000 at the bank was a clear indication that claims would be met and
therefore was evidence of an intention to create legal relations; the plaintiff's use of the inhalant as
prescribed was sufficient consideration.

Finally the court, by analogy with reward cases took the view that it was possible by way of an
advertisement to make an offer to the whole world which was capable of being accepted by the
conduct of the person who responded to the advertisement.

The contract in this case was a unilateral contract, which may be described as a contract in which
one party makes an offer which the other accepts by doing whatever is required.

In a situation where the offer is made to the public at large the contract which results will usually be
a unilateral contract.

Most contracts are bilateral, where one person makes a promise in exchange for a promise by the
other, so that both parties have an obligation to perform the contract. An everyday example of a
bilateral contract is the sale of a car for a certain sum of money - the seller is obliged to deliver the
car and the buyer is obliged to pay for it.

Other requirements of an offer are that it must be definite in its terms and it is only effective when
communicated to the offeree, but an offer can be made in any form.

In Carlill the offer was made in writing (in the advertisement), but words or conduct may be equally
effective.

For example a shopper unloading his trolley at the till in a supermarket is, by his conduct, offering to
purchase the goods at the marked price.

On acceptance of the offer, as long as the other essential elements are present, the parties will be
in agreement and will be legally bound.

Distinction between an offer and an invitation to treat

Clearly there are steps in the negotiations prior to this event, and it is important to distinguish an
offer from an invitation to treat, which is merely a stage in the process of reaching agreement, an
invitation to the other party to make an offer.

Gibson v Manchester City Council : Mr Gibson was a council tenant in Manchester. In 1970 the
council adopted a policy of selling council houses to tenants and in 1971 the City treasurer wrote to
the plaintiff saying "the Council may be prepared to sell the house to you et the purchase prise of
£27251 less 20 per cent.

The letter invited Mr Gibson to make a formal application, which he did. In May 1971 political control
of the council changed hands and the policy of selling council houses was reversed. The council
decided to proceed only with those sales where exchange of contract had taken place. Gibson, in a
test case which would affect some 350 other tenants in the same position, asserted that he had a
binding contract with the council and claimed specific performance. The House of Lords held that
the council's letter was an invitation to treat, so Gibson's application was an offer which the council
was free to reject.

Distinction between Offers and Tenders

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One situation where it is important to distinguish between an invitation to treat and an offer is when
a business, local authority or other such organisation invites others to tender for a contract.

It is now common commercial practice for one organisation wishing to purchase goods or services
to invite others to put in a bid for the contract.

Bids are confidential and competitive and it is up to the organisation inviting tenders to select the
successful bid.

Generally, an invitation to tender is an invitation to treat and the tender itself constitutes an offer.

Acceptance

The rules relating to acceptance revolve around the need for consensus ad idem or as it is
sometimes expressed a "meeting of minds"

In order to form a contract there must be agreement in the sense that the parties know what their
mutual rights and obligations under the contract are and there must be no doubt about the exact
extent of those rights and obligations.

So the contractual principles which have developed fall into two groups, first chose relating to the
need fur certainty and secondly those relating to communication.

Certainty of terms and counter-offers

The terms of an offer must be certain and must be accepted unequivocally.

It follows that if the terms of an offer are qualified in any way by the offeree, that cannot amount to
an acceptance and will generally be a counter-offer.

The counter-offer has the effect of destroying the original offer, and of constituting a fresh offer
which the defendant is free to reject.

There is often a fine line to be drawn between a counter-offer and a mere request for more
information.

Communication of acceptance : general rule

The law has put the onus of communicating on one of the parties and English law favours the
offeree in the sense that it will not allow the offeree to be put in the position where he or she must
do something to indicate that he or she does not wish to be contractually bound.

The general rule is that silence cannot be construed as an acceptance, so if you receive a letter
through the post offering to sell you certain books any attempt by the seller to put the onus on you
to reject the offer - for example by words like "the books will be sent to you and must be paid for
unless we hear to the contrary within two weeks" will be ineffective according to the principles of
English contract law.

It is considered undesirable that the offeree should be put to the trouble and expense of
communicating lack of consent.

The offeror can stipulate that acceptance must be communicated in a certain way and then he or
she will not be bound unless it is communicated in that way, so if in a commercial situation the
offeror wants to be certain of acceptance and requests a written response to his offer, he will not be
contractually bound by an oral acceptance.

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Special rules

There are, however, some In unilateral contracts the offer is accepted by anyone who starts to
perform the act.

Unilateral contracts

The offeror can waive the need to communicate acceptance and this is common in unilateral
contracts.

The contract in Carlill v Carbolic Smoke Ball Company was a unilateral contract, the
characteristics of which are that a promise is made in return for an act.

If I offer to pay £100 to anyone who provides me with information leading to the return of a valuable
antique stolen from my house, you would not expect in a case like this that anyone would ring up or
write to the offeror (ie.me !) to tell me that my offer had been accepted and the said information is
being sought.

In unilateral contracts the offer is accepted by anyone who starts to perform the act.

The postal rule : When the post is used to accept an offer.

In the case of Adams v Lindsell (1818) a letter of acceptance was posted, and it was held that the
contract was made at the time of posting, thus before the offeror could know that his offer had been
accepted.

This rule applies even when the letter never arrives because, for instance, it is lost in the post as
happened in Household Fire and Carnage Accident Insurance Co v Grant (1879).

Not surprisingly, since it can sometimes lead to injustice when a person is contractually bound
before he or she knows it, the courts have been very willing to qualify the postal rule and limit it as
much as possible.

So it has been held that the rule will only apply if the offeree can show that the letter was properly
stamped and addressed and properly posted, which means putting it in a post box or handing it in
at the post office to someone who is authorised to accept letters for posting.

The offeror gets some protection in that the postal rule can quite easily be excluded in the offer.

The offeror can stipulate that he wants "actual notice in writting". Actual notice means he wants to
know, so he will not be bound until he had the letter of acceptance in his hand.

With the advent of modem office technology, the courts have had to decide whether the postal rule
applies to new forms of communication, and first the Court of Appeal in Entores Ltd v Miles Far
East Corporation (1955) and then the House of Lords in Brinkibon Ltd v Stahag Stahl GmbH (1983)
have held that it does not apply when the method of communication is by telex.

These cases involved offers being made in one country and accepted by telex in another and the
question was where was the contract concluded. The answer was that the contract was made in the
country where the telex message was received.

There are still unanswered questions surrounding this problem - is the offeror bound when the telex
message arrives on his telex machine (perhaps in the middle of the night), or when it is put on his
desk, or when he actually reads it?

In Brinkibon the House of Lords said obiter that a telex sent and received outside working hours
could not be considered instantaneous, so the court would have to consider other factors to

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determine where and when the contract was concluded.

Ending the offer

When an offer is accepted, we have seen that it merges into the contract, but it may be that an offer
is made but not accepted.

There are a number of ways in which an offer may be brought to an end.

First an offer can be withdrawn (or revoked) at any time before it has been accepted, as long as
the offeree is informed by a reliable person that it has been withdrawn.

There questions were discussed in the case of Dickinson v Dodds (1876) where the defendant gave
the plaintiff a written offer to sell a house 'to be left over until Friday 12 June, 9 am’.

On 11 June the defendant sold the house to a third party and the plaintiff was told of this sale by
someone else.

Nonetheless, before 9 am on the 12th the plaintiff handed to the defendant a formal letter of
acceptance and then claimed that the defendant was bound to sell him the house.

The Court of Appeal thought otherwise, saying that the plaintiff "knew that Dodds was no longer
minded to sell the property to him as plainly and clearly as if Dodds had told him in so many words".
This case illustrates the further point that an offeror is not bound by a gratuitous promise to keep an
offer open for a specified period.

Problems arise in unilateral contracts as a result of the convergence of two rules : that an offer
can be withdrawn at any time before acceptance; and that in unilateral contracts acceptance need
not be communicated.

Thus it is important to decide exactly when an offer is accepted in a unilateral contracts

It was held in Errington that an offeror cannot revoke his offer once the offeree has started to do
whatever is required of him or her.

An offer is ended if it is rejected, and a counteroffer amounts to rejection by the offeree of the
original offer.

Many contracts are concluded only after lengthy and complex negotiations in which there will be a
series of offers and counter-offers before agreement is reached and even an everyday contract
between neighbours for the purchase of a lawnmower will probably involve some haggling about
the price, so careful analysis of the facts may be necessary in the event of a dispute as to whether
the parties are legally bound.

Naturally if the offer is expressed to last for a specific period, then it will lapse on the expiration of
that period.

So in Dickinson v Dodds the offer to Dodds would have lapsed on 12 June if it had not been
revoked before that by the sale of the bouse to a third party.

But if no time limit is put on the offer the useful concept of 'reasonableness' will be employed and
the offer will lapse after a reasonable lime, which will depend upon the nature of the contract in
question.

In Ramsgate Victoria Hotel Co v Montefiore (1866) six months was held to be longer than was
reasonable in a case involving an offer to purchase shares.

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Failure of a precondition will also have the effect of causing an offer to lapse. For example, there
may be an express condition in an offer to purchase a secondhand car that the purchaser will be
able to mise finance for the deal - if lie faits then the offer will lapse.

Finally, death of the offeror before the offer has been accepted, will terminate the offer.

2. Consideration

The notion of consideration is central to English contract law.

In any legal system it is obviously necessary to be able to distinguish between those agreements
which the law will enforce and those which it will not.

English contract law depends to a large extent on the doctrine of consideration (the price of the
bargain) to make the distinction.

For example a promise of gift of £100 is not enforceable as a simple contract, but an exchange of
£100 for a bicycle is enforceable.

Several points should be noted:

• Consideration may be an act, or forbearance (that is the giving up of some right) or a
promise. If A promises to pay B £3000 for B's car, if is that promise which constitutes the
consideration and which may be enforced.
• Both parties must provide consideration - the law enforces bargains, not gratuitous promises.
• Only a person who has provided consideration may enforce a contract.
• Consideration must have some value. If is often said that consideration must be sufficient but
if need not be adequate.

There is much case law exploring the meaning of value and adequacy of consideration.
Consideration may be either executory, executed or past.

In most bilateral contracts the consideration will be executory - that is a promise given in
exchange for another promise "I will give you delivery of my car in exchange for payment of
£3.000"

When the contract is concluded the consideration consist of promises as yet to be performed.

Executed consideration is consideration which has been provided when the promise of one party
becomes enforceable - it is often described as an act in exchange for a promise "I will pay you
£100 if you find and return my lost bracelet".

Here the obligation to pay £100 only arises when the bracelet has been found and returned to the
promisor, in other words when the consideration is executed.

Past consideration, the general rule is past consideration is no consideration at all.

Re v McArdle (1951) provides a modern example of a promise being unenforceable for lack of
valuable consideration because the consideration was past.

In this case a person who made improvements to her mother in-law's house and was then promised
a sum of money for her work was unable to enforce the promise when the mother-in-law’s
executors failed to pay up.

The rule that “past consideration is no consideration” has been much criticised for its injustice and
technicality, so it has to some extent been modified in that if an act is done at the request of the
promisor and it is understood that payment will be made, even though this may not be discussed at
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the time, then the promise will be enforceable.

“Sufficient" and "adequate" consideration

Whether the consideration is executed or executory, it must be sufficient, that is it must be of some
value.

However, since consideration need not be adequate (that is, it need not represent a fair exchange),
its value can be very small indeed.

The courts have long taken the view that it is up to the parties to a contract to ensure that they each
achieve a fair bargain and although Acts like the Sale of Goods Act 1979 (see for example s 14)
contain provisions aimed at achieving fairness in the marketplace, the general rule remains that
consideration must be sufficient but need not be adequate.

The attitude of the courts is summed up in the statement by Lord Blackburn in Bolton v Madden
(1873) : `The adequacy of the consideration is for the parties to consider at the time of making
agreement, not for the court when it is sought to be enforced".

What is sufficient consideration?

It has long been settled law that a promise to perform or the performance of an existing duty is not
good consideration, although doing something over and above what you are already bound to do is.

Performing a public duty cannot be sufficient consideration, a point illustrated by Collins v Godefroy
(1834). The plaintiff, who had received a subpoena to give evidence in court, agreed with the
defendant that he would give evidence in return for his expenses. The court held that the defendant
was under no obligation to pay the expenses since the plaintiff was under an existing duty to give
evidence.

By contrast, doing more than is demanded by an existing duty does provide sufficient consideration
to support a contract.

In Harris v Sheffield United FC (1987) the football club asked the police authority to provide a
certain number of officers to police home matches. When the club denied its liability to pay for the
policing of home matches the court held that there was a valid contract between the club and the
police authority because the number of officers provided was greater than would have been
provided if the police had simply been fulfilling their public obligation to keep the peace.

Moreover, performance of an existing contractual duty will not support a new contract, but doing
more or something different will amount to good consideration.

The 19th century cases, Stilk v Myrick (1809) and Hartley v Ponsonby (1857), still provide a useful
comparison.

In the first case a ship sailed from England to India with eleven men in the crew. Two deserted and
the captain agreed to share the wages of the deserters between the remaining men if they accepted
to sail the ship back to Britain.

After the ship had returned, he refused to pay and when Stilk sued for his share, the court held that
no extra consideration had been provided for the promise because he had only done was he was
already bound by contract to do.

On the other hand in the second case where almost hall the crew deserted, the court was prepared
to hold that as the ship had become dangerous, a new contract was negotiated between the captain
and the remaining crew members, entitling the men to the extra payments promised.

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The recent case of Williams v Roffey Bros & Nichols (Contractors) Ltd (1990) has cast some doubt
on this area of law.

In summary, the facts were these. The defendants were the main contractors in a building contract
for the refurbishment of a block of 27 flats, which contained a clause entitling the customer to a
penalty if the work was not completed by a certain date. They had a contract with the plaintiff, a
carpenter, under which they had agreed to pay him £20,000 for the carpentry work. The plaintiff ran
into financial difficulties, partly because he had underestimated the cost of the work. The
defendants agreed to pay the plaintiff a further £90,300 at the rate of £575 per flat as each flat was
completed. Only £1500 was paid and the plaintiff stopped work and sued for the damages. The
defendants contended that no consideration had been provided for the payment of the additional
amount. The Court of Appeal, however, held that in the absence of any economic duress or fraud
on the part of Williams in procuring the promise, the main contractors had received a benefit and
judgment was given for the plaintiff.

Consideration and the variation of contracts

Since Pinnel's case in 1602 it has been recognised that if the parties vary a contract by agreement,
that agreement must itself be supported by consideration.

Pinnel's case involved part-payment of a debt and the rule which emerged may be expressed thus:
"Payment of a lesser sum on the day the debt is due cannot be any satisfaction for the whole".

This rule was accepted by the House of Lords in the later case of Foakes v Beer (1884).

Mrs Beer had obtained a judgment debt against Dr Foakes. She agreed that she would take no
further action if he paid the debt by instalments which he duly did. However, judgment debts carry
interest and the House of Lords held that Mrs Beer was entitled to claim the interest which had
accrued. Dr Foakes had not given any consideration for her promise to take no further action on the
debt as he was bound to pay the full debt plus any interest.

There has been some suggestion that the principle established in Williams v Roffey should apply to
part payment of a debt and that an agreement to receive part payment in full settlement of the debt
should be binding on the parties if the creditor gets some practical benefit from accepting part
payment.

However, in Re v Selectmove (1995) this position was not accepted by the Court of Appeal.

Selectmove was a company which had fallen into financial difficulty and owed the Revenue sums of
money in respect of PAYE (Paye As You Earn) and National Insurance.

The managing director offered to pay these debts by instalments and to pay future liabilities as and
when they fell due. When the Revenue petitioned for the company to be wound up, the company
argued that the agreement to pay by instalments was binding because the Revenue obtained a
benefit (they were likely to receive more by this method of payment than if the company was wound
up). The Court of Appeal rejected this argument and applied Foakes v Beer.
There was no consideration for the promise to pay by instalments.

If the ordinary rules of consideration are applied, the common law exceptions which have
developed will be readily understood.

The rule in Pinnel's case will not apply if the debtor does or gives something in addition to the part-
payment - so for example a chattel delivered in full settlement of the debt will discharge the debt.

This is termed "substituted performance" and the rule that consideration need not be adequate
applies.

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So in Sibree v Tripp (1846), Alderson B said: `A man may give, in satisfaction of a debt of £100, a
horse of the value of £5, but not £5".

Similarly payment of a lesser sum before due date will do, as will payment of a smaller amount at a
different place at the creditor's request.

The equitable doctrine of promissory estoppel

In addition to the common law exceptions discussed above, an equitable exception to the ride in
Pinnel's case bas also been recognised.

The High Trees case : the plaintiffs were entitled to the full rent from the date of the action, but they
would not be entitled to claim the full rent for the years when the flats were empty during the war.

The High Court was of course bound by the House of Lords decision in Foakes v Beer, but it was
able to rely on Hughes v Metropolitan Rail Company (1877), also a House of Lords authority, as a
precedent for the use of equity.

The principle laid down in High Trees became known as the doctrine of promissory estoppel and
may be stated as follows: "A simple promise to waive performance of a contractual obligation is
binding if it is intended to be acted upon and is acted upon"

In other words, "if A promises not to enforce his strict legal rights and B, as intended, alters his
position in reliance on this, then the promise can be a defence for B in equity despite the lack of
consideration":

it was at first thought that the doctrine would only be used if the promisee had acted to his detriment
in reliance on the promise.

However, later cases have suggested that reliance on the promise need not be detrimental to the
promisee.

Because this rule is based on equity, it will not apply in circumstances where it would be inequitable
to use the ride.

In D & C Builders Ltd v Rees (1965), the defendant owed £482 to the plaintiffs, a small firm of
builders, for work which they had done. He delayed payment for several months and then offered
them £300 stating in effect that if they did not accept this amount they would get nothing at all.

As the plaintiffs were in desperate financial straits, a fact known to Rees, they accepted £300 in full
seulement of the debt. However, on the advice of their solicitor, they later sued for the balance of
the debt. Again the case came before Lord Denning, who took the view that the defendant must pay
the balance. The rule in Pinnel's case was applied rather than the doctrine of promissory estoppel
as Lord Denning held that it was not inequitable for the plaintiffs to go back on their promise to
accept a lesser amount than was due. The settlement was not truly voluntary since the defendant
had improperly taken advantage of the plaintiffs financial situation.

It is important to note that the doctrine of promissory estoppel has not swept away the need for
promises to be supported by consideration.

Its application is limited to situations involving the discharge or variation of contracts, and it has no
application at all in the formation of contracts where the need for consideration remains intact.

ln Combe v Combe (1951) it was said that the doctrine of promissory estoppel "may be used as a
shield not as a sword", that is it can be used to prevent someone from going back on a promise; not

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to enforce a promise.

3. Intention to create legal relations

The law does not proclaim the existence of a contract merely because of the existence of mutual
promises.

In addition to agreement and consideration, a third element is required - the intention to create legal
relations.

Clearly, difficulties of proof can arise in relation to intention, and the courts have approached the
problem by dividing agreements into two categories: social and domestic agreements on the one
hand, - commercial agreements on the other.

Courts make different presumptions for each class.

Social and domestic agreements

The vast majority of agreements made within the family or between friends are never intended to
give vise to legal action.

If Mary invites Joe to dinner and Joe fails to turn up, Mary would not think of taking him to court; if a
parent agrees to give a child an allowance and fails to pay up, the child would not issue a writ. But
the line must be drawn somewhere.

Compare Balfour v Balfour (1919) and Merritt v Merritt (1970).

In the first case a husband, on his departure to a foreign country, agreed to pay his wife a sum of
money each month. It was held there was no contract as there was no intention between them to be
legally bound.

On the other hand in Merritt v Merritt, a couple who were separating made an agreement "at arms
length", which the wife insisted should be put in writing, and it was held that the circumstances
showed that the parties did intend that their agreement should have legal consequences.

Simpkins v Pays provides another interesting example. A grandmother, granddaughter and paying
lodger regularly entered a competition in a weekly magazine. They took it in turns to complete the
entry form and pay the fee. On one occasion the grandmother (the defendant) won and the court
had to decide whether the others were legally entitled to a share of the winnings. It was held that
the parties had entered into a common enterprise, that they did have the intention to create legal
relations and thus a contract had been made by which they had agreed to share any winnings.

Commercial agreements

While in the case of domestic agreements it is for the party who wants to enforce the contract to
prove in the light of the surrounding circumstances of the case that the parties intended to be legally
bound, in the case of commercial agreements the courts will presume that the parties intended their
agreement to be legally binding.

However, this presumption can be rebutted.

Generally, in order to rebut the presumption, it will be necessary expressly to declare that a
transaction is not binding in law.

For example, a declaration on football pool coupons to the effect that `This transaction ... is binding

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in honour only" has been held to mean that it is not intended to be binding in law

In Rose & Frank Co v J R Crompton & Bros Ltd (1924) the agreement contained the following
words:

“This arrangement is not entered into nor is this memorandum written, as a formal or legal
agreement, and shall not be subject to legal jurisdiction in the law courts either of the United States
or England, but it is only a definite expression and record of the purpose and intention of the parties
concerned, to which they each honour and pledge themselves".

This was an ordinary commercial agreement between a New York firm and an English
manufacturer, but the court nonetheless held that there was no contract since the parties had made
it clear that they did not intend their agreement to be legally binding.

Agreements which are made "subject to contract" - as in Winn v Bull (1877) - may be regarded as
agreements which can be ignored by either party as they have shown that they do not intend to be
legally bound at that stage.

Sometimes the question may arise whether a contract is sufficiently certain to be enforced.

In Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd (1988), the plaintiff’s bank agreed to
make a loan facility of up to £10,000,000 available to a wholly-owned subsidiary of the defendant
(MCC Metals ixd). The plaintiffs wanted a guarantee from the defendants, which they (the
defendants) were not prepared to give, but after lengthy negotiations it was agreed that the
defendants would give the plaintiffs a letter of comfort rather than a guarantee, but that the
defendants would charge a higher rate of interest.

The letter of comfort stated "It is our policy to ensure that the business of [MMC] is at all times in a
position to meet its liabilities to you".

When MMC became insolvent, the plaintiffs claimed that the defendants should reimburse them for
the subsidiary's indebtedness. At first instance it was held that this was a commercial agreement
and there was nothing to rebut the presumption that it was intended to be legally binding. However,
the Court of Appeal approached the question by looking at the legal meaning attached to the form
of words used in the letter of comfort, which amounted only to a statement of the defendants
`present intention" and not to a legally binding agreement.

4. Formalities

The general rude is that a contract may be made in any form: in writing, orally or by conduct.

Some types of contract require certain formalities.

Contracts which must be made in writing :

Contracts for the sale or other disposition of land, regulated consumer credit agreements.

These contracts must be made in writing and that all the terms of the contract must be included in
the written agreement.

Further, the contract must be signed by the debtor and by or on behalf of the creditor.

If the contract is not 'properly executed', then it will not be enforceable against the debtor.

12
Contracts which must be evidenced in writing

In these cases, it is not necessary for the actual contract to be in writing, but there must be written
evidence of the contract otherwise it will not be enforceable by the courts.

Contracts which must be made by deed

Contracts witch are nor supported by valuable consideration (ex : a promise of gift, the lease of land
for more than three years).

5. The parties to the contract

5-1 / Capacity

In general, adults of sound mind have full contractual capacity but there are certain categories who
it is considered need some protection in the marketplace.

Minors

That is people under the age of 18.

Acts passed by minors are regulated the Minors' Contract Act 1987.

Valid contracts passed by minors

Contracts for necessaries

It is recognised that minors, like everyone else, have certain basic requirements.

The term 'necessary' in relation to goods is statutorily defined in the Sale of Goods Act 1979:
'necessaries means goods suitable to the condition in life of the minor ... and to his actual
requirements at the time of the sale and delivery'.

In Peters v Fleming (1840) the court held that a watch and chain could be regarded as necessaries
for an undergraduate, but that the jury must decide whether it was reasonable that the chains
should be gold.

In Nash v Inman (1908), an undergraduate at Cambridge, already well-supplied with clothes,

bought 11 fancy waistcoats on credit from a Saville Row tailor. It was held that the goods were net
necessaries, so the tailor was unable to enforce the contract.

The Sale of Goods Act 1979 imposes that the minor pays a reasonable price

13
 Beneficial contract of service

Certain contracts, if they are beneficial to the minor, will be binding on the minor (for example
contracts of employment, contracts of apprenticeship).

A trading contract is never binding on a minor, no matter how beneficial its terms may be.

In Mercantile Union Guarantee Corporation v Ball (1937), a hire purchase contract involving a lorry
entered into by a minor who had a haulage business was held be a trading contract and therefore
not binding on the minor.

Voidable contracts

Contracts in this group are voidable in the sense that they are binding on the minor unless he or
she repudiates the contract before reaching the age of 18 or within a reasonable time after the age
of 18.

Such contracts confer on the minor an interest of a permanent nature in the subject matter of the
contract, for example: a contract to buy shares in a company, or to enter into a lease or a
partnership.

Contracts void unless ratified

Void contracts are considered never to have existed. The can not be enforced.

The Minors' contract act 1987 stipulates that void contracts, such as repayment of a loan made
minors, may be ratified by the minor after he turns 18.

An adult can also guarantee a contract agreed to by a minor.

The guarantee is enforceable against the adult, although the contract could not have been enforced
against the minor

Mental disorder and drunkenness

In the case of a person suffering from a mental disorder (defined by the Mental Health Act 1983) the
contract will be voidable at that person's option if at the time it was made he or she was incapable
of understanding the nature of the contract and the other party to the contract was aware of that
fact.

If the contract is for necessaries, then it will be binding on the person who is mentally disordered,
but the person must pay a reasonable price for them.

Similar rules apply in the case of people who are so drunk that they do not appreciate the nature of
the contract, if the other party is aware of that fact.

The contract may the ratified by the drunken person when he becomes sober again.

Corporations

A corporation is a person in the eyes of the law and as such is able to make contracts which can be

14
enforced against the corporation.

In contrast, an unincorporated association such as a club has no capacity to make contracts.

The capacity of a corporation is governed by the method of its creation.

The powers of statutory corporations are to be found in the statute creating the corporation.
Corporations created by royal charter have no limitation on their capacity to contract.

Before the Companies Act 1985, amended in 1989, inspired by European Union regulations, the
capacity to contract of registered companies were defined in the memorandum of association.

Any contract outside the object of the company was said to be "ultra vires" and void.

Companies Act 1985 provides: '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'.

5-2 / Privity of contract

According to the privity rule, only a person who is a party to a contract may incur rights and
liabilities under that contract.

In Tweddle v Atkinson (1861), the fathers of William Tweddle (the plaintiff) and his wife agreed with
each other that, in order to provide for the couple, they would each give a sum of money. One
father paid up, the other did not and when the defaulter died, Tweddle sued the executor for the
money.

His action failed because he was not a party to the agreement.

However, the courts have recently shown themselves more willing to award substantial damages,
particularly in the context of building contracts where, because of complex subcontracting
arrangements, the contracting party has suffered no loss and the third party cannot bring an action
because of the privity rule.

There are a number of exceptions to the privity rule in various domains such as life insurance,

All of the above exceptions are attempts to confer the benefit of a contract to a third party.

But what about the burden? Again the general rule is that only the parties to a contract are bound
by its terms.

Tulk v Moxhay (1848). The plaintiff owned several plots of land in Leicester Square. One of the
plots was sold and a covenant (agreement) was included in the deed of sale to the effect that the
Square should be kept 'open as a pleasure ground and uncovered with buildings'.

The Land was bought and sold again several times and and eventually it was purchased by the
defendant, who claimed that he was entitled to build on it, despite the fact that he had notice of the
covenant, because he was not a party to it.

It was held that the burden of a restrictive covenant will run with the land in equity, as long as the
purchaser of the land purchases the land with notice of the covenant.

The law of privity has been the subject of a lot of criticism, mainly because third parties are unable
to enforce benefits arising out of contracts to which they are not privy.

15
The current situation creates difficulties in commercial deals because so many exceptions have
been developed to the rule making the law highly complex.

Furthermore third party rights are accepted in most other legal systems in the European Union and
other parts of the world.

16
PART II : ENDING CONTRACTUAL OBLIGATIONS - VITIATING
FACTORS AND DISCHARGE

The common law has always taken the view that people enter into contracts voluntarily. It follows
that if the contract was made without full knowledge of the fact or if a person was forced to make a
contract against his or her will, a court would not consider that contract to be binding.

The vast majority of contracts made day in and day out are valid and fully binding. However, a
contract may be void (for mistake or possibly illegality) or voidable (for misrepresentation, duress or
undue influence).

If a contract is void it has no legal effect at all: it is a complete nullity from the very beginning.

On the other hand a voidable contract is valid until one of the parties avoids it and up until the point
when it is avoided it will give rise to legal obligations and rights. A contract may also be
unenforceable - certain types of illegality have this effect - which means that although there is a
contract between the parties the courts will simply not enforce it so gains and losses lie where they
fall.

Misrepresentation

Statements made during the negotiations may be either terms or representations.

Terms form part of the contract, representations do not. But representations are made by one party
to induce the other to enter into the contract. A line must be drawn between what have been called
`mere puffs' - the sort of thing advertisers tell us in order to persuade us to buy their products, and
which have no legal effect - and representations, which if false give rise to an action for
misrepresentation.

Phrases like 'washes whiter than white', 'probably the best lager in the world', `mountain fresh' and
so on are mere puffs, whereas if, while negotiating the sale of a car, A tells B that the car has
recently had a new clutch fitted, that is a different matter.

A misrepresentation has been defined as 'an untrue statement of fact made by one party to the
contract (the representor) to the other (the representee) which induces the latter to enter into the
contract'.

Each element of that definition is important.

A statement

A statement need not be made in words, but could be 'a nod or a wink or shake of the head or a
smile'.

In general silence cannot amount to a statement, but there are certain important exceptions to this
principle. Simply not saying anything can distort the truth and give a false impression - so telling
only half the story could be a misrepresentation.

Further, if a true statement is made but the facts change before the contract is concluded, then the
representor has a duty to inform the representee of the change.

17
In With v O’Flanagan (1936) a doctor was selling his practice. When the sale was negotiated he
gave the purchaser a true picture of the number of patients. But he himself became ill before the
sale was completed and lost most of his patients. He said nothing about this and it was held that the
contract could be avoided for misrepresentation.

Insurance contracts are in a class of their own in this respect, because they are said to be contracts
uberrimae fidei, that is, contracts of the utmost good faith. The insured thus has a duty to disclose
all material information to the insurer in the proposal and failure to do so can result in the insurer
avoiding the entire contract.

A statement of fact

Statements of law or of opinion are not actionable as misrepresentations, but if a person expresses
an opinion fraudulently, then that is treated as a statement of fact.

Bissett v Wilkinson (1927) : the vendor of land in New Zealand, which had never been used for
sheep farming, told the purchaser that the land would support 2000 sheep. It was held that this was
a statement of opinion.

Smith v Land & House Property Corporation (1884) : The landlord of certain property which was
being sold described the tenant as `most desirable', knowing that the tenant was in fact most reluc-
tant to pay his rent. This was held to be a misrepresentation.

Similarly, a fraudulent statement of intention may be treated as a statement of fact. It was said in
Edgington v Fitzmaurice (1885) : ‘the state of a man's mind is as much a fact as the state of his
digestion. It is true that it is very difficult to prove what the state of a man's mind at a particular time
is, but, if it can be ascertained, it is as much a fact as anything else’.

A misrepresentation as to the state of a man's mind is, therefore, a misstatement of fact.

The misrepresentation must induce the contract

The first point that must be made here is that if the representee knew that the statement was
untrue, then that is a complete bar to relief.

Secondly, the representee must rely on the statement. In Attwood v Small (1838) the purchasers of
a mine checked up on statements made by the vendors and it was held that this debarred them
from claiming rescission on the basis of misrepresentation as they had not relied on the statements.

Misrepresentation Act 1967

Before this Act was passed, the remedy at common law for misrepresentation was rescission of the
contract. This applied whether the misrepresentation was made innocently or fraudulently. If it could
be shown that the misrepresentation was fraudulent, then damages would, in addition, be awarded
for the tort of deceit. But fraud is difficult to prove and in Derry v Peek (1889) it was held that a
fraudulent misrepresentation was one `made knowingly, or without belief in its truth, or recklessly,
careless whether i be true or false'.

The importance of this case was that it made very clear distinction between fraud and negligence
and the remedy of damages was available only for fraud.

In 1962 the Law Reform Committee recommended that damages should be given for negligent
misrepresentation as well, and this resulted in the Misrepresentation Act 1967, s 2(1):

‘Where a person has entered into a contract after misrepresentation has been made to him by

18
another party thereto and as a result thereof he has suffered loss, then, if the person making the
misrepresentation would be liable to damages in respect thereof had the misrepresentation been
made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not
made fraudulently, unless he proves that he had reasonable ground to believe and did believe up to
the time the contract was made that the facts represented were true’.
If an action is brought for negligent misrepresentation, the plaintiff will have to prove that contract
had been entered into after a misrepresentation had been made, but the burden a proof will be on
the defendant to show that the misrepresentation was not made negligently. There is thus no
requirement under the Act for the plaintiff to prove negligence.

As a result of this legislation, misrepresentation may be said to fall into three categories:

• Innocent misrepresentation for which the remedy is rescission or damages - under section
2(2) p: the Act the court may declare the contract subsisting and award damages in lieu of
rescission, if it would be equitable to do so.
• Negligent misrepresentation for which the remedy is rescission and damages - section 2 (1)
• Fraudulent misrepresentation for which the remedy of rescission is available and the
claimant may claim the common law remedy of damage for the tort of deceit.

Negligent misstatement at common law

Developments in the law of torts have also to be considered before we leave this topic of
misrepresentation.
In 1963 the case of Hedley Byrne Co Ltd v Heller & Partners Ltd came before the House of Lords.

The facts of this case were:

The plaintiffs had to decide whether to enter into an advertising contract on behalf of Easipower
under a contract which provided that they would be liable if Easipower did not pay.
They asked the defendants, who were Easipower's bankers, for a credit reference which the
defendants provided, but with a disclaimer to the effect that the reference was given `without
responsibility'.
When Easipower defaulted, making the plaintiffs liable on the contract, they sought damages from
Heller & Partners. The House of Lords held that an action for negligence would lie in these circum-
stances, but that the plaintiffs could not succeed in this particular case because of the disclaimer.

The law surrounding this area is complex, but an action will only lie if a statement was made
negligently and if there is a 'special relationship' between the parties. If a claim for negligent
misstatement is successful, the remedy is for damages in tort.

Rescission - limitations on the remedy

The remedy of rescission is one of the equitable remedies and is limited by the general principles
common to all the equitable remedies. While the common law remedy of damages is available as of
right in appropriate circumstances, the equitable remedies are available only at the discretion of the
court. The courts exercise their discretion according to a set of well-established principles and, for
example, the right to rescission will be lost if:
• The representee has affirmed the contract.
• The representee has waited too long before seeking the remedy. In Leaf v International
Galleries (1950) a painting was sold which bath buyer and seller believed was by Constable.
About five years later when the buyer came to resell the painting, it was found that it was in
fact by an unknown artist and the buyer sought rescission of the original contract. It was
held that the doctrine of lathes operated to prevent rescission.
• Restitutio in integrant is no longer possible. Rescission requires that both parties must be
put in the position they were in before the contract was made - in other words `a giving back
and a taking back on both sides' - so if the subject matter of the contract has ceased to
exist, for example because it has been consumed, or if it has changed its identity, perhaps
19
 by being mixed with other goods in a manufacturing process, then rescission is impossible.

Mistake

While misrepresentation makes a contract voidable, an operative mistake has the effect of
rendering a contract void. The entire transaction is a complete nullity, and no rights or obligations
can arise under it.
Contractual mistake can be classified into three types:

Common mistake

Here the parties make the same mistake.

It has been held, however, that a common mistake about the quality of the subject matter of the
contract will not affect its validity.

Take for example the facts of Leaf v International Galleries, considered above in relation to
misrepresentation. Both the buyer and the seller thought the painting was by Constable - they both
made the same mistake, but it was decided that the mistake was about the quality of the painting.

For a mistake of this sort to make a contract void, it must be one about the very existence of the
subject matter of the contract and the reasoning behind this rests on the premise that people cannot
make a valid contract about something which does not exist.

Couturier v Hastie (1852) illustrates the point. The case was decided in 1852, when
communications were not what they are today :

a shipment of corn was on its way from India to England. The parties, in London, concluded a
contract for the sale of the corn, both believing it to be safely in the hold of the ship. But unbeknown
to both parties, before the contract was made the corn had begun to deteriorate and the captain of
the ship had sold it to a third party, so when the contract was made in London the corn, to all intents
and purposes, did not exist. It was held that the contract was void for mistake.

Equity takes a wider view, and contracts may be set aside for common mistake, the court laying
down whatever terms it considers to be just.

Mutual mistake

It may be that when the contract is being negotiated, the parties are at cross purposes. If this
happens there is no `meeting of minds' (consensus ad idem) so there can be no contract, since the
very foundation upon which a contract is built is agreement

In Raffles v Wichelhaus (1864), the defendant agreed to buy some cotton which was `to arrive on
the Peerless sailing from Bombay'. Unfortunately, there were two ships called Peerless, one sailing
in October and the other in December. The seller was referring to the ship sailing in December, the
buyer to the ship sailing in October. There was no agreement, so no contract.

Unilateral mistake

One party makes a mistake and the other knows that a mistake is being made.

Unilateral mistake often arises in the context of mistaken identity but the courts are not over-
anxious to set contracts aside simply because a person believed he was dealing with someone
other than the person with whom he was in fact dealing.

A party who is seeking to avoid a contract on the ground of mistaken identity must show not only
that he or she intended to deal with someone other than the person with whom he or she apparently

20
made the contract, but also that at the time of making the contract the identity of the other party was
of crucial importance, so that had the true identity been known the contract would not have been
concluded. These things are, of course, much easier to prove if the parties are negotiating by letter
or on the telephone than if they are standing face to face when the contract is made.

Clearly, if a contract is made with a person standing in front of you, it is a good deal more difficult to
prove that you did not intend. to deal with that person. Consider the case of Phillips v Brooks Ltd
(1919).

Non est factum

The meaning of this Latin phrase is `it is not my deed' and the plea can be used in a situation where
a person has signed a document which is different from what he or she thought he or she was
signing.

Saunders v Anglia Building Society (1971) is the sort of case where the situation may arise :

An elderly lady, Mrs Gallie, with failing eyesight and whose spectacles were broken, signed a deed
of gift, assigning the leasehold in her home. She thought she was giving the leasehold to her
nephew of whom she was very fond, but in fact the document assigned her interest to a rogue
called Lee, who failed to pay the mortgage instalments and eventually absconded.

The building society tried to rely on the document to take possession of the property and Mrs Gallie
pleaded non est facture. The case is important because the House of Lords laid down guidelines as
to when a person may raise the plea;

if the document that he or she signed was fundamentally different in character from that which he or
she intended to sign, and he or she was not careless in signing the document.

An example of this point is to be found in Lloyds Bank v Waterhouse (1991) in which it was held
that the defendant, who was illiterate, could plead non est factum when he signed guarantee forms
which he was unable to read.

In Saunders itself it was held that Mrs Gallie had not been negligent in signing the document
without reading it, but that she thought she was signing a deed of gift and that is precisely what she
was signing, so her plea failed.

Exactly the same principles apply when a person signs a document knowing that it has blank
spaces in it which he or she leaves to the other party to complete: United Dominions Trust Ltd v
Western (1975).

Duress and undue influence

Concept of freedom of contract The theory is that contracts are entered into freely and that a
contract thus made is binding on the parties, irrespective of the balance of bargaining power
between the parties and even if the bargain could be described as 'unconscionable' However, there
are situations where the contract is not freely made.

Duress

The law has long recognised the principle that a contract entered into under duress will not be
binding because it was not made as a result of free choice. This can be seen in the Australian case
of Barton v Armstrong (1976), where the respondent threatened the appellant with death and
unpleasant injury unless the appellant made a contract which was advantageous to the respondent,
but commercially disadvantageous to the appellant.

21
 Economic duress

Until quite recently English law took the view that duress is limited to the use of force or threats of
force. But over the last couple of decades the doctrine of economic duress has developed. In 1979
in Pao On v Lau Yiu Long, Lord Scarman, in the Privy Council, said :

There is nothing contrary to principle in recognising economic duress as a factor which may render
a contract voidable, provided always that the basis of such recognition is that it must always amount
to a coercion of will, which vitiates consent.

In that case it was held that there was in fact no 'coercion of will', but the principle of economic
duress was accepted by the High Court in North Ocean Shipping Co Ltd v Hyundai Construction Co
Ltd (1979) and by the House of Lords in Universe Tankships of Monrovia v International Transport
Workers Federation (1982).

In the former case, the defendants had agreed to build a ship for the plaintiffs. During the course of
construction the defendants demanded an increase of 10 per cent of the contract price and
threatened not to complete the ship unless the plaintiffs agreed. The plaintiffs agreed, mainly
because they had made a profitable contract to charter the ship on completion although they had
been advised that the defendants' claim for an increase was legally unenforceable. The ship was
duly delivered and eight months later the plaintiffs claimed repayment of the additional amount. The
judge held that although this was a case of economic duress, the right to avoid the contract was lost
because the plaintiffs had affirmed it.

Undue influence

Duress is a common law doctrine and is fairly restricted in its scope. Alongside it, however, equity
has developed the more flexible doctrine of undue influence.

Lloyds Bank Ltd v Bundy (1975) : Lord Denning suggested was merely one way in which the courts
could attempt to attack the problem of `inequality of bargaining power' between contracting parties.
Lord Denning commented in this case that 'It is not right that the strong should be allowed to push
the weak to the wall'.

Undue influence renders a contract voidable and applies in cases where a person enters into a con-
tract, which is disadvantageous to him or her, as a result of influence exerted by the other party.
The doctrine applies to gifts, which may be set aside on the ground of undue influence, as well as to
contracts.

There are two groups of cases - those where a relationship of confidence exists between the parties
and those where there is no special relationship.

National Westminister Bank v Morgan was concerned with the relationship between a bank and its
customers. The House of Lords decided that this was not a relationship of special confidence and
that undue influence on the part of the bank manager must be proved in fact. Some relationships
are regarded by the courts as being relationships of confidence, in which the court will presume
undue influence, so that the burden of proof is on the defendant to show that there was no undue
influence: this could be done for example by showing that the plaintiff obtained independent advice
before entering into the transaction. The confidential relationships which fall into this category
include those between parent and child, solicitor and client, doctor and patient, trustee and
beneficiary …, but not husband and wife or employer an employee.

Another question which has been considered in recent cases is whether a loan should be set aside
for undue influence, although the influence (or fraud or misrepresentation) was exercised by some
person other than the lender.

22
For example, in Avon Finance v Bridger (1981) the defendants were an elderly couple who had
bought a house on the advice of their son, who they trusted implicitly.

Part of the purchase price was provided by a mortgage which the parents negotiated and part was
provided by their son.

Unbeknown to them, the son raised the money by taking a loan with Avon Finance using their
house as security.
The couple had signed the documents required by the finance company giving the house as
security for the loan because the son had fraudulently told them that the forms had to be signed in
connection with their own mortgage on the property.

The son failed to keep up the instalments on the loan and evenually the finance company sought to
rely an th security and sued for possession of the house The Court of Appeal held that although the
fraud and undue influence were exercised by the son, they could be attributed to the lender and the
security could not be enforced against the parents.

Similar principles may apply where a wife allows the matrimonial home to be used as security for
husband's debts as a consequence of undue influence exercised over her by the husband.

The law was reviewed in Barclays Bank plc v O'Brian (1992) in which the Court of Appeal confirmed
that in appropriate circumstances protection would be given. In such a case the lender may find that
the court will not allow the security to be enforced against the surety. Three conditions must be
fulfilled :

• There must be a relationship between the debtor and the surety which could give rise to
influence and this must be known to the creditor.
• The consent of the surety must have been obtained by undue influence, fraud or mis-
representation by the debtor.
• The creditor must have failed to ensure that the surety's consent to the transaction was a
real consent in that the surety was given full information to enable him or her to make the
decision. This may occur when the creditor leaves it up to the debtor to make the
agreement, as in Avon Finance.

The effect of undue influence is to render the contract (or gift) voidable. In Cheese v Thomas (1994)
the Court of Appeal held that when a contract was set aside on the ground of undue influence, it
was open to the court to direct that any overall loss sustained by the parties in the value of the
subject matter of the contract should be shared by both of them. The Court said that the basic
objective of the remedy was to put the parties as nearly as possible back to their pre-contractual
positions.

Illegality

What is meant by an 'illegal contract' and how should the law deal with one?

The meaning of the word 'illegal' is wider in the context of contract law than in everyday
understanding, covering both illegality at common law on grounds of public policy and statutory
illegality, for example it may be illegal to buy and sell certain goods unless licensed to do so.

The law has also distinguished between those contracts which are illegal when formed and those
which are illegal in their performance.

The importance of the distinctions drawn lies in the remedies available to the respective parties in
that if a contract is illegal when formed, the contract is void ab initio and no rights or duties will arise
under it.

Further, if the parties are in pari delicto (equally at fault) then the defendant is in the stronger
23
position because 'gains and losses lie where they fall', Thus, neither party can recover property
under an illegal contract if he or she must disclose the illegality in order to bring the action,

If the contract is illegal in its performance, then the party who is guilty of illegal performance will not
be able to enforce the contract, but the innocent party's rights will be unaffected.

Public policy includes a number of different areas ranging from a contract to commit a crime, which
will clearly not be enforced by the courts, through contracts which are considered to be 'immoral', to
contracts in restraint of trade, which are considered to be against public policy 'but not necessarily
unprincipled.

Restraint of trade clauses may be found in contracts of employment - for example if you are
employed as a hairdresser there will very likely be a clause in your contract preventing you from
taking a job with another salon within a radius of, say five miles, and for a period of say two years.

This type of clause will be upheld by the courts only if the employer has some interest to protect
and not simply to stifle competition.

In Fitch v Dewes (1921) a clause preventing a solicitor's managing clerk from working within a
radius of seven miles of Tadworth Town Hall was upheld because the clerk was in a position to
have information about the solicitor's clients.

On the other hand in Attwood v Lamont (1920) a clause preventing a cutter/fitter from taking
employment within 10 miles of Kidderminster was held to be void because it was intended merely to
prevent competition.

In a number of recent cases recording artists have challenged their recording contracts on the basis
of unreasonable restraint of trade clauses.

In Panayiotou v Sony Music Entertainment (UK) Ltd (1994) George Michael challenged such a
clause on two fronts. He argued first that the clause in his contract, negotiated in 1988, was against
public policy under UK law and secondly that it was unenforceable under EU competition law (under
Article 85(2) of the Treaty of Rome which seeks to maintain freedom of competition within the
European Union). His claim failed in the High Court. It was held that the contract was freely entered
into by the parties, and was fully enforceable.

Such clauses also commonly appear in contracts for the sale of a business.

The courts take the view here that if the clause is reasonable in scope, both as to distance and
duration, then it will be upheld to protect the goodwill of the business which is being sold.

Clearly, if I am selling a restaurant with a thriving trade based on good reputation, my buyers would
be most put out if I opened another restaurant three shops down the road offering a similar service
to the public.

The cases vary as to what is reasonable, which will depend on the circumstances of the particular
case, but perhaps the most extreme example of what was considered reasonable was the case of
Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co (1894) in which a covenant not to set up a
similar business anywhere in the world for a period of 25 years was valid.

The world-wide reputation of the company involved was seen to justify the restraint. It should be
noted also that the courts have shown themselves willing to sever a restraint of trade covenant and
uphold the part which is reasonable and declare void that which is not.

24
Discharge of contract

Performance and breach

Of course contractual obligations must eventually be brought to an end, and when this happens the
contract is said to be discharged. In everyday life and in commerce most contracts are discharged
by performance, that is, both parties carry out their contractual promises. Usually, also, both of
them do exactly what was promised - and this represents the general rule of performance, that
performance must be exact and complete.

Sometimes it seems that this rule can be taken too far :

for example in the old case of Cutter v Powell (1795) a sailor was contracted to sail from Jamaica to
Liverpool for a sum of 30 guineas.

The ship set sail from Jamaica on 2 August and nearly two months later, when it was 19 days short
of Liverpool, Cutter died.

His widow was unable to recover a proportion of his wages, because he had failed to complete the
contract !

Note that nowadays this sort of situation is governed by rules of employment law, but the case
remains authority for the proposition that a person only becomes entitled to payment if he or she
has done precisely what he or she promised to do.

The case of Bolton v Mahadeva (1972) provides a modern example. The Court of Appeal held that
the plaintiff was not entitled to any payment when he installed a central heating system in the
defendant's house which not only failed to heat the house effectively, but also gave off unpleasant
fumes.

It will be appreciated that, while this doctrine will produce a just decision in some cases, if it is
always applied to the letter it will lead to rather harsh results.

So the doctrine of substantial performance has been developed - if a person does substantially
what he or she promised to do then he or she will be entitled to payment, less the amount required
to achieve complete performance.

Hoenig v Isaacs (1952) may be compared to Bolton v Mahadeva :

The plaintiff, an interior decorator, agreed to refurbish a flat for £750. He was paid £400 by the
defendant, who refused to pay the rest on the grounds that the workmanship and materials were
defective. The Court of Appeal upheld the decision of the court below that the plaintiff was entitled
to be paid £294, being the remainder of the contract price, less the amount which would be required
to put matters right

Performance and breach of contract are opposite sides of the same coin : if a contract is not
performed exactly, it is breached to a greater or lesser degree. The courts must make judgments in
these cases as to whether the breach is such that the aggrieved party is entitled to treat his/her
obligations under the contract as completely discharged or whether he or she is entitled only to the
payment of damages to put him/her in the position he or she would have been in if the contract had
been properly performed.

Certain breaches of contract will entitle the innocent party to repudiate the contract, thus terminating
his/her obligations under it. This will be the case where the parties themselves attach great
importance to the term (as where the term is deemed to be a condition of the contract) or where
serious consequences have resulted from the breach.

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Further, in the case of anticipatory breach the innocent party has the right to repudiate.

Anticipatory breach occurs when one party indicates before the date of performance that he or she
does not intend to perform the contract. In such a case the innocent party has a choice - either to
treat the contract as subsisting and to sue for breach of contract on the date when performance was
due, or to treat the contract as discharged immediately and to sue for damages.

In Hochster v De la Tour (1853) a contract was made between the parties in April to the effect that
the plaintiff would be engaged as a courier by the defendant from 1 June. On 11 May the defendant
indicated that the plaintiff's services would not be required and the plaintiff sued for damages
immediately and succeeded.

If the aggrieved party decides to treat the contract as subsisting, the result is that the contract
remains in being, so that some event may intervene to relieve the defaulting party from his or her
obligation.

In Avery v Bowden (1855) the defendant chartered the plaintiffs’ ship at a Russian port and agreed
to load her within 45 days. Before the end of this period, the defendant informed the plaintiff that he
would be unable to load the ship and advised the plaintiff to find another cargo. However the
plaintiff chose to treat the contract as subsisting. The contract was rendered illegal when, before the
45 days had elapsed, war was declared between England and Russia. Thus the plaintiff was unable
to sue for damages.

Frustration

It may happen that an event over which the parties have no control occurs, making it impossible for
the contract to be carried out.

Neither party is at fault in these situations, so the law provides that the obligations of both parties
are discharged by the frustrating event.

The leading case is Taylor v Caldwell (1863) where a hall which was to be used for a concert was
destroyed by fire before the date of the concert.

In Taylor v Caldwell the subject matter' of the contract was destroyed.

In cases for personal services, the death or illness of a party to the contract has been held to
frustrate the contract: see Robinson v Davison (1871) where a pianist was unable to perform at a
concert because of illness, and Condor v The Baron Knights Ltd (1965) where a drummer in the
band was told by his doctor that he could only perform three times each week rather than every
night as agreed. Obviously not every illness will bring a contract to an end, and ultimately the ques-
tion is whether the contract becomes impossible of performance.

The so called `coronation cases' illustrate the point that a contract may be frustrated if some event
which formed the basis of the contract fails.

In 1903 the coronation of Edward VII was cancelled because the King became ill.

Krell v Henry (1903)

The defendant made a written contract for the hire of a suite of rooms overlooking the route of the
coronation procession. Vaughan-Williams LJ said: `I see no difficulty whatever in the case. It is not
essential to the application of the principle of Taylor u Caldwell that the direct subject of the contract
perish or fail to be in existence at the date of performance of the contract. It is sufficient if a state of
things or condition expressed in the contract and essential to its performance perishes or fails to be
in existence at the time.' The contract was held to be frustrated and the defendant did not have to

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pay for the hire of the rooms.

Herne Bay Steamboat Co v Hutton (1903)

The coronation celebrations were to include a naval review. A contract was made for the hire of a
boat `for the purpose of viewing the naval review and for a day's cruise round the fleet'. The naval
review was cancelled but the fleet remained at Spithead. The contract in this case was not
discharged.

One very important point to note is that a contract will not be frustrated if for some reason it
becomes more difficult to perform - impossibility of performance is essential.

In Davis Contractors Ltd v Fareham UDC (1956) it was argued that the contract should be
frustrated when, because of labour shortages and the rising cost of building materials, the cost of a
housing development turned out to be much higher than the contract price. The court did not accept
this argument.

The effect of frustration

At common law when a contract was frustrated, `gains and losses lay where they fell', but because
this could lead to rather unfair results where one party had invested money in the contract, for
example, or where one had gained some advantage before the frustrating event, the Law Reform
(Frustrated Contracts) Act was passed in 1943. This Act regulates the financial position between
the parties in the event of frustration.

In outline, the Act provides:

• Any money paid to either party under the contract before the contract was frustrated, shall be
recoverable from that party.
• Any sums which were payable to either party under the contract before the contract was
frustrated shall cease to be payable.
• If either party has incurred expense in the performance of the contract before it was frustrated,
he or she shall be entitled to retain or recover sums to cover that expense.
• If either party has obtained a benefit under the contract before the contract was frustrated, he
or she will be obliged to pay for that benefit.

Agreement

Finally, a contract may be discharged or varied by agreement. One party simply agrees to give up
his/her rights under the contract in exchange for an agreement by the other party to do likewise. As
with all contracts, such an agreement will only be binding if both parties provide consideration, so if
one person has already performed some obligation under the contract, the contract can only be
discharged in this way if the other provides consideration or if the agreement is made under seal.

This is called accord and satisfaction - accord equals agreement; satisfaction equals consideration.

Remedies for breach of contract

Breach of contract occurs when one or more of the terms of the contract is not performed or is
performed defectively. Some remedies have their roots in the common law, while others were
developed by the courts of equity and this distinction is important in that, although all the remedies
maybe administered by all courts now, the common law remedies are available as of right, while the
equitable remedies are available at the discretion of the court.

Damages

An award of damages is the most usual remedy for breach of contract, and is available for any
breach, whether it is a breach of condition or a breach of warranty. For a breach of condition, the
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remedy of repudiation of the contract is available as well.

Liquidated and unliquidated damages

Sometimes the parties to a contract will stipulate in the contract itself what damages should be paid
in the event of breach - such a clause in a contract is a liquidated damages clause, which should be
distinguished from a penalty clause.

A liquidated damages clause is a genuine attempt by the parties to estimate what the loss resulting
from a breach of contract is likely to be and to provide for the recovery as damages of that amount.

Such a clause is valid and binding on the parties and will be upheld by the courts.

A penalty clause, which may be defined as a threat by one party to ensure that the other performs
his side of the bargain, will not be enforced, since the courts have taken the view that recovery of
the loss suffered should be sufficient compensation.

Often, however, there is no such clause and it is up to the courts, to assess the damages. In these
cases damages are said to be unliquidated.

In contracts for the sale of goods, an action for the price of the goods will be an action for liquidated
damages, while in an action of damages for non-acceptance an unliquidated sum will be claimed.
Two main points in relation to damages require consideration:

What loss is the defendant liable for? (Remoteness of damage)

The loss suffered may be greater than the amount which the court is prepared to award in
damages. The general principles were laid down in the case of Hadley v Baxendale (1854).

The owners of a flour mill sent a broken crankshaft away to the makers so that it could be used as a
template to make a new one. The carriers' delay of five days in delivering the crankshaft was held
to be a breach of contract and the court had to decide what the measure of damages should be.
As the mill owners had no other crankshaft, the mill could not operate without it, a fact not known to
the carriers.
The owners claimed £300 in loss of profits for the five-day delay. ft was held that the measure of
damages should be:
• any loss which flowed naturally from the breath. The loss in this case did not flow naturally
since it would not have been unusual for the mill owners to have had a spare crankshaft; or
• any loss which was in the reasonable contemplation of the parties. Here the carrier had not
been told that the mill could not operate without the crankshaft, neither could he be expected,
as a reasonable man, to know.

The loss of profits was therefore not recoverable as it was too remote.

A good example of these rules in operation is the case of Victoria Laundry Ltd v Newman Industries
Ltd (1949).
The defendants were 22 weeks late in delivering a new boiler to the plaintiffs and as a result the
plaintiffs suffered
• loss of normal profits;
• loss of profits from an especially lucrative dyeing contract offered to them by the Ministry of
Works.

It was held that the loss of normal profits was recoverable, but not the profits arising from the
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Ministry of Works contract, as this was not known to the defendants.

How are the damages assessed? (the measure of damages)

The purpose of damages in contract is to place the aggrieved party, as far as possible, in the
position he or she would have been in if the contract had been performed.

Mitigation of damages

The aggrieved party has a duty to take all reasonable steps to mitigate, or minimise, his loss.

In Brace v Calder (1895) the plaintiff was employed by a partnership for a period of two years. After
he had been employed for five months the partnership was dissolved by the retirement of two part-
ners and the business was transferred to the remaining partners, who offered to employ the plaintiff
on the same terms as before. He refused and in an action for wrongful dismissal, claimed that his
damages should be the amount he would have earned if he had worked for the partnership for the
full two years. His claim was rejected - he was entitled only to nominal damages, because he
should have mitigated his loss by accepting the offer of employment.

The duty of mitigate does not appear to apply to cases of anticipatory breach where the injured
party elects to treat the contract as subsisting and sue for damages at the date when it was due to
be performed, even though this course of action may have the effect of inflating the damages. The
reason for this is that no duty to mitigate arises until the contract has been discharged by breach.
However, the results can appear unjust.

Injunction

An injunction is a decree of the court requiring a person to do, or to refrain from doing a certain
thing. In contract cases, it is used only to enforce a negative term of a contract - so an injunction
maybe granted to stop a person breaking an enforceable restraint of trade clause in a contract of
employment.

As with other equitable remedies, an injunction will not be granted if damages would be an
adequate remedy or if the court would be unable in the circumstances of the case to enforce the
order.

Neither will an injunction be granted if this would be a roundabout way of enforcing a contract which
would not be enforceable by specific performance. This may arise in contracts for personal
services.

Warner Brothers Pictures Inc v Nelson (1937) Bette Davis had a contract with the plaintiffs by which
she agreed to act only in their films for a fixed period. An injunction was granted to restrain her from
acting for other companies. This injunction did not enforce the contract with Warner Brothers, but
merely stopped her from acting for other companies in breach of the restraint clause - she was free
to earn her living in some other way if she wished.

Specific performance

This is an order of the court that the contract should be performed. Being an equitable remedy, its
award is at the discretion of the court and the court's discretion is exercised according to the
following principles.

• The order will not be granted where damages would he an adequate remedy. Thus, in
general, it will not be granted in contracts for the sale of goods, except if the goods are
unique, for example an original painting. In Cohen v Roche (1927) the court refused to order
specific performance of a contract to sell some Hepplewhite chairs which, although rare,

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 were not unique.

Land, however, is considered to be unique, so specific performance may be requested in

cases involving the sale of land - see for example Gibson v Manchester City Council and
Hyde v Wrench although in both cases the remedy was ultimately refused.

It is important to note, however, that a decree of specific performance maybe granted in cases
involving the payment of money, as in Beswick v Beswick, where because of the special
circumstances of the case damages would not have been an appropriate remedy.

• A decree will not be granted if it could not be effectively enforced by the court, for example if
constant supervision would be necessary, since 'equity does nothing in vain'. In Ryan v
Mutual Tontine Association (1895) the lease of a flat had a term requiring the lessors to
provide a porter who would be `constantly in attendance' and an application for specific
performance of the contract failed.

Neither will the remedy be awarded if its effect would be to enforce a contract for personal services.
This is an aspect of the above principle. However, in Posner v Scott Lewis (1986) the court was
prepared to award the remedy in 'a case involving the lease of flats in a residential block in London.
One of the landlord's covenants was to employ a resident porter, which he had failed to do. It was
held that damages would not be an adequate remedy, that constant supervision would not be
necessary and tl obligation to employ the porter could readily enforced.

• Finally, specific performance will not be awarded to a plaintiff against whom it would not
have been awarded. This means, in effect, that a minor would not be able to claim specific
performance of contract on which he or she would not be liable.

The overall effect of these principles is that, for practical purposes, specific performance is only
used I any significant extent to enforce contracts for th sale of land or some interest in land.

Rescission

The effect of rescission is to place the parties in the position they were in before the contract was
made. It therefore involves a handing back of money or property which has changed hands under
the contract.

Rectification

If a contract which is made orally is then reduced to writing and the court is satisfied that the written
version does not accurately reflect the oral contract the remedy of rectification may be ordered. The
effect is to correct the written contract so that it properly reproduces the oral contract.

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