LLB MODULE 4 1st SEMESTER

Contract Law

What exactly is a contract?

Simply put, a contract can be described as a legally binding oral or written
agreement which exchanges any combination of goods, services, money and
property. It is a common misconception that a contract may only be in written
form, as oral or conduct agreements can be just as credible in contract formation.
A contract is unique in that unless certain exceptions apply, parties are free to
agree to whatever terms they choose, this is known as the ‘freedom of contract’.

You may unknowingly enter hundreds of contracts a year, for example, in buying
groceries from a supermarket, you have entered into a contract for the exchange
of money in return for goods. This is an example of a very simple contract, but
contracts can be extremely complex, owing to the parties’ freedom to agree to
whatever terms they see fit.

What are the sources of contract law?

Contractual relations are between individuals, and therefore contract law is a
form of civil law. The dominant source of contract law is common law, whereby
the previous decisions of the courts form part of the current law. There are also
various statutory provisions which support contract law, one example which will
be discussed later in this guide is the Unfair Contract Terms Act 1977.

What is contract law and what does it aim to do?

Contract law aims to provide an effective legal framework for contracting parties
to resolve their disputes and regulate their contractual obligations. The law of
contract is mostly self-regulatory, with the majority of contracts requiring no
intervention. The courts make no consideration for whether the contract was fair
or not; if it was agreed, it should be enforced. Despite this, on some occasions,
the courts are willing to depart from the principal of contractual freedom. This is
often where there has been an abuse of bargaining power by one contracting
party.
Offer in Contract Law

This contract law lecture covers the areas of what makes an offer, offer vs
invitation to treat, and the revocation of an offer.

What makes an offer?

The first requirement of a legally binding agreement is that there is an offer. One
party is the offeror, who presents the offer, and one party is the offeree, who is
the potential acceptor of the offer.

The case of Storer v Manchester City Council [1974] 1 WLR 1403 outlines that an
offer is:

1. An expression of willingness to contract on specified terms

2. With the intention that it is to be binding once accepted

Storer v Manchester City Council confirmed that in assessing whether these

conditions have been met, the courts will take an objective approach. Therefore,
the courts will consider how the conduct of the offeror would appear to an
objective party, which requires an application of the ‘reasonable man’ standard.
Therefore, the question to ask is:

‘On examination of the offeror’s conduct as a whole, would the reasonable

person consider the offeror to have expressed a willingness to contract on
specified terms with the intention that it is to be binding once accepted?’

This test means there is no consideration of the intentions of the offeror or their
state of mind. Even if the offeror did not intend his conduct to amount to an offer
at all, the courts may still find contractual intent based on this test. This is an
interesting standard to apply, as most other civil laws apply a subjective test.

The courts have admitted that the ‘reasonable man’ standard is inherently
difficult to apply, as it is always difficult to be completely impartial or reasonable.
However, owing to the lack of a better alternative, the courts will apply the
‘reasonable man’ standard, if this standard did not apply, there would be a high
amount of absurd rulings and decisions, as will become clearer on consideration
of some of the rules of contract law.
It is also important to note that the offer must be communicated to the offeree
(Taylor v Laird (1856) 25 LJ Ex 329)

Examination consideration:

You may be asked to analyse the test from Storer v Manchester City

Council.  Ensure to explain exactly what the test is, and what the ‘reasonable
person’ standard is. You will gain most of your marks from analysis - is the test
effective? Is the ‘reasonable man’ test practical? Are there any viable alternative
tests? What would be the result of not using the ‘reasonable man’ test?

Offer v Invitation to Treat

An important distinction to make in contract law is that between an offer and an
invitation to treat. An invitation to treat is usually an invitation for another party
to make an offer. It may also be defined as an indication that a party is open to
negotiation.

The case of Gibson v Manchester City Council [1979] 1 WLR 294, held the
following words to be an invitation to treat

“May be prepared to sell the house to you”

There was clearly no display of contractual intent, due to the words “may be
prepared”, which suggest the Council were open to negotiation, and therefore
the statement was construed as an invitation to treat, rather than an offer.
Applying the standard from Storer v Manchester City Council and the ‘reasonable
man’ standard, would the reasonable man consider the words “may be prepared
to sell the house to you” as being an unequivocal display of contractual intent?

Here are some key distinctions of offers and invitation to treats.

Offer:

 Certain promise to be bound

  Clear and specified terms
 The conduct or words of the party show certainty
 There is no room for negotiation

Invitation to treat:

 There is room for negotiation

 There is an invitation for offers
 There is a request for information
 Lack of certainty

Presumptions
Throughout the history of contract law, there has been various disputes over the
distinction between an offer and an invitation to treat. Therefore, in order to
provide consistency, there are a number of presumptions which are applied to
certain types of conduct.

Presumption one - Display of goods

The case of Pharmaceutical Society of Great Britain v Boots Cash Chemists [1953]

1 QB 401 confirms that a display of goods is considered to be an invitation to
treat. The specific approach taken is as follows:

 The display of goods in a shop/self-service shop are an invitation to treat

 The customer makes the offer to the cashier by presenting the goods at the
service desk
 The cashier accepts the offer by scanning the goods and requesting
payment

Reasons why a display of goods is an invitation to treat:

 There are a multitude of reasons for which the court construed the display of
goods in this way. It is evident that there would be various issues with the display
of goods constituting an offer. If a display of goods was an offer, the acceptance
would occur when the customer removes the goods from the shelves. The type of
problems that may occur are:
  The shopkeeper has no choice whether or not to sell to somebody once
they have removed an item from the shelves, preventing the shopkeeper’s
ability to choose their customers
 The acceptance has occurred at the price specified for the goods, meaning
there can be no negotiation between the buyer and seller. This is not
particularly relevant in most shops where negotiation is not possible, but it
is still a relevant issue in some cases, and particularly if an item is mispriced
 A customer couldn’t choose to exchange the item for another once they
have removed it from the shelf, or replace the item, as acceptance has
already occurred. Otherwise, they would be in breach of contract

Presumption two - Display of goods in a shop window

The case of Fisher v Bell [1961] QB 394 is the legal precedent that confirms the
display of goods in a shop window is an invitation to treat. In this case, the
defendant had a knife in the window of their shop with a price tag attached,
which was held to be an invitation to treat.

Reasons why a display of goods in a shop window is an invitation to treat: This

presumption is based upon the rules from the above case of Pharmaceutical
Society v Boots Cash Chemists, in that if it was considered an offer, the
shopkeeper could not pick and choose his customers.

There is a further consideration for display of goods in a shop window; the shop
may have a limited stock of the item, therefore if two individuals saw the ‘offer’ at
the same time and there was only one available item, the shopkeeper would be in
breach of contract to one of the individuals.

Presumption three - Advertisements

As a general rule, the case of Partridge v Crittenden [1968] 2 All ER 421 rules that
an advertisement is an invitation to treat. The primary reason for this is the
“multi-acceptance” principle.

The multi-acceptance principle: If an advertisement is considered an offer,

theoretically, an unlimited amount of people could accept that offer, which
causes obvious problems when the advertisement is for a limited amount of
goods, as the seller would be in breach of contract to each individual whom they
could not provide goods for.
This statement from Lord Herschell in the case of Grainger & Son v Gough [1896]
AC 325 HL succinctly describes this issue:

“The transmission of such a price-list does not amount to an offer to supply an

unlimited quantity of the wine described at the price named, so that as soon as an
order is given there is a binding contract to supply that quantity. If it were so, the
merchant might find himself involved in any number of contractual obligations to
supply wine of a particular description which he would be quite unable to carry
out, his stock of wine of that description being necessarily limited.”

Theory behind the multi-acceptance principle: Following this consideration, it is

obvious that an advertisement does not fulfil the requirement from Storer v
Manchester City Council,  as there is clearly no unequivocal display of contractual
intent; the reasonable person would recognise that the individual who placed the
advertisement never intended to contract with everybody who responds to the
advert.

Exceptions to advertisements as invitations to treat:

Advertisements from a manufacturer

There is a theoretical argument that suggests if an advertisement is from a

manufacturer it may be construed as an offer. This viewpoint was suggested by
Lord Parker in Partridge v Crittenden, where he stated that:

“I think 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”

As can be identified, the issue was only mentioned in passing, and there was no
debate or discussion with the other judges. The issue has not been revisited by
the courts, therefore, this is not an established legal precedent and should only
be treated as a persuasive factor for the courts rather than a rule.

Unilateral contracts

Before the effect of a unilateral contract on an advertisement is considered, a

clear definition of a unilateral contract is required.
A unilateral contract is formed where the offeror makes a promise in exchange for
an act by any offeree. This is often considered to be a contract with the whole
world, as theoretically, any offeree may accept the contract. Acceptance is made
through the performance of the act specified in the offer, and the offeree need
not communicate his intention to accept/perform. Here is a common example of
a unilateral contract:

Party A puts a poster up in the street, offering a £100 reward to anybody who
finds their lost dog.

It is clear that the acceptor of the offer, party B, is any individual who finds the
dog, with acceptance occurring on performance. The contract is considered to be
‘unilateral’ as there is only obligations for one of the parties; the offeror has the
strict obligation to pay the £100 to anybody who finds the dog, but there is no
second party who must search for the dog, they may choose to, but there is no
obligation.

Following, an advertisement is likely to be construed as an offer when these

requirements are met

 There is a unilateral offer

 Acceptance is communicated through performance (to refer to our above
example, finding the lost dog)
 Clear terms and conditions (are the requirements for performance and the
reward clear?)
 Intention to create legal relations and be legally bound (this will be
explained further in the following paragraphs)
 Consideration (benefit and detriment to each party - in our above example,
the benefit for the offeror is the return of the lost dog, the detriment is the
loss of £100, and for the offeror, the benefit is the £100, and the detriment
is time/money spent looking for the lost dog. For more detail on
consideration, please see the chapter on consideration)

There are limited judicial decisions showing this in operation, but the most
famous example of a court finding an advertisement amounting an offer due to a
unilateral contract is found in Carlill v Carbolic Smoke Ball Co Ltd [1893] 1 QB 256.
In Carlill, the defendant’s product was a medicinal device which was designed to
help prevent the contraction of illnesses. The defendant’s advertised the product,
and promised a £100 reward to any person who contracted influenza after using
the ball for two weeks, three times daily, following the printed instructions. In
respect of this, I will consider the above bullet-pointed criteria for an
advertisement to be construed as an offer.

 A unilateral contract can be identified here, as only the defendant has an

obligation under the contract, to pay the £100 reward, any potential
offeree may accept this contract
 Acceptance is communicated through the performance of using the device
in the specified way, and contracting influenza
 The terms and conditions are clear - the advertisement is very specific with
regards to in what way and how frequently the device is to be used, and
the £100 reward is also clear.
 Intention to create legal relations and be legally bound - this was a point of
contention, the defendant’s argued that the advertisement was a
marketing device to entice people into buying the product (the courts
referred to this as a “mere puff”), and that no contractual intent could be
inferred from the advertisement. However, this justification was negated by
the fact the defendant explained in the advertisement that £1,000 had
been deposited in a bank account specifically for the purpose of paying the
rewards, which suggests a clear contractual intent. As Lindley LJ stated…

“The deposit is proof of his sincerity in the matter - that is, the sincerity of his
promise to pay this £100 in the event which he specified”

 Consideration - there was a benefit for the defendants created by the use
of the balls (free advertising), the detriment being the £100 reward. The
benefit for the claimant was the £100 reward, and the detriment was
spending the time and effort to use the ball, and also contracting influenza

All of the criteria were met, and therefore the advertisement was considered to
be an offer. As noted, this exception does not operate frequently and only under
very specific circumstances.

Advertisements negating the ‘multi-acceptance’ problem

The American case of Lefkowitz v Great Minneapolis Surplus Stores Inc(1957) 86
NW 2d 689, although only persuasive on the English courts, is an excellent
example of the negation of the ‘multi-acceptance’ problem posed by
advertisements.

The advertisement stated ‘Saturday 9AM sharp, 3 brand new fur coats worth
$100, first come first served, £1 each’. Multi-acceptance is not an issue here, as it
is clear that there is only 3 of the coats available, and only the first three people
to arrive at the shop would be able to accept the offer. If the principle from Storer
v Manchester City Council is applied, it is objectively clear that there is an
intention to create legal relations with those first three people.

In effect, this example can be seen as a unilateral contract, with the performance
required being the arrival at the store first.

Further reasoning as to why advertisements should be considered invitation to

treats

Seller’s discretion

As explored previously in regards to the display of goods in a shop, if

advertisements were construed as an offer, the seller would have no discretion as
to who they choose to sell to. This could cause a number of issues, even without
the operation of the multi-acceptance problem:

 The buyer may live in another country - the seller would now potentially
have to arrange delivery
 The creditworthiness of the buyer
 Any discretion of who to sell to, for example, a seller may not want to sell
large amounts of alcohol to younger individuals.

Free promotion of goods without liability

Goods which are wrongly marketed would have to be sold at the price they were
advertised for. This is unfair for the sellers. This issue is especially relevant in the
technological age. Many advertisements are made online or priced automatically,
and a small typographical error/mistake could mean the difference between £10
and £100.
Examination consideration:

The reasoning behind presumptions are often a topic of discussion in

examinations. Ensure you are aware of how the presumptions operate, which
cases are authority for them, and the courts justifications for deciding the cases in
the way they did. The justifications are where you will get your marks for analysis
- are the justifications strong, weak or even outdated?

Presumption four - Tenders

A tender is where an individual seeks specific goods or services and advertises

their need for them. This is construed as an invitation to treat, and any response
to the tender will be an offer. Here is an example of a tender:

“I am looking to purchase a new car for around £5,000”

There is clearly no contractual intent, as it is merely inviting an offer in response.

Even if the price was specified as exactly £5,000, there is still no offer owing to the
lack of contractual intent, the writer of the tender obviously intends to negotiate
and consider his options.

Exceptions

Intention

If a person seeking a tender shows unequivocal intention to be bound, a

tender can be construed as an offer.

In the case of Harvela Investments v Royal Trust Co of Canada [1986] AC 207, the

defendants set out a tender for their sale of shares in a company. One of the
details in the tender was that they would accept the highest offer.

Again, it can be seen that this tender negates the issue of multi-acceptance, as
the seller can only accept one bid, the highest one. Therefore, the highest bid was
considered to be an acceptance of the offer.

Tenders with collateral offers

In Blackpool and Fylde Aero Club Ltd v Blackpool BC [1990] 1 WLR 1195 the
council stipulated it would consider all tenders submitted before a specific date.
The claimants delivered their tender before the required date, but the post
wasn’t emptied by the defendant. As the defendant did not consider the
claimant’s tender, the defendant had breached the collateral contract to consider
all tenders submitted before the required date.

Presumption five - Automated machines

Automated machines posed an interesting question for the court in Thornton v

Shoe Lane Parking [1971] 2 QB 163. The court ruled that the operation of an
automatic machine is considered an offer. The reasoning behind this was mainly
based on the inability of the machine to negotiate with the customer and they
cannot reject a customer.

An interesting debate can be had about exactly when acceptance occurs. It may
be contended that the acceptance is made once an individual inserts the
coins and  chooses an option. Acceptance is not at the point of the insertion of
coins because the customer can still choose to cancel and get their coins
returned. However, if there is no coin return option, acceptance would likely be
held to be on insertion of payment.

Presumption six - Auctions

Auction without reserve: Where an auction is “without reserve” (i.e there is no

minimum priced bid required to win the auction) each bid is an offer, and when
the auctioneer ends the bidding, this is the acceptance. Therefore, each bidder
may revoke their offer at any time before the end of the bidding.

The auctioneer could, in theory, refuse to accept the offer, however, in the case
of auctions, there is a collateral contract, this is between the auctioneer and the
highest bidder, which involves the obligation to accept the highest bidder,
meaning any refusal of a highest bid would amount to a breach of contract (Barry
v Davies [2000] 1 WLR 1962).

Damages for a breach of collateral contract: The court will consider the position
the bidder would have been in if his bid was accepted. For example, if the
auctioneer declined a highest bid of £10 for an item worth £100, the price
difference between the bid and the market price of the item would be awarded -
in this case, £90.
Auction with reserve: Where an auction is “with reserve”, (i.e the owner of the
goods has set a minimum price) the auctioneer is only obliged to accept any bids
which are above the minimum price.

Advertisement of an auction: An advertisement of an auction is considered to be

an invitation to treat, meaning an individual who intended to bid on items cannot
bring an action against the auctioneer who does not auction the item. In the case
of Harris v Nickerson(1872) LR 8 QB the claimant attempted to claim for travel
expenses and the time spent travelling for the auction.

Presumption seven - online transactions

Online transactions operate on a similar basis to that of advertisements and

displays of goods. They are considered to be an invitation to treat, as the
customer has the freedom to pick and choose the items in their virtual ‘basket’
before actually committing to a purchase.

The question of where acceptance occurs is a difficult one with online

transactions. The three common points of acceptance are on acceptance of the
terms & conditions, on payment, or on shipping of the goods. Usually, the terms
& conditions of the purchase will stipulate exactly when the binding contract is
formed.

The most common position for online terms & conditions to take is where
acceptance occurs on the shipping of the goods. This may seem difficult to
reconcile with the other types of contracts, but there is a specific reason for this:
it allows the seller to avoid liability for any pricing errors. There are often pricing
errors made online, and if the acceptance takes place when the customer chooses
to buy the goods, the seller would be legally obliged to sell for that price. In
effect, this is a failsafe for any errors with the pricing.

Revocation of an offer
How to revoke an offer: An offeror may revoke an offer at any point prior to
acceptance (Routledge v Grant [1828] 4 Bing 653). In order to be effective, the
revocation must be communicated. An offer may also be revoked if there is a
fixed time for acceptance; once this period is over, there is an automatic
revocation of the offer.
Automatic revocation of an offer: An offer will automatically be revoked after a
reasonable lapse of time. ‘Reasonable’ is assessed on a case-by-case basis.
In Ramsgate Victoria Hotel v Montefiore(1866) LR 1 Ex 109 an offer was accepted
by the claimant six months after the offer, but the courts held that this offer had
been revoked due to the lapse of time.

In Ramsgate, six months was seen as a sufficient lapse of time due to the subject
matter of the contract. The contract was for the sale of shares; naturally, the price
of shares is volatile and the possibility of a significant change in price is high,
therefore it is sensible for the court to apply the lapse of a reasonable period of
time.

Examination consideration:

What might be the outcome of there being no automatic revocation for the lapse
of time? Would individuals simply leave offers open constantly until the
acceptance was more financially beneficial?

What if in Ramsgate the contract was for a purchase of something with a non-

volatile price, such as a diamond ring? Would the outcome have changed?

Third-party revocation: A third-party may also revoke the offer by communicating

this to the offeree. In order for the revocation to be effective, the third-party
must be objectively reliable (Dickinson v Dodds(1875) 2 Ch D 463).

Revocation of unilateral contracts: Unilateral contracts pose a different issue, as

there are any number of potential offerees to communicate revocation to. In the
case of unilateral contracts, the courts require the offeror to take reasonable
steps to communicate the revocation. Shuey v USA (1875) 92 US 73 suggests
revocation should occur in the same manner that it was offered. For example, if
the offer was made via a post on a website, the revocation should also be posted
on the website.

Revocation of unilateral contracts when the offeree has begun performance:  As

previously explained, unilateral contracts require the performance of an act for
acceptance. The current judicial precedent from Dahlia v Four Millbank
Nominees [1978] Ch 231 is that the unilateral contract cannot be revoked once
the offeree has embarked on performance.
Counter offers: A counter-offer from the offeree has the effect of revoking the
original offer (Hyde v Wrench (1840) 49 ER 132

Acceptance in Contract Law

Overview of Basic Principles

The purpose of this chapter is to grasp the concept of acceptance, which is in
simple terms the acceptance of the offer.  This is of course a deceptively simplistic
overview of acceptance, as there are many different forms of acceptance, and a
variety of scenarios within which acceptance may be found.  However, in brief
terms: in order for a contract to be formed, the offer must be accepted, e.g. I
accept your offer of £1,000 in exchange for my car.  Acceptance represents the
meeting of the minds of the parties to the contract - both agree to exchange
something for the other (payment, services, goods, etc.).  it is important that you
are able to distinguish between the different rules and principles governing
acceptance, and under which circumstances each rule will apply. 

Principle 1: Acceptance must be unequivocal

This essentially means that there must be nothing left to be negotiated by the
parties.  This is a simple principle, which in fact ties in with Principle 2 below.

Principle 2: Acceptance must mirror the offer

The acceptance must correspond exactly with the offer in order to be valid and
form a binding contract.

The offeree cannot accept an offer and add further terms while accepting.  For
example, A offers to sell 100 books to B for £1000.  B accepts the offer but adds
that A must deliver the books at no extra cost.  This does not mirror the offer
because it did not initially include the free delivery.  This is not valid acceptance
because it does not mirror the offer.  It is a counter offer which can then be
accepted or rejected by the original offeror, or met with a further counter offer. 
The parties can continue to make counter offers until a consensus has been
reached.

Hyde v Wrench [1840] 3 Beav 334 - Wrench offered to sell a farm to Hyde for
£1000.  Hyde responded that he would pay £950 for the farm.  Wrench rejected. 
Hyde later accepted Wrench’s original offer of £1000.  Wrench rejected again.  It
was held that there was no agreement between the parties, as Hyde had rejected
the original offer by submitting the counter offer of £950.  

A mere request for information is not a counter offer.  If the offeree asks the
offeror for more information, the original offer stands and the offeree has neither
accepted or rejected the offer.  Referring back to the above example, if B merely
asks A if the £1000 includes delivery of the books, this would be classed as a mere
request for information, not a counter offer.

Stevenson Jaques & Co. v McLean (1880) 5 QBD 346 - Mclean (M) offered to sell
Stevenson (S) iron. S asked whether he would accept delivery over 2 months, and
if not, what his longest time limit for delivery would be.  M did not respond and
later claimed that the original offer had not been accepted because S’s telegram
was a counter offer.  It was held that the telegram was a mere request for
information, not a counter offer, or a rejection of the original offer. 

It is important to understand the difference between a request for information

and a counter offer.  If you compare Hyde v Wrench and Stevenson Jaques & Co v
Mclean, you will be able to observe that, while in Hyde the offeree responded
with a completely different price, the offeree in Stevenson simply requested
information on delivery terms.  A counter offer is the offeree’s adding of terms (“I
accept but you must also deliver the books for free” or “I will pay £900 rather
than £1000”) whereas a request for information is simply a question about the
original offer (“does the price include delivery?” or “will the goods be ready for
collection in one week?”).   

Consider the justifications that underlie the distinction between a counter offer
and a request for information.  Would it be fair for an offeree to try to negotiate
better terms, and then to revert back to the original offer?  Think about the aim of
the courts.  Does it create certainty?  For whom?  Should an offeror be required to
negotiate with one party when another is ready to accept the original offer?  The
attempt here is to achieve both certainty and an equal playing field for both
offeror and offeree.  The same applies to a request for information, which
protects the offeree’s position.  In the book example, imagine that C has
approached A, accepting his offer.  If A is in the middle of negotiations with B and
is required to continue such negotiations, would it be fair? 
You may be given a scenario in which the parties make a cross offer.  An example
of this could be when A sends B a letter offering him 100 books for £1000 and B
sends A the same offer.  If the letters cross in the post, then there is no
agreement - Tinn v Hoffman (1873) 29 LT 271. 

Exam Considerations:

You may be given a scenario in which you will be required to not only identify
whether a counter offer or a request for information has been made, but also to
explain why it is one but not the other.  Be careful to address this in your answer. 
Do not simply state “X made a counter offer”.  Explore in more detail why it is not
a request for information.  Address both sides of the debate, and state “X made a
counter offer because……..it could be argued that it is a request for information
but it is unlikely that this is the case because…..”  Support your answer with
evidence from the scenario.  

Principle 3: Acceptance must be communicated to the offeror

This is a logical requirement, and should not be too difficult to grasp because the
offeror must be aware that the contract has been formed.  If B accepts A’s offer to
buy 100 books for £1000, but does not communicate his acceptance, A cannot
fulfil his part of the bargain and give the books to B.

When acceptance is by post, potential problems arise.  For example, B accepts A’s
offer, and communicates such acceptance by post.  How does B know when the
letter will arrive?  At what point does the posted acceptance form a binding
contract?  The postal rule for communication of acceptance is therefore different
to the usual rule that posted communication is legally valid once it has arrived. 
Therefore, acceptance has been communicated once the letter has been posted:

Henthorn v Fraser [1892] 2 Ch 27 - Where post is considered to be a main means

of communication within the contemplation of the parties, acceptance is
communicated once it has been posted.    

Consider the legal reasoning behind the postal rule.  To require that the letter of
acceptance actually arrive at the offeror’s address places a considerable burden
on the offeree to ensure that it arrives, which is not fair.  Therefore, in order to
balance the positions of the offeror and offeree, it is accepted that the offeree has
fulfilled his obligation by posting the letter.  He can assume that it will arrive and
should not be expected to do anything more.  The offeror, in accepting to
communicate by post, therefore accepts responsibility for the potential that the
letter may not arrive.  

This rule applies even if the letter has been destroyed, delayed or lost.

Adams v Lindsell [1818] 1B & Ald 681 - The postal acceptance rule applies even if
the letter is destroyed, delayed, or lost.  A valid contract had been formed at the
moment that the letter of acceptance had been placed in the post box.  The rule
applies when the parties have agreed to communicate by post, and when the
letters have been correctly addressed and stamped.

The postal rule can be excluded by the offeror - he can state that acceptance must
be communicated in a specific way (fax, telephone etc.), or that postal acceptance
must arrive in order to be binding.  This gives the offeror the freedom to require
that acceptance actually come to his notice.  It also relates to the above section
on the legal reasoning behind the postal rule.  The fact that the offeror is free to
exclude the postal rule means that it would be unfair to require that the offeree
take extra steps to ensure that the letter has arrived.  The offeror, in declining to
exclude the postal rule, accepts that the letter may not arrive. 

Household Fire insurance v Grant [1879] 4 Ex D 216 - The acceptance letter was

lost in the post.   The postal rule was applied, and hence acceptance was binding
once it had been posted.  Thesiger LJ opined that using the postal service as a
method of communicating is the same as putting the letter in the hands of the
recipient oneself.  Bramwell LJ most importantly added that the postal rule could
have been avoided if the offeror (G) had stated that acceptance would only be
binding when it actually reached him.  

Exam Considerations:

It is highly likely that you will be given a question or a scenario that at the very
least addresses the postal rule.  Make sure that you not only state whether the
postal rule does or does not apply, but also to address the legal reasoning
underlying the postal rule.  Household most prominently illustrates the legal
reasoning behind the postal rule as explained above.  Consider the comments of
the judges in this decision.  Do you consider them to be logical and/or fair?  These
are considerations that can be included in an examination answer on the postal
rule.  Do not simply apply the rule, explain and demonstrate that you understand
why this rule is being applied above others.

However, should the offeree use a different form of communication to that which
was specified by the offeror, this may be acceptable provided it is no more
disadvantageous than the stipulated method of communicating acceptance.

Holwell Securities v Hughes [1974] 1 WLR 155 - Hughes granted an option to

Holwell Securities (HS) to purchase his house for £45,000.  The offer stipulated
that acceptance should be in written form and returned within 6 months.  5 days
before the offer was to expire, HS posted a letter of acceptance to Hughes. 
Hughes never received the letter and HS sought to enforce the agreement by
relying on the postal rule.  It was argued that, since the letter had been posted
before the offer expired, the agreement was valid and binding.  It was held that
Hughes, in stipulating that communication of acceptance had to be in writing, he
had specified that acceptance would only be communicated upon his receipt of
the letter.  He had effectively excluded the postal rule by placing this requirement
in his offer.

The postal acceptance rule is not absolute, however.  It only applies in cases in
which the parties could reasonably contemplate that communication would be by
post.  The aim is to achieve fairness, as has been addressed.  But it could also
prove unfair for the offeror, because the offeree could omit to reveal acceptance
if, for example, the prices of goods they would have bought falls.  This illustrates
that the law cannot be completely fair, but only seek to strike a balance between
the position of offeror and offeree. 

The postal rule will also apply if the offeror has stipulated that communication of
acceptance is to be by post.  Moreover, and quite logically, if the offeree has
incorrectly addressed the letter of acceptance, or been careless in some other
manner which causes delay or failure to communicate, then the postal
acceptance rule does not apply - Getreide-Import GmbH v Contimar SA Compania
Industrial, Comercial y Maritima [1953] 1 WLR 207.

LJ Korbetis v Transgrain Shipping BV [2005] EWHC 1345 - Acceptance letter was

sent to the wrong address.  Toulson J held that there was no acceptance because
it would be unfair to bind B to an agreement that he was not aware of due to the
fault of A. 

Exam Considerations:

Note that, in the majority of cases examined until now, the focus is on fairness,
and on attempting to achieve an equal distribution of power between the
contracting parties as possible.  It would therefore give A an unfair advantage if
he was able to enforce an agreement that B was not informed of due to A’s error. 
When answering problem questions, consider the fairness of the outcome that
you are proposing, and address that this is usually the overall aim of the courts -
to achieve a fair a result as possible for both parties.

Thus far, you will have recognised certain core principles surrounding the postal
rule.  These may seem confusing and difficult to remember, but they are in fact
simple.  The list below outlines the core principles:

 It must be reasonable to accept the offer by post (Henthorn v Fraser).

 The letter must be correctly addressed and properly posted.
 The offeror can exclude post as a valid form of communicating acceptance.
 If the offeror prescribes a specific method of acceptance, then the postal
rule may be excluded (Manchester Diocesan Council of education v
commercial and general investments Ltd).
 The postal rule will not apply if it will create an absurd result (British &
American telegraph Co v Colson).

There are problems with the postal rule, and also with the use of post to
communicate offer and acceptance.  Consider, for example, that B posts his
acceptance of A’s offer of 100 books for £1000.  Before A receives the letter of
acceptance, he revokes his offer and sells the books to C.  He then receives A’s
letter of acceptance and, because he no longer has the books, is technically in
breach of his contractual obligation to B.  Due to such problems, the courts have
adopted an increasingly restrictive approach towards the postal acceptance rule. 
Refer back to Holwell Securities v Hughes  above,  in which the court accepted that
the offeror could exclude the postal rule by stipulating that he must receive
acceptance in order for a contract to be formed between them.  Contracting
parties are therefore free to determine the method of communication of
acceptance, and to avoid the problems posed by the postal rule altogether.
As technological advancements have made methods of communicating more
instantaneous, the postal rule has lost its original force and scope.  The postal
acceptance rule has therefore not been extended to include instantaneous
communication such as fax and email.  The rule in such cases is that acceptance is
binding at the time and place of receipt.  ‘Receipt’ means the point at which the
acceptance has actually reached the technology of the offeror, not when he has
actually heard or read it - Tenax Steamship Co v Owners of the Motor Vessel
Brimnes [1974] EWCA Civ 15.

Brinkibon Ltd v Stahag Stahl [1983] 2 AC 34 - When instantaneous communication

is used, the acceptance is binding when it is received.  The rationale behind this is
that, particularly in a business context, acceptance may be sent out of business
hours, or it may be read by others, or not read by the recipient at the time it
arrives.  The rule is therefore based on principles of good business practice. 
Consider the underlying justification here, and the importance attached to
fairness once again.  It is important to reiterate that acceptance need not actually
be read or heard by the offeror - it must have arrived at his computer/answer
machine.  The fairness here is based on balancing the position of both offeror and
offeree.  It would be unfair to require that the offeror actually read or hear the
acceptance, because he could fail to do so purposely if he finds another buyer,
which would be unfair for the offeree.  On the other hand, it would be unfair to
the offeror to state that acceptance is binding once it is sent, because many
different events could occur (an email could be put into offeror’s spam folder,
message could be deleted by another in the office, etc.). 

Entores v Miles Far East Corp [1955] 2 QB 327 - A in England sent offer by telex to
B in Holland to purchase 100 tons of goods.  B accepted via telex.  The court was
required to consider the point at which a binding contract had come into
existence in order to determine whether English or Dutch law would govern the
contract.  It was held that acceptance had to be actually communicated to the
offeror.  The contract was therefore held to be governed by English law - the
place at which acceptance had been received.  The court reasoned that telex
messages are almost instantaneous, similar to a telephone conversation.  The
postal rule did not therefore apply.  This is an important case because it
establishes three categories of acceptance via instantaneous communication.

(1) - Offeree is aware that acceptance has not been received, but neither party is
at fault.  There is no contract because this would produce an absurd result that
neither of the parties could reasonably have contemplated and should therefore
not be bound to it.  An example of this would be if A communicates acceptance to
B over the telephone, but the line drops before he accepts.  It would be absurd to
bind the parties to an agreement.

(2) - Offeree reasonably believes that acceptance has been received, although it
has not, but neither party is at fault.  There is no contract because an absurd
result would again arise.  It would not be fair to bind the parties to the
agreement. 

(3) - Offeree reasonably believes that acceptance has been received, although it
has not, and the offeror is at fault. There is a contract because the offeree should
not be denied the contractual agreement simply because the offeror is at fault. 
An example of this would be that the telephone line is unclear, and the offeror
does not hear the offeree’s acceptance, but does not ask him to repeat.  It would
be unfair to not hold the parties to the agreement, because the offeree could not
know that the offeror did not receive the message, and the offeror is at fault for
not stating as such.

You will see that the principle of fault serves to distinguish between these three
categories.  It is unfair to disadvantage party A due to the fault of party B.  Fault
was developed further in Brinkibon, in which Lord Wilberforce emphasised the
need for the law to be sufficiently flexible to account for many different potential
scenarios.  The concept of sound business practice plays a core role here, because
the courts will consider whether the facts of the case indicate usual business
practice (sending emails inside of usual office hours, using the company’s official
email address, etc.).   

Exam Considerations:

It is important to be able to identify the distinction between the postal

acceptance rule and the instantaneous acceptance rule.  Postal acceptance is
binding when it is posted.  Instantaneous communication acceptance is
binding when it is actually received (arrives at the offeror’s technology). Consider
why this is the case.  Imagine that the opposite applies for instantaneous
communication, and that acceptance is binding once it has been sent.  A sends B
an email, which may not have reached his computer due to a server failure, due
to the fact that his computer was not connected to the internet, etc.  There are so
many events that could intervene and prevent the offeror from receiving the
message.  Would it be fair to apply the postal rule in such cases and bind him
nonetheless?  Make sure to explore such issues and justifications when dealing
with scenario questions on instantaneous communication.

The offeror cannot state that the offeree’s silence qualifies as acceptance.  It must
be communicated.

Felthouse v Bindley [1862] EWHC CP J35 - Silence cannot amount to acceptance.

However, silence can qualify as acceptance if it is accompanied by conduct.  This

is a form of implied acceptance, which is gathered by examining the whole course
of conduct of the parties.  Note that the courts again adopt an approach based on
fairness, depending on the conduct of the parties.  It would be unfair to overlook
the fact that a party was acting as though an agreement existed, and to then
allow him to go back on it simply because a problem has arisen. 

Brogden v Metropolitan Railway(1877) 2 App Cas 666 -The companies had been
dealing with each other on a long-term and informal basis, and without any
written contract.  They agreed that they should write up a formal agreement. 
Acceptance was never communicated but the companies continued to do
business with each other.  A valid contract was found because acceptance was
inferred from the continued performance of the contract without any objection as
to its terms.   

In the case of unilateral contracts, the communication rule does not apply.  
Acceptance in such cases can be by conduct, or performance.  This is because
unilateral contracts feature an offer to pay another if a certain act is performed. 
Acceptance of the offer takes place through performance of the specified act -
there is no need to communicate acceptance.  For example, A puts an
advertisement in the local shop window offering £50 to anyone who finds his
dog.  B searches for and finds B’s dog.  He has accepted the offer by performing
the act that A requested - he need not have communicated to the offeror that he
has accepted the offer.  In searching for (and eventually finding) the dog, he has
accepted the offer by performance.  Refer to chapter 1 for the legal principles and
case law on this principle.   
Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256 CA -In the case of a
unilateral contract, there is no need for the offeree to communicate acceptance
of the offer, because acceptance is achieved through performance.

The communicated acceptance, whether it is by words or conduct, must allow

one to objectively conclude that the offeree is consenting to the terms of the
offeror.  This is an overarching rule that can apply to all cases.  It will also help you
to examine problem questions in order to determine, overall, whether a contract
can be said to have been formed.

Day Morris Associates v Voyce [2003] EWCA Civ 189 - Day Morris Associates
(DMA) approached Voyce (V), offering to sell her property in return for
commission once it had been sold.  To the knowledge of V, DMA listed the
particulars of and marketed the property.  The property was sold, but V refused
to pay commission to DMA, arguing that she had not communicated acceptance. 
It was held that V had acquiesced to the marketing of her property, and was
thereby held to have accepted DMA’s offer to market it in return for commission
upon the sale of the property.  The court stated that the test for determining
whether an agreement has been formed is objective - a reasonable person
observing the conduct of the parties would assume that V had accepted DMA’s
offer through conduct.

Scammell and Nephew v Ouston  [1941] AC 251 HL - Scammel (S) entered into an
agreement to sell a van to Ouston (O), to be paid for in monthly instalments over
2 years.  Ouston also agreed to trade his old van for £100.  A dispute arose
between the parties and S refused to sell the van to O.  The court held that there
was a lack of certainty regarding the terms of the agreement.  Although the price
had been agreed, there was no statement as to how often the instalments should
be made and how much they would be.  It could therefore not objectively be
concluded that an agreement had been formed.  

Sudbrook Trading Estate v Eggleton [1983] AC 444 HL - A lease granted tenant

Eggleton (E) the option to purchase the property at a price that was to be
determined by two surveyors - one of which would be appointed by the landlord
and the other of which would be appointed by E.  E sought to exercise the
purchase option, but the landlord declined to appoint a surveyor, claiming that
the clause did not specify a price and was therefore too vague to constitute an
offer.  The court again adopted an objective approach towards the facts of the
case, holding that the clause was not vague because it contained a process for
determining the price.

Exam Considerations:

The above three cases demonstrate the objective approach adopted by the
courts.  When reading through them, consider whether a reasonable person
observing the conduct and words of the parties could reasonably conclude that a
binding contract had been formed between them.

Principle 4: The battle of the forms

It is not uncommon for the parties to negotiate the terms of the contract, which
they do by going back and forth with different terms and stipulations.  The ‘battle
of the forms’ term arises from the fact that the parties keep changing the
standard terms of the agreement.  For example, A offers B 100 books for £1000,
and his standard terms apply that delivery costs are to be paid by the buyer.  B
responds, accepting the offer, but adding his own terms and conditions, which
state that the seller must organise and cover the costs of delivery.  In such cases it
can get confusing to determine what the terms of the agreement are, and what
the parties have actually agreed to, because of the back and forth addition and
alteration of the terms of the agreement.  This is common in commercial
agreements because the parties often have their own standard terms, which are
then either altered or met with other standard terms. The parties go back and
forth, amending the standard terms of the agreement. 

The rule in such cases is that the last shot wins,in that the last party to send the
form which is then acted upon and not explicitly rejected provides the basis for
the contract.  Contrast this to the counter offer rule, under which the counter
offer must be accepted or rejected. 

BRS v Arthur V Crutchley Ltd [1968] 1 All ER 811 - A delivered a consignment of

whisky to B to be stored at B’s property.  The delivery driver gave B a delivery
note which incorporated A’s conditions of carriage.  B signed the delivery note to
show that he had received the consignment, and also wrote on the note that it
was received under his own conditions.  The whisky was then given to B.  The last
shot rule was applied by the court.  B’s writing on the note of his own conditions
constituted a counter offer which had been accepted by A through conduct, as in,
the handing over of the consignment of whisky.     

Butler Machine Tool v Ex-Cell-O Corporation [1979] 1 WLR 401 (CA) - Ex-Cell-O (E)
approached Butler (B) with the intention of purchasing a machine.  B offered E the
machine for £75,535, and sent the offer along with a copy of their standard terms
of sale.  Included in the terms was a price variation clause, as well as the
stipulation that B’s terms would override any terms submitted by E.  E ordered
the machine at the offered price and sent their own set of terms which did not
include B’s price variation clause.  Accompanying the order was a slip stipulating
that the contract would be subject to E’s terms, and which required that B sign it
and return it to E.  B signed and returned the slip, and the machine was
delivered.  B sought to enforce the price variation clause, which demanded that E
pay an additional sum, which E refused to pay.

It was held that E, in responding to the original offer with its own terms, had
responded to the original offer with a counter offer.  The price variation clause
contained in B’s original terms of sale was therefore not a part of the contractual
agreement.  E’s counter offer had been accepted by B’s act of signing the
acknowledgement slip accompanying and referring to E’s terms. 

It is appreciated that this is a somewhat complex case and it can indeed get
confusing.  However, it is merely necessary to recognise the points at which an
offer, a counter offer, and an acceptance of the counter offer took place.  This is
best achieved (and will aid in deconstructing problem questions) by breaking the
scenario down into a timeline as follows:

1. B offers E machine for £75,535, with B’s terms of sale (original offer).
2. E placed order with its own terms of sale and acknowledgment slip
(counter offer).
3. B signed acknowledgement slip (acceptance of counter offer).

Recognise that stage 2 represents a counter offer because E’s terms of sale were
different to B’s terms of sale.  Remember that only acceptance of exact terms
qualifies as acceptance, whereas the changing of terms qualifies as a counter
offer.  This case also demonstrates the ‘battle of the forms’ principle explored
below.  When each party submits their own terms, the courts will apply the last
shot rule, under which the terms set forth by the last party will govern the
contract.

Exam Considerations:

You may be given a complex scenario, in which the parties go back and forth,
altering terms.  This can get daunting, but you can make it more palatable.  The
best method of structuring complex situations is to separate them into a timeline
of events, which can then be labelled appropriately (original offer, counter offer,
acceptance, etc.).  See the above example under Butler.

Principle 5: end of acceptance period

An offer does not last forever, and an offeree does not have an unlimited time
frame within which he may accept an offer.  The valid period of an offer may end
in a variety of situations.

If the offeror changes his mind and revokes the offer.

Routledge v Grant [1828] 4 Bing 653 - A offered to purchase B’s house and gave
him 6 weeks to accept the offer.  Before the 6 weeks had passed, A withdrew his
offer.  B sought to accept the offer, claiming that the 6 weeks’ time limit had not
passed and was therefore still valid. It was held that A was free to withdraw his
offer because there was no contract.

Offord v Davies(1862) 12 CBNS 748 - D agreed to secure funds given to a third

party on discount for 12 calendar months.  It was held that this offer could be
withdrawn before the 12 months had passed because it had not been acted upon.
It was further emphasised that the withdrawal of an offer must be
communicated.

If the offeror stipulates a specific deadline for acceptance of the offer, the offeree
cannot accept it once the deadline has passed. The offeror can still withdraw the
offer before the deadline, provided it has not been accepted by the offeree - Hare
v Nicholl(1966) 1 All ER 285. 

As has been stated above under Offord v Davies,  revocation of an offer must be

communicated in order to be validly withdrawn.
Byrne & Co v Leon Van Tien Hoven & Co [1880] 5 CPD 344 - Van Tien Hoven (VTH)
posted letter from Cardiff to Byrne (B) in New York, offering 1000 boxes of tin to
be sold on 1 October.  B received the letter on 11 October and sent acceptance of
the offer via telegraph on the same day.  On 8 October, VTH had sent a further
letter to B, withdrawing the offer.  It was held that revocation of an offer must be
directly communicated to the offeree.  The postal rule does not therefore apply to
revocation of offer, as it is only valid once it is received by the offeree.

The offeror himself does not need to communicate revocation - it can be achieved
through a third party or other reliable source: Dickinson v Dodds(1876) 2 Ch D
463.  See chapter 1 on offer for elaboration on this issue, as it is more relevant to 
offer.

The offeree’s rejection of the offer will cause it to expire: Hyde v Wrench  [1840] 3

Beav 334.

If the offeree changes his mind, problems can arise. For example, B accepts A’s
offer of 100 books for £1000, and posts a letter of acceptance.  However, before
the letter arrives at A’s address, B telephones A and rejects the offer.  Which
method of communication applies first in such a scenario?  There are no English
cases on this matter, illustrating that it is indeed rare, although not impossible.  It
is worth considering cases decided in other jurisdictions, although they are of
course not binding in England. 

Dunmore v Alexander (1830) 9 Sh 19 - A Scottish decision in which it was held that

postal acceptance can be withdrawn by faster means of communication.  This
case should not be relied on as an authoritative decision - it is merely an example
of the approach that can be taken in such cases.

Wenkheim v Ardnt(1873) 1 JR 73 - A New Zealand case in which a letter of

acceptance was sent, and a revocation of the acceptance letter was
communicated by telegram.  The court held that the revocation by telegram was
not valid.  Again, this is not binding in the UK, but it is interesting to observe a
different approach to that adopted in Dunmore v Alexander.

You may refer to the above cases to determine what may be the case if such a
situation was to arise in England.  The general approach appears to be that the
courts will consider whether the offeror would be subject to unjust consequences
by allowing the offeree to revoke acceptance by faster means of communication,
having accepted the offer by post.

An offer will terminate if a condition of the offer is absent or unfulfilled.  For
example, if B accepts the offer of 100 books for £1000 and the books have
become badly damaged (the offeror in his original offer stated that the books are
in good condition), then the offer, and acceptance, are no longer valid
-  Financings Ltd v Stimson [1962] 3 All ER 386.

An offer will end upon the death of the offeror.  The general rule is that the death
of either the offeror or the offeree means that there can be no
agreement: Dickinson v Dodds  (1876) 2 Ch D 463.  Therefore, if the offeror dies
and the offeree is aware of this, he cannot accept the offer: Bradbury v
Morgan [1862] 158 ER 877.

Learning Outcomes - You should be able to:

 Explain and distinguish between valid and invalid acceptance.

 Distinguish between a counter offer and an invitation to treat.
 Determine when acceptance has been communicated.
 Explain what happens when the offeror stipulates the method of
communicating acceptance.
 Demonstrate the importance of communicating acceptance.
 Recognise when the need to communicate acceptance does not apply.
 Describe the postal acceptance rule and when it applies.
 Recognise when the postal acceptance rule does not apply.
 Recognise when the parties are free to withdraw from negotiations.
 Distinguish between instantaneous and non-instantaneous forms of
communicating acceptance, and when they are valid.
 State how and when an offer expires.

Certainty & Intention to Create Legal Relations

This lecture covers certainty and the intention to create legal relations as part of

our contract law series of lectures.

Certainty
Introduction
Once there is valid offer and acceptance, an agreement is formed. The next
requirement for such an agreement to be enforceable as a legally binding
contract is its certainty.

An agreement may not qualify as a valid and enforceable contract if it lacks

certainty, as upheld in the early decision in Guthing v Lynn, (1831) 2 B7 Ad 232. 
For instance, where a son sought to avoid a promissory note on the pretext of a
promise made to his father to not challenge the distribution of wealth under the
latter’s will, the court rejected the plea as the promise being too uncertain- White
v Bluett, (1853) LJ Ex 36.

However, the extent of certainty necessary to validate an agreement depends on

the facts of individual case, leaving much scope for judicial interpretation.  Thus,
while a failure to describe a vital term (such as price, rent, quality, quantity, time
period) is likely to render an agreement without effect, it is not always necessary
to fill in every detail, for instance- even if the agreement envisages future
documentation, it may nonetheless constitute a binding contract- Harvey v ADI,
[2003] EWCA Civ 1757. Although an estimate or quotation is normally not
regarded as having contractual effect, the result may vary - as in case of
quotations against tenders culminating into a binding contract- Blackpool Aero
Club v Blackpool BC, [1990] 3 All ER 25. 

Another genre of agreements causing ambiguity is one which is subject to

conditions precedent. A condition precedent is an event which must occur before
performance of the contract is due.  While such an agreement may not be fully
effective until the conditions are fulfilled, it may nevertheless be binding upon the
parties insofar as completing those conditions are concerned- Ee v Kakar, (1979)
124 SJ 327.  The problem intensifies further in the context of open contracts,
specifying only the parties, property and price, under broad heads- Bigg v Boyd
Gibbins, [1971] 2 All ER 183.

Despite the peculiarity arising from varying facts and circumstances of each case,
the uncertainty vitiating a contract may be broadly classified into two categories:
(a) vagueness, and (b) incomplete agreement, discussed below.

Vagueness
Where an agreement is too vague and abstract, such that no definite meaning can
be accorded to it without altering the original terms or adding new ones, the
courts will refrain from substituting its own will over the parties’ intent, and thus,
not enforce the agreement-Mileform Ltd v Interserve Security Ltd, [2013] EWHC
3386.  For instance, in G Scammell & Nephew v Ouston, [1941] AC 251, it was held
that an agreement to buy goods on hire-purchase, without specifying the exact
kind and terms of it, was not enforceable.  Likewise, an agreement subject to
satisfaction of another party has been reckoned as vague and incapable of
enforcement, in Stabilad Ltd v Stephens & Carter, [1999] 2 All ER 651.  An
estoppel or action by a party cannot be cited to remedy the inherent gaps in the
contract, although a claim for restitution may apply- Easat Antennas Ltd v Racal
Defence Electronics Ltd, [2000] All ER (D) 845.

Also, where the court is of the opinion that an agreement is no more than an
agreement to agree, enforcement has been negated, for instance, in Barbudev v
Eurocom Cable Management Bulgaria, [2011] EWHC 1560, and Dhanani v
Crasnianski, [2011] EWHC 926. In the former case, the court, while deciding upon
the enforceability of a side letter issued in relation to a merger deal, held that
agreement could not be enforced if it is uncertain and vague in its entirety.  In the
latter case, an agreement and a term sheet requiring the parties to do their best
towards setting up a private equity fund were found to have much left to be
decided in future, and thus, held to not constitute enforceable contract.

Methods of resolving vagueness

1. Use of business customs and trade usages: Not all agreements apparently
vague are, however, rendered unenforceable.  Rather, courts, in the
interest of contractual sanctity and commercial needs, tend to cure any
gaps through business, customs and trade usages, wherever
possible- Courtney v Fairbairn Ltd v Tolaini Bros (Hotels) Ltd, [1975] 1 All ER
453.  Thus, the likelihood of an agreement getting vitiated due to
uncertainty is lesser in the business/commercial context, as parties can fill
the gap through ordinary course of dealings, trade customs and usages- as
was the case in British Crane Hire v Ipswich Plant Hire, [1974] 1 All ER 1059. 
In this case, an agreement over the telephone was held valid, owing to the
standard forms subsequently circulated of which practice the hirer was
aware of.  Having said that, the same outcome may not follow where one
of the parties is not accustomed to the usual business trends- Hollingworth
v Southern Ferries, [1977] 2 Lloyd’s Rep 70.  In another case, the term “not
less favourable” in relation to remuneration in the agreement was
 interpreted to mean of an equivalent value or more, and thus, was upheld
as clear and certain clause- Leeds Rugby Ltd v Harris, [2005] EWHC 1591.
2. Reasonableness:The aspect of reasonableness is also used by courts to
rectify uncertainties, as was done in Hillas & Co v Arcos Ltd, (1932) 147 LT
503.  This case concerned an agreement for sale of timber of certain fair
specification, which was contended as being vague and uncertain.  The
court, applying the standard of reasonableness and objective standards of
quality, upheld the agreement.  More recently, the standard was applied
in MRI Trading AG v Erdenet Mining Corporation LLC, [2012] EWHC 1988, to
uphold a delivery contract based on a reasonable shipping schedule where
it was not expressly so agreed upon.
3. Doctrine of severability:The doctrine of severability can also come to
rescue an uncertain clause, i.e., court may ignore the vague clause and
effectuate the remaining agreement.  This was done in Nicolene Ltd v
Simmonds, [1953] 1 QB 543, where the sale was subject to usual conditions
of acceptance, although no such conditions existed.  The court, ignoring the
phrase as meaningless, upheld the other parts of the contract.  Similarly, a
self-contradicting arbitration clause in ERJ Lovelock v Exportles, [1968] 1
Lloyd’s Rep 163, was disregarded to validate the other provisions.
4. The contract itself:The courts may also identify a mechanism inherent in
the contract itself by which ambiguity is to be resolved. The case of Foley v
Classique Coaches Ltd,[1934] 2 KB 1 is an example of this, whereby the
contract had a term stating any ambiguity would be resolved by arbitration.

Incompleteness
While an agreement does not require to contain all minute details, it should
nevertheless be complete insofar as the vital or essential terms are
concerned- Grow With Us Ltd v Green Thumb (UK) Ltd, [2006] EWCA Civ 1201. 
Thus, while period of a lease and identification of property in conveyance are
important (Harvey v Pratt, [1965] 1 WLR 1025, and Bushwall Properties v Vortex
Properties, [1976] 1 WLR 591), price in a sale of goods may not be that critical as it
can be ascertained by standard of reasonableness.  The latter is corroborated by
section 8(2) of the Sale of Goods Act of 1979, and upheld in Foley v Classique
Coaches Ltd, [1934] 2 KB 1.  A contrast ruling is however found in May and
Butcher Ltd v The King, [1934] 2 KB 17, where the court held that price is an
essential of sale, and thus, where price is left to be agreed between the parties,
there is no contract- a view given restricted play in contemporary times. While
both the cases had an arbitration clause, what distinguished Foley from May and
Butcher was that the arbitration clause in the former was to apply in case of
“failure to agree” on a price (a certain mechanism) as against the arbitration in
the latter which was to be triggered in case of dispute over “disagreement” about
the price.  Having said that, this very fine line of distinction is difficult to
demarcate in every case.  Similar reasoning over absence of arbitration clause was
applied in King's Motors (Oxford) Ltd v Lax, [1969] 3 All ER 665.

In the context of interest payments on a loan, a clause varying the rate from time
to time in accordance with mortgage conditions was held to be not completely
unfettered, and thus, valid- Paragon Finance v Nash, [2001] EWCA Civ 1466. An
agreement enclosing only bare essentials may be reckoned as complete if that is
so intended by parties.  Accordingly, in Perry v Suffields Ltd, [1916] 2 Ch 187, an
agreement to sell a house was upheld, notwithstanding that it did not address
important features like payment of deposit, and completion.   Similarly, where the
core terms in respect of product, price, and quantity were agreed upon in a sale
of goods, incompleteness as regards port of shipment was held to be
immaterial- Pagnan SpA v Feed Products, [1987] 2 Lloyd’s Rep 601.

Methods of resolving incompleteness

1. Determination by contracting party: Where the clause provides for

resolution of an incomplete provision, such as valuation, by one of the
contracting parties, the contract may be valid, as was upheld in relation to
the seller’s duty to specify place of delivery in a FOT contract, in Bulk
Trading Co v Zenziper Grains and Feedstuffs, [2001] 1 Lloyd’s Rep 357.
2. Determination by third party or mechanism: Similar to the above,
determination by a third party or an identified methodology outside of the
agreement can remedy uncertainty, such as deciding upon the price by
valuers to be nominated by each party has been upheld to be a complete
and certain clause, in Sudbrook Trading Estate v Eggleton, [1983] 1 AC 444.
This case however must be distinguished from Gillatt v Sky Television,
[2001] 1 All ER 461, where valuation of shares to be determined by an
independent chartered accountant was held to be essential and integral to
the agreement, and thus, the clause stood vitiated due to uncertainty.

Certainty must be tested only against the essential and vital terms of the
agreement, i.e., clauses integral to it.  Vagueness or incompleteness relating to
ancillary matters can be ignored while ascertaining the enforceability as a
contract.

Conclusion
Owing to the fact specific interpretations, consequences of alleged uncertain
clauses may be highly unpredictable under English contract law. Having said that,
courts have moved much ahead of the restrictive approach exhibited in May and
Butcher, to accord validity to party intentions as much possible.  The tension
nonetheless still prevails, as courts would not wish to devise a contract for the
parties on one hand, while also being reluctant to deny a valid one on minor
discrepancies, on the other hand (KC Sutton, ‘The Uncertainty of Certainty of
Contract’ (1981) 5(1) Ontago Law Review 11). 

Further, with advent of complex commercial products like pre-emption rights and
options (i.e., an agreement by which one party gets the right to buy at a price to
be agreed, if the other wishes to sell in future, has been upheld to be valid
agreement, in Pritchard v Briggs, [1980] Ch 339), the determination of contractual
certainty has become all the more debatable.

Certainty of agreement is the first step.  Only if an agreement is certain as regards

its essential features, then the next check of contractual intent (intention to
create legal relations) arises- Baird Textile Holdings v Marks & Spencer, [2002] 1
All ER 737.

Intention to Create Legal Relations

Introduction and Origin
Intention to create legal relations, or animus contrahendi, can be explained as the
agreed intention to be legally bound by a contract between the parties.  While
intention to create legal relations is acknowledged as a central contractual
element, its requirement as a necessary constituent or characteristic of a valid
contract is much debated. One school advocating the objective theory of contract
law lead by Williston and Tuck argues that so long as consideration is found to
exist, what the parties contemplated as regards the legal enforceability of the
agreement is not relevant. On the other hand, the subjective theory enunciates
that the intention to create a contractual legal relation is a prerequisite for a
complete contract to arise, as argued by Treitel, Anson and Cheshire- “In order
that an offer may be made binding byacceptance, it must be made in
contemplation of legal consequences. A mere statement in the course of
conversation will not make a binding promise, though it be acted upon by the
party to whom it was made”- WR Anson & EW Huffcut, Principles of the English
law of contract (Clarendon Press series 1879) 47.

The advent of the intention of parties can be traced back to the seventeenth
century legal thinkers like Pufendorf and Simpson, who emphasised on the
principle that “expressions not intended to be binding do not constitute a
promise” and that courts must distinguish a genuine promise from a mere puff-
WB Simpson, ‘Innovation in Nineteenth Century Contract Law’ (1975) 91Law
Quarterly Review247, 264.  This was later supported by Savigny’s Will Theory
laying down the premise that the “law of contract protects the wills of the
contracting parties”- D Kennedy, 'From the Will Theory to the Principle of Private
Autonomy: Lon Fuller's "Consideration and Form"' (2000) 100 Columbia Law
Review 94, 115.

As a corollary, a statement so vague, not seriously meant, or one of opinion does

not make a contract.  For instance, in Weeks v Tybald, (1605) Noy 11, where the
defendant published an advert agreeing to pay certain sum of money to a suitor
for his daughter’s marriage, the court declined to effectuate such general words. 
Likewise, Lord Stowell commented that contracts ought not be “sports of an idle
hour, mere matters of pleasantry and badinage” not intended to have legal
repercussions- Dalrymple v Dalrymple, (1811) 2 Hag Con 54, 105. Also, the
description of a product as being fool proof was held to have no contractual
consequences in Lambert v Lewis,[1982] AC 225.  On a similar note, oral
statements made in the course of negotiations do not assume the status of
contract, if not so intended- Heilbut, Symons & Co v Buckleton, [1913] AC 30,
reiterated in IBA v EMI Electronics, (1980) 14 Build LR 1.  Thus, in the English law
of contemporary times, intention to create legal relations, or animus contrahendi,
stands, parallel to consideration, as a necessary condition to a valid contract. 

Development - Journey of Case Law

While hints of the intention to create legal relations as a contractual requisite can
be found in the 1893 Court of Appeal decision in Carlill v Carbolic Smoke Ball
Company, [1893] 1 QB 256, the case of Balfour v Balfour, [1919] 2 KB 571,
provided for it as a separate formative constituent of contract.  The case involved
an alleged contractual breach bythe husband in respect of his promise to provide
a certain monthly payment to his wife while he worked overseas. The court, while
ruling that such promise was not enforceable, held that such agreement between
husband and wife “do not result in contracts even though there may be what as
between other parties would constitute consideration for the agreement…they
are not contracts because the parties did not intend that they should be attended
by legal consequences”- Balfour v Balfour, 578-9.  Although widely criticised, this
decision still stands as a good law in the English jurisprudence, and has also
founded the presumption that domestic agreements do not create enforceable
obligations.

Test of Reasonableness
While the question of intention to create legal relations is one of fact, the court
does not look into the minds of the parties. Instead, it assesses the circumstances
to ascertain if a reasonable person would regard the agreement as having legal
consequences.  In other words, while the promisor may not anticipate that the
promise would give rise to any legal obligation, he may nonetheless be bound by
it if a reasonable person would consider that there was an intention to be so
bound. 

Thus, the test is an objective one, regardless of the subjective belief or opinion of
any of the parties, as upheld in the recent case of RTS Flexible Systems Ltd v
Molkerei Alois Müller, [2010] UKSC 14.  This position can be inferred from the case
of J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd, [1976] 1 WLR 1078,
where the court worked closely on the objective test to prevent the promisor
from relying upon his subjective intention not known to the customer of not to
enter into a contractual relationship.  Also, in Smith v Hughes, (1871) LR 6 QB
597,it was decided that the intention is to be determined from the perspective of
a reasonable man, regardless of what the actual intentions could be.  Lord
Donaldson, in Summit Investment v BSC, [1987] 1 Lloyd’s Rep 230, described
parties actual/subjective intentions as “happily irrelevant”.  Likewise, in the
recent case of Pennyfeathers Ltd v Pennyfeathers Property Co Ltd, [2013] EWHC
3530 (Ch), the court ruled that, as a reasonable observer would not have so
concluded, the parties did not have the subjective intention to form a binding
buy-out contract, thereby upholding the test of reasonableness.
The question is whether the parties reasonably believed themselves to be
entering into a contract, as against them foreseeing a legal action in the event of
breach, as elucidated in Albert v Motor Insurer’s Bureau, [1972] AC 301. Thus, an
agreement to give effect to pre-existing rights (with no intention to create any
new contract) was held to not create legal relations- The Happy Day, [2002] EWCA
Civ 1068.  Accordingly, where the promise is vague and uncertain, the intention
may be negated considering that the parties would not have
believed/contemplated to be bound by such vague statements, as witnessed
in Dickinson v Abel, [1969] 1 All ER 484.  For instance, a promise made by a
property developer to a firm of solicitors in respect of a proposed development
was held to not be a contract in the absence of definite commitments- JH Milner
v Percy Bilton, [1966] 1 WLR 1582; and a promise by a husband to deserted wife
allowing her to stay at matrimonial home for a not specified period or terms was
held to have no contractual effect- Vaughan v Vaughan, [1953] 1 QB 762.  On a
similar note, a promise induced merely by emotions cannot reasonably conclude
a contractual intention, as evidenced in Licenses Insurance Corporation v Lawson,
(1896) 12 TLR 501.  

The burden of proof as regards establishing the contractual intention depends

much upon the nature of the agreement, i.e., implied or express.  While the
courts must be able to affirmatively and confidently conclude of legal relations in
the former, the burden is on the other party to assert that no legal effect was
intended from the express stipulations, in case of the latter- New Hampshire
Insurance v MGN, The Times (28 July 1995).  Having said that, the onus of proof is
governed by presumptions in certain specific categories of contracts, discussed in
detail below.

The test of reasonableness applies only where the facts trigger no presumption of
contractual intent.

Presumption 1 - Domestic Agreements

Such presumption against contractual intention in domestic agreements

emanates as a matter of public policy, i.e., marital and household arrangements
ought to be customarily kept outside the realm of contracts and judicial
enforcement, regardless of the presence of any consideration.  Accordingly, an
agreement to nurse a child or to gift a flat by a mother to daughter is held to be
not constituting a contract- Ellis v Chief Adjudication Officer, [1998] 1 FLR 184.  It
was on the same basis that an arrangement between husband and wife in respect
of a dress allowance was held to be unenforceable in Cohen v Cohen, (1929) 42
CLR 91, much on the same lines as Balfour v Balfour (from which the presumption
can be originally traced).

The presumption has been held to be relevant and applicable in a plethora of

subsequent cases, for example, in the context of an agreement between a mother
and daughter in Jones v Padavatton, [1969] 1 WLR 328.  In this case, the mother
promised to maintain the daughter if the latter left her job, which maintenance
was later altered to provide for rent free accommodation in the former’s house. 
When the mother subsequently claimed possession of the house, the daughter
resisted it on the ground of contractual promise by her mother. The court, ruling
in favour of the mother, held that the agreement was purely a domestic
arrangement which triggers the presumption that the parties never intended to
create stiff contractual relation or be bound by it.

Rebuttal of the presumption

1. Lack of cohabitation: The presumption above has a limited scope and can
be rebutted.  For instance, an agreement where the husband and wife have
separated was held to be enforceable in Merritt v Merritt, [1970] 1 WLR
1211.  Similarly, in Popiw v Popiw, [1959] VR 197, where a wife (who had
left her husband) agreed to return, relying on his promise of putting the
matrimonial home under their joint ownership, the court ordered the
enforcement of the husband’s promise.  These cases may be used to
decipher that while cohabitation, whether as married couple or otherwise,
is a strong indicator for the presumption to apply, absence of it is
conversely a ground of rebuttal.  More recently, the court opined in Frank
Kofi Otuo v Jonathan David Morley, Watch Tower Bible and Tract Society of
Britain, [2016] EWHC 46 (QB), that simply because the context of personal
relations is religious, intention cannot be negated.
2. Commercial attributes: Similarly, where the context of the agreement
being entered upon has commercial attributes, the court may consider the
presumption to have been rebutted- Snelling v John G Snelling, [1973] 1 QB
87. Thus, agreements not relating to household maintenance, but for
commercial partnership, family business, or employment purpose are not
 presumed unenforceable, only because the parties are married or cohabit,
as envisaged in Nunn v Dalrymple, The Times (3 August 1989). Examples
may be agreement between a husband and wife relating to sharing of bank
accounts, ownership of property, tenancy, or use of assets- Granatino v
Radmacher, [2010] UKSC 42.  Likewise, as between parents and children, an
agreement by which a house is bought for the children on the condition
that they will pay certain sum of money every week to pay off the purchase
price, was held to be a contractual license in Hardwick v Johnson, [1978] 1
WLR 328.  Also, regardless of cohabitation, an independent agreement to
share certain prize between persons staying in the same house is legally
binding.
3. One party has acted upon the promise to a detriment: Further, the
presumption may be rebutted where one party has acted upon a promise
to its detriment relying upon such agreement.  In Parker v Clark, [1960] 1
WLR 286, where a couple were induced to sell their house and move in
with their elderly relatives on the promise of a share in certain joint
property, the court rejected the presumption of non-enforceability of the
promise. Similarly, where a man promises a woman (with whom he
cohabits) to make available to her the house for their children, based on
which she vacates her rented flat, the court infused contractual effect to
such promise- Tanner v Tanner, [1975] 1 WLR 1346. On that note, a
promise of vesting interest in property so as to procure contribution from
the other party towards improving such property was held enforceable
in Eves v Eves, [1975] 1 WLR 1338.  This is in contrast to Pettitt v Pettitt,
[1970] AC 777, where the husband, after divorce, claimed an equitable
interest in the house for which he had expensed on its repairs and
decoration while still being in marriage.
4. Executed agreements: A difference in the applicability of the presumption
may also lie in the context of executed and executory contracts, as purely
executory agreements are generally not enforced- White v Blackmore,
[1972] 2 QB 651.  Thus, courts may apply the presumption more strongly in
domestic cases when none of the parties has performed its side of the
bargain, affirmed in the case of Merritt v Merritt, and Rob Purton Richwood
Interiors v Kilker Projects Limited, [2015] EWHC 2624.

There is, however, no exhaustive list of circumstances or cases for the

presumption to apply or be rebutted, much of which depends on judicial
determination on a case-to-case basis.
Presumption 2 - Social Agreements

Similar to domestic and household agreements, the presumption against the

intention to create contractual consequences applies to social agreements too. An
example in this regard is demonstrated in Lens v Devonshire Club, The Times (4
December 1914), where it was held that a winner of certain golf tournament was
not entitled to legal remedies to recover the prize.  Although reiterated in White v
Blackmore, [1972] 2 QB 651, the position has however evolved since then to
recognise a legal relationship between the competitor and the organiser, as more
recently ruled in O’Brien v MGN Ltd, [2002] CLC 33.

Other illustrations may be an agreement of hospitality- Wyatt v Kreglinger &

Fernau, [1933] 1 KB 793; a car pool between friends or neighbours, even if one
party bore the costs of the other’s vehicle- Coward v MIB, [1963] 1 QB 259; an
agreement for musical performances by friends- Hadley v Kemp, [1999] EMLR
589; sharing of house - Monmouth BC v Marlog, The Times (4 May 1994); and
provision of rent free accommodation to close friends- Heslop v Burns, [1974] 1
WLR 1241.

Rebuttal of the presumption

Similar to domestic agreements, the presumption in social agreements is

rebuttable too, as was done in Simpkins v Pays, [1955] 1 WLR 975.  In this case,
the parties (a grandmother, a granddaughter, and a lodger) lived in the same
house. They participated in certain competition via newspaper every week, and
shared the fee and postage between themselves, on the promise to share the
prize money.  Later, when one party (grandmother) refused to share the prize on
the ground that they never intended any legally binding relation, the court
reckoned the presumption to have been successfully rebutted (given that an
outsider- lodger was also involved in the agreement) so as to rule that a valid
contract existed.

Presumption 3 - Commercial Agreements

Much in contrast to domestic and social agreements, the presumption in

commercial agreements lies in favour of contractual construct, i.e., the courts
presume that parties intended to create legal relations in a commercial
arrangement. 
A leading case on this is Esso Petroleum Ltd v Commissioners of Customs and
Excise, [1976] 1 WLR 1. Esso had implemented a sales promotion scheme under
which it offered to give certain coins to every purchaser of four gallons of petrol. 
When a tax was sought to be levied on the coins, the court went on to consider
whether the coins were been supplied by Esso by way of a legal obligation or as a
gift, and concluded that there was an intention to create legal relation.  In ruling
so, the court reasoned (Lord Simon)-

I am … not prepared to accept that the promotion material put out by Esso was
not envisaged by them as creating legal relations between the garage proprietors
who adopted it and the motorists who yielded to its blandishments. In the first
place, Esso and the garage proprietors put the material out for their commercial
advantage, and designed it to attract the custom of motorists. The whole
transaction took place in a setting of business relations. In the second place, it
seems to me in general undesirable to allow a commercial promoter to claim that
what he has done is a mere puff, not intended to create legal relations. The coins
may have been themselves of little intrinsic value; but all the evidence suggests
that Esso contemplated that they would be attractive to motorists and that there
would be a large commercial advantage to themselves from the scheme, an
advantage in which the garage proprietors also would share”- Esso Petroleum, 5-
6.

Prior to Esso, the presumption was evident in Edwards v Skyways, [1969] 1 WLR
349, where an agreement to pay an ex-gratia payment was upheld as binding and
legally enforceable. Also, in McGowan v Radio Buxton, (2001), where a claimant
of a prize in a radio competition alleged breach of contract, the court found the
intention to create legal consequences, and thus, awarded her damages. More
recently, the presumption was upheld in the context of construction contract
in Malcolm Charles Contracts Ltd v Crispin, [2014] EWHC 3898.

Needless to state, the presumption in commercial agreements is much stronger,

and thus, instances of its rebuttal are few.  Accordingly, courts have confirmed
contractual intent even where the agreement was stated to have been fixed in
good faith (as in The Mercedes Envoy, [1995] 2 Lloyd’s Rep 559), or executed as an
honourable engagement (as in Home and Overseas Ins Co v Mentor Ins Co (UK),
[1989] 1 Lloyd’s Rep 473).  More so, in cases of agreements where one party has
acted upon it, notwithstanding that such agreement may contain a disclaimer or a
“without prejudice” clause to avoid such contractual intent- Tomlin v Standard
Teles & Cables Ltd, [1969] 1 WLR 1378.

Rebuttal of the presumption

1. Collective agreement between trade union and employer: An exception to

the presumption, however, is a collective agreement between a trade
union and an employer, which is presumed not to be legally enforceable, as
upheld in Ford Motor Co v Amalgamated Union of Engineering and Foundry
Workers, [1969] 2 QB 303, and reiterated in Kaur v MG Rover, [2005] IRLR
40. 
2. Honour clause:Another exception is an honour clause, which has been
upheld to have the effect of preventing a contract from coming into
existence, in Rose and Frank Co v JR Crompton and Bros Ltd, [1925] AC 445. 
In this case, the agreement contained a provision stating- “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 ..., but it is only a definite expression and record of the
purpose and intention of the three parties concerned to which they each
honourably pledge themselves”. Similarly, honour clause prevented a legal
claim in Jones v Vernons’ Pools Ltd, (1938) 2 All ER 626.
3. Pre-contractual promise, comfort letter or letter of intent: On a similar
note, contractual intent may be negated in the commercial context where
the promise is made at a pre-contractual stage, or the agreement is
captured in a letter of intent or a comfort letter, as was the case
in Kleinwort Benson Ltd v Malaysian Mining Corporation, [1989] 1 WLR
379.  Having said that, such rebuttal is not absolute, as a letter of intent
may be held to constitute a collateral contract where the parties have acted
upon it over a long period or expensed considerable monies on it, as ruled
in Turriff Construction Ltd v Regalia Knitting Mills, (1971) 22 EG 169, and
reiterated in Wilson Smithett & Cape Sugar Ltd v Bangladesh Sugar and
Food Industries Ltd, [1986] 1 Lloyd’s Rep 378.   Lastly, in the absence of
formal written agreement or record where it is normally and reasonably
expected, the intent may be negated, as in relation to agreement with State
authorities or understandings in company board meetings- Meates v
Westpac Corp, The Times (5 July 1990).

Intention versus Consideration

The principle of consideration will be explored in depth in the next chapter. It is
important to note that scholars have always been at loggerheads in relation to
the necessity of intention versus consideration, as constituents of a valid
contract.  While Hepple and Hedley argue that intention is a misleading concept
for which there is no place, over and above the prerequisites of offer, acceptance
and consideration (BA Hepple, ‘Intention to Create Legal Relations’ (1970) 28
Cambridge Law Journal 122; and S Hedley, ‘Keeping Contract in its Place - Balfour
v Balfour and the Enforceability of Informal Agreements’ (1985) 5 Oxford Journal
of Legal. Studies 391), it is advocated by others that consideration by itself is
indicative of such intention, more particularly, in the common law countries (B
Gulati, ‘Intention to Create Legal Relations: A Contractual Necessity or an Illusory
Concept’ (2011) 2 Beijing Law Review127). 

Having said that, English law provides otherwise.  It is clear from the court
decisions (discussed above) that contractual intent and consideration are two
distinct aspects, i.e., aside to consideration, an agreement must be backed by the
additional element of intention to create legal relation/effect legal consequences,
so as to constitute a valid enforceable contract.  Thus, a move to "go back" to the
orthodox English position is advocated by some contemporary commentators (Z
Liao, ‘Intention to Create Legal Relations and the Reform of Contract Law: A
Conservative Approach in the Modern Global Era’ (2013) 4(2) Beijing Law Review
82), and which continues to be the prevailing legal position of today. 

Intention to create legal relations and consideration are distinct (and therefore to
be separately tested) constituents of a valid contract under English law.  The two
elements may however coincide or overlap in the practical context- White v
Bluett, (1853) 23 LJ Ex 36.

Conclusion
Intention to create legal relations, as distinguished from consideration, is a well-
established norm under English contractual law.  While the two elements are
doctrinally distinct, their separate enforcement (due to a potential overlap) is not
always easy from a practical standpoint, more so, as intention itself may not be
equivocally be identified in certain cases- firstly, because such intention relates to
the parties’ state of mind at the time of entering upon the agreement (and not
any future performance or subsequent conduct); secondly, legal sanctions may
not always play in the minds of parties even when making a serious promise; and
thirdly, the uncertainty of evidences that the court may accept as part of the
objective test of reasonableness (G Klass, ‘Intent to Contract’ (2009) 95 Virginia
Law Review 1437).  Thus, despite being a core component of contract in English
law, intention to create contractual relation remains a much vexed issue, more so
in the context of cross-border dealings and e-commerce mainly due to variances
with the legal position in other countries like the United States and India,
amongst others.

Consideration & Promissory Estoppel

This chapter will examine and analyse two principles of contract law. The first
is consideration, which along with the offer, acceptance and intention to create
legal relations, helps form a legally binding contract. Promissory Estoppel is a
related principle which can act as the exception to one of the main rules of
consideration - that for consideration to be valid, it must have economic value
and involve an exchange of benefit/detriment between the parties. This chapter
will ensure you understand the rules of consideration and when exactly
promissory estoppel can operate.

Consideration
What is consideration?
As you will have learnt in chapters one and two, the offer and acceptance are two
key components of the contract. However, a valid offer and acceptance only
constitutes an agreement. In order for that agreement to be legally enforceable,
there must be an intention to create those legal relations (see chapter 3), and the
subject of part of this chapter - consideration. The consideration of contract can
be described as the ‘badge of enforceability’.

A simple definition of consideration is as follows - an exchange between the

parties which results in a benefit to one party, and a detriment to the other. The
case of Currie v Misa (1874) LR 10 Ex 153 provides an apt description of this:

“A valuable consideration, in the sense of the law, may consist either in some
right, interest, profit, or benefit accruing to the one party, or some forbearance,
detriment, loss, or responsibility, given, suffered, or undertaken by the other.”
A practical example of this can be found by examining a simple contract. Party A
offers £500 to Party B, who in exchange will fit his car with a new engine. Party A
receives the benefit of his car being fixed, whilst Party B incurs the detriment of
having to take time, effort, and perhaps expenses to fix the car.

You can also identify from the above contract that there is a parallel detriment to
Party A and benefit to Party B; Party A suffers the detriment of having to pay
£500, and party B receives the benefit of the £500. It should be noted that this
parallel detriment/benefit is not required to form valid consideration, but it is
often present.

It is worth noting that the only contract where consideration is not required is
when a contract is made via a deed.

Does the exchange of the promise to a benefit/detriment constitute valid

consideration?
One common misunderstanding with regards to consideration is that
consideration is only valid once the benefit/detriment has been transferred
between the parties. This is understandably so, if you take the definition
from Currie v Misa, the promise to do something would surely not constitute valid
consideration. However, it is commonly accepted practice that a promise can
constitute valid consideration.

If we examine our example contract involving the £500 exchange for the
replacement car engine, under the assumption that a promise does not amount
to valid consideration, the reason behind this will become clear.

After the exchange of the promise, Party B orders the required engine part for the
replacement at the cost of £200. Party A is then offered a cheap replacement car,
and instead opts to purchase this, and leaves Party B a voicemail to let him know
he will no longer need the replacement engine. Party B is then left with an engine
part he has no need for, and will no longer receive the £500 from Party A that
would have resulted in profit for him. There are two principles clear from this
example:

1. If a promise did not constitute valid consideration, it could result in

extremely unfair outcomes for some parties
 2. If a promise did not constitute valid consideration, it would stifle the
economy and business, as parties would be unwilling to deal with each
other in fear of circumstances similar to the example

A promise operating as consideration in the above example results in Party B

having a remedy as a result of the breach of contract, negating the above issues.

Lord Dunedin confirmed this principle in Dunlop v Selfridge Ltd [1915] AC 847:

“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
Executory consideration: This is the kind of consideration which is formed by an
exchange of promises by the parties. Most commonly found in a bilateral contract

Executed consideration: This type of consideration is found in unilateral contracts,

where one party makes a promise in exchange for an act by the other party
(remember the example of the reward for the lost dog in chapter 1 - offer?).
Therefore, when the act is completed, the consideration is executed.

Consideration which is promised is called executory consideration

Consideration which has been completed is called executed consideration

The requirements of consideration

Unfortunately, consideration is not just as simple as identifying a
benefit/detriment exchange between the parties, as often is the case with legal
principles, there are some requirements that must be fulfilled. These rules are as
follows:

1. Consideration does not need to be adequate

2. Consideration must have economic value

These rules/requirements should be considered in turn when assessing a

contract. This section will examine each in depth with case/practical examples.

Consideration does not need to be adequate

As identified earlier in this module guide, the objectives of the courts in contract
law is to help to give effect to contracts in a fair and equitable manner, but the
courts will not protect the parties from a bad bargain. This is the basis upon which
the first rule of consideration is formed. Consideration does not need to be a
sufficient, it merely needs to exist.

The case of Thomas v Thomas (1842) 2 QB 851 highlights this principle in

operation. This case involved the rental of a property for the cost of £1. It was
argued that this £1 could not be considered valid consideration due to the actual
value of the property rental significantly exceeding the £1 consideration. The
courts ruled that this was irrelevant; the fact that there was some consideration
made it valid.

Chappell & Co Ltd v Nestle Co Ltd [1960] AC 97 is evidence of the courts’

justification for this approach -  Lord Somervell stated ‘A contracting party can
stipulate for what consideration he chooses’, implying the courts will not interfere
in bad bargains.

Exam consideration:

Be careful when analysing contracts and considering whether the consideration is

valid. The consideration needs to be assessed alongside whether there was an
intention to create legal relations. Although a £1 offer for a house may be able to
operate as valid consideration, it only does when there is an intention to create
legal relations.

Consideration must have economic value

The case discussed above of Thomas v Thomas  confirms that although

consideration need not be sufficient, there must be at least some consideration.
There is now the question of what the definition of ‘some’ consideration is.
‘Some’ consideration refers to anything that has economic value.

The case of White v Bluett(1853) 23 LJ Ex 36 is a good starting point for examining

the definition of ‘economic value’. In this case, a father waived his son’s debt on
the condition that he stops complaining about his Father’s will. The son argued he
had provided valid consideration by not complaining about the will. The court
ruled the contract was unenforceable due to the son’s promise not having any
economic value.

Economic value can be of extremely minimal value, as seen in Chappell & Co Ltd v
Nestle Co Ltd  [1960] AC 97, where the wrappers of sweets amounted to
consideration with an economic value. However, the contrasting case of Lipkin
Gorman v Karpnale Ltd  [1991] 2 AC 548 ruled that gambling chips were not a valid
form of consideration.

Exam consideration:

Can you reconcile the two above cases? Why were gambling chips seen as
different to sweet wrappers - surely they both have economic value? Consider the
argument that gambling chips are only worth something to the casino who owns
the chips. Could you distinguish the sweet wrappers on this basis? These cases
highlight the potentially inconsistent nature of the courts when deciding whether
something amounts to consideration or not. When you are assessing a contract
for consideration, you may often be correct in thinking that there is no wrong or
right answer, just be sure to justify your decision, drawing comparisons with cases
and distinguishing the facts from others, this shows the marker you understand
the concepts and can make a reasoned decision.

Limitations of consideration
The previous section examined how the courts decide whether something
amounts to consideration or not. Unfortunately, there is even more to
remember! The courts have identified particular ways and circumstances in which
consideration is ruled to be insufficient to form a binding contract. Of course,
along with these circumstances come some exceptions for each. Ensure to learn
these and be able to identify them in a problem scenario. These limitations are as
follows:

1. Performance of an existing duty

2. Past consideration
3. Part-payment of a debt

Performance of an existing duty

There are three different types of existing obligations which will need to be
examined, these all have different rules and exceptions.

1. Performance of legal obligations which are independent of any contract

2. Performance of a duty already promised in a different contract
3. Performance of a duty owed to a third party

Performance of existing legal obligations which are independent of the contract

This type of existing duty refers to one which is already owed prior to the creation
of a contract. The most commonly cited example of this is individuals employed to
do a public duty, such as policemen or firemen. Therefore, what happens when
Party A promises Party B (a fireman), £100 to save his wife from perishing in a
fire?

As a general rule, performance of an existing legal obligation will not constitute

valid consideration. In the example above, the £100 payment would not be
enforceable. The case of Collins v Godefroy(1831) 1 B & Ad 950 is good authority
for this principle. In that case, a contract was formed which promised payment to
a witness to give evidence. This contract was not enforceable by virtue of the
existing legal obligation the individual had to give evidence.

Exam consideration:

Why do you think the performance of a legal obligation cannot amount to valid
consideration? Think about the possible policy and public interest arguments.

Exception: The performance of an existing legal obligation can be valid if the

contract requires an individual to go further than their normal existing legal
obligation. Take the example of the fireman, who is under a legal obligation
where reasonable to attempt to save humans from perishing in fires. If somebody
offered £100 to the fireman in order to save a pet rabbit from perishing in the
fire, this would be going further than their normal existing legal obligation, and
could therefore constitute valid consideration.

The case of Glasbrook Bros v Glamorgan County Council [1925] AC 270 is authority

for this exception. An individual requested police protection in the form of a
constant presence on his property; the police did not have the resources to do so,
but did in exchange for a financial contribution. It was argued the police were
under an existing legal obligation to protect members of society, however, the
court ruled that the consideration was valid as it required the police to go above
and beyond their ordinary duties.

Performance of a duty already promised in a different contract

The performance of a duty already promised in a different contract is not valid

consideration. If in our earlier example of the exchange of £500 for the engine
replacement, Party A contacted party B and said he would now pay £600, this
promise to pay £600 would not constitute valid consideration, as Party B is
promising the same performance as they did under the previous contract (to
replace the car engine).

The seminal case for this rule comes from Stilk v Myrick (1809) 2 Camp 317, 170
ER 1168. In this case, the contractual duty of the crewmen of a ship was to sail a
vessel. Two of the crewmen refused to sail, and the remaining members of the
crew were promised a split of the deserting crew’s wages, forming a new contract
to sail the vessel for a higher price. Therefore, similar to our above example, the
crewmen were offered extra money to complete their already existing duty (to
sail a vessel). The court held that this consideration of performance of an existing
duty was not valid consideration, meaning the contract was not valid.

Exception - going beyond the existing duty: Similar to the exception of the

performance of an existing legal obligation, if the performance of a duty already
promised in a different contract goes beyond the original duty, it will be held as
valid consideration. In Hartley v Ponsonby [1857] 7 EL BL 872, the facts were
identical, but more crewmen had deserted the ship. Therefore, as the sail back
was dangerous due to the lack of crew, and the remaining crew had to do a
significantly higher amount of work, they had exceeded their contractual duty,
meaning the consideration was valid.

Exception - Williams v Roffey: The case of Williams v Roffey [1991] 1 QB 1 

provides a specific set of circumstances in which performance of a duty already
promised in a different contract can amount to valid consideration. The criteria
set out by Glidewell LJ are as follows (See Williams v Roffey  at 16):

1. If A has entered into a contract with B to do work for, or to supply goods or

services to, B in return for payment by B; and
 2. At some stage before A has completely performed his obligations under the
contract B has reason to doubt whether A will not, or will be able to,
complete his side of the bargain; and
3. B thereupon promises A an additional payment in return for A’s promise to
perform his contractual obligations on time; and
4. As a result of giving his promise, B obtains a benefit, or obviates a
disbenefit; and
5. B’s promise is not given as a result of economic duress or fraud on the part
of A.

In Williams v Roffey, these criteria were successfully fulfilled. Party A had a

contract to refurbish a number of flats with Party B, a housing association. Party A
then subcontracted the refurbishment out to Party C. Party C were unable to
complete the building on time due to financial difficulties, and Party A offered
them extra payment to ensure they did complete it on time. Following the logic
from Stilk v Myrick, this would be an unenforceable contract, due to the
consideration of Party B being an already existing obligation. However, if you
apply Glidewell LJ’s criteria to the circumstances, the consideration becomes
valid. This is because Party A would incur severe penalty costs from Party B, the
housing association, if the work was not completed on time. Therefore, criterion 4
is also fulfilled, as Party A avoided the disbenefit of these penalties by ensuring
Party C completed the work on time.

We can again examine our example contract. If Party A needed the car engine
replaced immediately in order to attend to a lucrative business opportunity, and
was unsure Party B would complete this in time, and offered additional payment
to do so, this would be valid consideration. This is because Party A has obtained
the benefit of being able to attend to the business opportunity.

It should be noted that this principle from Williams v Roffey  does not

overrule Stilk v Myrick.  Glidewell LJ explained that it acts to “refine and limit the
application of that principle, but they leave the principles unscathed”.

Exam consideration:

What kind of things do you think could constitute a ‘practical benefit’ or

avoidance of a ‘disbenefit’? Does it need to be a severe one or could it be trivial?
This is an interesting point to assess when criticising the rule from Williams v
Roffey.

Limitation: Re Selectmove [1995] 1 WLR 474 was a case in which an individual

promised to pay their debt in instalments over time, rather than in full. It was
argued that a practical benefit was obtained because the debtor would receive
full payment, instead of some due to the insolvency in event of having to pay in
full at the time. The courts confirmed that the rule from Williams v Roffey  could
not extend to the part-payments of debts. See the part-payment section later in
this guide for more information.

Performance of a duty owed to a third party

This limitation of consideration is similar to that of above example, however, in

this case, the duty will be owed to a third party, and not the same party.

A basic example of this can be found in Shadwell v Shadwell(1860) 9 CB NS 159,

where an uncle promised his nephew a sum of money to marry his fiancée. At the
time, the nephew had already agreed to marry his fiancée (which in 1860 created
an enforceable legal obligation). The outcome of the case is not considered good
law, but it is a good example to cite of a duty owed to a third party.

The current law is found in New Zealand Shipping Co Ltd v AM Satterthwaite & Co
Ltd (The Eurymedon) [1975] AC 154. This is a notoriously complex and unintuitive
decision, so you may have to re-read these facts a few times alongside the
decision!

1. Party A, the shippers, had a contract of carriage with Party B, the carriers.
2. This contract included an exemption clause whereby the carriers would not
be liable for any damage as a result of the unloading of the goods
3. Party B then entered a contract with Party C, the stevedores, to unload the
goods.
4. Subsequently, Party A promises Party C that they can take benefit of the
exemption clause they offered to party B

It is important at this point to note that this is where the consideration fails. The
agreement to take benefit of the exemption clause requires a contract between
Party C and Party A. Party A’s consideration is the benefit of the exemption
clause, and Party C’s consideration is the unloading of the goods. Party C already
owe that duty to Party B, meaning their consideration to Party A would be invalid
as it is the performance of an existing duty.

Similar to the decision in Williams v Roffey, the court held that the consideration
of the existing duty was valid, on the grounds that is conferred a practical benefit.
The practical benefit being Party C’s ability to enforce a direct obligation against
Party A. This is a surprising decision as it ignores the privity of contract doctrine
(see chapter 5).

Therefore, the general rule created is that performance of an existing duty owed
to a third party may be valid consideration if it allows the party to enforce a direct
obligation against the other.

Past consideration

Past consideration is insufficient to form a legally enforceable agreement. Only

consideration which is given at the time or after the promise for which it is given
will be enforceable. A promise given after the consideration has been completed
is unenforceable.

Re McArdle [1951] Ch 669 is authority for this point. In this case, a sum of money
was promised for some building work. However, this promise was made
subsequent to the building work being completed; therefore, the building work
was ‘past consideration’

Exception - requested performance: The case of Pao On v Lau Yiu Long [1980] AC

614 confirmed and restated the requested performance exception first identified
in Lampleigh v Braithwaite (1615) Hob 105. The three criteria are as follows:

1. The consideration which is ‘past’ would have operated as valid

consideration if the act was done at the promisor’s request

The case of Lampleigh v Braithwaite (1615) Hob 105 highlights this criterion. Party
A asked Party B to obtain a pardon for his murder charge. Party B did so, and
Party B subsequently promised to pay him £100. This contract would normally not
be valid due to the consideration of obtaining the pardon being ‘past’. However,
the court decided that if the performance (obtaining the pardon) was at the
request of the promisor (whoever promised the £100), the performance would
constitute valid consideration.
 2. There was an understanding there would be the conferment of some kind
of reward, payment or benefit for the act

Re Casey’s Patents [1892] 1 Ch 104 is good law for this point. Due to the
commercial relationship of the parties, it was presumed payment
would eventually be promised despite it not being so at the time of performance
of the contractual requirements. A mutual understanding should be identifiable.

3. The consideration would have been valid had it been promised in advance
of the contract.

This requirement is fairly simple and just requires an examination of whether the
consideration would normally be valid (is there an economic value, etc).

Part-payment of debt

It was mentioned earlier in discussions regarding Williams v Roffey and Re

Selectmove about part-payments of debt. The general rule is that part-payment of
a debt is never good consideration to discharge that debt.

This rule stems from Pinnel’s Case (1602) 5 Co Rep 117 and was confirmed by the
House of Lords in Foakes v Beer(1883) LR 9 App Cas 605. The judicial reasoning for
this is rooted in the Stilk v Myrick  principle, that performance of an existing duty
is not valid consideration. Part-payment of a debt is simply the performance of an
existing duty. No practical benefit argument can be used to negate this principle -
it does not matter if the part-payment comes before the due date, or some other
benefit is conferred (see Re Selectmove)

Exam consideration:

The part-payment of a debt is a common topic of exam questions or moots.

Consider exactly why the rule is so strict. The decision is rooted in the potential
for parties to exploit those in poor financial positions. For example, Party A owes
Party B £1,000, but is aware Party B is in dire financial need of £500. With this
knowledge, Party A can offer £500 as part-payment of the debt if Party B waive
the remaining £500, knowing that Party B have no choice but to accept the
money. The case of D&C Builders Ltd v Rees [1966] 2 QB 617 is an excellent
example of this in operation.
Pinnel’s case also ruled there are two exceptions to the part-payment rule.

Exception: Part-payment of a debt is valid if something else is exchange along

with/instead of money. For example, £1 and a mobile phone could be valid
consideration for a debt of £1,000. This is because the court can presume the
mobile phone has some value which goes beyond the debt, even if in reality it
does not.

Exception: Payment in a different form or at a different location. If you are

required to pay via bank transfer, but are later asked to pay in person, the part-
payment of a debt can be sufficient consideration here, as the effort and expense
of travelling helps to amount to sufficient consideration.

Promissory Estoppel
So far in this module guide we have only examined and analysed forms of
common law. As can be identified throughout this chapter, there are many
circumstances in which the common law might produce unfair results. Equity, in
the form of Promissory Estoppel, can provide a remedy for those unfair
circumstances.

Where does promissory estoppel fit in with consideration?

Promissory estoppel operates to ensure a party does not go back on their promise
when another party has relied upon that promise. Clearly, consideration relates to
the exchange of promises, therefore it becomes an extremely useful tool in
providing a remedy for aggrieved parties. Promissory estoppel will have the effect
of stopping the party who attempted to go back on their promise to do so.

How does promissory estoppel operate?

The decision in Central London Property Trust Ltd v High Trees House Ltd [1947]
KB 130 is the leading authority on promissory estoppel and also provides a clear
example of the principle. The facts are as follows

1. Party A leased some properties from Party B, at the cost of £2,500 a year.
This lease was signed in September 1937
2. Following the outbreak of World War 2, Party B agreed to reduce the rental
cost to £1,250 due to the difficulty in letting all of the flats out.
 3. Following the end of World War 2, Party B attempted to re-assert the
£2,500 a year cost, not only for the future payments, but for the rent in
arrears.

Unsurprisingly, the £2,500 a year cost could now be re-asserted, as the difficulties
of the war were now over. The question of the arrears is where the promissory
estoppel becomes relevant. The £1,250 payments would have been considered as
part-payments of a debt, which as we identified in the previous section
from Foakes v Beer, would not be valid consideration, and therefore, the arrears
in full for £2,500 would be able to be reclaimed.

In his judgment, Lord Denning explained that where a promise is made which is
intended to be binding, intending to be acted upon, and is also acted upon, it
comes binding, notwithstanding any limitations of consideration. Therefore, in
the case, as Party A had been paying £1,250 rent instead of £2,500, they had
acted upon that promise, and therefore Party B would be estopped from going
back on the promise.

This principle of promissory estoppel may be seen to operate as a way in which

the requirement of consideration is removed altogether and instead as long as
there in reliance on a promise, the agreement can be binding. However, there are
restrictions to promissory estoppel; again, each will be explained in turn:

1. Need for an existing legal relationship between the parties

2. There must have been a detrimental reliance on the promise
3. Promissory estoppel can only be used as a defence
4. It must be inequitable to allow the promisor to go back on the promise
5. The doctrine is generally suspensory and does not extinguish rights

There must have been an existing legal relationship between the parties

Generally, promissory estoppel can only operate when there is a pre-existing legal
relationship, and will not create new ones. Lord Denning, in the case of Combe v
Combe [1951] 2 KB, confirmed this.

Exam consideration:
Despite Lord Denning confirming this, in the case of Evenden v Guildford City
FC [1975] QB 917 he expressed the view that it could apply to parties without an
existing legal relationship. Would this be a sensible idea?

There must have been a reliance on the promise

The promisee must rely on the promisor’s promise in order for promissory
estoppel to operate. In the High Trees case, this was by paying £1,250 rent
instead of £2,500, alongside this, they would have used the spare money to fund
something else, therefore relying on the promise that the rest of the £2,500
would not need to be paid, meaning it would be unfair and unreasonable to force
them to comply with the original terms of the contract.

The test for reliance has an extremely low threshold, all one party must do it act
differently to what they would have otherwise done based on the promise. It has
also been suggested the reliance must be detrimental, but there is clearly no
detriment in High Trees and Denning also maintained this view in C.

Promissory estoppel can only be used as a defence

This means promissory estoppel can only be used as a defence in an action, not
be the cause of an action. The case of Combe v Combe provides authority for this
point, where it was stated that promissory estoppel can only operate as a ‘shield
not a sword’.

In Combe v Combe, a wife attempted to sue her former husband for a promise to
pay her maintenance, although she had provided no consideration for the
promise. She tried to rely upon promissory estoppel, arguing that she had relied
on the promise. Therefore, as this was the cause of action, promissory estoppel
could not be relied upon.

It must be inequitable to allow the promisor to go back on the promise

The courts of equity are remedies which attempt to ‘fill the gap’ where the
common law produces unfair results. Therefore, it would be illogical to not allow
the promisor to go back on the promise where it is in fact equitable. The law of
equity, unlike the common law, affords discretion to the courts to decide whether
it is fair or not to impose the principles of equity.
A case which provides a good example of this is The Post Chaser [1982] 1 All ER
19, in which the promise was revoked within a few days, due to this small lapse in
time, the promise would not have relied upon their promise or changed their
position, therefore, it was equitable to allow the promisor to go back on the
promise.

The doctrine is generally suspensory and does not extinguish rights

A contractual modification supported by consideration will create the effect of a

permanent set of obligations for the duration of the contract. Promissory
estoppel operates slightly differently, only suspending the rights where relevant.

The operation of this principle is clear in High Trees. Promissory estoppel

suspended the rights of Party B to claim £2,500 during the time of the war, but
the right to charge the full £2,500 was reintroduced following the end of the war.

Privity of Contract

Introduction
Commercial transactions of the modern times are no longer confined to
individuals or simple sale-purchase deals.  With the multiplicity of parties on one
hand, and the various stages of performance on the other, contemporary
commercial contracts have become a complex web. Needless to state, the
consequences and enforcement of such contractual relations are difficult to
decipher.

1. An example may be a contract between two parties- A and B, where A

promises to pay B £5000 to B against the construction of a water tank.  B
sub-contracts a part of the task to C for £1000, which C completes.  Upon
non-receipt of £1000 from B, C seeks to recover the amount from A. A
denies the payment as there was no contract ever executed between A and
C.
2. Conversely, while undertaking the task at A’s premise, C causes some
damage to the site.  A then seeks to sue C for contractual breach, which C
refutes on the ground that A was not privy to its sub-contract with B.  The
complication further intensifies where the contract between A and B
 contains an exclusion clause seeking to exclude any liabilities on B or its
associates for damage on site.
3. Another instance being, where A (in its contract with B) agrees to pay
£5000 to C, for work done by B.  Here, while the consideration flows from
B, the benefit accrues to C.  In the event of non-payment, C seeks to
enforce the contract executed between A and B only.
4. Lastly, A and B (supplier) agree in a supply contract that C will bear all costs
of materials supplied at the site, to which C has not consented otherwise or
of which C is not aware.  Later, upon non-payment, B seeks to recover the
dues from C.

All of the above illustrate the nuances of the doctrine of “privity of contract” and
its implications on commercial arrangements.  While there are no straight-jacket
solutions, certain principles have evolved over time in common law and statutes,
which attempt to provide a direction to the issue - explained in more detail below.

General Rule
The Doctrine
The general rule at common law states that a contract creates rights and
obligations only as between the parties to such contract.  As a corollary, a third
party neither acquires a right nor any liabilities under such contract.  This is what
the proclaimed doctrine of “privity of contract” enunciates and establishes as the
overarching rule underlying any contractual relation.

The rule can trace its roots in the classical Roman law, which although later (in
seventeenth century) made a divergence to recognise third party rights of action
or contractual enforcement- Zimmerman, The Law of Obligations (Oxford
University Press 1996).  Having followed this, English law too witnessed a journey
of disarray - while the rule of no third party rights or liabilities formed the
foundation since as early as the thirteenth century (Ibbetson, A Historical
Introduction to the Law of Obligations (Oxford University Press 1999)) evidenced
in cases like Crow v Rogers (1724) 1 Str 591, decisions favouring third party
actions could be found in Dutton v Poole (1678) 2 Lev 210, Pigott v
Thompson (1802) 3 Bos & Pul 98, and Carnegie v Waugh (1823) 1 LJ KB 89.

The position was somewhat fixed by the triple rulings in Price v Easton (1833) 4
B&Ad 433, followed by Tweddle v Atkinson (1861) 1 B&S 393, later affirmed
in Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] AC 847.  In Price v Easton,
the contract between Easton and another party provided for certain payment to
Price against work done by such party.  While the work was completed, Easton
failed to pay Price, who then sought to enforce the contract.  The court ruled that,
as Price was not an executing party to the contract and did not supply any
consideration to Easton, no rights of enforcement arose in favour of Price.

In Tweddle v Atkinson concerning an agreement between Guy and John to pay

certain sums to William Tweddle where the contract allowed the latter to sue
either of them upon non-payment, the court disallowed such right of action as
William Tweddle was not a party to the contract.  This result was corroborated
in Gandy v Gandy (1884) 30 ChD 57, and later in Dunlop Pneumatic Tyre Co, where
a manufacturer sought to sue a subsequent dealer for sale of tyres on terms in
breach of the original contract between the manufacturer and the intermediary
wholesaler.  The court held that only a person who is a party to the contract can
sue on it or be sued, and thus, no right accrued to the manufacturer to sue the
dealer (a third party).  The court explained that “our law knows nothing of a jus
quaesitum tertio arising by way of contract. Such a right…cannot be conferred on
a stranger to a contract as a right to enforce the contract in personam”-Dunlop
Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] AC 847, 853.

Despite some initial doubts raised in cases like Smith and Snipes Hall Farm Ltd v
River Douglas Catchment Board [1949] 2 KB 500, and Pyrene Co Ltd v Scindia
Steam Navigation Co Ltd [1954] 2 QB 402, the doctrine was confirmed
in Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, and established firmly
in Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (The
New York Star) [1981] 1 WLR 138, and Amsprop Trading Ltd v Harris Distribution
Ltd [1997] 1 WLR 1025.  While Scruttons and The New York Star dealt with benefit
of exclusion clauses in shipment contracts, Amsprop Trading was concerned with
beneficial covenants relating to land and property vis-à-vis third persons.

Rule of Consideration
The above line of cases hint at another rule ancillary to the main doctrine of
privity of contract, that being, consideration must flow from the promisee.  In
other words, “if a person with whom a contract has been made is to be able to
enforce it consideration must have been given by him to the promisor”- Dunlop
Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] AC 847, 853.  Thus, while this rule of
consideration is distinct and separate from the doctrine of privity, as upheld
in Kepong Prospecting Ltd v Schmidt [1968] AC 810, it yields the same result so as
to be closely connected. For instance, in an arrangement of sub-contract, the
promisor cannot sue the sub-contractor (who is not the promisee) for any
damage or defect in the work - Junior Books Ltd v Veitchi Co Ltd [1983] 1 AC 520.
Conversely, the sub-contractor cannot bring an action of non-payment against the
promisor too.    

General Rule: A contract creates rights and obligations only as between the
parties to such contract.  A third party neither acquires a right nor any liabilities
under such contract. 

Right of Action
It is worthwhile to highlight that what the doctrine prohibits is the right of action
or enforcement in favour or against a third party, and not beyond.  That is, a
contract may bestow benefits to a third party, although such imposition of
liabilities remains a bar.  In the former case, a breach may be enforced by the
other contracting party for and on behalf of the third party, by way of remedies
such as specific performance, stay of proceedings, and damages, as discussed
below.

Specific Performance
The leading case on this issue is Beswick v Beswick [1968] AC 58. In this case, John
made promises to pay monies to Peter and his wife for life, against acquisition of
certain coal delivery business from the latter.  The agreement was made between
Peter and John, where the wife was not a party. Upon death of Peter, John
refused to make the agreed payments to Peter’s wife, who then sought to enforce
the agreement in the capacity of (a) administrator of Peter’s estate, and (b)
personal right.  The court, citing the decisions in Robertson v Wait (1853) 8 Exch
299, and Lloyd’s v Harper (1880) 16 Ch D 290, ruled that where a contract is made
with A for the benefit of B, A can bring an action for benefit of B, and recover all
dues as if the contract was made with B himself.  The contracting party may,
singly or jointly with the third party, have the contract performed by way of a
court order for specific performance.  Accordingly, the claim of the wife as the
administrator (as a contracting party) succeeded to obtain an order for specific
performance by way of payment of all dues and arrears.
Having said that, the claim made in her personal capacity (as a third person) was
not accepted on ground of the doctrine of privity. Moreover, it was clarified that
such contracting party cannot retain the monies so recovered to himself (as it
belongs to the beneficiary third party), and thus, he must hold the proceeds for
the third person.  Accordingly, the monies recovered in the Beswick case was
appropriated to the wife for her own benefit, and not to her husband’s (Peter’s)
estate.

Stay of Proceedings
This remedy is relevant where a contract provides for a covenant not to sue the
third person.  Where a party institutes a legal action against the third person in
breach of such covenant, the other contracting party may seek to discontinue
such proceedings by way of a stay order.  This relief was granted in the case
of Snelling v John G Snelling Ltd [1973] 1 QB 87, concerning the forfeiture of
certain dues owed by a company to its directors (three brothers), which
agreement was executed only between such brothers. The question, thus, arose
whether one of the brothers could later sue the company for recovery of debt,
notwithstanding the agreement of forfeiture.  The company along with the other
two directors (by way of counterclaim) sought to invoke the agreement so as to
stay the legal action, and/or dismiss the recovery claim.

Having said that, the following conditions must be satisfied to obtain a stay- Gore
v Van Der Lann [1967] 2 QB 31:

1. The contract must provide for an undertaking by the promisor not to sue
the third person, and
2. The promisee must have a sufficient interest in the enforcement of the
promise.

In the above case of negligence against a bus conductor, the promisee sought to
invoke its agreement with the passenger excluding liability on injury to stay the
action.  The court, stating the absence of both of the above conditions, declined
to order stay of proceedings.

Damages
As a general rule, a contracting party can sue for damages only in respect of his
own loss, and not for losses suffered by a third person- Alfred McAlpine
Construction Ltd v Panatown Ltd [2001] 1 AC 518. 
This rule, however, has been applied with exception where the third person had
no alternate course of remedy available to make good the loss, commonly
referred to as a situation of “legal black hole”- Darlington Borough Council v
Wiltshier Northern Ltd [1995] 1 WLR 68, 79.  This was affirmed in Linden Gardens
Trust Ltd v Lenesta Sludge Disposals Ltd [1993] UKHL 4, and St Martins Property
Corporation Ltd v Sir Robert McAlpine & Sons Ltd   [1994] 1 AC 85, 115 - where the
court held "In such a case, it seems to me proper… to treat the parties as having
entered into the contract on the footing that Corporation would be entitled to
enforce contractual rights for the benefit of those who suffered from defective
performance but who, under the terms of the contract, could not acquire any
right to hold McAlpine liable for breach”. 

The above position was followed in Darlington Borough Council v Wiltshier

Northern Ltd [1995] 1 WLR 68, in relation to a construction contract (although
doubted without definite results in another construction case of Woodar
Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277).
Moreover, in the context of family losses in Jackson v Horizon Holidays Ltd [1975]
1 WLR 1468, the court upheld Jackson’s right to recover damages for losses
suffered by his wife and sons from the travel company in relation to breach of
certain accommodation conditions.  

However, the position as regards such right of recovery of damages by the other
contracting party (without having suffered any loss) differs where the third person
may have an independent right to claim- (GH Treitel, ‘Damages in Respect of Third
Party Loss’ (1998) 114 LQR 527).  This is the reasoning on which the refusal of
claim for damages in Alfred McAlpine Construction may be differentiated from the
allowance in the above cases.  In Alfred McAlpine Construction, the court held
that there was no justification for Panatown to recover damages on behalf of X,
when X had its own cause of action against Alfred. 

Doctrine of Privity prohibits right of action only. Thus, a contract may bestow
benefits to a third party, although imposition of liabilities remains a bar.

Such benefits can then be enforced by promisee to procure remedies for the third
person, by way of:

 specific performance,
 stay of proceedings, and/or
  damages.

Exceptions to the Doctrine

The rule that a third person has no right to enforce a contract to which he is not a
party is not absolute, as it is qualified by a number of exceptions, arising in
common law and statutes:

Statutory Exceptions
Some of the earliest statutory right of third person to enforce contractual
obligation of another can be found in section 56(1) of the Law of Property Act
1925 (invoked in Beswick v Beswick), section 11 of the Married Women’s Property
Act 1882, section 14(2) of the Marine Insurance Act 1906, and section 148(7) of
the Road Traffic Act 1988 (all of the above relating to policy of
assurance/insurance for benefit of family or third persons).  Also, section 2 of the
Carriage of Goods by Sea Act 1992 bestows a holder of bill of lading with all rights
of legal action permissible under the contract of carriage, notwithstanding that he
was not a party to it when originally drafted.

The Contracts (Rights of Third Parties) Act 1999

The most frequently invoked statutory exception lies in the Contracts (Rights of
Third Parties) Act 1999 (1999 Act), which came about pursuant to the Law
Commission deliberations and report of 1996 (Law Commission, Privity of
Contract: Contracts for the Benefit of Third Parties, Law Com No 242,1996).  The
enactment was devised to remedy the uncertainties and ambiguities surrounding
the doctrine and its exceptions in common law, more particularly, that depriving a
third person of such enforcement right has unwarranted results- (a) eroding the
intention of the original contracting parties, (b) a situation of dichotomy where
the person who has suffered loss is left with no remedy while one who can sue
has no damage, (c) the promisee, although can seek redress for the third person,
may chose not to do so, (d) injustice to third person interests, and (e) overall
inconvenience to the commercial domain- (Law Commission Report, paras 3.1-
3.28).  

The 1999 Act prescribes a two-fold test to allow a third person action or
enforcement of contract, namely (section 1) -

1. Where the contract expressly provides for it, or

 2. Where the contract purports to confer a benefit on such third person.

For either of the conditions, the third person must be clearly identifiable, i.e., by
name or class/category of persons (even if not in existence then).  Such class or
category may be references to stevedores, tenants, owners, family, future
spouse, an unincorporated company, or unborn child, or   a description of
characteristics (A Burrows, ‘The Contracts (Rights of Third Parties) Act and its
Implications for Commercial Contracts’ (2000) LMCLQ 540).  Notably, such
identification must be specific and express, ruling out any scope for identification
by construction or inference- (Avraamides v Colwill [2006] EWCA Civ 1533). 

Further, the test (i) if satisfied, also covers negative rights as specified in section
1(6), such as right of exclusion or limitation of liability (Himalaya clause) - the
subject matter of much dispute in common law (to be discussed in part 3.4 later).

The position as regards test (ii) however remains controversial.  This is because it
indicates towards an implied case of third person right, where no express
stipulations exist in the contract.  This leaves much scope for subjectivity and lack
of predictability, as under the common law exceptions- Trident General Insurance
Co Ltd v McNiece Bros(1988) 165 CLR 107.  Moreover, the right is allowed only
where the contract “purports to confer” benefit on the third person, such that
consequential or incidental benefits are not covered- Dolphin Maritime &
Aviation Services Ltd v Sveriges Angfartygs Assurans Forening [2009] EWHC 716. 

Also, the condition does not enable a third person action where the intention of
the contracting parties appears to the contrary in the contract (section 1(2)). This
rebuttal was invoked in the case of Nisshin Shipping Co Ltd v Cleaves & Co
Ltd [2003] EWHC 2602, where it was asserted on the ground that the third person
had a right of action otherwise, so that such right under the 1999 Act was not
necessary.  Likewise, in Laemthong International Lines Co Ltd v Artis (The
Laemthong Glory) [2005] EWCA Civ 519, it was argued that allowing third person
action would be inconsistent with the sequential contractual structure in place
between the charterer, owner and receiver (following from para 7.18 of the Law
Commission Report precluding third person actions to cut through the custom of
chain of contracts prevalent in the construction industry). The court, however,
ruled that simply a sequential arrangement of contract does not negate third
person right, unless backed by industry customs, as in the construction industry. 
This is further affirmed in Great Eastern Shipping Co Ltd v Far East Chartering Ltd
(The Jag Ravi) [2012] EWCA Civ 180.

Moreover, the 1999 Act prevents the variation or rescission of a contract where
such third person right to action is established, except by way of consent of the
third person (section 2).  While this opens up the potential for third person legal
suits on one hand (N Andrews, ‘Strangers to Justice No Longer: The Reversal of
the Privity Rule Under the Contracts (Rights of Third Parties) Act 1999’ (2001) CLJ
353), the 1999 Act seeks to balance the case for contracting parties too through
provisions on defences to the promisor (section 3), avoidance of double liability
(section 5), promissee enforcement rights (section 4), and exceptions to third
person action (section 6).

All in all, the 1999 Act (although an exception) does not abrogate the doctrine of
privity of contract, which continues to remain the predominant overarching rule
governing contractual relations.  Additionally, the 1999 Act does not alter the
legal position, including the exceptions, under common law, which continue to be
applied by courts alongside (GH Treitel, The Law of Contract  (Sweet & Maxwell
2003).

1999 Act

Two-fold Test:

1. Where the contract expressly provides for third person action, or

2. Where the contract purports to confer a benefit on such third person
(consequential or incidental benefits not covered).

When Allowed?

Identifiable Third PersonNegative Clauses Included

No Contrary Intention of Contracting Parties

Common Law Exceptions

Collateral Contracts
This exception is much conflicted as it depends upon the finding of the court of a
contract in existence where the claimant is an actual contracting party, and not a
third person.  It was brought to test in the case of Shanklin Pier Ltd v Detel
Products Ltd [1951] 2 KB 854.  In this case, the defendant represented that certain
paints were suitable for use in re-painting of the pier with a life of seven to ten
years.  Relying upon this, the plaintiffs re-painted the pier which paint was found
to be unsuitable, and having a much lesser life. The court was, thus, concerned
with deciding whether such representation could be reckoned as a warranty
between the plaintiff (owner of the pier) and the defendant (paint manufacturer)
where the original sale and purchase of paint was not undertaken between them. 
Such collateral contract was found to be existing in this case.

Whether or not such collateral contract exists depends upon evidence of the
generally applicable constituents of a valid contract, namely- offer, acceptance,
intention to create legal relations and consideration- Gravy Solutions Ltd v Xyzmo
Software GmbH [2013] EWHC 2770.  Where any of such elements is absent, the
exception enabling third person action will not be triggered- Independent
Broadcasting Authority v EMI Electronics (1980) 14 Build LR 1.

Trust

The way for this exception was paved by the ruling in Dunlop Pneumatic Tyre
Company Ltd v Selfridge and Company Ltd [1915] AC 847, 959, where it was held
that although privity of contract does not allow third person action, such a “right
may be conferred by way of property, as for example, under a trust”.  This was
affirmed in Les Affreteurs Reunis v Walford [1919] AC 801.  In this case, Walford
(broker) negotiated a contract between the charter party and the ship owner,
containing a stipulation as regards certain commission payable to Walford.  Upon
failure of such payment, Walford sued the ship owner.  The court found a trust to
have been created owing to Walford receiving benefit under the agreement.

Caution should, however, be exercised to not confuse this exception with that of
a simple contract executed for benefit of a third person.  Not in every such
contract involving third person beneficiary is a trust of contractual right created. 
This was highlighted in the case of Re Schebsman [1944] Ch 83, 89.  Schebsman
employment was terminated with a company, following which he entered into an
agreement with the company for certain payments against such termination.  The
payments, in the event of his death, were to be made to his wife and daughter.
Upon his death and failure of payments by the company, it was argued that the
contract between Schebsman and the company created a trust in favour of the
wife and daughter.

The court ruled that no such trust was created as “It is not legitimate to import
into the contract the idea of a trust when the parties have given no indication that
such was their intention. To interpret this contract as creating a trust would… be
to disregard the dividing line between the case of a trust and the simple case of a
contract made between two persons for the benefit of a third. That dividing line
exists, although it may not always be easy to determine where it is to be drawn”. 

Thus, aside to receipt of benefit by the third person, the general character of trust
and an intention to create one must be established- Green v Russel [1959] 2 QB
226. The above proves the potential ambiguity surrounding the application of the
exception from a practical perspective.

Assignment

As such, a contracting party can assign his rights (not liabilities, except by way of
consent) under the contract to a third person.  Having said that, a mere right to
litigate or sue for damages cannot be so assigned, unless the third person has a
commercial interest in assuming such right, as enunciated in Trendtex Trading
Corporation v Credit Suisse [1982] AC 679.  Moreover, defences of the promisor
and the extent of remedy available to the third person would be as what was
contemplated and applicable under the original contract- Offer Hoard v Larkstore
Ltd [2006] EWCA Civ 1079.

Agency

This exception can be traced from the Dunlop Pneumatic Tyre Company Ltd case,
i.e., a principal not named in the contract may sue upon it if the promisee really
contracted as his agent, and consideration was directed personally or via the
promisee in the capacity of an agent.  In other words, the real right of action then
rests with the principal as the contracting party, as the agent (promisee) then
moves out of the arrangement so as not to sue or be sued- Wakefield v
Duckworth [1915] 1 KB 218.

Action in Tort
In the event of a breach of duty of care, an independent claim for negligence can
be instituted by the person having suffered the loss, regardless of any contractual
arrangement otherwise.  This can be best asserted through the case of Donoghue
v Stevenson [1932] AC 562, where despite the claimant having no contractual
relation with the ginger beer manufacturer, a claim in tort could be successfully
sustained.

Similar stance in the domain of tort was witnessed in Junior Books Ltd v Veitchi Co
Ltd [1983] 1 AC 520, where a claim against defective construction was allowed by
the pursuer against the sub-contractors (contractually possible only via the main
contractor). This was however criticised much, including the more recent case
of Linklaters Business Services v Sir Robert McAlpine Ltd [2010] EWHC 1145, which
advocated for sequential action owed to immediate contracting party under
contract law instead. Nonetheless, action in tort continues to be a prime area of
third person actions where contractual remedy may otherwise be barred due to
the doctrine of privity, more so when that renders a situation of lacunae and
injustice- White v Jones [1995] 2 AC 207.

Restrictive Covenants

In an example of sale and purchase of land, any terms of conveyance will

generally be confined to the seller and the buyer, and not extend to subsequent
buyers/owners.  Having said that, a restrictive or negative covenant such as bar
on use of the land for commercial purposes or on constructing permanent fixtures
on the land, may be carried forward with the land and enforced by the seller
against subsequent owners.  This was upheld in Tulk v Moxhay [1848] 41 ER 1143.

Exclusion/Limitation/Himalaya Clause

The question whether or not a third party could take benefit of an exclusion or
limitation clause (popularly known as the Himalaya clause) in a contract, more
particularly, in a contract of carriage, has been subject to much judicial bargain- E
McKendrick, Contract Law (Oxford University Press 2012). 

In the early case of Elder Dempster v Paterson Zochonis [1924] AC 522, where oil
was damaged by bad stowage in relation to a contract between the claimant and
the carrier, the court extended the exclusion in the bill of lading to the ship
owner, notwithstanding the absence of any direct contract of the ship owner with
the claimant.  This was so because the clause expressly mentioned ship owners,
reckoned to have operated as the agent of the carrier.  This stance was, however,
soon refuted in Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, which
enumerated several requirements for such an extension of exclusion clause to a
third person, such as stevedore, namely- (i) declaration of agency in the clause
itself that the carrier had contracted as agent of the stevedore for the purpose of
securing the benefit, and (ii) carrier must have the authority from the stevedore
to do so (even if by later ratification).  In this case, drums of chemicals were
damaged by stevedore during carriage under a contract between the carrier and
the claimant.  The court ruled that, as the stevedores were not parties to the
carriage contract, they could not avail the exclusion clause.

Notwithstanding the above, the position of Elder Dempster was once again

reiterated in New Zealand Shipping v AM Satterthwaite Ltd (The
Eurymedon) [1975] AC 154, where the Himalaya clause was held to be capable of
protecting third persons.  The case facts were similar as above cases, concerning
liability of stevedore under bill of lading executed between the shipper and the
carrier.  The court found a new contract between the shipper and the stevedore,
separate from and collateral to the main contract of carriage.  The above
reasoning based on agency and collateral contract were affirmed in the New York
Star case - Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty
Ltd [1981] 1 WLR 138. 

In relation to exclusive jurisdiction clause too, as evidenced in the Pioneer

Container case [1994] 2 AC 324, the doctrine of privity was excepted.  In this case,
the shipper allowed the carrier to sub-contract the carriage. The carrier then sub-
bailed the goods to the ship owner under certain bills of lading, which contained
an exclusive jurisdiction clause providing for Taiwan to be the forum to determine
any disputes. The Privy Council held that the exclusive jurisdiction clause in the
bills of lading were binding and enforceable against the shipper too. On the
contrary, such a jurisdiction clause was held to be not stretchable to the ship
owner from a contract between the shipper and the carrier.  This was so because
only the liability clause (and not jurisdiction) extended to the ship owner from the
original contract- The Mahkutai [1996] AC 650. 

The swing of law, however, stands settled to certain extent by the 1999 Act,
which expressly provides for the extension of negative clauses (protection), where
applicable, to third persons (section 1(6)).
Conclusion
It is clear that the doctrine of privity of contract is an established norm, and third
person action or right to enforce a contract of which he is not a party is an
exception to the general rule.  This position remains unshaken, notwithstanding
the debate around the redundancy of the doctrine in the contemporary
commercial context, as advanced by Flannigan, who condemned the doctrine as
being an error and inconsistent- (R Flannigan, ‘Privity- the End of an Era (Error)’
(1987) 103 LQR 564).

The above view is refuted by the school of advocacy defending the doctrine,
including inter alia, observations in response to and criticising the Law
Commission arguments for reform, by Stevens, Smith and Kincaid (R Stevens, ‘The
Contracts (Rights of Third Parties) Act 1999’ (2004) 120 LQR 292; SA Smith,
‘Contracts for the Benefit of Third Parties: In Defence of the Third-Party Rule’
(1997) 7 OJLS 643; and Kincaid, ‘Third Parties: Rationalising A right to Sue’ [1989]
CLJ 243).

On another note, the implementation of the doctrine has been much turbulent,
owing to the uncertainty and ambiguous contours of the common law
exceptions.  Although much has been sought to be streamlined through the 1999
Act, the legislation remains underused- H Beale, ‘A Review of the Contracts
(Rights of Third Parties) Act 1999’ in A Burrows & E Peel (eds), Contract Formation
and Parties (Oxford University Press 2010). 

Moreover, in terms of the second limb of the test under section 1 of the 1999 Act,
the position continues to be determined by courts on a case-to-case basis, with
little improvement from the situation previously under common law- T Roe,
‘Contractual Intention under Section 1(1)(b) and 1(2) of the Contracts (Rights of
Third Parties) Act 1999’ (2000) 63 MLR 887.  This statutory gap is reiterated by
Rhune, who advices for equivocal exclusion of the 1999 Act, so as to avoid
enforcement by third persons, where the contracting parties intend to do so- J de
Rhune, ‘Contracts (Rights of Third Parties) Act 1999’ (2000) The Legal Executive
22.  Unless so stated, all of the 1999 Act along with the common law exceptions
may be triggered towards spur of third person litigation, diluting the voluntary or
personal facet of contract law. 
Terms of a Contract Lecture

This chapter of the module guide will examine how the parties’ agreements are
interpreted. We will examine how the terms of the contract are identified, and
assess how the courts interpret the meaning of certain terms.

Are statements made pre-contract terms or representations?

The first point to address is in relation to statements made at the pre-contractual
stage, which are not in the written contract. The difficulty with these statements
is that they are often made orally. Do these statements form part of the
agreement or not? Generally, the courts will take an objective approach to
consider the intentions of the parties. There are a number of guidelines which the
courts use in order to ascertain the intentions of parties.

Pre-contractual statements can be categorised as one of the following:

 Puffs
 Terms
 Representations

A puff
A puff is a statement which cannot give rise to legal consequences, as they are
never meant to be taken literally and there is no intention to be legally bound. As
example of a puff would be an advertisement for a theme park which stated “you
will have the time of your life at our theme park”, what if you didn’t have “the
time of your life”, would you be able to sue for breach of contract? Evidently, this
is a statement not meant to be taken literally, and is an advertising gimmick. The
advertisement in Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 was argued to
be a puff unsuccessfully.

Term or representation? Why does it matter?

Both terms and representations provide a remedy for the aggrieved party,
therefore, why does it matter which of the two a statement is? The significance is
the form  of remedy, as the remedies are different for the two. First, it is helpful to
define the two.

Term: A promise as to the truth of a statement

Representation: There is no promise, but the statement induces the making of
the contract

The ability to claim damages

Term: On a breach of a term, there is automatically a right to claim for damages

Misrepresentation: A misrepresentation only allows a claim for damages if it can

be proven that the statement was made fraudulently or negligently, an innocent
representation will not result in a claim for damages (unless there is an exception
under Section 2(2) of the Misrepresentation Act 1967, see the misrepresentation
chapter for more information).

The measure of damages

Term: Damages will be based on an expectation measure - the claimant will be

put into the position they would have been in had the contract been properly
performed

Misrepresentation: Damages will be limited - the claimant will be put into the

position they were in before the contract was made.

It is clear from this that the measure of damages is favourable in the event of a
term breaching a contract, as opposed to misrepresentation. However, the ability
to recover for damages is slightly different.

Term: Damages will be recoverable based on the remoteness rule from Hadley v

Baxendale(1854) 9 Exch 341 (see chapter on damages for more information). This
test requires that the loss suffered by the claimant was ‘reasonably
contemplated’ by the parties

Representation: Fraudulent misrepresentation will allow for a claim for all direct

loss by the claimant, irrespective of forseeability.

In contrast to the right to claim for damages, a representation is much more

favourable, as the damage need not be in contemplation of the parties.
Therefore, it becomes clear that it is extremely important to the outcome of the
case whether a statement is classed as a term or representation, it could be the
difference between thousands of pounds in damages.
The difference between a term and a representation
This section will examine the key differences between a term and a
representation, and how the courts will make a decision on the matter. Some
presumptions and guiding factors which the courts will consider will be examined,
these are as follows:

1. Is the statement in writing?

2. Is there any specialist skill or knowledge from one party?
3. Is there reliance on the statement, or importance placed on the statement?
4. How long was the lapse of time between the statement being made and
the formation of the contract?
5. Could the party relying on the statement have verified it?

Is the statement in writing?

If a statement is in writing, there will be a presumption that it will form a term of

the contract. There are a variety of different rules related to this. Each will be
examined in turn.

The parol evidence rule

Even if there is a written contract, parties may claim there are other terms in the
contract, perhaps ones in another document, or ones from an oral agreement.

The starting point for a court determining whether a written term is a term or a
misrepresentation is that it will be a term, and the only term. The case
of Henderson v Arthur [1907] 1 KB 10 is authority for this point. Claims pointing to
other documents or oral agreements will usually be ignored. This is known as the
‘parol evidence’ rule.

It should be noted that there will be circumstances in which other documents or

oral agreements can form terms, but this is the initial starting point for the courts
when faced with terms reduced to writing. One such rebuttal to this can be found
in J. Evans & Son (Portsmouth) Ltd v Andrea Merzario [1976] 1 WLR 1078. If the
contract was intended to be partly written and partly oral, the parol evidence rule
will not apply. To this effect, the courts will look at the conduct of the parties
from the start to the end of the contract formation.
Exam consideration: Can you think of some example of conduct which may mean
that oral evidence is allowed and the parol evidence rule would be displaced?

Collateral contracts

The parol evidence rule can be circumvented by the use of a collateral contract.
The courts may hold that the oral statements following the formation of a written
contract may represent a collateral contract which runs alongside the written
contract. This collateral contract would be enforceable, the consideration for the
promise would be the making of the main written contract.

This interesting device used by the courts can only be found to exist if the promise
contains a term which is different to the ones in the written contract, and does
not contradict them at all - Henderson v Arthur [1907] 1 KB 10

The presumption is also limited by statute, any terms which fall foul of the Unfair
Contract Terms Act and similar legislation will be void.

The document being signed also must be one which would be expected to contain
contractual terms. In Grogan v Robin Meredith Plant Hire [1996] CLC 1127 a
signing of a time sheet which included clauses was held to be invalid as a time
sheet would not have been expected to include contractual terms.

Is there any specialist skill or knowledge from one party?

If the individual making the statement has some specialist skill/knowledge of the
contractual subject matter, or claims to have such knowledge, the presumption is
that the statement is more likely to be a term.

These two contrasting cases should help aid your understanding of this principle.

In Oscar Whell Ltd v Williams [1957] 1 WLR 370, a car seller represented his car to
be a model which was worth substantially more than the actual model he was
selling. This statement was held not to be a term, as the seller had no specialist
knowledge, and used what the registration book told him. Furthermore, the
buyers were actual car dealers, and should have discovered the truth.
In Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623 a
car dealer stated a car had only done 20,000 miles, when it had done significantly
more. As the statement was made by a car dealer, with specific knowledge, the
statement was held to be a term.

The distinction between these cases is the credentials of the person making the
statement. The private seller did not claim to, nor would it have been presumed
that he had specialist knowledge, whereas it would be presumed a car dealer
would.

Is there reliance on the statement, or importance placed on the statement?

If the individual relying on the statement makes it clear that the statement was of
such importance that they would unlikely have contracted without that
guarantee, the presumption is that the statement will be a term. This is a two-
part test.

1. Is the statement so important that the party would not have entered into
the contract but for the statement?
2. Is the above importance clear to the statement maker at the time this
statement is made, either by an express statement or it would be clear
from the contractual circumstances

The case of Bannerman v White(1861) 10 CB NS 844 Party A asked whether

sulphur was used in the product he was buying, explicitly stating he was not
interested if they included sulphur. He was assured by Party B that there was no
sulphur included. This is an example of expressly confirming the importance of a
term, therefore, when there was sulphur included, the defendant could rely on
this term to claim for breach of contract.

The case of Pritchard v Cook & Red Ltd unreported, 4 June 1998 provided a test to
determine importance. The question to ask is if whether the statement maker is
taking personal responsibility for the statement.

How long was the lapse of time between the statement being made and the
formation of the contract?

The first presumption relating to a lapse of time is that if a party makes a

statement, and soon after, the contract is reduced to writing without inclusion of
the statement in writing, that statement would not form a term of the contract,
and would only be a representation - Heilbut, Symons and Co. v Buckleton [1913]
AC 30.

In Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s Rep 611, it was stated
that the longer the interval between the statement and the contract, there is a
greater presumption that the statement is not a term.

These presumptions can be rebutted if the parties’ intentions are clear through
another means.

Could the party relying on the statement have verified it?

There are two presumptions which fall under this heading. First, if a statement
maker accepts responsibility for the truth of a statement, the statement will be a
term. This was seen in Schawel v Reade [1913] 2 IR 81, where Party A were
examining a horse, and Party B stated the quality of the horse was fine and they
did not need to inspect it. This statement was held to be a term.

The second presumption is that where a statement is made, but that party
advises or tells the other party to verify that statement, the statement will be a
representation, not a term. This is because the statement maker suggests the
statement may not be true and he would advise it is confirmed. Ecay v
Godfrey(1947) 80 Lloyd’s Rep 286 is good authority for this point.

Incorporation of terms
Once a statement has been identified as a term of a contract, it is not the case
that this will always be binding on the parties; the term must have been
successfully incorporated into the contract. Only following incorporation will that
term become a part of the contractual obligations. There are three main ways by
which this may be done:

1. Signature
2.
3. Notice
4. Previous course of dealings

Signature
The case of L’Estrange v E. Graucob Ltd [1934] 2 KB 394 outlines the importance
of a signature to the contractual document. It is held that if a party signs a
document containing contractual terms, they are wholly bound. The terms are
incorporated, and it is immaterial whether or not they read the document.

This presumption is limited in that the signature will not bind if it is fraudulently
obtained or is subject to a misrepresentation, as shown in Curtis v Chemical
Cleaning and Dyeing Co [1951] 1 KB 805, where the receipt for a dress excluded
all liability for damage. The customer only signed the receipt because the
assistant misrepresented the terms as applying to damage to the beads and
sequins on the dress.

Exam consideration: Aren’t the two decisions in L’Estrange v E. Graucob

Ltd  and Curtis v Chemical Cleaning and Dyeing Co  [1951] 1 KB 805 conflicting?
Surely the customer in Curtis should have been bound no matter what as
per L’estrange. Consider the commercial difficulties if the Curtis exception did not
operate.

Notice

In order for a term to be incorporated into the contract, the party who it confers
obligations upon must be or ought to be aware of its existence. In light of this,
there are two requirements.

1. The term must be included in a document in which contractual terms would

normally be found
2. There has been reasonable notice of the existence of these terms before or
at the time of contracting

Documents

The most famous case on this matter is Chapelton v Barry Urban District
Council [1940] 1 KB 532. In this case, Party A hired deckchairs from Party B. The
ticket he was given contained a term exempting the council for liability for any
injury in relation to the hiring of those chairs. It was held that the term was not
incorporated into the contract, as a ticket was a receipt, and not a contractual
document.
Here are the two main factors to consider when assessing a document to decide
whether it is contractual:

1. What the document is called is not conclusive - the document does not
have to be specifically identified as a contract
2. This document must be delivered before the contract or at the time of the
contract

Grogan v Robin Meredith Plant Hire [1996] CLC 1127 confirms that invoices, time
sheets and statements of accounts are not documents of contractual intent.
However, if one of these documents was part of the offer to contract, they would
be held to be a contractual document.

Reasonable Notice

Reasonable notice is an objective consideration of whether the party subject to

the terms are aware of the terms. There is no requirement that the party must be
privy to the actual contents of the terms, the need only be aware of the fact that
they exist.

Parker v South Eastern Railway (1877) 2 CPD 416 ruled that if the document
received is one that would normally contain contractual terms in, and it would be
common knowledge that this would be so, the party receiving the document
would be assumed to have notice.

This objective consideration is highlighted particularly in Thompson v London,

Midland and Scottish Railway [1903] 1 KB 41, where it was held to be irrelevant
that the individual was illiterate if this fact is not known by the party supplying the
document with the terms. If it was, for example, plainly obvious that the
individual was blind, the term would not be incorporated.

Terms can also be incorporated by referring the party to a different document

which has the terms in. Thompson v London, Midland and Scottish
Railway  highlights this, the ticket stated “subject to conditions set out in
timetables”. Although the actual contractual document did not have these
conditions in, the reference was enough to objectively incorporate them.

In order for the terms to be incorporated by reference, the document referred to

must be ‘readily available’. In Sterling Hydraulics Ltd v Dichtomatik Ltd [2006]
EWHC 2004 QB, a term referred the party to their general terms of sale. However,
these terms of sale were not sent with the contractual document, therefore were
not incorporated.

Before or at the time of contracting

The reasonable notice must be given either before or at the time of contracting.
In Olley v Marlborough Court Ltd [1949] 1 KB 532, a hotel excluded liability for loss
to personal possessions of the guests. This notice was on the doors of the hotel
rooms. The contract was formed at the hotel desk, therefore the notice was
deemed to be after the formation of the contract, and the exclusion could not be
relied upon.

One unique circumstance of incorporation and notice relates to ticket machines.

The case of Thornton v Shoe Lane Parking Ltd [1971] QB 163 has affirmed the fact
if terms of a contract are included on a ticket which is printed after the money has
been paid, the contract has been formed already, and therefore the terms are not
incorporated. Following, the terms relating to contracts through automated
machines must be made clear before the ticket has been purchased, perhaps by a
sign or another form of notification.

Different standards for different terms

More onerous or unusual terms have a higher standard of incorporation.

In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988] QB 433 a
term in the contract stipulated there would be a £5 per day late fee. The court
considered this term as onerous and unusual, and therefore would have had to
have been brought directly to the attention of the party subject to the term.
Examples of ways this might be done are:

 Large sized print in the contract

 Placed in a box in the document to highlight the term

It should be noted that the term does not need to be both onerous and unusual,
only one of the factors need be satisfied - Ocean Chemical Transport Inc v Exnor
Craggs Ltd  [2000] 1 All ER (Comm) 519

Previous course of dealings

There are some occasions where notice of terms will not be required to be given.
This will be on the basis that the parties have had a previous course of dealings,
and therefore will be aware of all the relevant terms. Where parties regularly
contract with consistency in terms and conditions, the terms may be held to be
incorporated - Hardwick Game Farm v Suffolk Agricultural Poultry Producers
Association [1969] 2 AC 31. It will be for the party attempting to rely on the fact
the term has been incorporated to prove the past dealings have been sufficiently
consistent enough to imply the terms into the contract.

The two requirements are:

1. There must be sufficient notice of the term

2. The previous dealings must have been sufficiently consistent

Sufficient notice

Sufficient notice refers to the terms being present at some point in the previous
dealings. In Spurling v Bradshaw [1956] 1 WLR 461, the parties had dealt with
each other for a number of years. After every contract, Party A sent Party B a
“landing account” which excluded their liability. Due to the fact there was such a
large amount of previous dealings, this term was held to be included in all of the
following agreements.

The parties in Spurling v Bradshaw had dealt with each other for a number of
years, but it is unclear exactly how many dealings are required to result in a
decision such as in Spurling v Bradshaw. The case of Hollier v Rambler Motors
(AMC) Ltd [1972] 2 QB 71 confirmed that three or four dealings over five years did
not result in any terms being implied due to previous course of dealings.

Exam consideration: As there is no law which tells us exactly how many previous
dealings are required to result in terms implied through a previous course of
dealing, in a problem question, ensure to contrast both cases and form a
reasoned judgment - there can’t be a wrong answer if you substantiate your
conclusion well!

Consistency in the dealings

This requirement highlights the need for consistency in the previous dealings, if
the terms between the parties are subject to change each time, incorporation
through previous course of dealings will not be possible.

McCutheon v David MacBrayne Ltd [1964] 1 WLR 125 was a case in which the
consistency in the dealings was not sufficient. In the past course of dealings, there
was inconsistency in whether one party was required to sign a “risk note” which
included an exclusion clause. In the particular dealing where the other party
attempted to rely on this clause, the risk note was not signed. The court could not
incorporate the term due to the inconsistency of the dealings, as the dealings only
sometimes required the risk note to be signed.

Nature of terms - express or implied?

A term may be incorporated into the contract either expressly or impliedly.
Express terms are those which have been explicitly communicated between the
parties orally or in writing. The intention of the parties is clear and there is little
discussion to be had of these.

Implied terms are those terms which fill the gaps in the contract. For example,
take a contract in which an individual goes to a restaurant for a meal. The express
contractual terms will be for the exchange of an amount of money for the food.
However, there will be implied terms as to the quality of the food; for example, it
will be implied that the food will be cooked correctly. If for each and every
contract each term needed to be expressed, it would be very tedious and
inefficient. Therefore, terms can be implied in the following ways:

1. Custom
2. Law
3. Fact

Terms implied by custom

There is potential for terms to be implied based on established custom or usage in

the relevant field. An example of this can be found in Hutton v Warren(1836) 1 M
& W 466, in relation to an agricultural lease. In this case, a term was implied by
custom that the tenants were entitled to an allowance for seed and labour. This
was usual and custom in agricultural leases. The main three requirements are
 1. The term is clearly established and ‘notorious’ in that trade context
2. The term is not inconsistent with any of the express terms
3. Both parties must be involved in the trade context in such a way that they
would be expected to be aware of the term being custom in that context

An example which satisfied this test was in British Crane Hire Corporation Ltd v
Ipswich Plant Hire Ltd [1975] QB 303, in which the ‘Contractors’ Plant Association’
terms were implied, as they were custom in the business context and both parties
were involved in the plant hire business.

Terms implied by law

Terms in law can be implied irrespective of the intentions of the parties, they
relate to legal obligations imposed either by the courts or by statute.

Terms implied by the courts

The basic requirements for a term to be implied by courts are:

1. The term is implied in all contracts of that type, as a policy matter

2. The term must be necessary
3. The term must be reasonable to imply

The case of Liverpool City council v Irwin [1977] AC 239 is the leading authority
here. In this case, the council let some flats to tenants. The communal areas of
the flats were not maintained, meaning the tenants could not use the stairs and
lifts. The contract was quiet as to the obligations of the council the repair any of
these communal areas. The tenants refused to repair these, and the council
attempting to evict them. The contract did give the tenants an explicit right to use
the stairways and lifts, therefore, incidental to this, the House of Lords implied a
term which required the council to keep these areas in repair, so that the tenants
could use them.

Therefore, it can be seen that the implied term was a necessity in order for the
tenants to be granted other rights in the contract. The implied term must be
incidental to the granted rights, and cannot be entirely separated. In Spring v
Guardian Assurance plc [1995] 2 AC 296 this approach was clarified. Lord Woolf
explained that it was also based on what ‘normal practice’ would be in the
context.

In Liverpool City Council v Irwin, as ‘normal practice’ would be for the council to
maintain the communal areas, this term was able to be implied.

Terms implied by statute

Where it has been deemed necessary by the legislature, certain terms have been
implied into contracts by statute. The most obvious example of this relates to the
sale or supply of goods.

The Sale of Goods Act 1979 imposes a variety of obligations on sellers and confers

various rights to buyers. Here is a quick overview of some of the more implied
terms

 Section 14(2) implied that in the sale of goods in the course of a business,
there is an implied term that the goods will be of satisfactory quality
 Section 14(3) implies that the goods sold will be fit for the required purpose
if the buyer has made this purpose clear
 Section 13(1) implies that where goods have been sold by description, the
goods will correspond with this description

Terms implied by fact

Some contracts will include terms which are implied by the facts surrounding the
contract, on the basis of the parties’ intentions. This is a strange implication, as
the courts have always wished to focus on giving effect to the parties’ intention,
surely if they intended something to be a term of the contract, they would have
expressed this wish and it would not have to be implied? The starting position,
therefore, is that the courts should not interfere and imply terms - Attorney-
General of Belize v Belize Telecom Ltd [2009] UKPC 10

However, it is sometimes necessary to imply facts in order fill the gaps in the
contract where the parties had not expressly set out certain terms. This can only
be where the court entirely satisfied that the contract actually meant to include
the terms implied at fact. There are two methods of implication at fact:

1. The ‘officious bystander’ test

 2. The ‘business efficacy’ test

The ‘officious bystander’ test

This test was created in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206.
Essentially, it would be a term implied because it would be so obvious that it
would go without saying. The test, as explained by MacKinnon LJ is:

“If, while the parties were making their bargain, an officious bystander were to
suggest some express provision for it in their agreement, they would testily
suppress him with a common ‘Oh, of course!’”

This standard is rather strict and subsequently it becomes difficult to imply terms
using it. The difficulty is that is requires a theoretical unquestionable assent by
both parties to the implied term.

The ‘business efficacy’ test

The business efficacy test refers back to our initial example of a customer buying a
food in the restaurant. This test allows the courts to imply terms based on
business efficacy, which would have been presumed to form terms of the
contract.

The Moorcock (1889) 14 PD 64 is a prime example of this. In that case, there was

a contract to unload a ship on the river Thames. The parties were aware the ship
would settle on the riverbed at low tide. The ship was damaged at low tide when
it was above hard ground, rather than mud as it should have been. There was not
an express term to ensure the ship was above mud at low tide, but the court
implied such a term.

The reasoning behind this term being implied is that this term must have been the
intention of the parties, as without this term, the contract could not have been
performed as intended and it was needed for the contract to work.

Generally, it was set out in SABIC UK Petrochemicals Ltd v Punj Lloyd Ltd [2013]
EWHC 2916 (TCC) that the two grounds a term can be implied into the contract on
the grounds of business efficacy are:

1. The term is necessary for the contracts operation

 2. It would be obvious the parties would understand this term was intended

Exam consideration: Under which of the two tests do you think our example of a
contract for food in a restaurant would be implied terms as to the quality of the
food fall?

Different types of terms

Contractual terms can be classified as one of three different types of terms:

1. Conditions
2. Warranties
3. Innominate

The importance of this classification is the extent a breach of each term will have
in the event they are breached.

Conditions and warranties

A condition is the most important of terms. If a condition of a contract is

breached, the aggrieved party can choose to bring all contractual obligations to
an end, and will have the right to sue for damages. A condition will be typically
described as being of fundamental importance to the contract.

In contrast, a warranty is of less importance to the contract. The result of a breach

of warranty is the innocent party can claim damages for that specific breach of
contract, but will not be able to bring the contract to an end, their contractual
obligations will continue despite this breach.

As you can identify, it will be of utmost importance when a party breaches a term
whether that term is a condition or a warranty. There are three main ways the
classification can be presumed:

1. Statutory presumption
2. Identified by parties
3. The importance of the term to the contract

Statutory presumption
As we are now aware, there are some terms of contracts which are implied by
statute. It may be the case that the statute in question expressly defines whether
the term is a condition or a warranty. To use the example we examined when
discussing terms implied at statute, the terms in the Sale of Goods Act 1979 are a
mixture of conditions and warranties, which are all expressly defined as such.

Identification of the term by parties

The parties may imply a term to be a condition or a warranty. Take the following
example of two terms in a contract.

 If the windows are not cleaned on time, I will have no further obligations
under the contract
 I will be entitled to £50 if the windows are not cleaned on time

There is no express reference to the terms here being a condition or a warranty,

but it is clear the first term would be a condition, as if it is breached, the
obligations under the contract are ceased, and the second one will only allow for
a claim for damages of some kind.

Interestingly, the fact that the parties have expressly labelled a term as a
condition or a warranty will not always mean this is the case. In L Schuler AG v
Wickman Machine Tools Sales Ltd [1974] AC 235 a term in the contract stated a
term would be a condition. However, the court held it was not a term, as due to
its lack of importance to the contract, to treat it as a condition was unreasonable.
This brings us to the final way of categorising a term.

Importance of the term to the contract

In the absence of statutory or party intention, a holistic overview of the contract

will be required in order to ascertain the importance of the term to the contract.
The presumption being the more important the term is to the contract, the more
likely the term will be a condition. Subsequently, if a term is less important to the
contract, it will more than likely be a warranty.

The two contrasting cases of Poussard v Spiders(1875) LR 1 QBD 410 and Bettini v

Gye(1875) LR 1 QBD give an excellent illustration of this. Both contracts involved
similar facts in which there was a singer who was contracted to perform in a
show. Both had terms in the contract that they must attend rehearsals and that
they must perform in the show.

In Poussard, the singer failed to perform on the opening night of the show. This
was held to be a condition. In Bettini, the singer failed to show up to rehearsals,
this was held to be a warranty. Clearly, the performance in the show was of more
importance in the contract, and could therefore be classified as a condition,
whereas the term to show up for rehearsal in Bettini could only be a warranty due
to its lack of importance to the contract as a whole.

Innominate terms

An innominate term is one which strikes a middle ground between a condition

and a warranty, and it would be unfair to classify the term as either. The result of
such a term is that the courts will classify the term upon breach of it. Once the
term has been breached, the court can clearly see the consequences and
seriousness of the breach, and are able to make a fully informed judgement on
whether it should be a condition or warranty.

An example of such a term comes in Hongkong Fir Shipping Co Ltd v Kawasaki

Kisen Kaisha Ltd [1962] 2 QB 26 in a contract for the lease of a ship. The term is
question was that the ship must “be in every way fitted for ordinary cargo
service”. This term was breached when the ship was not kept in adequate repair,
which resulted in the ship only being at sea for six months of the contract.

This breach was considered to be a breach of warranty, due to the less serious
nature of the breach. The same term could have been breached by the ship not
being seaworthy and actually sinking, destroying the subject of the contract,
therefore in such a case the breach would have been serious and would likely be
classified as a condition. The question the courts ask it:

 Will the breach deprive the innocent party of a substantial part of their
bargain?

If yes, the term is likely to be a condition, if no, the term is likely to be a warranty.

Exclusion Clauses Lecture

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During this module guide we have already referred to a number of exemption
clauses. An exemption clause in a contract is a term which either limits or
excludes a party’s liability for a breach of contract. In order for an exclusion clause
to be binding and operable upon the parties, the clause must:

1. The clause must be incorporated into the contract as a term.

2. The clause must pass the test of construction.
3. The clause must not be rendered unenforceable by the statutory provisions
in the Unfair Contract Terms Act 1977 or the Consumer Rights Act
2015 (enacting the Consumer Rights Bill 2013-14).

Exclusion clauses and the freedom of contract

It can be suggested that exclusion clauses are nonsensical in the context of
contract law; why would you exclude a party’s liability for a promise they have
made? However, it is evident that the exemption clause is a vital tool in allocating
the risk of contracts between the parties and allows for commercial efficacy. Take
the following example:

Party A delivers cargo on his one ship that makes him a moderate amount of
money to feed his family. Party B would like to deliver some expensive cargo on
Party A’s ship on a route that is notorious for storms and is a risky trip. Party B are
a national multi-million-dollar company. It makes sense in this context for Party A
to be entitled to an exclusion clause limiting their liability for damage to the cargo
- Party A would not be able to afford to replace the cargo, but Party B would be.
Without an exclusion clause, Party A would probably be unwilling to take on the
commercially beneficial contract.

The courts are happy for parties to use exclusion clauses, and to restrict them
would undermine the freedom of parties to contract on terms they wish to.
Nonetheless, the law will interfere in some forms of contract will be examined
later in this chapter. Generally, except for those the law interferes with, the
common law provides no rule whereby an exclusion clause would be declared
unenforceable on the grounds that it is unfair or unreasonable - Photo Production
Ltd v Securicor Transport Ltd [1980] AC 827.

Different types of exclusion clauses

Exclusion clauses can be created in a multitude of ways, and are able to exclude
whatever liability the parties to the contract wish to, except for those restricted
by legislation. Here are some examples of some common forms of exclusion
clauses:

 Clauses that exclude liability for anything included in the contractual

obligations.
 Clauses that exclude liability for consequential loss regarding anything in
the contractual obligations.
 Clauses that limit the remedies available to the aggrieved party, by
exclusion or by setting a time limit on those remedies.

Requirement 1- Incorporation
Incorporation of a term into a contract was discussed in detail in the previous
chapter, terms. Therefore, a detailed exploration of this will not be required here,
but you should ensure that you have read the terms chapter before you read this
chapter as an in depth understanding of incorporation is vital to exclusion clauses.
The three ways in which a term may be incorporated are:

1. Signature - if the exclusion clause is included in a contract which has been

signed, this will be held as incorporated into the contract (L’Estrange v E.
Graucob Ltd [1934] 2 KB 394).
2. Notice - if a term is included in a document in which contractual terms
would normally be found, and there is notice of the existence of these
terms before or at the time of contracting, the term will be incorporated
(Chapelton v Barry Urban District Council [1940] 1 KB 532.
3. Previous course of dealings - if there has been consistency in dealings
between two parties over a certain amount of time, the normal terms of
the contract will be considered to be incorporated despite no actual
express incorporation.

Exam consideration: Do you think it is fair that exclusion clauses are subject to
the same rules of incorporation as normal terms? Surely such terms should be
subject to a higher standard of incorporation to reflect their effect on the parties?

Requirement 2 - Construction
The requirement of construction refers to the ability of the exclusion clause to
cover the loss which has occurred. As a general rule, an exclusion clause must
only be construed on its natural and ordinary meaning, as per the case of George
Mitchell (Chesterhall) Ltd v Finney Lock Seeds [1983] 2 AC 803. Alongside this rule,
there are various devices of interpretation the courts will use in order to
circumvent the rule in order to provide fairness, usually in the context of
consumer and commercial relationships. Here are the various rules to remember:

 The courts will not infer a greater exclusion than that which is present in
the exclusion clause.
 Exclusion clauses are interpreted ‘contra proferentum’.
 Exclusion clauses will limit the scope of the clause to contractual matters.
 Limitation clauses will be construed more favourably.
 If the exclusion clause is inconsistent with an oral agreement, the clause
will not apply.

The courts will not infer a greater exclusion than that which is present in the
exclusion clause

The courts are very strict in their interpretation of exclusion clauses. In the case
of Andrews Bros (Bournemouth) Ltd v Singer & Co Ltd [1934] 1 KB 17 an exclusion
clause excluded ‘all conditions, warranties and liabilities implied by common law
statute or otherwise’. The contract was for the purchase of a ‘new’ car, but the
car had a substantial amount of mileage and was not new. The defendant
attempted to rely on the exclusion clause to absolve them of liability for selling a
car that was clearly not ‘new’. The courts held that the exclusion clause was not
operable, as the clause only excluded liability for any implied terms and the term
breached was an express term.

Exclusion clauses are interpreted ‘contra proferentum’

The contra proferentum rule is that where a term of a contract is uncertain and
ambiguous, the term is to be construed against the party attempting to rely on
the clause. In the context of exclusion clauses, this means the exclusion clause
would be inapplicable.

In this case of Houghton v Trafalgar Insurance Co. Ltd [1954] 1 QB 247, an

insurance policy excluded damage that occurred when the car was carrying ‘any
load in excess of that for which it was constructed’. The claimant had six people in
the car at the time of the damage, when the car was only designed to carry five
people. The courts decided that the clause was ambiguous, due to the term
‘load’, and therefore interpreted it in favour of the claimants. It was held to mean
the total weight the car could carry, not the amount of people, which meant the
insurance claim was valid and the exclusion clause could not be relied upon.

The above is an excellent example of just how strict the interpretation rules are;
any ambiguity in an exclusion clause will give rise to circumstances similar to this.

Exam consideration: Why exactly do you think the ‘contra proferentum’ rule acts
in favour of the party attempting to rely on the clause? Think about this in the
context of a consumer contracting with a business.

Exclusion clauses will limit the scope of the clause to contractual matters

The courts are unwilling to give effect to exclusion clauses which exclude liability
for liabilities other than contractual matters. The most common and key example
for this is exclusion clauses attempting to restrict liability for a tortious matter,
negligence.

The case of  Canada Steamship Lines v The King [1952] AC 192 created a test
which the courts will consider when assessing whether an exclusion clause
excluding liability for negligence will be valid. There are two situations in which
this may happen, which are outlined below in depth and are very important when
you are assessing clauses which exclude negligence:

1. Where the clause contains language which expressly excludes liability for
negligence.
2. Where the clause does not expressly exclude liability for negligence, but
excludes damage which would be considered to be negligent damage.

Where the clause contains language which expressly excludes liability for
negligence

If the clause language explicitly refers to exemption from liability of the

consequences of negligence, the courts will uphold this type of exclusion clause. 
A strict interpretation of this is required, only clauses which include the word
‘negligence’ or a synonymous word will be given effect to. The case of Monarch
Airlines Ltd v London Luton Airport Ltd [1997] CLC 698 held the words ‘neglect or
default’ to be sufficient to be classed as expressly mentioning negligence.
In EE Caledonia Ltd v Orbit Valve Co plc [1994] 1 WLR 1515 the clause excluding
‘any claim, demand, cause of action, loss, expense or liability from death of an
employee’ was held not to be one that expressly excluded negligence. This
exemplifies the courts’ strict approach to these matters.

Where the clause does not expressly exclude liability for negligence, but excludes
damage which would be considered to be negligent damage

In the absence of any express reference to negligence or synonymous words, if

the wording of the clause must be construed to cover negligent liability, only if
the only liability that arises on the facts is negligent may the exemption clause be
given effect.

This is a rather confusing rule, and is best examined with reference to a case.
In Alderslade v Hendon Laundry Ltd [1945] 1 KB 189, a laundrette was covered by
an exclusion clause that restricted recovery for lost items to twenty times the
laundering charge of the items. This exclusion would be one that covers a
negligent liability (breach of duty to take care for the items), therefore, it would
be given effect to as long as there was no other liability on the facts. For example,
if there was a term in the contract stating “it is a breach of contract if the
laundrette loses the items”, this would mean there would be contractual liability
on the facts; therefore the negligent exclusion clause could not be relied upon. On
these particular facts, there were no other claims for liability, meaning the
exclusion clause was upheld.

The words attempting to exclude liability must also be clear and unambiguous.
In Hollier v Rambler Motors AMC Ltd [1971] EWCA Civ 12, the relevant clause
excluded liability for “damage caused by fire to customer’s cars”. This was not
given effect to, as it needed be clearer that this referred to a fire caused by the
defendants, as it may have been suggested that they were referring to any fire,
not ones they had caused negligently.

Limitation clauses will be construed more favourably

The courts approach to simple limitation clauses has been more generous than
clauses which exclude full liability. In order for a clause to limit negligent liability,
the requirement is that the clause should be ‘clearly and unambiguously
expressed’ as per Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR
964.

However, the rule should not always be taken literally. Take for example, a clause
that limits liability for negligent acts to a sum of £1,000,000,000. In reality and
practice, this clause essentially limits all liability, as it would be very unlikely
liability would be over this sum. Therefore, the potential liability of the contract
and the actual limitation of the clause must be considered when deciding whether
it is a simple limitation clause or in reality it is fully excluding liability (Darlington
Futures Ltd v Delco Australia Pty Ltd(1986) 161 CLR 500).

Exam consideration: Do you think the distinction between limitation clauses

essentially acting as unlimited liability and those valid limitation clauses will be
difficult to ascertain? When applying this to problem questions ensure to discuss
both cases and come to a reasoned decision.

If the exclusion clause is inconsistent with an oral agreement, the clause will not
apply

The ruling from  J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1
WLR 1078 established that any oral agreement that contradicted an exclusion
clause would have priority, and the exemption clause would not apply.

In Mendelssohn v Normand Ltd [1970] 1 QB 177 a printed exclusion clause which

stated the car park would not be liable for any loss to contents in the car was held
to be invalid due to the car park attendant promising to lock the car after parking
it. Despite not being an explicit promise contradictory to the exclusion clause, the
presumption was that the attendant would be liable for protecting the cars
contents, thus displacing the exemption clause.

Limitations of exclusion clauses

Misrepresentation and fraud

An exclusion clause will not be operable and able to be relied upon if the person
attempting to rely on the clause had induced the other party to enter the contract
by misrepresenting the effect of the clause.
The previously mentioned case of Curtis v Chemical Cleaning and Dyeing
Co [1951] 1 KB 805 is of relevance here. The exemption clause was represented as
excluding liability for the beads and sequins on a dress, however, in fact, the
exemption clause excluded all liability. The defendants could not rely on the
clause due to the misrepresentation of the nature of the clause.

Exclusions of fundamental breaches of the contract

A fundamental breach of the contract refers to a breach of the purpose or key

term of the contract. For example, if Party A contracts to supply Party B with
vehicles, the fundamental term of the contract would be the supply of vehicles.
For many years, it was thought liability for a fundamental breach of a contract
could not be excluded under an exclusion clause - See Denning LJ in Karsales
(Harrow) v Wallis [1956] 1 WLR 936. The case of Photo Production Ltd v Securicor
Transport Ltd [1980] AC 827 rejected this view, confirming that there is no rule of
law that prevents liability being excluded for a fundamental breach.

Requirement 3 - The clause must not be rendered unenforceable by statutory

provisions
There are various statutory provisions which prevent the effect of certain
exclusion clauses. This section will examine and analyse two of the most relevant
pieces of legislation.

1. The Unfair Contract Terms Act 1977

2. The Consumer Rights Act 2015

Unfair Contract Terms Act 1977 (UCTA)

The UCTA is a piece of legislation which prevents the exclusion of liability in

certain circumstances. It applies both to exclusions of contractual and tortious
liability in contracts relating to (mostly) things done or to be done in the context
of business liability. Therefore, the first question to ask is whether or not a
contract has been formed which will fall under this context.

Business liability

Section 1(3) of UCTA defines business liability as arising in things done or to be

done in the ‘course of business’. Business is defined loosely in Section 14 of UCTA
to include the normal meaning of commercial activity, but also that it includes
professions, governments and local/public authorities.

Dealing as a consumer

Parties who deal as a consumer will not be subject to some the restrictions in
UCTA. Dealing as a consumer is defined in Section 12 as any contract not made in
the course of business. Just because it is a business/company making the contract
does not mean that it is automatically assumed that the contract will be in the
course of business.

The case of R&B Custom Brokers Co Ltd v United Dominions Trust Ltd [1998] 1
WLR 321 examines this distinction. In this case a shipping company purchased a
car for the company’s director to use. When the car developed some issues, the
shipping company sued for breach of contract. The question was asked of
whether the shipping company were dealing in the course of business, or as a
consumer when they purchased the car. As the car purchase was not an integral
part of the shipping business, the court held they were acting as a consumer.
Therefore, the test to apply is whether or not the contract forms an integral part
of the business; if not, they will be dealing as a consumer.

Key sections of UCTA

The following are the sections which impact the validity of exclusion clauses:

 Section 2: negligence liability

 Section 3: contractual liability
 Section 6: implied terms in contracts for the sale of goods and hire
purchase
 Section 7: implied terms in contracts for the supply of goods and services
 Section 8: terms excluding liability for misrepresentation
 Section 11: the reasonableness test

Each section will be taken and in turn they will be explained and analysed with
reference to the relevant case law.

Scope of UCTA, Exclusions and limitations

Before we start examining the legislation, is it worth discussing the scope of
UCTA, and whether there can be any exceptions to being bound by UCTA whilst
dealing as a business.

Section 13 of UCTA extends the definition of exclusion clauses to exemption

clauses making the enforcement of liability subject to compliance with a certain
condition, clauses excluded or limiting rights/remedies and clauses restricted or
excluding rules of evidence/procedure.

An example of a clause excluding or limiting rights/remedies comes in Stewart Gill

Ltd v Horatio Myer & Co Ltd [1992] 1 QB 600, in which the clause prevented a
buyer from exercising a right to set off any claims.

 Contracts of insurance, intellectual property, land, securities and contracts

related to companies are exempt from Sections 2, 3, 4 and 7 of UCTA - as
per Schedule 1, paragraph 1
 Contracts for marine salvage, carriage of goods by sea and charterparties
and exempt from UCTA - as per Schedule 1, paragraph 2
 Contracts of employment are exempt from UCTA - as per Schedule 1,
paragraph 4
 International supply contracts are exempt from UCTA - as per Section 26

Liability for negligence - Section 2

Negligence in this context is defined by the act. It refers to the obligation to take
reasonable care or exercise reasonable skill in relation to the express or implied
terms of a contract.

Section 2(1) rules that any exclusion clause which entirely excludes or limits
liability for death or personal injury arising from negligence will be unenforceable.

Section 2(2) rules that clauses provided exclusion of limitation for liability for any
other loss or damage arising from negligence may be enforceable, as long as the
term satisfied the test of reasonableness. (the test of reasonable will be discussed
later).

Other loss or damage in this context can include financial loss and damage to
property (Smith v Eric S Bush [1990] 1 AC 831.
Contractual liability and limitations

Section 6

Section 6 of UCTA applies to provisions which attempt to exempt liability for

terms which are implied by statute into contracts for the sale or supply of goods.
These implied terms were briefly mentioned in the previous chapter; ones from
the Sale of Goods Act 1979.

Section 12 of the Sale of Goods Act 1979 implies a term that the seller has title to
the goods and the right to sell it. Section 6(1)(a) of UCTA prevents an exclusion of
this term, no matter whether the seller is dealing as a consumer or in the course
of business.

Sections 13-15 of the Sale of Goods Act 1979 imply terms as to the satisfactory
quality, fitness for purpose and correspondence with samples. Whether or not
these terms can be excluded under a contract is dependent on whether the
contract is made in the course of business or as a consumer.

1. If one party is dealing as a consumer, liability for these breaches may not be
excluded (Section 6(2)(a) UCTA).
2. Where the party attempting to enforce liability is not a consumer, the
exclusion clause may be valid if it reasonable (Section 6(3) UCTA) - again,
whether or not an exclusion is reasonable will be discussed later in this
section.

Section 7

Section 7 relates to the implied terms from The Supply of Goods and Services Act
1982.

 Section 7(3A) rules that liability for Section 2 of the Supply of Goods and
Services Act cannot be excluded.
 Section 7(4) rules that liability for Section 7 of the Supply of Goods and
Services Act may be excluded when the exemption clause is reasonable.
 Section 7(2) rules that if one party is dealing as a consumer, liability for the
description, quality, fitness for purpose and correspondence with sample
may not be excluded.
  Section 7(3) rules that the rule from 7(2) may not apply as long as the
exclusion is reasonable and the contract is made in the course of business.

General contractual liability

Section 3 of UCTA applies to exclusions of breaches of strict contractual

obligations other than the implied goods obligations covered in Section 6 and 7.
There are two situations in which this may apply:

1. One party deals as a consumer (dealt with previously).

2. One party deals on the other party’s written standard terms of business.

Dealing on another party’s written standard terms of business

An examination of relevant case law will be required to understand this

requirement, as it has not been defined in the act. A succinct definition can be
found in Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC);

“They are terms which the company in question uses for all, or nearly all, of its
contracts of a particular type without alteration (apart from blanks which have to
be completed showing the price, names etc)”

A further clarification of this general rule can be found in St Albans City and
District Council v International Computers Ltd [1996] 4 All ER 481. Where a
standard form contract has been submitted and subsequently negotiated and
amended, it will still be considered standard for the purpose of Section 3 so long
as there has been no amendment to the relevant exclusion clauses and there is
no significant difference between the terms suggested and the terms agreed on.
This can be described as the ‘significant difference’ test.

Once the contract has satisfied one of ‘a’ or ‘b’, there can be no exclusion or
limitation of liability for breach of contract in relation to a contractual term except
if this term satisfies the test of reasonableness.

The test of reasonableness

Now we have an understanding of how each provision works, we can examine the
requirement of reasonableness which underpins most of the provisions. The test
for reasonableness can be found, enshrined in section 11 of UCTA.
Section 11(1) defines the test, as whether or not the term is a fair and reasonable
one to have included in the contract, in light of all circumstances known (and
ought to be known) at the time of contracting. Therefore, any information that
was discovered following the making of the contract would be irrelevant.

Section 11(5) rules that the burden of proving this reasonableness relies on the
party attempting to use the exclusion clause.

The factors to assess reasonableness are as follows:

1. Factors identified by legislation.

2. Factors identified by courts.

Factors identified by legislation

Section 11(2) directs us to Schedule 2 of UCTA for some guidelines which will be
considered when assessing reasonableness:

 Bargaining positions of the parties.

 Was agreement to the exemption clause as a result of inducement.
 Could any condition for the enforcement of liability be complied with?
 Were the goods made specifically at the request of the buyer?
 Was the contracting party actually aware of the existence and extent of the
term, irrespective of any rules of incorporation such as notice or signature

Factors identified by courts

In the context of commercial contracts, Adams and Brownsword (1988) 104 LQR

94 explained the two separate approaches the court could take:

1. The freedom of contract approach where commercial entities have the

options of allocating risk and insurance cover - Watford Electronics Ltd v
Sanderson CFL Ltd [2001] EWCA Civ 317.
2. The interventionist position - George Mitchell (Chesterhall) Ltd v Finney
Lock Seeds Ltd [1983] 2 AC 803.

As case law has developed, the freedom of contract approach has become most
commonly used.
When deciding upon which approach to use, the courts should consider these
factors:

 Equality of bargaining positions.

 Is the clause commonplace in that particular industry?
 Does the clause allocate risk between the parties appropriately?

The case of Thompson v T Lohan (Plant Hire) Ltd [1987] 1 WLR 649 clarified the
courts approach. It was made clear that it is not a question of whether the clause
in general in reasonable, but it is whether the clause between the parties made in
the exact circumstances, at that exact time could be held to be unreasonable.

In George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd  [1983] 2 AC 803 the
interventionist approach was considered. The interventionist approach is first
reluctantly used if there has been a decision of a lower court to not interfere. This
statement from Lord Bridge outlines this:

“The appellate court should treat the original decision with the utmost respect
and refrain from interference with it unless satisfied that it proceeded upon some
erroneous principle or was plainly and obviously wrong”

One example of a term that was considered unreasonable comes in Trustees of

Ampleforth Abbey Trust v Turner & Townsend Management Ltd [2012] EWHC
2137. This case involved an exclusion clause which excluded liability for
negligence as limited to the liability covered by the professional indemnity policy,
but also stated the liability was limited to the fees paid. The fees paid in the case
were around £111,000. The professional indemnity policy was limited at 10
million pounds. Therefore, this term was held to be unreasonable as the terms
were clearly incompatible; how could the exemption clause be limited to both
£111,000 and 10 million pounds?

In the context of consumer contracts, the decisions will mostly be based on the
equality of the bargaining positions between the parties. As often is the case, the
consumer will be in a weak position and it is likely that the exclusion clause would
not apply. This approach can be found in Smith v Eric S Bush [1990] 1 AC 831.

The effect of finding unreasonableness in the clause

If it is held that a term is unreasonable, the exclusion clause in question will not
be enforceable. However, there comes some difficulty when the unreasonable
term is part of a composite term which includes a variety of exclusion clauses -
does this mean the whole clause is invalid or only the unreasonable ones?

The decision in J Murphy & Sons Ltd v Johnston Precast Ltd [2008] EWHC 3024 TCC
was that the courts would be able to sever the unreasonable parts of the
composite term, giving effect to those remaining reasonable terms.

Consumer Rights Act 2015

The Consumer Rights was enacted in October 2015, giving effect to the Consumer
Rights Bill 2013-14. It mostly brings together and consolidates the existing law
protecting consumers. However, there are some interesting developments which
relate to the use of exclusion clauses which should be considered. Due to its
recent enactment, there is no case law to clarify the relevant terms; therefore this
section will focus purely on the statute.

The Consumer Rights Act will be applicable to contracts between a “consumer”

and a “trader”.

Definitions of “trader” and “consumer”

Section 2(2) of the act defines a trader as “a person acting for purposes relating to
that persons trade, business, craft or profession, whether acting personally or
through another person acting in the trader’s name or on the trader’s behalf.”

The definition of “person” will include natural and legal persons, as per Solomon v
Salomon [1897] AC 22 a company would qualify as a “person” for the purposes of
this act. This departs from the UCTA definition of consumer as one who makes a
contract not “in the course of business”. This means to prove an individual is
acting in the course of their business is now easier.

Exam consideration: Why do you think it has been made easier to prove a

contract has been made in the course of business? Do you think the decision
from R&B Customs Brokers Co Ltd v United Dominions Trust Ltd was unfair at all?

Exclusion of negligence liability

Section 65(1) is identical to Section 2(1) of UCTA, rendering all clauses attempting
to exclude or restrict liability for personal injury void.

Section 65(1) also excludes the restriction or exclusion of liability for any other
loss or damage arising from negligence. UCTA excludes this term unless it passes
the test of reasonableness. In the Consumer Rights Act, if the clause is fair under
the fairness test of Section 62 such a clause will be valid.

Both sections remain important as UCTA still applies to business to business

contracts, whereas the Consumer Rights Act applies to contracts involving a
consumer.

Exclusion of contractual liability

Section 31 of the Consumer Rights Act will apply to contracts which attempt to
exclude liability of any of the following provisions:

 Section 9, goods to be of satisfactory quality

 Section 10, goods to be fit for a particular purpose
 Section 11, goods to be as described
 Section 12, relating to any information to be shared pre-contract
 Section 13, goods are to match a sample
 Section 14, goods are to match a model seen or examined

Any clause which excludes liability for any of the above will be void. The UCTA
statute still remains important as it still applies to contracts between businesses
and between consumers only.

Fairness of an exclusion clause

As mentioned above, when a party is attempting to exclude or limit liability for

loss and damage other than personal injury and death, the exclusion will be valid
so long as the term is considered fair.

Section 62(4) defines a term as unfair if it ‘creates a significant imbalance in the

parties’ rights under the contract to the detriment of the consumer’. In order to
assess this, the courts will take into the subject matter of the clause and all of the
relevant circumstances.
Misrepresentation Lecture

A misrepresentation is a false statement of fact made that has the result of

inducing the other party to enter a contract. If a misrepresentation is shown to
have occurred, the effect will be that the contract becomes voidable. This means
that the party who was induced into the contract as a result of the
misrepresentation may choose to rescind the contract, but does not necessarily
have to.

Misrepresentation is based mainly in contract law, and has a relationship with

other areas of contract that this module guide will explore, such as terms
and mistake. There is also the negligent element of misrepresentation, which is
based in tort. Therefore, an understanding of tortious principles will be helpful in
understanding the law.

This chapter will be split into four distinct sections which should allow for a full
and comprehensive understanding of the law of misrepresentation.

1. Defining a misrepresentation
2. What makes a misrepresentation actionable?
3. What type of misrepresentation has been made?
4. The remedies for misrepresentation

1. Defining a misrepresentation
A misrepresentation is a form of statement made prior to the contract being
formed. There are two types of statement that can be made before a contract
forms, these will either:

1. Form part of the contract

2. Not form part of the contract, therefore becoming a representation.

The importance of this distinction has been explained in the chapter relating
to terms, so for a full understanding it is recommended that you have studied that
chapter. But to recap, if a statement is made that is considered to be a term, in
the event of this statement being breached, the aggrieved party would have a
remedy under a breach of contract. However, if a statement is not considered to
be a term, it will be held to be a representation, meaning if that representation is
not true, the remedy will be under the law of misrepresentation. In order to
distinguish between the two, the courts will consider the intentions of the party.

Intention
The courts will attempt to give effect to the parties’ intention insofar as this is
possible. This will be an objectively applied standard. There are a number of
presumptions related to when or how a statement is made which will help the
courts when they are attempting to ascertain whether a statement is a term or a
representation (Heilbut, Symons & Co v Buckleton [1913] AC 30). These factors
were covered in detail in the chapter on terms, therefore this chapter will provide
a simple overview of the factors. For more information on this you should refer to
the chapter on terms.

Statement is reduced to writing

If a statement has been reduced to writing, there will be a strong presumption

that this will form a term of the contract, as opposed to a representation. The
presumption is even stronger if the document in which the statement is included
has been signed (L’Estrange v F Graucob Ltd [1934] 2 KB 394.

If there is a statement reduced to writing, the parties may suggest there was an
oral agreement which is contradictory to the statement made in writing. The
courts are unreceptive to such claims, as per the ‘parole evidence’ rule.

Therefore, when there is a statement which has not been reduced to writing, the
presumption may be that it is a representation. Be careful, as oral statements can
still form a term of the contract; you should still considers the other factors
alongside this one.

Specialist skill or knowledge

If the statement is made by a party who has, or claims to have, specialist skill or
knowledge, there will be a presumption that this statement is a term. The cases
of Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965] 1 WLR 623
and Oscar Chess v Williams [1957] 1 WLR 370 are good authorities for this. In Dick
Bentley, the statement was held to be a term because it was made by a car dealer
who would claim to have specialist skill or knowledge. However, in Oscar Chess,
the statement was made by a private seller who had no real specialist skill or
knowledge.

Lapse of time

As a general rule, if there is a longer lapse of time between the statement and the
formation of the contract, the greater the presumption will be that the statement
is a representation.

2. What makes a misrepresentation actionable?

In order for a representation to become a misrepresentation, it must be first
proven that it was an unambiguous, false statement of fact. In order to prove this
misrepresentation is actionable, it must be shown that this representation
induced the claimant to enter the contract.

Unambiguous, false statement

False and unambiguous

Ascertaining whether a statement is false in the context of misrepresentation is

not as straightforward as a question of whether the statement is true or false. The
degree of falsity is a relevant consideration. The case of Avon Insurance plc v
Swire Fraser Ltd [2000] 1 All ER (Comm) 573 ruled that the test to apply is
whether or not the statement is “substantially correct”. This involves a
consideration of the inducement of the individual to the contract. If a statement
is made that was technically false, but most of the statement was true, the
statement would held to be true so long as the true part of the statement induced
the claimant into the contract, as opposed to the false part.

Whether or not the false statement is unambiguous refers to how the claimant
interpreted the statement. If, on a reasonable construction, the statement was
true, however, the claimant interpreted the statement in a different way which
rendered the statement false, the statement would not be unambiguously false,
and the claim would fail. The case of McInerny v Lloyds Bank Ltd [1974] 1 Lloyd’s
Rep 246 is an example of this, where the unreasonable interpretation of the
statement by the claimant meant the claim failed.
Statement

The word ‘statement’ has been broadly interpreted. ‘Statement’ does not just
refer to a verbal statement; it has been held that conduct can amount to a
statement for the purpose of misrepresentation. The case of Curtis v Chemical
Cleaning & Dyeing co Ltd [1951] 1 KB 805 outlined this fact. An example of this
can be found in Gordon v Selico (1986) 278 EG 53, where the concealment of
some dry rot during an inspection of a property was held to be a statement which
misrepresented the fact that the property was free of dry rot.

Silence or non-disclosure will not amount to a statement, it is clear that there

must be some kind of positive conduct to constitute a statement. Therefore,
although in Gordon v Selico the party was silent as to the existence of dry rot, the
conduct went beyond merely remaining silent; there were active steps to conceal
this fact.

Half-truths

A misleading half-truth will amount to a misrepresentation. A misleading half-

truth is a true statement which is misleading due to all relevant information not
being revealed. Take the case of Nottingham Patent Brick & Tile Co v Butler(1885)
LR 16 QBD, where a solicitor was asked whether any restrictive covenants
burdened some land. The solicitor answered that he was not aware of any, which
was technically true, as he had not yet checked. Of course, when he checked,
there was some restrictive covenants. Therefore, the statement was technically
true, but only half-true and misleading, meaning it would be construed as false.

Change of circumstances

If a statement is made which is true at the time of making, but subsequently

becomes untrue, there is a positive duty on the statement maker to ensure to
inform the relevant party of this.

In With v O’Flanagan [1936] Ch 575, the defendant was contracting for the sale of
his medical practice. A question was asked of the income of the practice. At the
time, business was excellent, so he truthfully disclosed this. The sale was made a
few months later, in which time the business’ income had dropped drastically.
Therefore, due to the change of circumstances, the defendant had a positive duty
to notify the plaintiff of this. The fact he didn’t was held to be a false statement of
fact.

In contracts which are negotiated over a long period of time, any statements
made of a volatile nature can be considered “continuing statements”, with which
extreme care should be taken.

Contracts of utmost good faith

Certain types of contracts will impose a higher duty of disclosure than under
normal circumstances. This is due to the nature of the relationships between the
parties. The most common example of such a relationship is that between an
insurer and the insured. It is the insured’s duty to disclose all material facts at the
time of the formation of the contract for insurance and failure to do so will result
in any form of claim under that insurance contract failing.

This differs greatly from the usual duties of contracting parties, whereby there is
no positive duty to disclose any facts (Keates v The Earl of Cadogan (1851) 10 CB
591).

False statement of fact

This section will be concerned with whether or not the statement was of fact. This
is a key component of misrepresentation, as a claim for misrepresentation will not
be actionable if the statement made was merely an opinion or a suggestion.

Statements of opinion

As mentioned above, the general rule is that a statement of opinion is not a fact.
This is exemplified in the case of Bisset v Wilkinson [1927] AC 177. In this case, a
farmer stated that “it was his opinion” that the land could hold 2,000 sheep. The
plaintiff claimed for misrepresentation, but it was held not to be a statement of
fact. This was due to two factors

1. He expressly stated it was only his opinion

2. He held himself out as having no expertise as to whether the land held that
many sheep, he had never claimed to keep sheep on the land, it was merely
a guess. The plaintiff was also aware of this fact.
It is irrelevant whether the statement of opinion made is unreasonable, or
whether the statement maker could subsequently check the validity of the
opinion and update the other party as to whether the statement was true or not
(Hummingbird Motors Ltd v Hobbs [1986] RTR 276).

In Hummingbird, an insurance company contracted the insured’s son to enquire

about the value of their contents. He incorrectly stated the value of the contents.
This was held to not be a representation, as he was in no better position than the
insurance company to know the value of his parent’s contents.

Therefore, the question to ask is whether the statement maker is in a better

position to know the truth than the plaintiff? If not, and the plaintiff is aware of
this, it will likely be classified as an opinion.

Exam consideration: Do you think a statement that amounts to an opinion would

still be held to be an opinion if the statement maker then went on to check the
truth of the opinion, and realised it was incorrect?

If the statement maker is in fact in a superior position to know the true fact, the
position is different. If the statement is made with a reasonable belief and they
have reasonable grounds to make this statement, it will amount to a statement of
fact. Correspondingly, if the statement maker holds themselves out to have
reasonably grounds to make a statement, when in fact this is not true, it will
amount to a statement of fact for the purposes of proving misrepresentation.

The case of Smith v Land & House Property Corporation (1884) 28 Ch D 7 is an

example of an opinion amounting to a fact. The landlord sold a property and
described the tenant as ‘a most desirable tenant’, and this was not true. Although
this may have been expressed as an opinion, the fact the defendant was in the
best position to know the true facts means this statement was held to be a
statement of fact.

Statements of intention

A misrepresentation as to future intention is usually not actionable for

misrepresentation, as it will not amount to a statement of fact. The statement of
future intent will not be held to be a fact even if the defendant intentionally
changes their mind as to their intentions (Inntrepreneur Pub Co v Sweeney [2002]
EWHC 1060 (Ch)).
A statement of future intention made with absolutely no intention at the time of
the statement, however, will amount to a misrepresentation, as seen
in Edgington v Fitzmaurice (1885) 24 Ch D 459.

Statements of law

A statement of law which is incorrect will amount to a false statement of fact for
the purpose of misrepresentation.  Pankhania v Hackney London Borough [2002]
NPC 123 concerned the purchase of a property to be used as a car park. There
was a statement that the occupier of the car park could be evicted within three
months under law. This was incorrect, and therefore classified as a false
statement of fact.

Inducement of the claimant

Once it has been proven that a false statement of fact has been made, the next
step is to prove that this statement of fact induced the claimant to enter the
contract. There are three requirements of inducement:

1. The representation made must be material

2. The representation must be known to the representee
3. The representation must be acted upon

The representation must be material

The representation must not be an inconsequential statement which is of

irrelevance to the plaintiff. In order to be actionable, the representation must be
material so that it would positively influence a reasonable person to enter the
contract. This is a relatively easy requirement to prove, as seen in Smith v
Chadwick (1884) 9 App Cas 187.

The test for whether or not a representation is an objective one. In JEB Fasteners
Ltd v Marks Bloom & Co [1983] 1 All ER 583 Party A was contracting with Party B
to purchase a company. Party B made a misrepresentation as to the accounts.
This misrepresentation was held to be unactionable as it had not induced the
contract; Party A only wished to secure the services of some of the directors, he
was not induced by the accounts.

There is a slightly alternate approach of the courts where a representee relies on

a statement that a reasonable person would not have considered a relevant
factor in entering the contract. In such a case, the representee will have the
burden of proving that this representation was material to their decision to
contract (Museprime Properties Ltd v Adhill Properties Ltd (1991) 61 P & CR 111).

The representation must be known to the representee

A representation will not be actionable and will not have induced the representee
unless the representee was aware of the representation.

Horsfall v Thomas  (1862) 1 H & C 90 is an excellent example of this. The

defendant hid a serious defect in a product, and when the representee discovered
this defect, he claimed this was misrepresented to him. It was held it could not
amount to a representation as the representee never inspected the product and
was therefore never aware of the misrepresentation.

A representation made to one party which then induces a third party may be
amount to a misrepresentation under the following circumstances:

If party A makes a misrepresentation to Party B, and Party B relays this

information to a third party, who is induced into the contract on that basis, it will
be a misrepresentation if Party A knew or ought to have known the
representation would be likely to be communicated to the third party. The
authority for this principles comes from Yianni v Edwin Evans and Sons [1981] 3
All ER 593.

In Yianna v Edwin Evans and Sons, a misrepresentation was made by some valuers
to a building society. The building society passed this information on to the
representee. The valuers knew or ought to have known this information would be
passed on to the representee (the third party), therefore, this representation was
actionable.

The representation must be acted upon

The final requirement of proving inducement is that the representation was

actually acted upon. The representor may attempt to prove the representee was
induced by another factor, and not the misrepresentation.
Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006]
EWCA Civ 386 outlines this requirement. In this case, it was questioned whether
the representee was induced to sign a contract by relying on information and
incorrect information given to him over the telephone. It was held that as an
experienced investor, he would not have been induced by a loose description
over the telephone, therefore, he did not act upon this misrepresentation.

It should be noted that the misrepresentation does not have to be

the sole inducement for the formation of the contract, as long as it formed part of
the inducement this will suffice - Edgington v Fitzmaurice(1885) 24 Ch D 459

If the statement is made fraudulently and is material, there is a strong

presumption that this statement has been relied upon - Barton v County Natwest
Ltd [1999] Lloyd’s Rep Bank 408

If the representee chooses to validate the truth of the representor’s statement,

unless the representation was made fraudulently, the statement will not act as a
misrepresentation. In S Pearson & Son Ltd v Dublin Corporation [1907] AC 351 it
was held that this mean the representee have relied upon their own judgment
rather than the statement of the representor.

If the representee has an option to validate the truth of the representor’s

statement, but refuses to do so, this will not prevent the statement as being held
to be a misrepresentation, as the representee has relied upon this statement,
thus being induced by it - Redgrave v Hurd  (1881) 20 Ch D 1.

3. What type of misrepresentation has been made?

Categorising the type of misrepresentation made is one of the most complex
parts of the law of misrepresentation, as there are four different types:

1. Fraudulent Misrepresentation - Common Law Tort of Deceit

2. Negligent Misstatement - Common Law via Hedley Byrne v Heller
3. Negligent Misrepresentation - Statutory under the Misrepresentation Act
1967
4. Innocent Misrepresentation - Statutory under the Misrepresentation Act
1967
The importance of these distinctions will become clear when each one is
assessed, as they have differing burdens of proof and remedies. The distinctions
are based upon the intention of the statement maker when the
misrepresentation is made. Types 2 and 3 will be dealt with under the one
heading of “Negligent misrepresentation”, the common law and statutory
differentiation affect the remedies available.

Fraudulent misrepresentation
The significance of a misrepresentation being classified as a fraudulent one is that
the measure of damages may be greater under certain circumstances. There are
two remedies available for fraudulent misrepresentation: recession and damages.

Representees should attempt a claim for fraudulent misrepresentation with

caution, as the courts impose a much higher standard of proof due to the serious
allegations. There may also be penalties in the event the claim is not made out.

Exam consideration: Why exactly do you think the courts may penalise parties
who attempt to make out a claim for fraudulent misrepresentation and fail to do
so?

A fraudulent misrepresentation was defined in Derry v Peek (1889) 14 App Cas

337 as a false statement which is ‘made knowingly, or without belief in its truth,
or recklessly, careless whether it be true or false’.

In order to assess whether a statement has been made fraudulently, you should
consider whether:

1. The statement maker knows that the statement he has made is false
2. The statement maker has reasonable grounds to believe his statement is
true even if it is false

In the case of a, there will clearly be a fraudulent statement.

In the case of b, if the statement maker has made a false statement, but has
reasonable grounds to believe his statement, it will not amount to a fraudulent
statement, as it has not been made recklessly or carelessly. A statement made
recklessly or carelessly needs to be a statement made which the statement maker
has no belief in the truth of (but does not know for sure that it is true or false).

Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 clarified that where a
statement is made where the statement maker has no idea whether or not it is
true or false, this statement would be fraudulent due to the recklessness
asserting it is true when it may not be.

True statements which become false

As we have discussed earlier in this section, some statements made may be true
at the time of the statement, but later become false. In those situations, it was
established that there is a duty for the statement maker to make the representee
aware of this change. However, for the purposes of ascertaining the type of
misrepresentation, would a failure to update the representee be classed as a
fraudulent misrepresentation?

In With v O’Flanagan [1936] Ch 575 it was suggested that misrepresentation as a

result of a change of circumstances might result in either a fraudulent
misrepresentation or a negligent one. Here are the circumstances in which this
can happen:

Fraudulent: The statement maker is aware there is a duty to notify the

representee of a change in circumstances (Banks v Cox (No 2) unreported)

Negligent: The statement maker is not aware there is a duty to notify the
representee of a change in circumstances.

Negligent misrepresentation
A negligent misrepresentation is made out where the statement maker has belief
in his statement, but has been careless in reaching this conclusion. It is considered
‘negligent’ as there has been a breach of duty of reasonable care and skill when
making the statement. As mentioned earlier in this section, the difference
between a negligent misrepresentation and a negligent misstatement is the
remedies available.
Negligent misstatement

A claim for a negligent misrepresentation that is based in tort under the common
law is usually referred to as a ‘negligent misstatement’ This claim was first
established in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC
465. As per Caparo Industries plc v Dickman  [1990] 2 AC 605, in order for a claim
in negligence to be successful, there must be a special relationship between the
parties so that there would be a duty of care which arises.

Subsequent case law which considered negligence of misrepresentations in the

context of duty of care concluded there would be a duty of care owed if there was
an ‘assumption of responsibility’ on the part of the statement maker (Henderson
v Merrett Syndicates Ltd  [1995] 2 AC 145). Whether or not there is an ‘assumption
of responsibility’ considers determining whether the statement maker has held
themselves out as possessing expertise or special skill, and is aware the other
party will rely on this information. It is irrelevant whether or not the statement
maker is an actual expert, only that they hold themselves out to be one.

Exam consideration: What do you think the above means for contracts in a

commercial context? May it be safe to assume the individual will always hold
themselves out to hold expertise or special skill since they are involved in a
particular business?

The significance of a negligent misrepresentation under a tortious claim is that

the aggrieved party has the burden of first proving the duty of care, and then
proving that this duty of care has been breached. As will become clear from the
following section, a claim under the statute is much easier to prove and therefore
favourable.

Negligent misrepresentation

An alternative approach to a claim for negligent misrepresentation is to pursue

the claim under statute. The Misrepresentation Act 1967 Section 2(1) allows for
such a claim. Here are the key components of a claim under the
Misrepresentation Act.

1. A misrepresentation has induced the representee to enter the contract

 2. The representee has suffered loss as a result
3. The statement, if made fraudulently, would have been actionable as a
fraudulent misrepresentation
4. If so, the representor will be liable for negligent misrepresentation unless
they prove they had reasonable grounds to believe the statement was true
up to and at the time the contract was made.

The significance of a negligent misrepresentation claim under statute is that the

burden of proof from the common law claim is reversed. Once the claimant
establishes there has been an inducement from a false statement of fact, it is to
the defendant to prove that they had reasonable grounds to believe the
misrepresentation they made was true up to and at the time of contracting. This
is advantageous to the representee, and thus a favourable action to bring.

The representor cannot escape liability simply by proving that he was not
negligent, it must be proven that he had reasonable grounds to believe the
statement, as shown in Howard Marine & Dredging Co Ltd v A Ogden & Sons
(Excavations) Ltd [1978] QB 574.

It should be noted that a claim under the Misrepresentation Act cannot be made
by a third party relying on a statement; the statute only applies where the party
to whom the statement is directly made is induced into the contract.

Innocent misrepresentation
With the development of the Misrepresentation act the claim for innocent
misrepresentation is extremely limited. A claim for innocent misrepresentation
will arise when a claim for negligent misrepresentation under the
Misrepresentation act has failed. The remedy for an innocent misrepresentation
will usually be rescission of the contract.

4. The remedies for misrepresentation

In the previous sections we have mentioned the advantages and disadvantages of
certain forms of misrepresentation being in the remedies. This section will first
discuss the different remedies available, and then explain the differing scales of
damages available to each type of misrepresentation.

Rescission
When a contract has been induced by misrepresentation of any kind, the contract
does still confer obligations upon the parties, but the contract will be voidable.
Voiding the contract as this stage is using the remedy of rescission. The aim of this
remedy is to put the parties back into the position they were before the start of
the contract.

There are a number of restrictions to the use of this remedy. These are known as
‘bars’ to rescission. Each of these shall be covered in turn.

Exam consideration: When answering a problem question on misrepresentation,

if you establish that the remedy would be rescission, ensure to attempt to apply
the bars of rescission to the contract to show a full understanding of the remedy.

Affirmation

Affirmation refers to an affirmation of the contract, whereby despite the

misrepresentation, the representee had held themselves out to be happy with the
contract as it is, therefore affirming the misrepresentation (Long v Lloyd [1958] 2
All ER 402.

In the event of a misrepresentation, it is expected that the representee, if they

are not happy with the contract, will take action to remedy the contract. Conduct
that will affirm the contract includes positive affirmation via words, positive
affirmation via conduct, or making no attempt to remedy the issue.

Lapse of time

The next bar to rescission is where there has been a significant lapse of time
between the formation of the contract and the discovery of the
misrepresentation. There is a differing approach by the courts for different types
of misrepresentation.

In the case of fraudulent misrepresentation, the lapse of time will begin at the
time the fraud was either discovered, or could have been discovered.

As for misrepresentation which is negligent or innocent, the lapse of time will

begin from the date of the contract. Leaf v International Galleries [1950] 2 KB 86
highlights this sometimes-harsh approach. In this case, a painting was purchased
as one painted by a famous painter. Five years later it was discovered this was not
true. Due to the lapse of time, this contract could not be rescinded.

Exam consideration: Do you think the courts approach to the lapse of time bar in
relation to negligent and innocent misrepresentation is fair? Consider the result if
there was no lapse of time rule.

Restitutio in integrum

This bar to rescission refers to where a rescission of the contract is no longer

possible. This is the case where the goods under the contract have been used,
consumed or have perished. In the case of Clarke v Dickson (1858) 120 ER 463 the
example of a contract for a sale of a cake we given; once this cake has been
eaten, the contract may not be rescinded.

If the event that the goods have only been partially consumed rescission is a more
complicated issue. In TSB Bank plc v Camfield [1995] 1 WLR 430 Restitutio in
integrum was referred to as an ‘all or nothing approach’ where this bar would not
be available if any of the goods at all had been consumed. In De Molestine v
Ponton [2002] 1 All ER (Comm) 587 this approach was rejected, and it was argued
a partial rescission may be possible where you can split the contract into multiple
parts.

Therefore, if there is a multi-part contract which you could sever and separate
some parts of, it will be possible to rescind the parts with goods that are yet to be
consumed. For example, a contract for one keg of beer could not be separated
and rescinded once consumed, however, a contract for 5 kegs of beer, each of
different types, could be separated so that the contract for any keg which was yet
to be consumed may be separated and rescinded.

Third party interests

Where rescission would encroach on the rights of a third party, the remedy will
be unavailable. Usually this will be where the goods have been sold to a third
party who had no knowledge of the misrepresentation.
Crystal Palace Football Club (2000)Ltd v Dowie [2007] EWHC 1392 gives another
example. In this case, rescission of the contract would have resulted in reinstating
his employment at Crystal Palace Football Club. Crystal Palace had hired a
replacement for him, and he was now employed at another football club.
Rescission of the contract would have adversely affected the rights of two third
parties; the replacement employee and the new club.

Damages
An award for damages is the most commonly sought after remedy for
misrepresentation. Although rescission is effective in releasing the parties from
their obligations under the contract, there are often circumstances in which the
damage caused goes beyond the contract in question. In this case, damages are
an effective remedy.

The measure of damages differs for each of the types of misrepresentation,

therefore each will be considered in turn.

Fraudulent misrepresentation

A fraudulent misrepresentation requires a high standard of proof, subsequently,

the measure of damages reflect the difficulty of proving this. The case of Doyle v
Olby (Ironmongers) Ltd [1969] 2 QB 158 is authority to the effect that damages
are awarded on a tortious basis, aiming to put the aggrieved party in the
position they would have been if the misrepresentation was true.

This standard is usually subject to a test of ‘reasonable forseeability’, where a loss

will only be claimable if the statement maker could have reasonably foreseen that
the fraudulent statement would have resulted in such a loss. Here is an example:

Party A sells Party B a car for £200. Party A is aware that Party B intends to sell the
car on for £2,000. However, Party A has fraudulently misrepresented the make of
the car, and it only worth £50 resale value.

In this case, it is ‘reasonably foreseeable’ that Party B would lose out on the profit
they intended to make on the resale, as Party A were aware of them attempting
to resell the car. Therefore, damages could extend to those.

However, following Doyle v Olby (Ironmongers) Ltd, it was established that

damages for a fraudulent misrepresentation are not subject to this test of
foreseeability, the damages will extent to all consequential loss of the control,
irrespective of foreseeability or remoteness of damage. Take the following
situation:

Party A contracts with Party B for the sale of 10 limos for £5000. There was a
fraudulent misrepresentation as to the quality of the limos. Party B had a
£1,000,000 contract to chauffeur a famous football team around, but due to the
lack of quality in the limos, has lost this contract. Even though Party A were not
aware of this, and it was unforeseeable, it qualifies as a ‘consequential loss’ and
therefore they would be liable for damages related to Party B losing out on this
contract.

For a full, in depth understanding of damages you should refer to the chapter on
damages. But from this explanation you should be able to understand the
measure of damages for fraudulent misrepresentation.

Negligent misrepresentation under the common law

Negligent misrepresentation claimed under Hedley Byrne v Heller and the tort of

deceit are extremely limited in comparison to those for fraudulent
misrepresentation. Unlike damages for fraudulent misrepresentation, under the
tort of deceit the damages are limited by the test of remoteness.

The test of remoteness, from Overseas Tankship (UK) Ltd v Morts Dock &
Engineering Co (The Wagon Mound) [1961] AC 388, only allows damages to be
claimed that are “reasonably foreseeable”. You should have an understanding of
how this will affect misrepresentations from the previous example of the contract
for the car.

If the claimant has also been negligent to some extent, damages may be reduced
by way of contributory negligence, apportioning some of the blame to the
claimant.

Negligent misrepresentation under the Misrepresentation Act

We have already discussed the misrepresentation act being a favourable avenue

as to a claim for negligent misrepresentation due to the burden of proof being
reversed. A claim made under the misrepresentation act is even more favourable
in respect of the damages it may award.
Under Section 2(1) of the Misrepresentation Act, damages are awarded on exactly
the same basis as fraudulent misrepresentation. Therefore, the statement maker
will be liable in damages for all consequential losses as a result of the statement,
irrespective of their forseeability. This was confirmed in Sharneyford Supplies Ltd
v Edge [1987] Ch 305.

Exam consideration: This may seem particularly harsh. What are the justifications
for this? Think about how exactly a claim under Section 2(1) is proven and how a
statement maker would absolve himself of liability.

Section 2(2) of the Misrepresentation Act clarifies the relationship between

rescission and damages. The courts have identified that rescission can often result
in unfair consequences, and therefore, damages may be awarded as an
alternative to rescission. This means that there cannot be a claim for
rescission and  damages; it must be one or the other.

Interesting, this suggests that damages may be subject to the same bars that
rescission is (affirmation, lapse of time, third party rights and impossibility). This is
because of the exact wording of the statute, it states damages may be awarded
“in lieu of rescission”, therefore, when rescission is not possible, it may be held
that damage will not be a possible remedy either.

The current position from Zanzibar v British Aerospace (Lancaster House

Ltd) [2000] 1 WLR 2333 is that in order to claim for damages under the
misrepresentation act, the right to rescission must still be active at the time.

Innocent misrepresentation

As mentioned previously, the only remedy for innocent misrepresentation is

rescission, meaning damages will not be possible for an innocent
misrepresentation.

Can liability from misrepresentation be excluded in the contract?

In order for liability for misrepresentation to be excluded, Section 8 of the Unfair

Contract Terms Act 1977 rules that the term must be:

1. Reasonable
2. Clear and precise as to the exclusion of misrepresentation
Reasonable refers to the “test of reasonableness” which you should refer to the
chapter on exclusion clauses for a full understanding of.

“Clear and precise” will require an express mention of misrepresentation being

excluded. In Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 “Liability
for any pre-contractual misrepresentation will be excluded” sufficed.

Mistake

The second of the vitiating factors of a contract we will be exploring is Mistake.

The law of mistake refers to where both parties have entered a contract under
the same fundamental mistake, which will render the contract void.

The significance of the contract being void will be analysed in detail later in this
chapter, but the essential characteristic of a void contract is that there is no
choice of the parties whether or not to void the contract, under the law it will
automatically be so. This differs from the ‘voidable’ position
under misrepresentation.

Mistake is a remedy which can arise either through the common law or equity,
however, the decision in Great Peace Shipping Ltd v Tsavliris Salvage
International) Ltd [2003] QB 679 has limited mistake mostly to the common law.

There are three broad categories of mistake which this chapter will explore:

1. Non-Agreement mistake
2. Mutual agreement mistake
3. Unilateral mistake

Non-Agreement mistake
A non-agreement mistake refers to where the parties have reached a valid
agreement, but would like nullify this agreement due to a mistake as to the terms
or subject of the agreement. This is often referred to as a ‘common’ mistake, as a
claim for non-agreement mistake requires that both parties made the same
mistake. The two main requisites for non-agreement mistake are as follows:

1. The mistaken matter must be one which is fundamental to the parties’

decision to enter into the agreement
 2. The party wishing to rely on common mistake must have reasonable
grounds for their belief

This type of mistake will operate where one of the parties wishes to negate the
agreement for mistake, but the other party denies this mistake.

Exam consideration: In the event of a mistake in which both parties are mistaken,
why do you think one party may deny there is a mistake?

For the purpose of requirement ‘a’ the courts have pre-determined a number of
categories which will be presumed to be fundamental to the parties’ decision to
enter the contract. We will now examine each of these in turn.

Res Extincta - Mistake as to the subject matter

The case of Strickland v Turner (1852) 7 Ex 208 confirmed that a mistake as to the
subject matter would amount to one which is fundamental to the decision to
enter the agreement. In this case, there was a contract for the annuity of a
person’s life, but there was a (rather large!) mistake, in that the person was
already dead.

Perishing of specific goods

The perishing of specific goods will amount to a fundamental mistake, as per

Section 6 of the Sale of Goods Act 1979.

Non-existent goods

Section 6 of the Sale of Goods Act 1979 requires that the goods have perished,
therefore, they will have needed to exist at some point. Goods which have never
existed at all will also amount to a fundamental breach, as in Associated Japanese
Bank (International) Ltd v Credit du Nord [1989] 1 WLR 255.

Exceptions - has one party taken responsibility for non-existence?

You should be careful when automatically jumping to the conclusion that because
the subject matter of the contract does not exist, that this will amount to a valid
claim for mistake. If there is a term in the contract which allocates the risk to one
party in the event of non-existence or non-delivery of the goods, any breach of
this will amount to a breach of contract, meaning a claim for mistake would not
be able to be made. McRae v Commonwealth Disposals Commission(1951) 84 CLR
377 is authority for this point.

The distinction between mistake and frustration

A further common error when assessing contracts for the doctrine of mistake is to
identify the non-existence of a subject matter as a matter for frustration. The
doctrine of frustration is covered in a later chapter, but essentially relates to
where after the formation of the contract, the obligations under the contract
become impossible to complete.

The key distinction is where the impossibility of the contract occurs. If the
impossibility, unknown to the parties, is present before the creation of the
contract, this will amount to mistake. Where the contract becomes impossible
subsequent to the creation of it, this will amount to frustration. The case
of Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1977] 1
WLR 164 is evidence of this. This distinction will become clearer once you cover
the chapter on frustration.

Res Sua - Mistake as to ownership

This category of fundamental mistake refers to where two parties’ contract for
the purchase of some kind of property, but unknown to both of these parties, the
purchaser of the property already owns the property.

Cooper v Phibbs (1867) LR 2 HL 149 is an example of such a situation. In this case,

there was an agreement to purchase a lease, but unknown the both parties, the
purchasing party already had a life entitlement to the lease through other means.
Therefore, the contract could have been set aside for mistake.

Mistake as to quality of the subject matter

Mistake as to the quality of a subject matter is a fairly straightforward concept; it
refers to where both parties believe the subject matter is of a certain quality, or
has a certain quality, whereas in reality it does not. An example would be a
purchase for a famous footballer’s boots which have been signed them, if it was
believed to be of this quality at the time of contracting, and then subsequently
came to light that they were not actually the footballer’s boots, this would be a
mistake as to the quality of the subject matter.

Is a mistake as to the quality sufficiently fundamental to a contract?

The law of mistake is concerned with the impossibility of a contract being

completing, therefore, this suggests that mistake as to the quality of a subject
matter would not be sufficiently fundamental to a contract, as it would not render
the contract impossible. Despite this, case law has developed to allow the
doctrine of mistake to operate in specific circumstances which will be covered
later in this sub-section.

A claim for mistake or a breach of the satisfactory quality term?

The distinction between these two principles is very important. Section 14(2) of
the Sale of Goods Act 1979 outlines that all goods sold should be of ‘satisfactory
quality’. This refers to the tangible quality of the goods, some examples are as
follows:

 A brand new car which keeps breaking down

 Some headphones in which only one side of the audio works
 An expensive suit which is discoloured after the first wash.

A mistake as to quality refers to a mistake of ‘some quality which makes the thing
essentially different from the thing it was believed to be’, as per Lord Atkin in Bell
v Lever Bros Ltd [1932] AC 161.

Case in Focus:  Bell v Lever Bros Ltd  [1932] AC 161

In this case, the Lever Bros appointed the two defendants to positions of power in
a subsidiary of his company. The company was extremely successful and made a
lot of revenue. The two defendants then retired. As part of their retirement
package, they received large bonuses of £30,000 and £20,000 each. It was
subsequently discovered that the defendants had been involved in a cartel in
order to steal information and make money. Lever Bros attempted to claim that
the contract was void for mistake of fact.
The House of Lords held the contract was not void for mistake. The mistake was
not sufficiently close to the subject matter of the contract (the retirement
payments).

Examples of this would be:

 A contract for a particular artist’s work, and it turns out not to be by that
artist
 A contract for 10kg of potassium, but it turns out to be a different
substance

A comparison between the two would be a contract for an amount of ‘Granny

Smith’ apples. If the apples were rotting and full of worms, this would be a breach
of the ‘satisfactory quality’ term under Section 14(2), whereas if the goods were a
different type of apples, this would be a claim for mistake as to the quality of the
goods. It should be noted that just because there is a mistake as to the quality of
the goods this does not mean that this will amount to a claim for mistake.

The test of ‘essential difference’

Lord Atkin in Bell v Lever Bros Ltd stated the goods must be essentially different in
order to amount to a claim for mistake. Later in his judgment he clarified this
approach and outlined its scope and limitations. It can be concluded that it has an
extremely narrow scope.

Lord Atkin used this hypothetical scenario in order to highlight his point:

“A buys a picture from B: both A and B believe it to be a work of an old master,

and a high price is paid. It turns out to be a modern copy. A has no remedy in the
absence of representation or warranty”

Lord Atkin stated that it was not enough to merely state ‘If I had known the true
facts I would not have entered into this contract’. His view was that this kind of
issue could easily be prevented by the use of an express term in the contract.
Taking the example of the purchase of a piece of art, if the artist is important, one
of the terms of the contract should be ‘this contract is for the sale of a piece of art
by …’. This would ensure a remedy.
The judicial reasoning for such an approach is unclear. Lord Atkin referred to his
hypothetical scenario, explaining that between a contract for the painting actually
painted by the old master, and the modern copy, there was no essential
difference. The subject matter of the painting was still that of the old masters.

Treitel, one of the most distinguished academics of contract law, disagrees with
this approach, and suggested a new approach whereby if a particular quality is so
important to the parties that they use it to describe the subject matter, it could
amount to a mistake. Therefore, in Lord Atkin’s hypothetical scenario, as they
describe the subject matter with reference to the old master, it could amount to a
claim for mistake. Despite this being a seemingly logical approach, it was rejected
in Leaf v International Galleries [1950] 2 KB 86.

In Leaf v International Galleries,  a contract was formed for a painting believed to

be created by the famous artist, Constable. There was no express term as to it
being a Constable painting, therefore the courts confirmed the approach of Bell v
Lever Bros Ltd, stating:

‘What he contracted to buy and what he bought was a specific chattel, namely, an
oil painting of Salisbury Cathedral [and]… it remains true to say that the plaintiff
still has the article which he contracted to buy’

Clearly, again, the courts needed an express term in the contract to result in a
breach of contract for a remedy; mistake could not provide a remedy in this case.

The limited exception to the ‘essential difference’ rule

There is one extremely limited exception to the ‘essential difference’ rule, which
will allow a claim for mistake to be as to the quality of the subject matter. This
rule was created in Associated Japanese Bank v Credit Du Nord SA [1989] 1 WLR
255. The facts are key, and they are as follows:

Case in Focus:  Associated Japanese Bank v Credit Du Nord SA [1989] 1 WLR 255
In Associated Japanese Bank the Bank (A) had an agreement with a party (B) to
purchase four machines from him. Following the purchase, they would lease the
machines back to him. The transaction required a guarantor, therefore a second
bank (C) guaranteed the agreement for the first bank. The party selling the
machines turned out to be a fraud, and once the bank had paid for the machines,
he disappeared and they discovered the machines never existed. The bank then
attempted to enforce their guarantee against the second bank for the £1,000,000
purchase price. The second bank attempted to rely on mistake as to the quality of
the subject matter.

The courts decided that the subject matter of the contract was essentially
different to what the second bank agreed to, and therefore the contract was void
for mistake. The essential difference was that the contract was for the guarantee
of existing machines, not machines which did not exist.

The application from Associated Japanese Bank v Credit Du Nord SA  is extremely

limited; therefore it is sensible to conclude that under most circumstances,
mistake as to the quality of the subject matter will not result in an actionable
claim for mistake.

Mutual agreement mistake

An agreement mistake is one in which a fundamental mistake has been made
relating to the terms of the contract which prevent the formation of a legally
binding contract. This is often referred to as an ‘offer and acceptance’ mistake.
The parties will subjectively believe they have formed a legally binding contract,
but in reality have not done so. This first examination of agreement mistake will
concentrate on mutual agreement mistake, where both of the parties to the
contract hold this belief.

An example of a mutual mistake can be found in Raffles v Wichelhaus  (1864) 2

Hurl & C 906, where a contract was made for the purchase of some cotton which
would be delivered by a ship named ‘Peerless’ which sailed from Bombay.
However, there was two ships named ‘Peerless’ which sailed from Bombay, one in
October and one in December. One party believed the contract was for the
delivery in October, and the other party believed it was a contract for the delivery
in December. Therefore, as per offer and acceptance rules, there was no mirror
agreement due to this mistake. This was a reasonable mistake to make, therefore
the contract was void for mistake.

The case of Smith v Highes  (1870) LR 6 QB 597 provides a contrasting set of facts.
In this case, a contract was formed for the purchase of some oats, which the
purchaser had previously used a sample of. When the oats for the contract were
delivered, the purchaser complained that they were new oats, rather than old
oats, and he was mistaken as to this. The contract never stated that the oats were
to be old or new.

This argument was rejected, as an agreement was formed via the sample of the
oats. The purchaser agreed to purchase a lot of the oats he had been given a
sample of, which he was, there was no question as to the agreement, and the
purchaser was simply mistaken as to the sample of the oats being old when they
were new.

Test for mutual agreement mistake

The courts will apply an objective test to the question of whether there is an
agreement, considering whether one party’s interpretation was more reasonable
than the others.

The leading authority for this test is Smith v Hughes,  which was examined above.
The most reasonable approach to the contract was the one of the defendants,
who believed the agreement was formed based on the sample oats.

The doctrine of fault in mutual agreement mistake

The courts have identified a doctrine of fault in the law of mutual agreement
mistake. Even where there can been a valid agreement, if one party is responsible
for the mistake of the other party, the court will decide the case in favour of the
aggrieved party.

This approach is highlighted in Scriven Bros and Co. v Hindley and Co. [1913] 3 KB
564. In this case, there was an auction for two lots of cargo from a ship. One was
hemp, and one was tow. The auction description did not list that the two lots of
cargo had different contents. Both lots of cargo were in the same packaging, and
there were no distinguishing factors between the two (aside from the contents). A
prospective buyer inspected one of the lots of cargo which contained hemp, and
assumed that both lots contained hemp based on the identical packaging. He then
purchased the other lot, which contained tow.

The issue here is that the parties had formed an objective agreement for that
specific lot, and there was no mutual mistake. However, as the mistake was
caused by the auctioneer’s actions of not distinguishing the two lots, the courts
ignored this fact and the contract was void for mistake. The key fact is that the
defendant had no duty to examine the different lots, but the auctioneer did.
The doctrine of fault is also evident in Smith v Hughes, it was the fault of the
buyer that they did not expressly indicate that old oats were required. If the seller
was aware of this, the case would have been decided differently. Therefore, the
doctrine of fault can work for or against either party in the contract; it is not
always the buyer or always the seller.

Unilateral mistake
This form of mistake applies when only one of the parties to the contract is
mistaken as to part of the contract. Unilateral mistake is limited, but will usually
operate in circumstances where one party is mistaken as to part of the contract,
and the other party is aware of this fact and takes advantages of it.

Unilateral mistake as to the terms of the contract

The three requirements that will render a contract void for unilateral mistake in
relation to the terms of a contract are:

1. One party is mistaken as to a term of the contract, and would not have
entered the contract but for this mistake
2. The mistake is known or reasonably ought to be known to the other party
3. The mistaken party is not at fault

Requirement one is fairly straightforward, the courts will consider whether, if the
mistaken party had known the real truth as to their mistake, they still would have
entered into the contract. If they would have, this cannot amount to an
actionable claim for mistake.

Exam consideration: Is this requirement similar to the ‘inducement’ principle

from the doctrine of misrepresentation?

Case in Focus: Chwee Kin Keong v Digilandmall.com Pte Ltd [2005] 1 SLR(R) 502

In this case, Digilandmall.com Pte Ltd were selling HP laser printers online. They
owned two separate websites. On both of the sites the printer was priced at over
$3000. A technical mistake was made by an employee and it was then priced at
only $66 on both websites. Chwee Kin Keong discovered the mistake and
purchased a large amount of these printers. The website refused to sell and
Chwee Kin Keong commenced an action for damages.
It was held that the contract was void for mistake. This was because the
defendant had constructive knowledge of the mistake. This was clear because
they purchased a large amount, knowing a mistake as to the price had been
made.

This means the party benefitting from the mistake cannot simply claim ignorance
to a mistake, under many circumstances it should be obvious that a mistake has
been made if the deal is too good to be true.

The third requirement is fairly straightforward and obvious and is given its literal
meaning; if the mistake made is unreasonable they would be considered to be at
fault.

This type of mistake seems fairly straightforward to prove on a cursory

examination, but the requirements have proven fairly difficult to meet. In Hartog
v Colin and Shields [1939] 3 All ER 566 a contract was formed for a certain type of
hare skin. The seller had priced it at a price one-third the custom price. Similar to
the previous case examined, the defendant had taken advantage of the mistake
that they either were aware of, or should have been aware of.

Unilateral mistake as to identity

The most common form of unilateral mistake that is actually actionable is where
there has been a mistake of identity. Take the following example:

Party A sells some goods to Party B. Party A is mistaken as to the identity of Party
B, who is in actual fact a fraud. Party A transfers property of the goods to Party B
before receiving anything in turn. Party B then sells the goods on to Party C, and
Party B disappears.

To understand the significance of a claim for mistake as to identity, the result of a

claim under fraudulent misrepresentation in this example should be examined. As
you will know, the two remedies for misrepresentation are damages and
rescission. In the case of damages, as Party B has disappeared, Party A will have
nobody to direct the claim for damages to, and will have no chance of recovering
anything. As for rescission, as Party B passed property to the goods to Party C,
who were unaware of the misrepresentation, there will be a bar to rescission in
the form of third party rights. As you can see, fraudulent misrepresentation is not
an ideal claim to bring where the statement maker cannot be traced.
A claim for unilateral mistake as to identity provides a remedy in this situation.
Due to the mistake, the contract is void at the time of creation, therefore, Party B
would never have title in the goods, and therefore could never pass title to Party
C. This means that Party A has one of two remedies; they may recover the goods
from Party C, or sue Party C under the tort of conversion.

Unfortunately, there is a clear issue here, Party A and Party C are both innocent,
yet one will be subject to an unequitable result. Lord Denning in Lewis v
Averay [1972] 1 QB 198 suggested in the event of mistake as to identity, the
contract should be void, not voidable. This would protect the third party, as Lord
Denning suggested they are generally the most innocent party and the one in
need of protection. This approach was rejected by the other judges and instead
the courts outlined circumstances in which a mistake to identity would be
actionable.

Lewis v Averay - What is a mistake as to identity?

The decision in Lewis v Averay made a distinction between ‘true mistakes as to

identity’ and mistakes as to attributes. Mistake as to the attributes of a party is
not sufficient for an actionable claim of mistake, for example, the
creditworthiness of a party. The mistake must be as to the actual identity of the
party.

An example of this can be found in King’s Norton Metal Co v Edridge Merrett &
Co (1897) 14 TLR 98, where a fraudulent party pretended to be a business, but in
reality the business they claimed to be did not exist. The contract was for the sale
of goods, and the fraudulent party disappeared once he had received the goods.
The aggrieved party claimed that the contract was void for mistake as to identity.

The court ruled that in this case, the innocent party was not concerned with the
identity of the party, they only had an interest in the creditworthiness of the
fraudulent party. In other words, the innocent party was mistaken as to an
attribute (creditworthiness) of the fraudulent party, not their identity, meaning
the claim failed.

Interestingly, in respect of mistake as to identity, the courts have differentiated

between contract that are made face-to-face, and written contracts.

Mistake as to identity in written contracts

The courts will presume that when a contract is in written form the parties only
intend to contract with the parties named in the contract. Therefore, if the
contract turns out to be with anyone other than the individuals named in the
contract, it will be void for mistake. Cundy v Lindsay  (1877) App Cas 459 is
authority to this effect.

Face-to-face contracts

The law on mistake as to identity is still confusing. The current authority is the
House of Lord decision in Shogun Finance Ltd v Hudson [2003] UKHL 62, however,
an examination of the prior law will help you understand this decision and analyse
the judicial reasoning.

The case of Phillips v Brooks Ltd [1919] 2 KB 243 was authority that ruled the
general presumption is that identity is not crucial to the decision to contract. In
that case, a fraudulent party went into a jewellery shop, claiming to be ‘Sir
George Bullough’, and wrote out a cheque in his name and gave his address. The
seller checked the name and address, and was content that these matched and
therefore allowed the fraudulent party to leave the shop without paying. The
court held that this contract could not be void for mistake as to identity as the
seller intended to contract with the person in the shop. The judgement of that
person’s creditworthiness had persuaded the seller to allow the sale on credit
terms, not his identity.

The recognised exception to this rule is where an innocent party intends to

contract with a company, and the individual they contract with holds themselves
out to be an agent of that company, but in reality has no authority to act
- Hardman v Booth(1863) 1 H & C 803

The case of Ingram v Little [1961] 1 QB 31 was based upon similar facts to Phillips
v Brooks Ltd, yet the judgment was different. In Ingram v Little, two sisters were
selling a car. A fraudulent party claimed they were someone named ‘Hutchinson’.
The sisters would not accept the cheque at first, but after checking his name,
initials and address against his telephone number they accepted the cheque.
When the fraudulent party did not pay the sisters, they claimed for mistake as to
identity, which was allowed.
This decision does not seem reconcilable with Phillips v Brooks Ltd. In both
circumstances it would appear the seller was only interested in the
creditworthiness of the buyer. The checks as to the identity of the buyer were
similar in that there were minimal efforts, which would suggest it was not the
identity of the party they were interested in, only the creditworthiness.

It is suggested that the courts approach in Ingram v Little was an analysis of the

offer and acceptance principles. The sisters presented an offer which was only
acceptable by Hutchinson, therefore, as the fraudulent party was not Hutchinson,
he could not accept the contract, making it void. There is still difficulty here as it is
clear the fundamental issue was not his identity, it was his creditworthiness. It has
been suggested that the courts were more lenient in Ingram v Little due to the
sisters being elderly women, who were protected for policy reasons.

Overall, it is clear that the law on mistaken identity in face-to-face contracts was
unclear. Unfortunately, Shogun Finance v Hudson has done little to help that!

The decision in Shogun Finance v Hudson

Case in Focus: Shogun Finance v Hudson  [2003] UKHL 62

In Shogun, a fraud (A) visited a motor dealer (B) and expressed an interest in
purchasing a particular car. During negotiations the fraud used a stolen driving
license as proof of his identity, name and address. The dealer was happy with this
and they both agreed on a price for the car. The finance company (C), Shogun
Finance, were contacted and they agreed to finance the hire purchase of the car.
The document signed for the finance agreement used the stolen driving license’s
identity, but the fraud signed himself with a forged signature. The finance
company carried out the required credit checks as to the identity of the stolen
driving licence and approved the finance. The fraud then took the car and sold it
on to an innocent third party (D), subsequently disappearing.

It was decided that the contract was void for mistake as to identity. Due to the
forged contract, the finance company believed they were entering into a contract
with the owner of the stolen driven license, whereas in reality it was with the
fraud.
The case was decided on a 3 to 2 majority to the effect that the innocent third
party, Party D, was not protected. There was varying opinions of the judges as to
the judicial reasoning behind this decision:

Lord Hobhouse, of the majority, used a construction of the document Party C

signed. Party C contracted with the real owner of the stolen identity, and as the
document was signed with a forged signature, on construction of the rules of
offer and acceptance, the contract was void for mistake as the finance company
only intended to deal with the real owner of the stolen identity. This was of
fundamental importance to the contract as they had run credit checks on the
individual.

Lord Walker and Philips, also of the majority, followed Lord Hobhouse’s
arguments with regards to the written contract being the key factor. They also
used rules of offer and acceptance, similar to the approach in Ingram v Little.
However, they also maintained the presumption that identity is not usually
material in face-to-face contracts.

Lord Nicholls and Millett, who were the dissenting judges, supported the view of
Lord Denning, that the third party should be protected. This quotation sums their
argument up nicely:

“It is surely fairer that the party who was actually swindled and who had an
opportunity to uncover the fraud should bear the loss rather than a party who
entered the picture only after the swindle had been carried out”

The two judges argued there should be no distinction made between parties
identified in written documents and parties identified face-to-face. They argued if
the finance company was present in the room to check the details (making the
contract face-to-face) the result of the circumstances would be no different.
Therefore, the argued that fraud as to identity should render the contract
voidable, which protects the innocent third party.

Analysis of the decision in Shogun Finance v Hudson

Essentially, the decision made was that the contract was between the finance
company and the person named in the written document. As the signature was
forged, this person had in fact not entered into the contract, someone else had
(Party A), and therefore, the contract was void for mistake as to identity.
Therefore, the distinction between written contracts and face to face contracts in
the context of mistake as to identity still remains. The fact the Shogun Finance v
Hudson decision was made on an extremely close 3 to 2 majority suggests that it
remains an uncertain area of law. Unfortunuately, for now, this decision of the
House of Lord will remain binding and should be used as authority for the
difference between face-to-face and written contracts, despite the questionable
approach.

To summarise the arguments against the difference, there seems to be little logic
in distinguishing between the two approaches. It seems in most situations the fact
that the contract is made face-to-face or via written correspondence does not
have an impact on the outcome of the contract.

Documents signed by mistake

A party may be released from a contract where they can prove that they have
signed the document by mistake. This arises where they sign a contractual
document which is fundamentally different to the contract they believe it to be.

Saunders v Anglia Building Society [1971] AC 1004 is authority for this form of

mistake. It should be noted that the party signing the document must not be
careless when signing the document. In Saunders v Anglia Building Society, the
party did not read the document before signing it, this was held to amount to
carelessness, meaning their claim for mistake was not valid.

Duress and Undue Influence Lecture

This chapter will examine the doctrines of duress and undue influence. These

doctrines both provide a means for an individual to avoid an already concluded
contract. These doctrines operate where the individual has been forced or
coerced into a contract by threats, unfair pressures or unreasonable influences.
The justification for these doctrines is fairly obvious, it is that it prevents one
party taking unfair advantage of another. The effect of these doctrines on a
contract is that it makes the contract voidable at the request of the aggrieved
party. The chapter will start with the doctrine of duress, before moving on to
undue influence.

Duress
Duress is defined as some kind of threat, violent or other action which is used to
coerce somebody into doing something against their will. In the context of
contract law, this refers to where a party uses duress against the other party in
order for them to enter into a contract which they either do not want to, or
where the terms of the contract are unfavourable to them.

History and development

The doctrine of duress has always been recognised in the English common law,
here are some of the main examples of the forms it may come in:

 Duress by the threat of violence - Barton v Armstrong  [1976] 1 AC 104

 Duress by threat of imprisonment - Williams v Bayley  (1886) LR 1 HL 200
 Duress by creating a threatening environment - Antonia v Antonia [2010]
EWHC 1199
 Duress by threat to damage property - Dimskal Shipping Co SA v
International Transport Workers’ Federation, The Evia Luck [1991] 4 All ER
871
 Duress by economic pressure - D & C Builders v Rees [1966] 2 QB 617

The two categories this chapter will explore are threats of force or violence, and
economic duress.

Duress by threat of violence

Duress by threat of violence is self-explanatory. If a party is able to prove they
were coerced into a contract due to a threat of violence, the contract will be
voidable. There are two main requirements of duress by threat of violence:

1. The nature of the threat must be sufficient to amount to duress

2. The effect of the threat must have been that it forced the claimant into the
contract
The nature of the threat

The threat made must be sufficient in its nature to amount to duress. Usually, the
indicator the courts have used is whether the threat is illegal. If the threat is
illegal, there is a presumption that this will amount to a sufficient threat. The
illegal act in question must be a criminal act, as opposed to one of a tortious
nature. The case of Barton v Armstrong [1976] AC 104 is authority for this point.
In this case, a threat of murder was one amounting to an illegal act of sufficient
nature.

Effect of the threat

The distinction to make when ascertaining the effect of the threat is whether
there is a threat which results in a claimant voluntary entering the contract, or
whether the claimant involuntary entered the contract. In the first case, it is
suggested that the claimant would have had another alternative to entering the
contract, and would therefore not be sufficient to amount to duress, as the
claimant must have no other alternative.

The criminal case of Northern Ireland v Lynch [1975] AC 653 provides an effective

explanation of this. The judges accepted that even in extreme circumstances
there is always usually an option, but it must be that only one option
is realistically available.

In contract law, there has been unwillingness to accept the position in Northern
Ireland v Lynch. It has been suggested that the claimants will must be overborne
and he must have no choice. However, if we examine Barton v Armstrong,  surely
despite the threat of murder there was still a choice. Overall, it can be concluded
that the threat must be one which is illegal

Economic duress
Economic duress refers to a threat to an individual’s financial interests. This was
not suggested as a potential ground of duress until the case of Occidental
Worldwide Investent Corporation v Skibs A/S Avanti, The Siboen and the
Sibotre  [1976] 1 Lloyd’s Rep 293. A typical scenario of such duress would be as
follows:

 Party A and Party B negotiate a contract

  Party B threatens to breach the contract unless the contract is renegotiated
 Party A opt to renegotiate the contract in favour of Party B because of the
potential outcomes in B were to breach the contract

In this situation, a breach of contract by Party B could have any number of

unwanted consequential results for Party A. Perhaps the contract is a subcontract,
and if Party B breach the contract, Party A will be liable in damages to another
party.

This doctrine requires a fine balance with the commercial needs of society.
Legitimate economic pressure can be recognised as a useful negotiation tool, and
the courts risk going too far with the scope of economic duress.

The doctrine of economic duress was established in the case of Pao On v Lau Yiu
Long [1980] AC 614. Lord Scarman set out these two requirements:

1. Coercion of the will that vitiates consent

2. The pressure or threat must be illegitimate

The first requirement, that requires a coercion of the will that vitiates consent,
was highly criticized by academics such as Atiyah. It was also criticised in Dimskal
Shipping Co SA v International Transport Workers’ Federation, The Evia
Luck  [1991] 4 All ER 871. The judges criticised the ‘coercion of the will that vitiates
consent’ requirement on the ground that a victim of duress’ consent has not been
vitiated, as they are completely aware of what they are doing, they consent
intentionally. This has been recognised in the criminal law, where it is recognised
that the party under duress does consent, but they do so with no other potential
alternative. Therefore, when the opportunity arose in DSND Subsea Ltd v
Petroleum Geo Services ASA [2000] BLR 530, Dyson J altered the requirement to
be:

1. Pressure
2. The practical effect of the pressure is that there is compulsion, or lack of
practical choice for the victim
3. The pressure is illegitimate
4. The pressure is a significant cause in inducing the claimant to enter the
contract

Lack of practical choice

A practical example of this principle in operation can be found in B & S Contracts
& Design Ltd v Victor Green Publications Ltd [1984] ICR 419. In this case, there was
a contract to erect some exhibition stands. A week before the due date of the
contract, the builders refused to work unless they were paid more money. If the
claimant had not paid the extra money, they would have suffered serious loss as a
result of the contract they had involving the completed exhibition stands. In this
case, they had no realistic option but to pay the extra money to avoid the serious
losses.

Here are some classic examples of conduct which can amount to economic
duress:

 Threat to stop supply of components needed in manufacture process

- Adam Opel GmbH v Mitras Automotive Ltd [2007] EWHC 3205 (QB). This
was because there was no realistic choice other than to pay the higher
price for the components
 Threats to withhold delivery once under contractual obligation - Carillion
Construction Ltd v Felix (Ltd) [2001] BLR 1
 Revising a contract for carriage of goods where it would be impossible for
the claimant to obtain alternative carriage quick enough for the goods if
they require those goods for another contract - Atlas Express Ltd v Kafco
(Importers & Distributors) Ltd [1989] 1 All ER 641.

Case in focus:  Atlas Express Ltd v Kafco (Importers & Distributors) Ltd [1989] 1
All ER 641

In this case, Kafco were contracted with a third party for the supply for baskets.
Kafco had an agreement with Atlas Express for delivery of the baskets. Atlas
Expressed realised they had miscalculated the size of the baskets, and would have
to spend more on delivery and cut their profits. Atlas told Kafco if they did not pay
a higher price for delivery, they would not deliver the baskets at all. Kafco had no
choice but to pay the higher price, as if they did not delivery the products to the
third party they would go into liquidation. They paid the price and later claimed
economic duress.

It was held that Kafco had no choice but to pay the price. If they had decided to
claim damages for the failure of Atlas to delivery the goods, it would have not
compensated them for missing the subsequent contract with the third party, and
a claim forcing them to deliver under a specific performance remedy would have
been too time consuming, due to the immediate requirement of delivery to the
third party. Therefore, the only viable option for Kafco was to pay the higher
price.

Illegitimate pressure or threat

The third requirement that the pressure must be illegitimate. It is difficult to
distinguish between an illegitimate and a legitimate one, as there is expected to
be a certain amount of pressure in commercial bargaining. As Dyson J described it
- ‘illegitimate pressure must be distinguished from the rough and tumble of the
pressures of normal commercial bargaining’ (DSND Subsea Ltd v Petroleum Geo
Services ASA).

An example of lawful pressure is seen in R v HM Attorney-General for England

and Wales [2003] UKPC 22.

Case in Focus:  R v HM Attorney-General for England and Wales  [2003] UKPC 22

This case involves an SAS member who was party to a specific patrol who were
considered infamous due to an amount of controversy surrounding their actions.
In light of this, the Ministry of Defence forced all members of the patrol to sign
confidentiality agreements. The member in question refused to do so, and the
Ministry of Defence threatened him with a demotion to a less important unit. The
member signed the contract, but eventually claimed he was forced to sign it
under duress.

The court explained that some demands may be lawful, but would constitute
duress. However, if the demand is justified, the pressure would not amount to
duress. In this case, the threat of a demotion amounted to legitimate pressure in
light of the importance of the confidentiality agreement. The member in question
still had a choice; he could have taken the demotion in order to opt out of
confidentiality. The court described the pressure as ‘overwhelming’, but not
illegitimate.

It was established in Kolmar Group AG v Traxpo Enterprises Pvt Ltd [2010] EWHC

113 (Comm) that generally speaking, a threat to break a contract would be
regarded as illegitimate, especially in cases where they were aware this threat
would result in a breach of contract.

The test to apply was confirmed in R v Attorney-General for England and
Wales. Two things should be examined:

1. The nature of the pressure

2. The nature of the demand

The threat of a lawful action would not necessarily mean that the pressure was
legitimate. For example, blackmail using a lawful threat would be an illegitimate
threat.

Can duress be lawful?

It has been established in CTN Cash and Carry Ltd v Gallagher Ltd [1994] 4 All ER
714 that duress may be lawful under certain circumstances, despite the
unreasonableness of the demands.

Case in focus:  CTN Cash and Carry Ltd v Gallagher Ltd [1994] 4 All ER 714

In this case, CTN contracted with Gallagher for some goods. Unfortunately, CTN
delivered the goods to the wrong place of business. Gallagher attempted to
remedy this, but the goods were stolen before they could do so. CTN mistakenly
believed the goods were at the risk of Gallagher, as they believed they had
delivered them properly. CTN therefore invoiced Gallagher for the goods, with a
threat of removal of credit facilities if the price was not paid. Gallagher opted to
pay for the goods, and attempted the reclaim the money based on duress.

The courts held there was no duress, because of these three reasons:

 The parties dealt with each other at ‘arm’s length’

 The threat was lawful
 CTN legitimately believed they were entitled to the money, there was no
intention to put pressure on Gallagher
Exam consideration: Do you think this case would have been decided differently
if Party A were aware they were not entitled to the money?

These requirements are difficult to meet, when parties are dealing as commerce,
it is rare they will be dealing at ‘arm’s length’. Nevertheless, this approach was
confirmed in Progress Bulk Carriers Ltd v Tube City IMS LLC, The Cenk
Kaptanoglu [2012] EWHC (Comm) 85. Withdrawing credit agreement was
confirmed as a lawful threat in Bank of Scotland plc v Cohen,  unreported, 16
January 2013.

The consideration of whether the parties have dealt in good or bad faith
Good faith on the part of the party pressuring the other party seems to be
relevant for proving a lawful threat falls under the ambit of lawful duress. In CTN
Cash and Carry Ltd v Gallagher Ltd the good faith element was that they were
unaware the risk in the property had not passed due to their incorrect delivery
address.

In relation to illegitimate threats, dealing in good faith seems of less relevance.

Although it was confirmed that dealing in bad faith makes it more likely that the
actions are considered illegitimate (Kolmar Group AG v Traxpo Enterprises Pvt
Ltd  [2010] EWHC 113), it does not bear much significance, the act itself will be
focussed on.

Was the pressure a significant cause in inducing the claimant to enter the
contract?
The case of Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620 is the
leading case for the degree to which the pressure must have induced the contract
to the party in relation to economic duress. It must be a ‘decisive or clinching’
inducement. The correct test to apply in this context would be the ‘but for’ test;
but for the duress, would the claimant have entered the contract on those terms?

The requirement of protest

In order for there to be an actionable claim for duress, the victim of the duress
must take action to remedy or protest the duress at the time of the duress or
shortly after.

An example of this principle in operation can be examined in North Ocean

Shipping Co Ltd v Hyundai Construction Co Ltd, The Atlantic Baron [1979] QB 705.
In this case, the duress was a threat to breach the contract unless extra payment
was made. The claimant made this extra payment, under duress, but only
attempted to recover the extra payment under the principle of duress eight
months later. The claim would have been an actionable claim for duress, but due
to the lack of protest at the time of the duress, there was no remedy available.
Eight months was seen as too long of a delay.

This requirement of protest is not required at the time of the contract formation.
The courts have correctly recognised that in some cases it would be impossible to
protest until performance is complete. Therefore, it is a requirement that if
protest would not have been viable at the time of the contract being made, it
must be made immediately after (Kolmar Group AG v Traxpo Enterprises Pvt
Ltd  [2010] EWHC 113.

In the event there is continuing duress, the protest may come at any point during
the duress or after it has stopped, it is irrelevant whether duress continues long
after the contract formation, as long as the protest is made when possible after
the duress ceases (Antonio v Antonio [2010] EWHC 1199 (QB)).

Bars to duress claims

It should be noted that the bars to rescission can apply in relation to claims for
duress. These are covered in depth in the previous chapter, Mistake, but a quick
run through of those is as follows:

 Lapse of time
 Third party rights
 Affirmation
 Restitutio in integrum (no longer possible due to a change in the goods)

Undue influence
The doctrine of undue influence provides a remedy where contracts have been
entered into as a result of improper pressure. This usually occurs due to a
relationship between the parties being exploited to gain an advantage.

Undue influence is similar to duress in nature, but the doctrine of undue influence
is an equitable doctrine as opposed to the common law basis of duress. The key
differing factor is the duress is based on a threat, whilst undue influence will be
based on a relationship that has been exploited.
The types of undue influence
Lord Browne-Wilkinson identified two distinct classes of undue influence
in Barclays Bank Plc v O’Brien [1994] 1 AC 180:

1. Actual undue influence

2. Presumed undue influence which can be categorised as:
o Protected relationships - pre-determined presumptions as to
relationships which will give rise to a presumed influence
o Other cases - relationships in which influence can be presumed, but
is not automatically done so

The evidential burdens of the different types

Before exploring the exact requirements of the differing types of undue influence,
the importance of the different types of evidential burdens should be outlined
briefly for a full understanding of the doctrines when we go on to explore them in
greater detail.

In relation to category ‘2a’, protected relationships, there is no burden on the

claimant to prove that the relationship was one that gives rise to presumed
influence, but virtue of the relationship this is already proven. Therefore, the
claimant must simply prove that that party exploited the nature of this
relationship.

In category ‘2b’, only if the relationship is one where influence cannot be proved
will the claimant have to provide evidence that the relationship was one where
influence arose. Following, the courts will assess whether the conduct amounts to
undue influence.

In category 1, the claimant does not have to prove there is an existence of any
special relationship. The evidential burden they are subject to is proving that their
free will to enter a particular contract was overcome, which is not easy to
establish, this is the same standard as a claim for duress, and was established
in Huyton SA v Peter Cremer GmbH & Co [1999] 1 Lloyd’s Rep 620.

Exam consideration: Before you explore these concepts in more detail, can you
think of the justifications for the differentiations between these categories?
Actual undue influence

This class of undue influence can be seen to be an alternative manifestation of

duress, being conceptually similar. Actual undue influence has been described as
acts of improper pressure or coercion such as unlawful threats, which seems to
draw a parallel with duress.

As can be seen from the assessments of the burdens of proof, in a claim for undue
influence it has to be proven that the undue influences overcome their free will.
This is similar to the standard of duress, but of course in cases of duress it is much
easier to prove. It will be an extremely high threshold to prove that undue
influence left the claimant with no choice at all. In cases of presumed undue
influence, all the claimant has to do it prove that one party exploited the nature
of the relationship, which is a much lower evidential standard.

Therefore, you may be questioning why a party would pursue a claim for actual
undue influence with such a high burden of proof. As mentioned, there is no need
for an existing relationship between the parties to prove actual undue influence,
which is advantageous in the event this is the case, as it would prevent a claim for
presumed undue influence from operating. Furthermore, the contract attempting
to be voided  for undue influence does not have to be of manifest disadvantage to
the claimant, as per CIBC Mortgages plc v Pitt [1994] 1 AC 200, whereas in proving
duress the contract must be of manifest disadvantage.

Case in focus:  CIBC Mortgages plc v Pitt  [1994] 1 AC 200

In this case, Pitt wanted to purchase some shares. In order to fund this purchase,
he put pressure on his wife to sign a second mortgage over the family home. The
application for the loan stated the purpose was to purchase a holiday home and
pay off the existing mortgage. Following, the husband used the money to
purchase the shares. When the bank sought to enforce their security under the
mortgage, the wife attempted to claim undue influence against her husband.

It was held that there was no requirement to demonstrate manifest disadvantage

where actual undue influence was established. Therefore there could be a claim
for actual undue influence. Unfortunately, due to other issues relating to notice of
the bank, the claim failed, but the key principle of no requirement of manifest
disadvantage remains for presumed undue influence.
Presumed undue influence

In Daniel v Drew [2005] EWCA Civ 507 the approach of the courts in relation to
both categories of presumed undue influence was confirmed. As mentioned
above, the claimant does not have to prove that the undue influence left them
with no choice, all that needs to be proven is that they exerted some  influence
over them, enough so that the transaction was not the exercise of their
independent free will. Royal Bank of Scotland plc v Etridge (No. 2) [2002] UKHL 44
clarified the approach to presumed undue influence; the relationship between
the party would give a presumption of influence, but not necessary undue
influence, this was for the claimant to prove.

The key test for presumed undue influence was set out in Turkey v
Awadh  [2005] EWCA Civ 382:

1. Do the facts give rise to either the existence of a protected relationship, or

a relationship in which evidence could prove that one party exerted
influence on the other?
2. If so, could the transaction be shown to be one that could not be explained
by ordinary motives, therefore suggesting some kind of undue influence
resulted in the transaction.
3. Can the defendant rebut this presumption by establishing there was no
abuse of trust?

Category 2A - Protected relationships

The law has deemed certain relationships special, meaning influence between
them can automatically be presumed in the absence of any other facts. The effect
of the case of Royal Bank of Scotland plc v Etridge (No 2) is that this presumption
is irrebuttable. Here are some examples of such relationships:

 Parent and child (but not between a parent and an adult child - Avon
Finance Co Ltd v Bridger [1985] 2 All ER 281
 Solicitor and client
 Doctor and patient
Once the existence of one of these relationships has been established, the
claimant must prove that the influence exerted was undue. The court will assess
the evidence and decide whether the transaction was suspicious, and if so, undue
influence will be presumed. It is then up to the party who exerted the undue
influence to prove no undue influence was exercised.

Category 2B - Other cases

If the relationship does not fall into any of the special relationships within
category 2A, if it can be shown that the relationship was based on trust and
confidence, it may be presumed to be a relationship of influence. The difference
in comparison with Category 2A is that this presumption is rebuttable by the
other party if they prove there was no trust or confidence.

Courts have considered a number of specific relationships that do not amount to

category 2A relationships, but may well amount to category 2B relationships. In
the following section the most important of these relationships are explained and
examined with reference to case law.

Husband and Wife

In Barclays Bank plc v O’Brien [1994] 1 AC 180 it was confirmed that the

relationship of Husband and Wife may amount to a relationship which satisfies
the requirements of category 2B. Whether or not this relationship gives rise to
one where there is presumed influence is dependent on the closeness of the
relationship and whether total trust and confidence has been put in each other. It
has been noted that the same will apply to other cohabitees as long as the trust
and confidence element can be recognised.

Due the nature of the husband and wife relationship, it is not enough to merely
show that there has been influence relating to a transaction which is not to the
claimant’s advantage. It has been shown that husband and wife will often do
selfless acts not to their advantage, and then later attempt to reverse them under
duress. The courts will focus on the extreme circumstances, therefore it is
suggested the ‘manifest disadvantage’ test may apply here, putting a higher
evidential burden on the claimants.

Other cohabitees
The application of the husband and wife presumption was also said to extend to
other cohabitees who were in an emotional relationship with each other, this is
applicable regardless of marriage status or sexuality. In Massey v Midland bank
plc [1995] 1 All ER 929 it was also ruled that individuals in long term emotional
relationships who had children would qualify under this category, even if they did
not cohabit. This presumption can also extend to cohabiting adult children and
parents (Avon Finance Co Ltd v Bridger  [1985] 2 All ER 281).

Bank and customer

The relationship between a bank and a customer is one which is possible to fall
under category 2B. The presumption was successfully proven in Lloyds Bank Ltd v
Bundy [1975] QB 326, in which the decisive factors were:

 The customer had banked at the branch for a long time and relied on the
bank manager for all his financial advice
 The manager recognised the fact the customer did put this confidence in
him
 The transaction was not in the interests of the customer

Exam consideration: Do you think this case would have been decided differently
if it was the customer’s first time banking at the branch? Would he have an
alternative remedy in the event undue influence could not be proven?

Therefore, it would seem the test for whether a bank and customer relationship
could fall under category 2B is based first on the previous dealings between the
two, considering whether there was evident trust and confidence. Secondly, the
courts will assess whether the transaction was in the interests of the customer or
not.

Commanding officer and solider in the army

We touched on the case of R v HM Attorney-General for England and

Wales [2003] UKPC 22 in the duress chapter. To remind us, the solider was
refusing a sign a confidentiality agreement, and was threatened with being
removed from his special unit if he did not sign the agreement. This did not give
rise to a claim for duress, but the courts did suggest there could be a degree of
undue influence involved in the transaction.
Due to the degree of trust and confidence the solider placed in his commanding
officer, the relationship fell under category 2B of one with a presumed influence.
There was mixed opinions from the judges, with some arguing that there could
not be trust and confidence in somebody who was attempting to coerce him. It
was concluded there was no undue influence, but it is clear the relationship
between soldiers and their superiors may amount to a relationship of presumed
influence for the purposes of category 2B.

Evidential burdens in relationships of presumed influence

The evidential burdens were briefly mentioned earlier in this section, however,
this section will discuss the evidential burdens for category 2A and 2B
presumptions with reference to specific case law.

The requirement that a transaction must be a ‘manifest disadvantage’ to the

claimant

In earlier cases of presumed influence, it was presumed that the transaction

needs to be of a manifest disadvantage to the claimant. This was first suggested
in National Westminster Bank Ltd v Morgan [1985] AC 686. Through subsequent
case law this was criticised at it was recognised as being difficult to prove (Royal
Bank of Scotland v Etridge (No. 2).  Unfortunately, the cases which criticised it
were bound by the higher court to apply the manifest disadvantage test.

The case of Goodchild v Bradbury [2006] EWCA Civ 1868 finally moved the
interpretation of ‘manifest disadvantage’ to focus more on whether the
transaction was advantageous or disadvantageous to the claimant. This approach
was confirmed in Mackin v Dowsett [2004] EWCA Civ 904, and the requirement of
‘manifest disadvantage’ was removed. The new focus and the current test is
whether the transaction is ordinary and explainable in the context of the
relationship between the parties, or whether there was some concern for the
legitimacy of the contract due to its suspicious nature. It should be noted that
whether the contract was of a ‘manifest disadvantage’ may be considered as
evidence to show that the contract is not ordinary and explainable, but it is no
longer a requirement (Thompson v Foy [2009] EWHC 1076 (Ch)).

Be careful in distinguishing a disadvantageous contract from one that is

suspicious. There will often be contracts where one side of the bargain is
inherently better, but this does not mean it is suspicious for the purposes of
proving undue influence.

Rebutting the presumption of undue influence

Once it has been proven by the claimant that there was influence of an undue
nature, the defendant may rebut the presumption of undue influence by proving
that the claimant entered into the contract freely without influence.

The most common way in which this presumption may be rebutted is where the
claimant has undertaken independent advice with regards to the transaction in
which undue influence has been claimed. In Howard v Howard-Lawson [2012]
EWHC 3258 (Ch) the claimant sought and received independent legal advice in
relation to signing some deeds. The courts concluded due to this independent
advice, the undue influence would not be the key factor and influence in entering
the transaction, meaning a claim for undue influence would not be actionable.

However, receiving independent advice may not always be conclusive. The facts
of each case will need to be assessing to consider whether the undue influence
was still the inducing factor or whether the independent advice was significant in
this regard (Royal Bank of Scotland v Etridge (No 2).

Can undue influence be actionable against a third party?

It has been confirmed that undue influence by a third party on a claimant may
give rise to a claim for undue influence, which can result in the contract between
the claimant and the party they are contracting with being voidable. This may
seem unfair on the contracting party, but a claim for undue influence under these
circumstances may only arise where the contracting party has knowledge that a
third party is exercising undue influence on the claimant. This may seem
confusing, so here is a basic example:

 Party A, a bank, are contracting with Party B, to guarantee the loan for the
third party, Party C.
 Party C have used undue influence in order to force Party B to guarantee
their debt
 This contract is voidable so long as Party A are aware of this undue
influence
The case of Barclays Bank v O’Brien [1994] 1 AC 180 confirmed this rule, making
reference to the ‘doctrine of notice’. The first category of notice is actual notice,
which is clearly easy to prove, where Party A in our example have actual
knowledge of the undue influence. The other category is constructive notice. In
order to prove this type of notice, there are two things the courts will consider:

1. Whether the contracting party has been “put on inquiry”

2. If “put on inquiry”, has the contracting party avoided notice of the undue
influence?

Have the contracting party been “put on inquiry”?

Being “put on inquiry” refers to where the contracting party should be aware that
the contract seems unusual, and therefore should make inquiries as to the nature
of the transaction. Factors in Barclays Bank v O’Brien  that put the contracting
party on inquiry were that the transaction they were entering into was not
financially advantageous for the claimant, and that there was a substantial risk in
transactions of that nature.

If on inquiry, has the contracting party avoided notice?

In order to avoid notice, and make the relevant inquiries, it is suggested that the
contracting party should privately meet with the claimant, or that the contracting
party should advise the claimant to seek independent advice of some kind. This
would absolve the contracting party of liability, as they may presume that the
independent advice given will prevent the operation of undue influence (Banco
Exterior Internacional v Mann (1955) 27 HLR 329).

If the contracting party can absolve themselves via one of these two
considerations, the contract will not be voidable for any undue influence.

Illegality

The last of the vitiating factors of contracts we will cover is illegality. This chapter
will first explore the two different types of illegality; statutory illegality and
common law illegality. The consequence of either of these types of illegality can
be varied, therefore the final section will examine the consequences for a
contract that is found to be illegal.
Statutory prohibition of contracts
A contract may be prohibited by a statute either expressly or impliedly. This is an
important distinction to make as whether or not a party may enforce the contract
is dependent on this.

Express Prohibitions
If a statutory prohibition expressly prohibits a type of contract or term, there is no
question as to the illegality of the contract. Neither party will be able to enforce
the contract, irrespective of the innocence of either or both parties.

The case of Re MahMoud and Ispahani [1921] 2 KB 716 involved the example of a
statute prohibited unlicenced dealing in linseed oil. The purchaser of the oil
claimed he had a licence to purchase the oil, but in fact did not. When the sellers
delivered the oil, the purchaser refused delivery, explaining he did not actually
have a licence. Despite the fact the seller of the oil was completely innocent, the
contract could not be enforced due to the statutory provision.

Implied prohibitions
Implied prohibitions are much more difficult to identify, and there are two tests
the courts may apply to determine whether the contract made is impliedly
prohibited. The tests applied and the decisions made are very fact dependent, so
try and be aware of the tests and make a sensible decision as to which one you
apply if faced with a problem-scenario.

In order to determine whether an implied prohibition is operable, the court must

ascertain whether the objective of the legislation is to forbid the contract. Here is
the first rule:

1. If the sole object of the statute is to increase national revenue, the contract
itself is not illegal

This rule covers examples such as statutes which requires individuals to have a
licence to trade in a particular area or with particular goods. Take for example a
fishing licence. There is no other reason for a licence to be imposed other than to
increase national revenue.

Case in focus:  Smith v Mawhood  (1845) 14 M & W 452

In this case, Smith, a tobacconist, sold an amount of tobacco to Mawhood. It was
subsequently found that Smith did not have the required licence to sell the
tobacco, and therefore statute required he paid a penalty for £200. Smith then
attempted to recover the price of the tobacco he had delivered to Mawhood.

It was held that the contract was not illegal, and he could claim the price of the
tobacco back. This was because the statute’s primary purpose was revenue. Parke
B stated ‘Looking at the act of Parliament, I think its object was not to vitiate the
contract itself, but only to impose a penalty upon the party offending, for the
purpose of revenue’.

It should be noted that the above must relate to the sole object of the statute. If
there are other objectives, such as public policy, this rule will not operate. An
example of this would be individuals requiring a licence to trade with certain
dangerous types of animal. The requirement of the licence may be to raise
revenue, but it is also for the public benefit as the licence can ensure dangerous
animals are not introduced into the country in the incorrect way.

Exam consideration: Can you think of any other examples of requirements for

licences that would go beyond having revenue as its only objective?

2. Does the statute contemplate that the prohibited act will be done in the
performance of a contract?

This is a confused concept best examined with an example. Take a fictitious act
which has these provisions:

Section 1 - It is a criminal offence to…

1. Sell chickens
2. Keep chickens as pets

Option (a) will always involve a contract, therefore it is clear that the statute
would contemplate this prohibited act would take place in the performance of a
contract, and would therefore be an implied illegal contract.

Option (b) may involve a contract, but more often than not, will not. You may
purchase a chicken for the purpose of keeping it as a pet, but you would not
contract with somebody to keep a chicken as a pet. Therefore, the statute does
not contemplate this prohibited act to take place in the performance of a
contract, and would not be an implied illegal contract.

Contracts which are not illegal, but have been performed in an illegal manner
A contract may well be legal, but the way in which one party has undertaken
their obligations amounts to illegality.

Case in Focus: Archbolds (Freightage) Ltd v Spanglett Ltd [1961] 1 QB 374

In this case, a contract was formed for the shipping of a consignment of whisky to
London. Unknown to the claimants, the shippers did not have the required licence
to use the transportation vehicle. The consignment of whiskey was then stolen. In
order to avoid liability, the shippers attempted to argue that the contract was
illegal in the first place, and therefore damages could not be claimed.

The courts held that the contract itself was not illegal (to ship a consignment of
whiskey), the method used was illegal (using that particular vehicle). Therefore,
because the claimants were not aware of the illegal method of transport being
used, they were able to enforce the contract.

Whether the contract is legal or not is dependent on whether the ‘innocent’ party
is aware of the illegal performance of the contract or is involved in it. In Ashmore,
Benson, Pease & Co Ltd v A V Dawson Ltd [1973] 1 WLR 828 one party carried
goods which exceeded the statutory maximum weight for lorry transportation.
The fact the other party were present at the loading and did not object to the
illegality meant they could not claim damages under the contract when some of
the goods were damage. Therefore, the general rule is: The party or parties who
are aware of the illegal performance of the contract cannot enforce any terms of
the contract.

The general rule above may be restricted where the purpose of the legislation is
not undermined by the illegal performance. The case of Anderson Ltd v
Daniel [1924] 1 KB 138 provides a clear example of this. In this case, a landlord
failed to provide a tenant with a rent book, which was a statutory requirement. If
the general rule was applied, the landlord would not be able to claim any rent
under the contract. The statutory purpose of the provision was not to allow the
tenant to avoid paying rent, it was to ensure he had a rent book; therefore the
landlord was able to claim rent.
Recent case law has added more complexity to this area of law. In ParkingEye Ltd
v Somerfield Stores Ltd [2012] EWCA Civ 1338. This case concerned the
installation of a monitoring system of a car park that would charge customers for
overstaying. The defendants ended the 15-month contract early and the
claimants who were making revenue from the charges claimed damages from the
defendants for loss of revenue. The defendants claimed the contract was illegal
due to the illegality of the letters the claimants sent to customers to induce them
to pay.

The court held that when deciding whether the illegal performance would render
the contract unenforceable, they would consider these things:

1. The object and intent of the party attempting to enforce the contract;
2. The gravity of the illegality in the context of the claim; and
3. The nature of the illegality.

In this case, the court decided a repudiation of the contract would be

disproportionate. Instead, the defendant should have informed the claimants that
their letter was illegal so they could have made the necessary amendments.
Therefore, each situation will be fact-dependant. Just remember to apply these
factors and come to a well reasoned conclusion.

The effect of statutory penalties

In some cases, the performance of an illegal contract will be subject to a statutory
penalty. The courts have held that where the penalty is proportionate and
sufficient to the breach, the contract is enforceable by either party.

In St Johns Shipping Corporation v Joseph Rank [1957] 1 QB 267 the statutory

breach in question was the overloading of a ship. There was a fine imposed for
this breach, but the defendants attempted to withhold the goods as it was an
illegal contract. It was held the fine was sufficient punishment, and the contract
would be enforceable.

Exam consideration: Have a think about exactly why the courts allowed the
contract to be enforceable. What does the statute actually prohibit and what
does it not prohibit?
Common law prohibition of contracts - Public Policy
Contracts may be prohibited via the common law, on grounds of public policy or
morality. There is a lot of uncertainty in this area, and the when the court can
prevent a contract from operating is often unclear. The courts approach this area
of law with a consideration of the common values of society - if the contract
breaches common values of society it will be void for common law illegality.

Contracts to commit crimes

The case of Bigos v Boustead [1951] 1 All ER 92 confirms a contract which includes
an obligations to commit a crime will be illegal. Furthermore, a criminal or
criminal’s estate may not benefit from the crime (Beresford v Royal Insurance Co
Ltd  [1938] 586).

Other examples of contracts which would fall under this area are:

 Tax fraud contracts (Alexander v Rayson [1936] 1 KB 169)

 A third party claiming damages from the guilty party after a criminal
offence (Gray v Thames Trains Ltd [2009] UKHL 33)

Contracts which prevent the administration of justice

Despite the law of contract mostly being self-regulatory, in the event of a dispute,
the courts will intervene. Contracts which preclude parties to the contract
accessing justice, or prevent the courts interfering with a contract, may be illegal
on the ground that they prevent the administration of justice. Here are some of
the main examples:

 Agreements between husband and wife where one agrees not to apply to
the court for maintenance (Hyman v Hyman [1929] AC 601). Note that this
does not invalidate the whole agreement, only the term that prevents the
court application (Section 34 of the Matrimonial Causes Act 1973)
 Contracts that preclude the jurisdiction of the courts, unless the
administration of justice is replaced with arbitration (Scott v Avery (1855) 5
HL Cas 811)

Contracts which are sexually immoral

Sexually immoral contracts refer to those relating to contracts for sexual acts or
services. An example of this can be found in Pearce v Brooks  (1865) LR 1 Ex 213,
where a contract for the hire of a carriage used for prostitution was held to be
illegal due to public policy.

However, this approach has evolved along with societies views. As mentioned
before, the public policy laws will consider the values of society at that point in
time. More recently, there have been a number of cases which have taken the
opposite view and allowed contracts for sexual acts and services to be enforced.

In Sutton v Mishon de Reya [2003] EWHC 3166 (Ch) a contract outlining an

agreement between two people in a master/slave sexual relationship was held to
be valid and not contrary to public policy. This is an excellent example of how the
courts are less likely to rule that a contract is illegal under grounds of public
policy.

Exam consideration: If you have studied the case of R v Brown [1994] 1 AC 212 in
Criminal Law, do you think a contract involving sadistic terms would be invalid on
the grounds that they were illegal acts, or valid due to the relaxed attitude to
sexual contracts that can be seen in Sutton v Mishon de Reya?

Contracts which involve public corruption

Some contracts are invalid because they involve corruption. The most common
examples of contracts which are corrupt are contracts for public office or
honours.

In Parkinson v College of Ambulance Ltd [1925] 2 KB 1, one party to a contract

paid £3,000 to a charity because some of the charity officials had persuaded him
they may be able to get him a knighthood if he donated. This was not in fact true,
and was therefore invalid due to corruption (the promise to get him a false
knighthood). It should be noted that the contract was also invalid due to statutory
illegality.

The most common examples of contracts which are corrupt are contracts for
public office or honours.

Common law prohibition of contracts - restraint of trade

As we know, contract law is governed by the principle of contractual freedom,
that parties can agree to any contracts and terms they wish. In some
circumstances this freedom may be abused. An example of such abuse is where a
term in a contract prevents somebody from working for somebody else, or
trading with somebody else.  To ensure there is a continuing freedom of contract,
contracts that restrain trade can be void for illegality.

Lord Macnaghten famously summed up this principle by stating the public has ‘an
interest in every person’s carrying on his trade freely’. This statement was made
in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535. In
this case, a contract prevented a seller from engaging in the business of
ammunition and arms for a period of twenty-five years.

In assessing whether the restraint on trade is enforceable, the courts will focus on
whether the contract between the two parties is reasonable, and if the limitation
would not be in the public’s interest.

Is the contract reasonable?

The case of Herbert Morris Ltd v Saxelby  [1916] AC 688 is the leading authority for
the assessment of reasonableness in this area of law. This case involved an
employment contract that included a term that restricted the defendant from
carrying on any related trade for seven years in the event he left the plaintiff’s
employment. The defendant left the job and the plaintiff attempted to enforce
this term. The courts held that this term was not enforceable. In this House of
Lord judgment, the courts identified general presumptions for deciding whether
or not a contract may be illegal due to a disproportionate restraint on trade.

1. Employment contracts that restrict former employees from being

employed by competitors would not normally be valid
2. Employment contracts that prevent the loss of trade secrets or stealing of
custom would normally be valid
3. Terms in a contract for the sale of a business preventing the seller setting
up another business in competition with the purchaser’s business are
normally valid

Once one of these presumptions has been identified, the duration and the
geographical extent of the limitations made by the contract will be considered.
These limitations should not be disproportionate. For example, a contract which
prevents the seller of a business setting up a competing business in the same area
would likely be valid, but not one preventing the seller setting up a similar
business anywhere in the world. Some further case examples can be found below.

In Mason v Provident Clothing & Supply Co Ltd [1913] AC 724 one term in the
defendant’s contract of employment stipulated that he must not enter into a
similar business within 25 miles of London. The employment was in Islington, and
therefore the restraint was too wide to be proportionate and reasonable.

The case of Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526 a term in an
agreement prevented a milkman from selling milk or dairy produce to any former
customers he dealt with in the course of his employment. This restraint was
reasonable, so long as ‘dairy produce’ was limited to the type of goods he dealt
with in his employment.

Case in focus:  Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co

Ltd [1894] AC 535

This case is the leading authority for the assessment of restrictions in the sales of
businesses. In this case, Nordenfelt, an arms manufacturer, sold his business to
Maxim. The contract included a term preventing Nordenfelt from selling guns or
ammunition anywhere in the world for twenty-five years, and to not compete
with Maxim in anyway.

The court held that this clause was partially valid. The part preventing
competition ‘in any way’ was not valid due to its complete restriction on trade.
However, the rest of the clause was valid due to these reasons:

 A substantial fee had been paid which reflects the fact he could not
compete for 25 years
 The amount of customers willing to buy arms and ammunition was limited,
therefore the restriction not to sell ammunition anywhere in the world was
valid because it was no wider than necessary to protect Maxim.
 The restriction was not damaging to the public interest

Reasonableness as to the public interest is a further important consideration for

the courts. The public interest consideration will be invoked where a contract will
have an effect on the competitive structure of a certain market. It is admitted that
these situations are rare because of the diversity and competition in business, but
it is important to consider if it may occur. The case of Herbert Morris Ltd v
Saxelby [1916] AC 688 is an example of this. In this case, two companies agreed
not to compete with each other, which on the face of it would seem a reasonable
agreement. Despite this, the public would be likely to suffer due to the inflated
prices as a result of the lack of competition; therefore the contract was not valid.

Exclusivity dealing contracts

Exclusivity dealing contracts, also known as ‘tie agreements’, are those between
parties at different stages in a commercial chain which force a closer ties between
the parties that a mere contract. The best way to understand and identify these
agreements is by reference to the leading authority in this area.

In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 the

parties involved were two garages and a seller of petrol. These are clearly parties
involved in different stages of the commercial chain relating to petrol. One garage
agreed to only buy petrol from the seller for a term of over five years in return for
a discount. The second garage agreed the same, but for a term of twenty-one
years.

The courts held that only the contract providing for exclusivity for five years was
valid. The courts held that for each exclusivity contract there must be an
investigation as to whether there is a legitimate interest protected by the
exclusivity, and whether the restraints are reasonable. The twenty-one year term
was seen to be extremely disproportionate due to the sheer amount of time it
tied the parties together for.

Exclusive service agreements

An exclusive service agreement is similar to an exclusive dealing contract, but
instead it relates to where a person provides services for only one recipient. Here
are some common examples of these:

 A singer agreeing only to appear at certain festivals

 A footballer agreeing to only appear in adverts for one company
 A celebrity agreeing to only sell their stories to one news outlet
As you can see, these mostly relate to professional entertainers and sports stars.
These contracts do not usually involve a contract of employment, only a contract
of restriction.  Generally, these courts will apply the same rules as those for
contracts of employment - that generally these agreements are not valid,
dependent on the geographical restraint and duration of the term.

The case of Creig v Insole  [1978] 1WLR 302 involved organizers of international
and county cricket attempting to exclude players who played in private games
promoted by a certain company. The courts held this ban was not valid as it
restricted the freedom of employment of players subject to the ban.

Another similar case is Eastham v Newcastle United Football Club Ltd [1964] Ch

413. A term in this contract prevented large clubs (Newcastle in this case), from
poaching the best players from smaller clubs. It was suggested these types of
contracts may be valid due to the public’s interest in watching a good level of
sport at all clubs. However, the courts held the contract restricted the freedom of
employment for certain members of the club, therefore making the contract
invalid.

The court will also take into consideration whether the individual subject to the
contract has been treated fairly, has undertaken independent legal advice, and
whether they have been taken advantage of.  Their age, the fairness of the
contract, and the duration of the contract will be helpful in assessing this.

In Proactive Sports Management Ltd v Rooney [2011] EWCA Civ 1444 a contract

that provided for exclusivity of image rights of a sportsman was considered to be
invalid. This was in light of the fact Rooney had not undertaken any legal advice,
was 17 years-old at the time, the contract was for eight years, and was a flat-rate
of twenty percent of all of his earnings.

The effect of illegality

The case of Holman v Johnson (1775) 1 Cowp 341 is authority for the general
principle of illegality - that the illegal contract will be unenforceable. However, as
we have seen, dependent on the circumstances, one or none of the parties may
enforce the contract, and on occasion only part of the contract will be
unenforceable. This section will consider the different effects of illegality,
separating them into distinct categories that should be easy for you to remember.
Severable illegal contracts
As we touched on in Nordenfelt v Maxim, the courts have the power to enforce a
contract, but only when the illegal parts of the contract have been removed.
There is a three-part test to apply when attempted to sever parts of the contract.
The test comes from Sadler v Imperial Life Assurance Co of Canada Ltd  (1988)
IRLR 388:

1. The ‘blue pencil’ test - can the illegal provision be removed without
modifying the words of the remaining terms. These remaining terms must
be grammatically and verbally separated. It is referred to as the ‘blue
pencil’ test as the best way to assess this is simply by crossing out the illegal
terms. If it still makes sense, the illegal provision can be removed.

Case in focus: Goldsoll v Goldman [1915] 1 Ch 292

This case involved a defendant who was competing with the plaintiff in the
business of imitation jewellery. The defendant’s agreed to no longer compete
with the plaintiff in a contract for two years in any capacity. The clause covered
‘London, England, Scotland, Ireland, Wales, or any part of the United Kingdom of
Great Britain and Ireland and the Isle of Man or France, the United States of
America, Russia, Spain, or within twenty-five miles of Potsdamerstrasse, Berlin, or
St Stefans Kirche, Vienna’.

The courts decided that the contract was valid, except for the geographical
restraints that were unreasonable. The ‘blue pencil’ rule was used to remove the
words following ‘or France’, so that the limitation only applied to the United
Kingdom.

Exam consideration: You should attempt to draft some fictional complex

contractual terms and consider what parts of the contract the ‘blue pencil’ rule
will allow you to remove. Remember it must make sense both grammatically and
verbally.

2. The remaining terms following the ‘blue pencil’ rule must be supported by
consideration

This part of the test is fairly straightforward. You may need a re-cap on your
knowledge of consideration, but here is a simple example of this test in operation:
‘You will be paid £250 per month to not compete with the company in any
capacity in the United Kingdom and the United States of America’.

If the ‘and the United States of America’ was removed as part of the blue pencil
rule, the £250 part would still be included in the contract, and therefore the
contract would still include some valid contract. However, if the contract was
drafted in this manner:

1. You must not compete with the company in any capacity in the United
Kingdom
2. You must not compete with the company in any capacity in the USA, and in
consideration for not competing in the USA, you will be paid £250 per
month.

Now if we attempt to use the blue pencil rule to remove the part of the clause
relating to the US, it is evident that the term that includes the payment of £250
would have to be removed. This means only term ‘a’ would remain, and there is a
lack of consideration in the contract.

This is an extremely simple example, and in practice the contract is likely to be

much more complex. However, just remember to ensure there remains some
form of consideration following the removal of any illegal terms.

3. Following the blue pencil rule, the contract must continue to be the same
sort of contract that the parties entered into in the first place. It cannot be
changed to the extent that it changes the character of the contract.

The final requirement is a question of fact, and can be difficult to assess. The case
of Attwood v Lamont [1920] 3 KB 571 provides a good example to further your
understanding.

Case in focus:  Attwood v Lamont  [1920] 3 KB 571

In this case, one party owned a tailoring business, whilst the other party was an
employee. The contract of employment prevented the employee from working
for any other tailor within ten miles of the store in the context of being a ‘tailor,
dressmaker, draper, milliner, hatter, haberdasher, gentlemen’s, ladies’ or
children’s outfitter’. The important fact in this case was that the employee was
only a cutter in the tailoring department.
The courts held this restriction was far too wide, as the employees only skill was
as a tailor. However, the clause could not be severed, as to sever it would change
the scope and intention of the agreement.

Collateral contracts
Where there is one illegal contract, but there is a collateral contract that allows a
recovery of all or part of the contract, this may be enforceable, but only if
providing for a remedy under the collateral contract is not equal to enforcing the
illegal contract.

Fisher v Bridges (1854) 3 El & Bl 642 is one such example of this. In this case, a
collateral contract providing for security of an illegal contract was made. This
collateral contract is ‘tainted’ by the illegality of the illegal contract, and can
therefore not be enforced.

A collateral contract must have the effect of protecting an innocent party to

whom a promise or misrepresentation has been made.

Claims based on an illegal contract

The general rule is any claim based upon an illegal contract is invalid, unless the
claim is related to an unrelated part or transaction of the contract which the
illegality does not affect. In Euro-Diam Ltd v Bathurst [1990] 1 QB 1, a contract for
the exportation of diamonds was illegal due to the falsely invoiced tax evasion.

Recovery under illegal contracts

The final assessment to make when considering an illegal contract is whether or
not any money or property may be recovered subject to the contract.

Both parties are guilty

When both parties are guilty in relation to the illegal contract, the general rule
from Holman v Johnson (1775) 1 Cowp 341 is that there can be no recovery of any
kind of money or property.

This rule has been challenged as being contrary to Article one of the Human
Rights Act - ‘no one shall be deprived of his possessions except in the public
interest’. In the case of Shanshal v Al-Kishtaini [2001] EWCA Civ 264 this argument
was dismissed, as it was held to be in the public interest to prevent the recovery
of property from illegal contracts.

One party unfairly induced into the illegal contract

If both parties are guilty of entering an illegal contract, but one party has been
forced into the contract as a result of duress or undue influence, the contract will
not be enforced, but the victim may successfully recover money or property they
have passed subject to the contract, as per Hughes v Liverpool Victoria Legal
Friendly Society [1916] 2 KB 482.

One party withdraws from the contract

If one party withdraws prior to the illegal part of the contract coming into effect,
the doctrine of locus poenitentiae comes into effect. The result of this is that the
party who withdrew may recover any money or property subject to the contract.
It should be noted that the withdrawal does not need to be with genuine regret
or sorry, the fact one party has withdrew will suffice - Tribe v Tribe [1996] Ch 107.
This has been justified as providing a strong incentive for the claimant to
withdraw from an illegal contract.

There has been some debate as to when the withdrawal from the contract must
occur. The two conflicting cases on this matter are Taylor v Bowers  (1876) 1 QBD
291 and Kearley v Thomson (1890) 24 QBD 742. In Taylor it was suggested that
withdrawal is allowed at any time before the completion of the contract, whereas
in Karley  it was suggested once the illegal part or purpose of the contract has
started, withdrawal cannot occur. Obiter statements in Collier v Collier [2002]
EWCA Civ 1095 confirm the approach in Kearley to be correct and therefore
although Taylor is worth mentioning, you should apply the law in Kearley.

The withdrawal from the contract needs to be voluntary, as shown in Bigos v

Boustead [1951] 1 All ER 92.

Agreement, Performance and Breach

We have explored both the formation of the contract, and circumstances in which

a formation of a contract can be invalid. The next two chapters will focus on
circumstances which discharge a party to the contract from their obligations. This
chapter will focus on discharge via agreement, performance and breach.
A discharge of obligations means that parties to the contract are no longer liable
for any terms of the agreement, and no further promises may be enforced. Here
are the three main ways this can occur:

1. Agreement - a mutual agreement that the contract is no longer binding on

both parties
2. Performance - when both parties have performed all of their obligations
under the contract
3. Breach - when the obligations under the contract have been breached

This chapter will discuss each of these three methods, aiming to build an
understanding of exactly how and when they occur.

Discharge by Agreement
To discharge a contract through agreement there are two simple requirements:

1. The discharge is mutual

2. The consent is free

In other words, as long as both of the parties agree to discharge their obligations,
they can do so freely. However, what happens if there is a subsequent change of
heart by one party, and they wish to re-enforce their obligations? At that point,
the contract may be re-enforced, as the agreement to discharge obligations has
no legal grounds, despite it being a perfectly valid agreement. Therefore, it is
recommended that parties form a second contract which binds both parties to
their promise to discharge the obligations under the contract.

Forming a discharge agreement

As with any other form of binding legal agreement, in order to create a binding
agreement to discharge obligations under a contract, there must be valid
consideration - The Hannah Blumenthal [1983] 1 AC 854. There is an exception to
the general rules of consideration in relation to discharge agreements, which is
called the ‘Mutual release exception’.  The mutual release exception rules that in
a discharge agreement, the mutual abandonment of obligations under a separate
contract amounts to valid consideration.
Therefore, when agreeing to discharge obligations under a contract, a separate
contract agreement to do so should be made. This will prevent either party from
later enforcing the initial contract.

Where only one party’s obligations remain

There may be a situation in which one party has performed their obligations
under the contract, and only one party’s obligations remain. Under these
circumstances, a regular agreement to discharge obligations will not be valid or
binding. The parties must enter into a binding release via a deed.

Agreement to replace obligations

Parties may also make an agreement similar to a discharge agreement, but
instead of simply discharging the obligations, it also replaces those obligations
with new ones under a separate contract. Similar to a discharge agreement, the
actual mutual agreement itself will amount to valid consideration. The leading
authority for this kind of agreement is Compagnie Noga D’Importation et
D’Exportation v Abacha (No. 4) [2003] EWCA Civ 1100

Agreement to alter obligations

Parties may also only discharge certain parts of the contract, by severing the
unwanted terms from the main contract, then either choosing to replace those
terms or simply leave the contract without the removed terms. In order for a
party to enforce such an alteration, there must be consideration for the discharge
or variation of the obligation.

It should be noted that the consideration paid for the discharge of an obligation
cannot be lesser than the sum due under the contract if it involves an agreement
to pay a sum of money. In other words, part-payment of a debt is not valid
consideration, as we have discussed in the consideration chapter (Pinnel’s
Case (1602) 5 Co Rep 117a).

Discharge by Performance
In order to discharge a contract by performance, both the express and implied
terms must be performed. Furthermore, the terms must be performed to the
expected standard of performance. There are two different types of performance:

1. The strict contractual obligations

 2. The qualified contractual obligations

Strict contractual obligation

A strict contractual obligation is a strict obligation which must be met. These
obligations will usually use definitive words, such as must, or will, and will discuss
a definite result, rather than an aim or a target. For example, A must do B.

Strict obligations must be fulfilled before a contract can be discharged for

completed performance. Excuses as to why an obligation could not be fulfilled will
not be sufficient.

Qualified contractual obligations

Qualified contractual obligations differ to strict obligations as they are not
definitive. Qualified obligations will not have to result in a specific outcome; the
obligation will be to perform to a standard. The most common example of a
qualified obligation is to exercise reasonable care and skill.

Case in focus: Platform Funding Ltd v Bank of Scotland plc [2008] EWCA Civ 930

In this case, a surveyor was employed to inspect and value a property. The
standard of care a surveyor is held to is to survey with the reasonable care and
skill that others in the profession would do so. The surveyor surveyed the wrong
house. There was therefore a question of whether this fell under a strict
contractual obligation, or a qualified in relation to the standard of care.

The court held that the surveying of the correct property was a strict contractual
undertaking, and it was not part of the reasonable care and skill qualified
contractual obligation.

If you can identify that all of the contractual obligations have been met in full, the
obligations under the contract may be discharged.

Discharge by breach
The final way in which contractual obligations can cease to exist is through a
breach of contract. In order to gain a full understanding of this process, we will
first explore what exactly amounts to a breach of contract.

Breach of contract
The general definition of a breach of contract is where there is a failure or refusal
by one or both of the parties to perform one or all of the obligations imposed
upon them under the contract. A breach of contract may also occur where one of
the terms has been performed, but it has not been performed to the appropriate
standard imposed by the contract. There may be lawful excuse for a breach of
contract, which will be covered in the next chapter (the law of frustration).

A breach of contract will usually result in the innocent party seeking one of the
various contractual remedies against the party who breached the contract. These
will be discussed in depth in a later chapter, but include damages, injunctions,
specific performance, repudiation, restitution and rescission. The secondary result
of the breach can be the release of the parties from their contractual obligations,
however, this is dependent on the nature of the breach and the term it relates to;
there must be a ‘repudiatory’ breach.

Repudiatory breaches
A repudiatory breach can be defined as a breach of contract which deprives the
other party of a substantial benefit under the contract.  There are some tests and
presumptions in order to assess whether a certain breach will amount to
repudiatory:

1. What type of term has been breached?

2. Are the obligations ‘entire’?
3. Has the party in breach indicated an intention to abandon the contractual
obligations?

In order to identify a repudiatory breach you will need to have knowledge of all
three of these tests, as one or all of these tests may apply to a breach of contract.

For something to amount to a repudiatory breach, the conduct must also be clear
and unequivocal as to intent to abandon the contract, the simple fact that one
party seems unlikely to meet their contractual obligations will not be sufficient.
The case of Alfred Toepfer International GmbH v Itex Itagrani Export SA [1993] 1
Lloyd’s Rep 360 is authority for the general threshold as being: apparent, on the
balance of probabilities, that the party cannot or will not perform their
obligations.
The more recent case of Eminence Property Developments Ltd v Heaney [2010]
EWCA Civ 1168 further developed this test: From the perspective of a reasonable
person in the non-breaching party’s position, has the other party shown a clear
intention to abandon and refuse to perform?

Type of term breached

The type of term breached can result in a presumption that the contract has been
breached and thus releases both parties from their obligations. Therefore, one of
the key parts of a question relating to breach of contract is to identify whether
the term breached can be classed as one of these:

1. Conditions
o Condition subsequent
o Condition precedent
o Condition
2. Warranties
3. Innominate terms

Contingent conditions

A Condition should first be distinguished from a condition precedent and a

condition subsequent. Conditions precedent and subsequent are ‘contingent’
conditions. This means that there is no contractual obligation to ensure that the
condition is met. Which therefore means a contract cannot be discharged for
breach of a condition precedent or subsequent.

A condition precedent is a condition which must be met before to any contractual

liability can incur. In other words, something that needs to happen before the
contract begins. A common example of a condition precedent can be found in
mortgage agreements. It will be usually be a condition precedent that the
property is inspected to assess the value before the mortgages contractual
obligations may arise. Another example is where a contract is formed on the basis
of a certain event (Pym v Campbell (1856) 6 E & B 370).

A breach of a condition precedent is valid and will not usually result in any
remedies so long as the parties do not prevent the occurrence of the condition
precedent (Mackay v Dick  (1881) 6 App Cas 251).
A condition subsequent is a condition which will terminate the existing
contractual obligations. The most commonly cited example is an employment
contract which is for a fixed period. Once the condition subsequent is met (eg. a 6
month period), the contractual obligations cease.

Exam consideration: When trying to identify whether a term is a condition

subsequent or precedent, try to think of them as a ‘catalyst’ for the beginning or
the ending of the contract. Be careful, because wrongly identifying a condition
subsequent or precedent as a condition can change the whole outcome of the
question.

Conditions

A condition is a term which is central to the contract. When attempting to identify

a condition, the question to ask yourself would be: if this term was breached,
would the whole nature of the contract change?

If a condition is breached, the innocent party has a choice to do one of two things:

1. Affirm the breach of contract, and continue to be party to the contract

2. Terminate the contract, which releases both parties from all of the
obligations under the contract

Warranties

A warranty is a term which is not central to the contract. In contrast to a

condition, if a warranty is breached, it would not change the nature of the
contract. In other words, a warranty is peripheral to the main contract, and would
not have serious consequences if breached. Therefore, a breach of a warranty will
not result in an option to terminate the contract. A breach of warranty can be
adequately compensated for with damages.

Innominate terms
An innominate term is somewhere between a condition and a warranty; a breach
would not change the nature of the contract, but it cannot be said to be
peripheral or a minor breach (Helpful!). The result of a breach of an innominate
term will be dependent on exactly how the breach has occurred and the
seriousness of the breach in those circumstances. If the breach is more serious, it
is likely the innocent party will be given the option to repudiate the contract. If
the breach is less serious, the only available remedy will be damages.

Breach of condition v serious breach of innominate term

I’m sure you will have read the above differences between the types of terms and
wondered how on earth you will be able to tell the difference between a breach
of condition and a serious breach of an innominate term! Thankfully there is some
guidance under the common law.

Case in focus: Hong Kong Fir Shipping Ltd v Kisen Kaisha Ltd (1962) EWCA Civ 7

In this case, Hong Kong Fir hired a ship to Kisen for two years. One of the terms in
the agreement was that the ship would be seaworthy and “in every way fitted for
ordinary cargo service”. Unfortunately, the ship’s crew, machinery and engineer
were not satisfactory. Kisen argued that these issues breached the condition that
the ship would be seaworthy, meaning the contract was repudiated. Hong Kong
Fir’s response was that this was not a breach of a condition, and therefore Kisen
were in breach for repudiating the contract wrongfully.

The court held that the term breached was innominate. The unseaworthiness of
the ship resulted in the ship being unusable for 80% of the period of hire, and
therefore this was adequately remedied with damages. The nature of the contract
had not changed, it was just that the ship was only ‘seaworthy’ for a shorter time
than was expected.

The case of BS & N Ltd v Micado Shipping Ltd (The ‘Seaflower’) [2001] 1 Lloyd’s
Rep 341 identified four categories or rules which can help classify a term as a
condition or an innominate term.

1. Express conditions
2. Condition by precedent
 3. Designated by contract or consequences
4. Nature of the contract

The first of these categories is the most obvious and easy to identify. Express
conditions refer to where a statute expressly states that a particular term or type
of term is to be a condition. The most common example of an express condition
are the terms implied into certain contracts by the Sale of Goods Act 1979.
Section 12(5A) states ‘the term implied by subsection (1) above is a condition and
the terms implied by subsections (2), (4) and (5) above are warranties’. Here you
have some express statements which leave no doubt as to which parts of the
section are warranties.

Where a statute expressly classifies a certain term as a condition, it is irrelevant if

the breach is extremely trivial and has little or no impact, the fact that statute has
classified it as a condition means a breach will result in a valid repudiation of the
contract. In the case of Arcos v EA Ronaasen & Son [1933] AC 470, there was a
contract to purchase some staves sold by description. The staves were described
as being half an inch thick. When the buyer received the goods, they were
actually 9/16ths of an inch thick. This breached the implied term that goods sold
my description will comply with the description from Section 14(2) of the Sale of
Goods Act 1979. As this term is classified as a condition by statute, the buyer was
able to repudiate the contract for breach of a condition, despite the small and
potentially trivial difference in the staves.

Exam consideration: Express conditions only apply where the classification is in

the statute. Take care with contracts that classify terms as conditions - it will not
automatically mean you can presume it will be a condition. You should see the
third rule to gain a better understanding of these.

The second rule is that where a certain term has been previously categorised as a
condition in another judicial decision, the term should be treated as a condition.
This may seem like it would be impossible in practice, but the fact that many
commercial contracts use standard contractual terms means that this is an
efficient method of categorising terms.

The court will not usually categorise the exact wording of a term as a condition,
but more so the idea and aim of the term. In Bunge Corporation v Tradax Export
SA Panama [1981] UKHL 11 it was decided that an obligation of ‘notice of
readiness’ in relation to the loading of a shipping vessel was a condition.
Therefore, regardless of the wording of the term, any breach of the requirement
to give a notice of readiness in that context will amount to a condition.

The third rule is that a term will be a condition if it is designated so in the contract
or the contract states the consequence of a breach of the term will be that the
innocent party may repudiate the contract. In order for this rule to operate, it
must be express and very clear that this was the intention of the parties.

The simple use of the word ‘condition’ will not usually be enough. The term
defined as a condition must be considered in the context of the whole contract -
is it consistent with the rest of the terms?

Case in focus: Schuler AG v Wickman Machine Tool Sales Ltd [1973] UKHL 2

In this case, clause seven of the contract was stated to be a condition. However,
clause eleven of the contract stated either party could terminate the contract if
there was a material breach of any term. Clause seven was breached, but not in a
material way, which meant clause eleven was not effective.

It was held that clause seven being defined as a ‘condition’ was inconsistent with
clause eleven, as surely for clause seven to be a condition it should have been a
material term, and would therefore fall under clause eleven. Therefore, clause
seven was not treated as a condition because of inconsistency with the rest of the
contract.

On the flipside, sometimes the term does not even have to make reference to it
being a condition or the consequences of its breach. The term must simply
highlight its importance to the contract. For example, the phrase ‘time is of the
essence’ is considered a condition, as it highlights the importance of keeping to
the timings stipulated by the contract.

The fourth and final rule is that a term is a condition where the nature of the
contract, subject matter or the circumstances of the contract imply that a breach
of the term would obviously mean that the innocent party could discharge their
obligations under the contract.

The courts will consider the importance of the term in the context of the contract
as a whole. In Samarenko v Dawn Hill House Ltd [2011] EWCA Civ 1445 a term
which required a purchaser to pay a deposit for a property following planning
permission being obtained was held to be a condition. The court decided that a
deposit was of such importance that is was obvious that the innocent party
should be allowed to repudiate the contract if the deposit was not paid.

If the innocent party relies on a trivial breach in order to repudiate the contract
for an ulterior motive, the breached term is treated as an innominate term. In The
Hansa Nord [1976] QB 44 there was a contract for the sale of animal feed pellets.
The pellets were damaged on arrival, but were still fit for their purpose of feeding
animals. The buyer attempted to repudiate the contract on the grounds that the
pellets were damaged, when in fact their motive was the fact the market value for
the pellets had dropped. The courts were therefore unwilling to treat the term
relating to the condition of the pellets as a condition, as it was not of true
importance in the context of the contract as a whole.

A term that is not even included in the contract may be implied as a condition
dependent on the commercial circumstances. An example of this would be a sale
of goods that have a volatile market value. It may be implied into the contract
that the time for performance is a condition.

Entire obligations

An entire obligation is an obligation that is necessary in order for the other party
to perform their obligations under the contract. If an entire obligation is not
completed this will constitute a repudiatory breach, allowing the innocent party
to terminate the contract.

Case in focus: Cutter v Powell (1795) 6 TR 320

In this case, a sailor was hired for a voyage from Jamaica to England. The hire
price was above the normal market value, and would be paid once the voyage
was complete. The sailor died before the voyage was complete, and his wife
attempted to claim some of the sum for the partial completion of the voyage.

The court held that the completion of the voyage was an entire obligation, which
meant he could only be paid once he had completed the entire journey - which he
did not. This case highlights how harsh the entire obligations rule may be. Failing
to perform an entire obligation will prevent the other party from claiming any
payment for the partial performance.
The courts have identified the harshness of the entire obligations rule, and in
response have attempted to avoid applying the rule. The first way in which the
courts will do this is by treating contracts as a number of smaller, separate
contractual obligations. Take for example a contract for the construction of a
building, there will be many stages of the construction, but it could be treated as
an entire obligation. The courts will therefore separate the construction contract
into stages and separate obligations, and if the entire obligation is not complete,
the party can be paid for the parts they did complete.

The entire obligations rule does not always apply to the payment of instalments.
The courts will assess what exactly the instalment was for; if that part of the
contract amounts to a sufficiently serious breach, the contract may be
repudiated. If the breach is not sufficiently serious, the other party will only be
liable for damages. In the context of the sale of goods, Section 31(2) of the Sale of
Goods Act 1979 explicitly refers to this exact rule.

If the entire obligations rule is not operative, a number of minor breaches could
have the cumulative effect of a repudiatory breach. In the case of Rice v Great
Yarmouth Borough Council [2003] TCLR 1, there were a number of breaches that
could not themselves be considered repudiatory, but due to the consistency of
the breaches, they were treated as amounting to a repudiatory breach. The
consistent breaches meant the innocent party was substantially deprived of the
benefit of the contract.

The courts may also waive the entire benefit rule where the innocent party
accepts the partial performance and opts to keep any benefit derived from it. The
case of Sumpter v Hedges [1898] 1 QB 673 shows this rule in operation. In this
case, a contract to build two houses was formed for a price of £565. The builder
abandoned the project after half the work was completed, and he was partially
paid for the work. The innocent party completed the project himself. The fact the
builder had been partially paid implied an acceptance of the breach by the
innocent party.

Following the acceptance, an implied secondary contract is formed, which is

essentially a contract to repudiate the first contract, and create a new one for
payment of the partial completion. This rule can only operate where the innocent
party has no choice whether or not to accept the benefit. In Sumpter v Hedges,
the innocent party could not have opted to destroy the building and the builder
could not recover everything for his partial performance of the building.
Therefore, a contract for partial performance was possible.

The final circumstance in which the entire obligation rule will not apply is where
the performance is substantial. If the extent of the failure to perform is small in
comparison to the performance they have undertaken, the courts have been
willing to waive the entire obligation rule and prevent the innocent party from
repudiating the contract.

A clear example would be a contract for the sale of a quantity of goods. If the
seller only manages to provide 999 of the 1000 goods, would this amount to
substantial performance? If the goods were of a relatively low value, such as
apples, this would amount to substantial performance.

The innocent party will however be able to claim damages, or offset the price of
payment against the extent of the breach (Hoenig v Isaacs [1952] 2 All ER 176). So
in the above example, the price would be offset by the cost of the one missing
apple.

In order to assess whether the performance is substantial enough, the

seriousness of the breach should be considered in the context of the contract as a
whole.

Exam consideration: Do you think a contract for the sale of five expensive sports
cars would be substantially performed if only 4 were actually provided? If you
were answering this in an exam you may be able to argue it either way, just
ensure you justify your answer well.

Intention to breach - anticipatory breaches

Obligations under a contract may be discharged even before a breach has

occurred if one party indicates an intention to breach the contract. This is
referred to as an ‘anticipatory breach’. This type of breach was first identified
in Yukong Line of Korea v Rendsburg Investments Corporation of Liberia [1996] 2
Lloyd’s Rep 604. Moore-Bick J explained that if one party intends to breach the
contract, the other can treat it as a breach in anticipation and can discharge the
contract immediately.
Case in focus: Hochster v De La Tour (1853) 2 E & B 678

In this case, the defendant employed the plaintiff as a courier for three months.
The defendant had a subsequent change of mind and told the plaintiff he would
not be required. The plaintiff claimed that this was a breach of contract, but the
defendant claimed that there could not have been a breach since the contract of
employment had not yet started.

The court held that this amounted to an anticipatory breach, and the defendant
could choose to either claim damages immediately for the anticipatory breach, or
wait until the date the contract should start and claim damages for the actual
breach.

The anticipatory breach rule is justified by the fact that the innocent party will be
aware the other party intends to breach the contract, but can do nothing about it
and will have to wait until the breach actually occurs before they may claim for
damages or repudiate the contract. The anticipatory breach rule gives the
innocent party a remedy as early as possible.

As with all circumstances under which a contract may be repudiated, the breach
intended must be sufficiently serious. In order to assess the seriousness of the
breach you should consider the points covered earlier in the chapter.

A party can show their intention to breach the contract through an express
statement, but the intention may also be inferred from certain conduct. The
conduct must also be clear and unequivocal as to intent to abandon the contract,
the simple fact that one party seems unlikely to meet their contractual obligations
will not be sufficient. The case of Alfred Toepfer International GmbH v Itex
Itagrani Export SA  [1993] 1 Lloyd’s Rep 360 is authority for the general threshold
as being: apparent, on the balance of probabilities, that the party cannot or will
not perform their obligations.

The more recent case of Eminence Property Developments Ltd v Heaney  [2010]
EWCA Civ 1168 further developed this test: From the perspective of a reasonable
person in the non-breaching party’s position, has the other party shown a clear
intention to abandon and refuse to perform?

The innocent party can choose to repudiate the contract, or affirm the intended
breach, as shown in Fercometal SARL v Mediterranean Shipping Co. SA [1989] AC
788. However, there are some limitations on the innocent party’s ability to affirm
the breach.

In White & Carter (Councils) Ltd v McGregor [1962] AC 413 it was confirmed that a
person who had no legitimate interest, financial or otherwise, in performing the
contract, could not affirm a contract for an anticipatory breach.

The affirmation of an anticipatory breach must be clear and unequivocal, and

there must be evidence to this effect (Yukong Line Ltd of Korea v Rendsburg
Investments Corporation of Liberia [1996] 2 Lloyd’s Rep 604). The reason for this
is that the affirmation of an anticipatory breach is irrevocable under most
circumstances.

The case of Stocznia Gdanska SA v Latvian Shipping Co [2001] 1 Lloyd’s Rep 537
identified one situation in which an affirmation of breach can be revoked. Only
when the breach is a continuing one may the innocent party revoke a previous
affirmation of the breach. The innocent party can also repudiate the contract
when the actual breach occurs, even if they had previously affirmed the
anticipation of it.

Where an innocent party intends to terminate the contract as a result of the

anticipated breach, they must make it clear to the party in breach that they are
terminating the contract. Vitol SA v Norelf Ltd, The Santa Clare [1996] AC 800
confirms that one way in which the innocent party may inform the party in breach
of this intention is simply by not performing any of their contractual obligations.
However, this is not always the case and it is a question of fact in each different
case. In most cases, it will be best for the innocent party to inform the party in
breach directly.

The final point with regards to an anticipatory breach is that damages can be
claimed from the date of the termination of the contract. The innocent party does
not need to wait until the date of the supposed performance of the contract
(Hochster v De La Tour  (1853) 2 E & B 678)

. Frustration of Contract

In the previous chapter we covered the main ways obligations under a contract
may be discharged. This chapter will focus on the doctrine of frustration, which is
the final way in which contractual obligations can cease.
What is Frustration?
The doctrine of frustration discharges both parties from their contractual
obligations where following the formation of the contract, performance of the
contractual obligations become either:

1. Impossible; or
2. Radically different

Essentially, what the doctrine of frustration allows for is a remedy in case of a

change of circumstances. This does seem contradictory to the law of contract and
the contractual freedom the law allows. If the law does not protect a party from a
bad bargain, why does frustration protect against an unfortunate one? Before the
doctrine of frustration was formed, the case of Paradine v Jane [1647] EWHC KB
J5 ruled that irrelevant of changes in circumstances, parties could never be freed
from their contractual obligations.

Understanding the justification for the doctrine of frustration is best done with
reference to a basic example. If I paid £50,000 for a meet and greet with a famous
celebrity, and before the meet and greet, the celebrity died, would it be fair that I
would still be forced to pay the £50,000? The doctrine of frustration would
intervene at this point. Of course, this is a very basic example and things can be a
lot more complicated than that as you will see! The case which established the
doctrine of frustration was Taylor v Caldwell (1863) 3 B & S 826

Case in focus:  Taylor v Caldwell  (1863) 3 B & S 826

In this case, the claimants had hired out the defendant’s concert hall for four days
at the price of £100 each day. After the contract was entered into, but before the
day of rental began, the hall was destroyed by fire. The claimant could no longer
host their concerts, and as a result lost a significant amount of money. The
claiming argued that the defendant should account for those losses, whilst the
claimant argued that they could not be liable for an accidental destruction of the
concert hall.

It was held that the defendants were not liable for the losses. Blackburn J held
there was an implied term in the contract that the concert hall would exist at the
time of the contract. This implied term formed the basis of the law of frustration
until the case of Davis Contractors Ltd v Fareham Urban District Council [1956] AC
696
Case in focus:  Davis Contractors Ltd v Fareham Urban District Council [1956] AC
696
In this case, the Davis agreed with the claimants to build 78 houses over eight
months for £92,425. The building actually took twenty-two months, because
Davis did not have the required staff or materials. Davis argued the contract was
frustrated due to their change in circumstance - it was assumed that they would
have a certain amount of staff and materials to work with, when in fact they did
not.

It was held that the contract was not frustrated. The obligations of Davis have
become more difficult, but not radically different. The importance of this case was
the move away from the doctrine of frustration inserting an implied term
covering the change of circumstance. Instead, the construction approach was
applied. The construction approach requires an assessment of the changes in light
of the context of the contract in order to assess whether performance is
impossible or radically different. This construction approach has continued to be
applied.

An important quality of frustration is that it must be based on an assumption

made by both parties. In the example used, both parties have made the
assumption that the celebrity will be alive for the meet and greet. Here is a simple
example of where only one party makes an assumption:

 Party A contracts with Party B to sell a car for £5,000

 Party A has made the contract on the assumption that they can buy the exact
car for £4,000 from Party C
 Party C’s car is then destroyed, and Party A can only find a replacement for
£10,000

As only Party A has made an assumption about the car, frustration cannot be
relied on. If, however, it was made part of the contract was that Party A would
purchase this car from Party C for £4,000 before selling it to Party B, both parties
would have made the assumption, and frustration could be relied on.

The test for frustration

There are three main elements when assessing whether frustration applies to a
contract:
 1. Has the contract allocated the risk of the particular event occurring
2. Has there been a radical change in obligations
3. Was the radical change due to the fault of one of the parties?

Has the contract allocated the risk of the particular event occurring?
Frustration can only operate where the parties have not themselves allocated the
risk of loss between themselves in the contract. In other words, where a party has
agreed to bear the risk/loss of some sort.

If we think back to the example contract of the meet and greet with a celebrity, if
there was a term in the contract that stated ‘in the event of death of the
celebrity, the seller will bear the risk and still pay the £50,000’, the risk has been
allocated to the seller, and they have accepted the risk by entering into the
contract, therefore they could not rely on the doctrine of frustration.

There is no requirement that the allocation of risk has to be exact or definite, just
that there is at least some mechanism for dealing with particular changes in
circumstances.

Has there been a radical change in obligations?

There are a variety of ways in which the obligations under a contract can change.
Previous case law has created distinct categories that provide for different
presumptions and rules relating to the application of frustration. Therefore, this
chapter will cover them each in turn. They are as follows:

1. Non-occurrence of an event
2. Increased expense
3. Destruction of subject matter
4. Illegality
5. Alteration of manner of performance or impossibility by one party
6. Outbreak of war
7. Delay or interruption

Non-occurrence of an event

The first of our categories of frustration is where an event fails that at least one of
the parties has assumed will occur. The operation of frustration in such
circumstances is best understood with reference to two of the most famous cases
on frustration, known as the ‘coronation cases’, as they both relate to the
coronation of King Edward.

Exam consideration: If you are answering a question on frustration in relation to

the non-occurrence of an event, ensure to compare and contrast the two cases
discussed below in the cases in focus! They are absolutely paramount

Case in focus Krell v Henry [1903] 2 KB 740

In this case, the defendant formed a contract with the claimant to hire a flat out
on Pall Mall from the 26th of June to the 27th of June, the exact date of King
Edward VII’s coronation service, which was due to pass through the street. The
flat backed on to the street with a balcony, meaning this particular flat would
have had an excellent view of the procession. The contract had no express
reference to the coronation or the purpose the flat was hired for. The contract
was only hired for the daytime, and would not be available overnight. King
Edward fell ill, and the coronation procession was cancelled. The claimant
attempted to claim the hire price from the defendant, but they refused to pay on
the grounds that the contract was frustrated due to the cancellation of the
coronation.

It was held that both parties were aware that the coronation procession was the
foundation of the contract, and the room had been hired only to view the
procession, therefore the contract was frustrated for the non-occurrence of the
event. The important factor of the case was that the claimant has advertised the
hire of their room specifically for the viewing of the coronation. There was no
other value to the room, as it could not be stayed in overnight, it was solely for
the viewing of the coronation.

Case in focus:  Herne Bay Steam Boat Co v Hutton  [1903] 2 KB 683

In this case, as part of the coronation of King Edward (the same one as in Krell v
Henry) a naval review was to take place. A contract was formed between the
defendant and claimant for the hire of a steamship to take passengers for a day
cruise round the fleet, and to view the naval review. As a result of King Edward’s
illness, the naval review was cancelled. The defendants then refused to hire the
boat, arguing the contract was frustrated due to the non-occurrence of the naval
review.
The exact same judges as those in Krell v Henry decided this case was not
frustrated. The reasoning behind this was that the happening of the naval review
was not the foundation of the contract. When the claimant hired their ship out,
they did not hire it out for the sole purpose of somebody viewing the naval
review. The happening of the naval review was only the defendants motive for
entering the contract; it was not both of the parties’ foundation. The hired boat
could still be used to cruise the review and view the moored fleet. The hiring of
the ship had nothing in particular to do with the naval review.

These cases can be difficult to reconcile, but hopefully you can spot the key
difference. In Krelll v Henry, the coronation was the foundation of both parties
entering into the contract, they had both made the assumption that the
coronation event would go ahead. However, in Herne Bay, only the defendant
was concerned with the naval review, there were no assumptions from the
claimant.

In his judgment in Krell v Henry,  Vaughan Williams LJ set out a hypothetical

example that should hopefully help your understanding further. The example
involves a taxi driver taking somebody to a famous horse race on derby day. The
taxi driver would charge an increased fare for the journey due to the
circumstances. If the race was cancelled, the contract for the taxi ride would not
be frustrated. Despite the higher price paid, and the purpose for which the
individual booked the taxi not occurring, the taxi has no particular qualifications
or specialism for the particular occasion; any other taxi driver would have been
the same.

If you consider the above example in light of the coronation cases, the fact the
room was hired for the purpose of the coronation procession in Krell v Henry was
not enough, but the fact the room was only rented for the day, and had particular
characteristics such as a balcony overlooking the procession which most other
rooms would not have, made the foundation of the contract, and would therefore
be able to be frustrated for non-occurrence of the event.

Exam consideration:

In relation to the taxi example, what if the individual had paid £1,000 to take
the taxi and be escorted to the VIP area where they had front row seats for the
race? It then becomes more comparable to Krell v Henry due to the specialism
of the seats for the race.

To recap, the three points from Krell v Henry  which identify that the coronation
was the foundation of the contract were:

1. The advertisement of the room expressly advertised a viewing of the

coronation, not a regular letting of the room
2. The use of the room was only during the day, and not the night
3. The claimant was not in the business of renting his room out regularly, he had
only done it on this particular occasion

These factors show that there was a joint assumption by the parties that the
event would go ahead, and it was not just one of the parties making the
assumption, which is one of the key requirements of frustration.

Increased expense in contract frustration

The courts have tended to rule that an increased expense for one party can never
frustrate a contract. The leading case in this area is the already mentioned Davis
Contractors Ltd v Fareham Urban District Council.  As part of their claim, Davis
Contractors cited the extra £17,000 cost they had incurred, which then resulted in
them losing money on the contract, whereas they were expecting to make
money. The courts justification for not allowing an increased expense to frustrate
a contract is that where one party enters a contract under the assumption they
can make a profit, just because the assumption is incorrect does not mean the
contract can be frustrated. The other party have not made this assumption. This
also relates to the idea that the courts will not protect an individual from a bag
bargain.

In Tsakiroglou & Co Ltd v Noblee Thorl GmbH  [1962] AC 93 it was suggested that
an increased expense, no matter how onerous, could never frustrate a contract.
Only one judge, Lord Reid, disagreed with this notion. He argued that in the case
of extreme increases in expense, the contract should be frustrated. This is an
interesting point, but under current English Law a contract can never be
frustrated for increases in expense, no matter how extreme. The justification
being for this that increased expense is the business of one party alone.

Destruction of subject matter

Similar to the non-occurrence of an event, a contract may be formed with a
particular subject matter in mind. This section covers what will happen where the
subject matter is destroyed.

We have already covered the key case in relation to destruction of subject

matter, Taylor v Caldwell  (1863). As you will remember, in this case, a concert hall
was hired out and subsequently destroyed in a fire. Generally speaking, where the
subject matter of a contract has been destroyed due to no fault of either party,
the contract will be frustrated.

Another example of this comes from Appleby v Myers (1867) LR 2 CP 65, where a

contract was formed for the defendant to install machinery in the claimant’s
factory. The premises and machines were destroyed before completion of the
contract, which resulted in frustration of the contract.

In these cases, the parties have both made an assumption that the subject matter
will exist at the time of the contract. You ensure that this is the case, and that the
destroyed thing is the actual subject matter of the contract.

Exam consideration: Consider the important of the assumption of both parties. A

party may enter into a contract for public transport to visit a famous church, but
the church is subsequently burnt down - would this be a case for destruction of
the subject matter? This would be more similar to the taxi example from Krell v
Henry - only one party has made the assumption about the church.

Illegality

Illegality refers to where the parties form a contract, and subsequently, before or
during performance, the contract becomes illegal to perform. The general rule is
that this will frustrate the contract if the effect on the contract is serious enough.
If the effect is minimal and only partial, the doctrine of frustration will not apply.

It is important to remember that the rules of illegality, covered in a previous

chapter, will apply where the contract is illegal at the time of formation.
Frustration here only applies where the contract becomes illegal following its
formation.
The most common example of illegality is where legislation is enacted which
renders the contract illegal (Denny, Mott and Dickson v James B. Fraser & Co
Ltd  [1944] AC 265).

Case in focus: Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32

In this case, Fibrosa, who were based in Poland, created a contract for the
purchase of some machinery from Fairbairn, who were based in England. £1,000
of the £4,800 was paid in July 1939. Subsequently, before all of the obligations
under the contract were completed, Germany invaded Poland and war was
declared. Fairbairn refused to pay the rest of the monies owed, citing the fact that
the contract was now illegal as the outbreak of war made it illegal for British
companies to trade with Poland. Essentially, Fairbairn argued that the contract
had been frustrated due to the outbreak of war.

It was held that the contract was frustrated as a result of the illegality of the
contract. As a further point, the courts held that the ‘loss lies where it falls’,
meaning Fibrosa could not recover the £1,000 paid.

In some cases, the illegality of the contract is temporary. If the length of time is
short enough, the contract may not be frustrated and the parties will simply have
to wait out the period of time before continuing the contractual obligations. The
courts which consider the length of time the contract will operate for, combined
with the length of time of the illegality. In National Carriers Ltd v Panalpina
(Northern) Ltd  [1981] AC 675, there was a contract which allowed access to a
warehouse for ten years, and the council banned access to the warehouse for
twenty months. In light of the ten-year term, the twenty months was not a
significant enough period of time to amount to illegality.

Exam consideration: Remember, if there is not a given period of time for the
illegality it either may be permanent or unknown (such as an outbreak of war).
Ensure to identify this and explain how it affects any frustration claims.

Alteration of manner of performance or impossibility by one party

Where an event results in a change in obligations or impossibility for one party,
there will not be frustration of the contract. Remember - frustration must be an
assumption both parties make, and it must result in impossibility for both parties.

In Blackburn Bobbin Co Ltd v Allen (TW) & Sons Ltd [1918] 1 KB 540, there was an
agreement to sell some Finnish timber to a purchaser. Due to the outbreak of
war, the seller could no longer obtain the timber from their supplier in Finland.
The contract was not frustrated, as this was the seller’s issue alone, the purchaser
of the timber was not concerned with where the seller got the timber from.

The important idea to remember that how one party conducts their business is
their problem, and they bear the risk of any business decisions they make which
result in circumstances such as in Blackburn Bobbin. They took a risk by not
already having the Finnish timber before forming a contract with the purchaser.
How they conduct their business is their risk alone, and the other party should not
be penalised for this.

Outbreak of war

As we have already seen, the outbreak of war can cause various contractual
issues. Another good example is the outbreak of war between Britain and Egypt.
The result of this outbreak was blockage of the Suez Canal, which resulted in
many breached international trade and shipping contracts. Again, these
assumptions have only been made by one party, meaning the contracts cannot be
frustrated for this reason.

Where both parties have assumed performance will be done in a specific way
which is rendered impossible by the outbreak of war, this may amount to
frustration. In Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93, a contract
was held not to be frustrated due to the Suez Canal blockages. However, it was
considered by the judges that if it was vital to the contract that the goods were
delivered by the Suez Canal, perhaps due to time being of the essence and other
routes taking too long, the contract may have been frustrated.

Delay or interruption

As mentioned, concerning temporary illegality, there may be a delay or

interruption that is impossible to avoid. The issues with such delays is that the
parties cannot be certain how long the delay will last, it could be ten days, which
would not frustrate the contract, but it could be ten years, which almost definitely
would frustrate the contract.

The famous academic, Chitty, has suggested that in order for a delay to frustrate a
contract, the delay ‘must be so abnormal, in its cause, its effects, or its expected
duration, so that it falls outside what the parties could reasonably contemplate at
the time of contracting’.

The courts will also consider these factors in deciding whether a contract may
be frustrated for delay (The “Sea Angel [2007] EWCA Civ 547)

 How did the delay arise

 Was the delay foreseeable
 How does the contract distribute the risk in other similar circumstances

Was the radical change due to the fault of one of the parties?
If one party is at fault for the frustrating event, it is less likely that the contract will
be frustrated. The case of The Super Servant Two  [1990] 1 Lloyd’s Rep 1 explained
that a frustrating event should be uncontrollable and an extraneous change of
situation. In other words, the frustrating event should be beyond the control of
the parties.

Importantly, if one party is at fault for the frustrating event, although that party
may not make a claim for frustration, the innocent party can do so and will be
able to claim damages for any loss that resulted from the contract.

Case in focus: The Eugenia, Ocean Tramp Tankers Corporation v V/O

Sovfracht [1964] 2 QB 226

This is yet another case involving the Suez Canal closure! It was a contract for the
chapter of a ship, and there was a condition that the ship should not be taken into
any war zone unless the owner of the ship gave permission. The ship entered the
Suez Canal, a war zone, which breached the contractual condition regarding no
entry to war zones. It was argued the contract was frustrated due to the blockage
of the canal.

The court held that the radical change in obligations was due to the fault of the
charterers - the position they were in was due to their own breach of contract.
As well as a breach of contract, a negligent act which results in the frustrating
event will amount to fault. This was discussed by the judges in Taylor v Caldwell
-  if the burning down of the concert hall was a result of some negligence of the
owners, the contract would not have been frustrated.

Going even further, DGM Commodities Corporation v Sea Metropolitan SA  [2012]

EWHC 1984 (Comm) confirmed that ‘fault’ has a very loose definition in this
context. There does not need to be an element of breach of contract or
negligence, it can just be a positive action from the party or an individual whom
the party is responsible for (ie. An employee).

Case in focus: Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524

This is the leading case on fault in the doctrine of frustration. This case involved
fishing boats which required licenses from the Minister of Fisheries. The
defendant required five licenses for five boats, but was only granted three. One of
the boats was the plaintiff’s. The defendant chose to allocate the three licenses to
three boats, leaving two boats without a license, one of which was the plaintiffs.
The defendant then claimed that the contract for the charter of the boat with the
plaintiff was frustrated, as it was impossible for them to use it due to them being
unable to acquire a license.

The court held that the defendant was at fault for the impossibility. They had
been given a license which they could have allocated to the plaintiff’s boat, but
opted not to, therefore being at fault and they were unable to claim for
frustration of the contract.

The legal effect of frustration

Effect on the contract
Now we have fully explored the legal issues and operation of the doctrine of
frustration, we can move on to its effects. It is important to be able to accurately
explain what it means for the outcome of the contract.

The case of Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497 confirms the
effect of frustration is that it brings the contract to an immediate end, whether or
not the parties wish this to be the result. In other words, it is void, not voidable
(as is the case for repudiatory breaches).
Financial effects
Previously, under the common law, all obligations under the contract ceased in
event of frustration. This included both primary obligations of the contract, and
secondary obligations in relation to breaches, such as damages. Therefore, the
general rule was that the loss lies where it falls. We touched on this slightly in the
case of Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd, where Fibrosa were
unable to reclaim the £1,000 they had paid under the contract, the loss had fell
with them. There are two different circumstances for these purposes:

1. Where the money is paid in advance

2. Where the money is paid on completion

Where money had been paid in advance, the advance payments could be
recovered if there was a total failure of consideration by the other party. This
approach was heavily criticised due to its impact of the other party. Advance
payments are usually used as a form of insurance against frustrating events or
breaches of contract. Therefore, by the courts allowing the advance payment to
be recovered, they were essentially disallowing the purpose of the insurance by
way of advance payment.

Where money is paid on completion, there was an unfair effect on the party who
have partially completed their obligations. One party could be 95% of the way
through a £1,000,000 construction project before an event which frustrates the
contract occurs. As the loss lies where it falls, the constructor would be £950,000
out of pocket, whilst the other party has lost nothing. Evidently, this was not
satisfactory either. An example of such an occurrence is found in Appleby v
Myers (1867) LR 2 CP 651.

As a result of these financial implications of frustration under common law, the

Law Reform (Frustrated Contracts) Act 1943 (LRA) was formed. However, the
common law position is still important to know, because the LRA will not always
apply, and if it does not, the common law position will apply to the contract.

Law Reform (Frustrated Contracts) Act

Section 1(2)
Section 1(2) of the act applies where money has been paid in advance or is
payable in advance. It states that money already paid is recoverable, and money
that is payable need not be paid. There must be a total failure of consideration in
order for this to apply.

You may be thinking that this is an identical position to that of the common law,
but there is another important factor which prevents unjust results such as those
in the Fibrosa case. The courts have the discretion to allow the other party to
retain any advance payment to cover any expenses incurred, so long as the
amount of money

1. Does not exceed the intended advance payments, and is a form of insurance
for the contract; or
2. Does not exceed the actual value or the actual expenses incurred

Essentially, this section prevents advance payments from automatically being

forfeited in the event of frustration.

In deciding whether to allow the retention of any advance payments, the court
will consider whether the expenses incurred may be recovered in an alternative
way. For example, take a contract for the sale of a car has been frustrated, but
the party selling the car purchased the car from somebody else one day earlier. In
theory, they would have incurred the expense of buying the car. However, it is
likely they could recover these expenses simply by selling the car to another
buyer, meaning the retention of any advance payment would be unfair and would
result in an extra gain.

Section 1(3)

Section 1(3) states that where no advance payment has been made or will be
made under the contract, there can be no compensation for expenses incurred in
the performance of a frustrated contract. Again, this seems very similar to the
position under the common law.

However, if the performance has conferred a valuable benefit on the other party
prior to the frustrating event, the court has the discretion to allow a claim for the
incurred expense. The amount will be assessed as follows:

1. It cannot exceed to value of the benefit conferred to the other party;

 2. The court must consider the expenses incurred by the party receiving the
benefit
3. The court must consider the benefit received and how the frustration has
affected such benefit.

In Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226 a stadium was

prepared for a concert, but the contract was subsequently frustrated. It was held
that the preparation of the stadium did not confer any tangible benefit to the
defendant.

The case of BP Exploration Co (Libya) Ltd v Hunt (No. 2) [1979] 1 WLR 783 saw an
application of Section 1(3). Robert Goff J confirmed the correct approach to
calculate the amount allowed for expenditure:

1. Identify and value the benefit to the party receiving the benefit, this becomes
the upper limit of award
2. Within the limit from (a), decide what sum is just with reference to fairness,
the effect of frustration, and the expenses incurred by the party receiving the
benefit.

Contracts which the LRA does not apply to

The LRA does not apply to certain contracts. In most cases, the common law rules
will then apply.

 Where the contract has made express provision for the consequences of
frustration (Section 2(3))
 Where the contractual obligations have been wholly completed (Section 2(4))
 Contracts for the carriage of goods by sea (Section 2(5)(a))
 Contracts for insurance (Section 2(5)(b))
 Contracts for the sale of specific goods which are frustrated due to the
perishing of goods (Section 2(5)(c)

Frustration - Hands on example

The following section will provide you with a problem scenario which involves
issues relating to the doctrine of frustration. This will test your understanding and
knowledge of what you have learnt and allow you put the law into practice. You
should now understand the doctrine of frustration, be able to identify the
different presumptions and rules for potential frustrating events, and the
limitations to each. The problem scenario will cover a variety of issues, and the
answers can be found at the bottom of the page.

In order to identify a problem question relating to frustration, you should look out
for situations in which a contract becomes impossible or radically different.
Obvious things to look out for are the non-occurrence of events, the subsequent
illegality of a contract or the destruction of the subject matter of the contract.

Here is a suggestion approach when tackling a problem scenario relating to the

doctrine of frustration that should allow you to answer the question fully and spot
all the relevant issues:

 Has there been an allocation of risk of that particular event between the
parties
 Does the event result in the contract being impossible, or make the
obligations radically different
 Can you apply any of the presumptions to the event
 Apply to the law of the presumption to the event
 Is the frustration based on an assumption made by both of the parties?
 Was either of the parties at fault for the frustrating event?
 Do you apply the common law allocation of loss or the Law Reform Act 1943
allocation?

Attempt to apply this approach to the problem scenario below; hopefully it

should work for you. Remember, if you are struggling, just refer back to the
detailed version in this chapter and refresh your knowledge.

Scenario
Sasha is an entrepreneur and is experimenting with a number of different
business ideas. She has had some awful luck and there has been a number of
events which may leave her in a difficult position as far as her contractual
obligations are concerned.

Contract one is with an artisan cheese shop. She has contracted to sell them
£10,000 worth of Swedish cheese. There is only one supplier of Swedish Cheese,
who is located in Sweden. Unfortunately, before the delivery of the cheese, a war
has broken out between Sweden and England. All trading between the countries
is to be ceased and is now illegal.

Can Sarah use the doctrine of frustration to release herself from the contract?

Contract two is a contract for the hire of a large wooden market stand in the
centre of the towns market. Subsequent to the making of the contract, the owner
of the market stand was cleaning it. After taking a break for a cigarette, he
accidently dropped the still lit cigarette, resulting in the market stand being
destroyed by a fire.

Would the destruction of the stall mean the contract for the rental of the stall is
frustrated?

Contract three is made with Joe, who is paying Sasha £3000 for her to build his
business a website. Sasha was concerned he may not pay her, so took an advance
payment of £1,500. The contract has now been frustrated due to a law which
renders the creation of this particular type of website illegal. Joe is now trying to
claim his advance payment back. Sasha has spent over fifty hours working on the
website, and her usual hourly rate is £20.

Following the frustration of the contract, can Joe claim the advance payment
back? If so, will he be entitled to the entire £1,500 or just part of it?

1. The subsequent illegality of a contract may render a contract frustrated

dependent on the length of time the contract would be illegal. In this case, it
would be uncertain how long the war will last, therefore it is more likely that
frustration would be able to be successfully argued.

However, in this case, the contract between Sasha and the artisan cheese shop is
not illegal, only Sasha’s supply contract for the Swedish cheese is illegal. This is
similar to the case of Blackburn Bobbin Co Ltd v Allen (TW) & Sons Ltd [1918] 1 KB
540. In that case it was held that the original contract was not frustrated just
because of the impossibility of the one party. Only one party, Sasha, had made
the assumption that the supply of cheese would be legal. In order for frustration
to operate, both parties must make the assumption, which is not the case here.
Therefore, the contract would not be frustrated.
 2. The second contractual issue relates to the destruction of the subject matter.
In Taylor v Caldwell(1863) 3 B & S 826 it was confirmed that where the
subject matter of a contract is destroyed, the contract will be frustrated.
However, in this case there is an element of fault. It was the owner of the
stalls fault the subject matter was destroyed, due to their negligent act of
dropping a lit cigarette on the wooden stand. Where one party is at fault, the
contract will not be frustrated (Maritime National Fish Ltd v Ocean Trawlers
Ltd [1935] AC 524).  Taylor v Caldwell  confirms a negligent act will be
sufficient to amount to fault.
3. The Law Reform (Frustrated Contracts) act gives guidance what happens in
the event that there has been an advance payment made for a contract that
is subsequently frustrated. Section 1(2) of the act rules that an advance
payment may be retained, so long as the amount does not exceed the
specified advance payment under the contract, and does not exceed the
expenditure of the party who has received the payment.

In this case, Sasha’s expenditure can be calculated by multiplying her hourly rate,
£20, by the number of hours she spent creating the website. Therefore, Sasha’s
expenditure amounts to £1,000. This means Sasha can retain a maximum of
£1,000 from the advance payment, meaning Joe will be entitled to a return of the
remaining £500

Copy to

Damages

Introduction to remedies and damages

We have now covered the formation of the contract, privity of contract, the
construction of the contract, vitiating factors and how obligations under the
contract are discharged. This brings us onto the final element of contract law, the
remedies for a breach of contract.
There are a number of different remedies under English law. The next chapter will
cover all of these, but this chapter will focus solely on the most common and
sought after remedy - damages. Damages in contract law can be defined as a sum
of money paid to the innocent party in compensation for a breach of contract.

As you will know by now, contract law is based upon the freedom of the
contracting parties. This concept is difficult to apply to the remedies and
damages. When the parties make the agreement, they will hope that they both
fulfil their obligations. Therefore, the intentions of the parties cannot usually be
used in order to calculate an amount of damages that should be awarded under
the contract. Instead, the amount of damages will be awarded based on the value
of the interest the innocent party has in the contract. This may well be more than
the value of the actual contract, as you will begin to understand as you progress
through this chapter.

The case of Photo Production Ltd v Securicor Transport Ltd [1980] AC 827

explained the basis of the remedy of damages. Lord Diplock stated that every
contracting party has a secondary obligation to pay monetary compensation to
the other party in the event they breach the contract.

The different types of damages

Before we begin examining the law behind damages, you should understand the
two different types of damages:

1. Compensatory damages
2. Non-compensatory damages

Compensatory damages are an award of a sum of money which aims to

compensate the claimant for his loss under the contract. This need not be limited
to loss from the contract itself, and may compensate the innocent party for losses
relating to subsequent contracts, which will be covered later in the chapter.

Non-compensatory damages are an award of a sum of money not only to

compensate the claimant for his contractual losses, but also aim to compensate
the claimant in relation to any bad conduct of the other party.

Compensatory damages are the most common form of damages, and will form
the content of this chapter.
Compensatory damages
In order to assess whether an innocent party may be entitled to damages, there
are six things that should be considered:

1. Has the claimant suffered any loss?

2. Is the loss suffered actionable?
3. Did the breach of contract cause the loss?
4. Was the type of loss reasonably foreseeable?
5. Did the claimant mitigate the loss?
6. Did the claimant contribute to the loss?

We will now examine each step in turn and consider the relevant legal principles.

Has the claimant suffered a loss?

The first step is to ascertain the loss the claimant has suffered under the contract.
The general rule is that the claimant may only recover for his own loss - Alfred
McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518.

The claimant does not need to be able to identify an exact amount of loss. The
fact there is a loss at all is sufficient to satisfy this first requirement. The courts
will attempt to quantify the loss no matter the difficulty.

Case in focus: Chaplin v Hicks [1911] 2 KB 786

In this case, the claimant was a finalist in a competition along with fifty other
people. The prize was a job as an actress. Each finalist was to book an
appointment to have an opportunity to showcase their skills. The defendant did
not allow the claimant to have an appointment, and they therefore missed out on
the opportunity to win the competition.

The court held that the defendant had breached the contract with the claimant by
not giving her a fair opportunity to participate in the contract. The court awarded
damages. Despite the difficulty in calculating the value of her lost opportunity, the
court was happy to award damages on this basis.

Chaplin v Hicks  brings us onto an important rule relating to loss. In that case,
there was no tangible loss as such, it was a lost opportunity. The loss of an
opportunity can only amount to an actionable loss where it is the actions of a
third party which determine whether the claimant would have made a gain (Allied
Maples Group Ltd v Simmons & Simmons [1995] 4 All ER 907). The claimant need
only to show that there was a speculative chance that they would have made the
gain, it does not need to be likelihood or a certainty. Assessing this rule in relation
to Chaplin v Hicks, the third party in that case was the panel of judges who would
decide the winners of the competition, whereas the contracting party did not
determine the potential gain of the claimant, they were only required to arrange
the appointment.

Assessing the amount of the loss

The court will assess the loss at the date of the breach, but under circumstances
where this would not be appropriate may assess the loss at a chosen date
(Johnson v Agnew [1980] AC 367).

The aim of damages is to put the non-breaching party in the position they would
have been in had the contract been performed as agreed (Robinson v
Harman(1848) 1 Ex 850). In order to calculate this, we need to know the extent of
the loss which results from the breach. There are two different ways in which this
can be measured:

1. Expectation measure
2. Reliance measure

Expectation measure

Expectation measure involves a comparison between the claimant’s current

position, and the position they would have been in had the contract been
performed correctly. An example of this would be a contract for the sale of a car
which should be worth £1,000. If the car is faulty, and is only worth £200, the
expectation measure would be £800, as the car is worth £800 less than it should
have been worth.

At this point it is worth noting that the expectation measure is subject to step four
of our approach to assessing damages; whether or not the damage was
foreseeable. This means that not absolutely everything under an expectation
measure can be claimed, but this will become clearer when we move on to the
forseeability later in the chapter.

The first important rule of the expectation measure is that it is calculated on the
expectation that the breaching party would have performed their obligations
under the contract, but no more and no less (Lavarack v Woods of Colchester
Ltd [1966] EWCA Civ 4). Therefore, care should be taken when assessing the
obligations under the contract - for example, take a contract of employment
where a bonus may be awarded every month. This bonus would not fall under the
expectation measure because it is not certain, it is only discretionary.

The above rule relating to discretionary parts of the contract does not apply
where there is discretion as to how the contract is to be performed.

Case in focus: Durham Tees Valley Airport Ltd v Bmibaby Ltd [2010] EWCA Civ
485

In this case, Bmibaby agreed to operate two aircraft from the airport for ten
years. The contract did not expressly state a minimum number of flights. The
airport generated money from each flight. Bmibaby only operated one aircraft for
some time, and eventually stopped operating an aircraft at all, therefore
breaching the contract. There was a question as to the amount of damages that
should be awarded, as there was no minimum number of flights, there was no
clear expectation measure.

The court identified this contract as being discretionary as to how the contract is
to be performed. In other words, it was up to the defendant to choose how many
flights they wanted to do. Therefore, the expectation measure will be assessed by
the court considering how the contract would have been performed if there was
no breach, rather than considering the minimum level of performance.

Exam consideration: In light of the above case, consider a contract that does
specify a minimum level/amount of performance. What would the result for the
amount of damages be?

The second important rule in relation to the expectation measure is the

conversion of expectation loss to an amount of money which successfully puts the
claimant into the position they would have been had the contract been
completed correctly. There are two viable methods, and they often result in the
same award. On some occasions, one method will be preferable as it will result in
a higher amount of damages.

The first method is the difference between the value of performance provided
and the value of performance that should have been provided. If we think back to
the earlier example of the £1,000 car actually worth £200 - the value of
performance £200, when it should have been £1,000, which gives us our
difference of £800 which would be the amount awarded under damages. This is
usually the applicable method for sales of goods.

The second method is the cost of curing the breach. In other words, how much
will it cost the innocent party to rectify the breach of the defendant, either by
paying someone else or the defendant to rectify it the breach. This method is
more likely to be applicable in contracts for the provision of services. For
example, in the case of a contract for the building of a house, if the contract was
breached due to the unsatisfactory quality of the house, and it was going to cost
£5,000 to get the house in a satisfactory state, the damages would amount to this
cost. This is known as the ‘cost of cure’ approach.

There are certain circumstances which will not allow the ‘cost of cure’ approach
to be used when calculating damages:

 If the claimant does not intend to rectify the issues with the damages (Tito
v Waddell (No 2)  [1977] Ch 106
 If the cost of cure is wholly disproportionate to the value the cure will add
to the end product, for example, the cost of building an extension on a
house which does not add little or no value to the market value of the
house (Ruxley Electronics & Constructions Ltd v Forsyth [1995] UKHL 8)

Case in focus: Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8

This case is an Australian case, and therefore is not binding on English law but
only persuasive. However, it provides an excellent illustration of when the cost of
cure might be disproportionate to the diminution in value.

In this case, a tenant of a commercial property destroyed the foyer of the

property, with the knowledge that the landlord had specifically picked this foyer
for the property. The tenant replaced the foyer with a different one. The landlord
claimed for breach of contract, arguing that the tenant should pay the cost of the
cure to replace the foyer with the previous one.

The new foyer only diminished the value of the property by $34,820 Australian
Dollars, but to restore the foyer to its original condition would have costed
$580,000 Australian Dollars. The court held that because of the actions of the
defendant, removing a foyer they were aware the landlord had specifically
chosen, the damages would not be limited to the $34,820 loss of value in the
property, and the whole $580,000 was recoverable.

This case shows it is important to analyse the actions of the defendant in such
cases, if they acted unconscionably the court are not likely to limit damages.

Exam consideration: If the tenant was never aware of the importance of the foyer
in Tabcorp Holdings Ltd, do you think it would be likely that the damages would
have been limited to the $34,820?

Reliance measure

The reliance measure aims to put the claimant back in the position he was before
the contract was made. This is relevant for where one of the parties has incurred
expenditure in preparing for their side of the bargain. At this point you need to
remember that only one measure of damages can be relied on, expectation or
reliance, as per Culinane v British ‘Rema’ Manufacturing Co Ltd [1954] 1 QB 292.
Therefore, before a claimant decides to pursue a claim for damages, they should
decide which of the measures is likely to compensate them more favourably.

Generally, the expectation measure is more favourable, as the claimant should

always be expecting to profit from the contract. However, where the claimant has
entered into a bad bargain, meaning the contract would not have been profitable,
the reliance measure will be advantageous. Below is a quick example:

 Party A enters into a contract with Party B to build a house 

 Party A has spent £9,000 on the preparation for the contract
 Party B then breaches the contract so that Party A can claim for damages
 Party A has now realised that the contract would have made a loss of
£5,000
  Party A’s expectation measure would be a loss of £5,000
 Party A’s reliance measure is £9,000 (the money spent on preparing for the
contract)
 As the reliance measure is more favourable, Party A would use this to
calculate damages

However, in C & P Haulage v Middleton [1983] EWCA Civ 5 the court ruled that
where the defendant can show that the reliance measure of damages exceeds the
claimant’s expectation loss, the claimant cannot claim the reliance measure.

Therefore, in our example, the reliance measure of £9,000 exceeds the

expectation loss of £5,000, meaning the reliance measure could not be claimed
for. This means that the reliance measure is not as effective as it might be. The
justification for this rule is that the courts are unwilling to put the parties in a
better position that they would have been in had the contract been properly
performed. However, there are two situations where it still may be used:

 Where the reliance measure is less than the expectation measure (but in
this case it would be preferable to just claim via the expectation measure)
 Where the expectation measure is difficult to calculate as it is hard to show
what would have happened if the contract was properly performed

Is the loss suffered actionable?

Now we have established how loss will be calculated, it must be considered
whether or not the loss suffered is actionable. This section will examine a number
of common categories and provide the legal principles relating to them.

Financial Loss

Financial loss refers to where the claimant is in a worsened financial position as a

result of the contract, either through less money, or less assets. This is the most
common category of loss and it will always be an actionable type of loss (subject
to causation and remoteness).

The consumer surplus

This consumer surplus is the amount by which a particular consumer values the
performance of a contract above its market value for some particular reason. In
order to understand this, here are some cases where this was relevant:
  Jackson v Horizon Holidays Ltd [1975] 1 WLR 1468 - The contract was for a
holiday, the consumer surplus being the value the claimant put on the
relaxation on holiday;
 Ruxley Electronics and Construction Ltd  v Forsyth - The contract was for
the building of a swimming pool, the consumer surplus being the value the
claimant put on the swimming pool being particularly deep because he was
very tall.

The matters are not of a financial value - in Jackson, the claimant has not missed
out on anything financial, only the relaxation that was important to them.
Therefore, it can be said that the claimant has suffered a loss of some sort.
However, it is difficult to assess the value of these consumer surpluses, and
whether they should be an actionable loss.

The case of Watts v Morrow [1991] 1 WLR 1421 ruled that damages cannot be
awarded for distress caused by breach of contract. Therefore, these consumer
surpluses are not actionable. However, they created a particular category which
would be actionable:

Where the contractual objective is to provide relaxation, pleasure or peace of

mind, damages may be awarded if this is not provided.

This approach is slightly narrower than the consumer surplus.

Consider Ruxley and the purchase of the swimming pool. The object of the
contract was to build a swimming pool; therefore it would not fall inside this
category. However, in Jackson it would be accepted that a contract for a holiday
has the objective of providing relaxation, meaning it would fall inside this
category and damages would be able to be claimed.

The rules regarding claiming for consumer surplus were clarified in Farley v
Skinner [2001] UKHL 49. In this case, Farley purchased a house near Gatwick
airport. He asked his surveyor of the house to take note of any noise from the
airport, as he wanted it to be sufficiently quiet. The surveyor reported the noise
would not be a problem, but Farley found it was very noisy once he had moved in.

The court awarded Farley £10,000 worth of damages for discomfort. The judges in
this case came to the same decision, but under two different grounds:
 1. The concept of consumer surplus - peace and quiet were evidently
important to the claimant. It was not required to show that this was the
sole object of the contract
2. Distress (this will be covered in the next section of the chapter)

Therefore, it can be seen that the English courts are willing to accept consumer
surplus as an actionable loss, but it must be treated with caution and be clear that
the consumer surplus was important to the claimant. Here are some important
things to remember:

 The award for non-financial loss will be small

 The foreseeability of the loss will be difficult to prove (see the section on
causation)

Exam consideration: When answering a question which relates to a consumer

surplus it would be wise to discuss Farley v Skinner and Watts v
Morrow, explaining the courts conservative approach to such cases. As long as
you justify your thoughts and talk about the ‘objective’ of the contract for the
claimant, you should be able to come to a logical conclusion and ensure you get a
lot of marks.

Distress

Distress resulting from a contract was the basis of Lord Scott’s decision in Farley v
Skinner. Distress is different to consumer surplus in that it actually results in a
negative experience, physically or mentally, for the individual. Consumer surplus
relates to an expectation, whereas distress is an actual result.

Distress being an actionable type of loss was questioned by the other judges
in Farley v Skinner. Lord Scott explained that the question to ask is whether there
has been distress caused by an unwelcome sensory experience. In Farley, the
distress was caused by the unwelcome noise.

However, the difficulty in using the test from Farley v Skinner  is that the legal
authority is questionable. The test did not form the ratio decidendi of the
decision. Every other judge based their decision on the consumer surplus.
Usually, there is an overlap between the consumer surplus and distress. One or
the other may be claimed. It is suggested that the legal basis for claiming under
consumer surplus is favourable due to the majority of the judges opting for it
in Farley v Skinner. This is not to say the test for distress from Lord Scott should
not be applied, just that it should be done cautiously and you should explain the
weakness of the concept.

Did the breach of contract cause the loss?

In order for a loss to be actionable, the claimant must show that the breach of
contract caused the loss. Causation requires both legal, and factual causation.

Factual causation

Factual causation requires an application of the ‘but for’ test; but for the breach
of contract, would the claimant have suffered the loss?

This is a simple concept and is the easier of the two tests to prove.

Legal causation

Legal causation requires the breach of contract to be the direct cause of the loss.
There must not be any subsequent actions which breach the ‘chain of causation’.
This actions can be those of the claimant, or a third party.

If the claimant may have broken the chain of causation, the courts will consider
whether the acts of the claimant were reasonable or not. The claimant will break
the chain of causation where they were so unreasonable that it must relieve the
defendant of all liability. This threshold is very high and difficult to prove.

If it is a third party who has broken the chain of causation, there are a number of
things to consider:

 Did the claimant have a duty to prevent the act occurring? (Stansbie v
Troman [1948] 2 KB 48). If the claimant had a duty to prevent the act
occurring, the action may break the chain of causation.
 How likely was the intervening act to happen? (Monarch Steamship Co Ltd
v Karlshamms Oljefabriker  [1949] AC 196). The more likely the act to
happen, the less likely it would break the chain of causation.
  How reasonable was the intervening act?  The more reasonable the act, the
less likely it would break the chain of causation.

Was the type of loss reasonably foreseeable?

This stage of assessing whether damages will be an appropriate remedy is the
most important stage, and is where a lot of claims will fail. The purpose of this
stage is to consider the remoteness of the damage. Consider the following
example:

 Party A contracts with Party B for some denim

 Party A intends to use the denim to make into jeans and sell to Party C
 The denim is of a poor quality, meaning Party A cannot fulfil their contract
with Party C
 As a result, Party C ceases all dealings with Party A
 Party A has been dealing with Party C for ten years, and would be dealing
with them for the foreseeable future
 Can Party A claim for all future earnings they would have made with Party C
from Party B, as Party B’s breach of contract caused Party C to cease
dealings with them?

This is a question of foreseeability; is it reasonable that Party B would have

foreseen that Party A would lose their lucrative contracting deal with Party C? In
this case, probably not, those subsequent contracts could be worth millions.
Therefore, the courts have some tests which impose limitations on what damages
can be claimed.

In the case of Hadley v Baxendale, the test for foreseeability of damages was laid
out. Alderson B explained that where there is a breach of contract, damages can
be claimed under two different limbs:

1. The damages which would fairly and reasonably be considered to arise

naturally from the breach of contract itself
2. Damages which reasonably would have been supposed to have been in the
contemplation of both parties at the time of the making of the contract as a
probably result of a breach

Case in focus: Hadley v Baxendale  [1854] EWHC J70

This case is the leading authority on the test of foreseeability of damages. In this
case, the claimant ran a mill. The mill broke down as a result of a broken crank-
shaft, and they did not have a replacement. The claimant therefore contracted
with the defendant to provide them with a replacement crank-shaft. At the time
of the contract, the defendant was unaware that the claimant’s mill was unable to
operate without the crank-shaft. The defendant did not provide the crank-shaft
on time, and the claimant sued for breach of contract. They claimed damages for
the loss of profits suffered due to the fact that the mill was not operating.

It was held that the damages for the loss of profits were not claimable. This was
because they did not fall under either limb of the test laid out in the case. Those
losses would not have fairly and reasonable arisen from the breach of contract,
and the defendants were unaware that the mill was not in operation without the
crank-shaft. Therefore, the claim fails under limb two, as those losses were not in
the contemplation of both parties at the time of the making of the contract (it
was only in the mind of the claimants).

The first limb of the test is relatively easy to understand. These are damages that
would be obvious under a contract. For example, in a sale of goods, if the goods
are faulty, the natural damages fairly arising out of this would be the
repair/replacement of the goods.

The second limb of the test is the more complicated one. These are those losses
which would not normally be ordinarily expected for somebody to suffer as a
result of the breach. Therefore, for them to be actionable, they must have been
reasonably contemplated by both parties at the time of contracting. The easiest
way this will arise is where the claimant directly informs the defendant of the
potential loss. If we take the above case of Hadley v Baxendale, if the claimant
had explained the importance of the crank-shaft, telling the defendant that their
mill was not in operation and they needed to crank-shaft for it to work, the loss
would have then been in both parties’ reasonable contemplation.

There are various cases which should help outline the rules of the test of
foreseeability. The first of these is Victoria Laundry Ltd v Newman Industries
Ltd [1949] 2 KB 528. In this case, the contract was for a boiler which was required
for the expansion of the claimant’s business, and the defendant was aware of
this. The claimant attempted to claim for their loss of profits, and the loss of some
lucrative contracts that they would have obtained with the boiler. The court held
that the loss of profits would have been in the reasonable contemplation of the
defendants, and would thus be claimable, but the loss of the lucrative contracts
would not have been in the reasonable contemplation of the defendants, and
were not claimable. Therefore, it is clear in our original example with the denim
and jeans, the loss of the future contracts would not have been reasonably
foreseeable.

Exam consideration: Do you think the decision in Victoria Laundry Ltd would have
been different if they had specifically told the defendant that if the boiler was not
delivered they would miss out on some contracts? (The answer is yes!) Why?

The case of Parsons (Livestock) Ltd v Uttley Ingham & Co Ltd [1978] QB 791
confirmed an important part of the rule from Hadley v Baxendale. It is the type of
loss which needs to be reasonably contemplated under the second limb, not the
extent or the exact nature. Therefore, if we consider Hadley v Baxendale, the
defendant need not know exactly how extensive the loss of profits would have
been for the mill if that type of loss was contemplated, the defendant would be
responsible for the extent of them. This rule has been criticised, as it could result
in a defendant being responsible for a million-pound contract when in fact they
only contemplated the loss of a sub-contract which was worth £100.

Did the claimant mitigate the loss?

In order for a claim for damages to be successful, the claimant must take
reasonable steps in order to mitigate the loss. There are three general rules
relating to mitigation.

First, as per British Westinghouse Electric Co Ltd v Underground Electric Railways

Co of London Ltd [1912] AC 673 the claimant will be unable to claim for damages
in respect of any loss that he could have reasonably avoided.

For example, if there was a contract for the sale of steel which was faulty, the
claimant must mitigate their loss by attempting to sell the faulty steel on. They
may only make 20% of the price they paid, but this is a step in mitigating the loss.

Secondly, the claimant may recover all expenses incurred whilst taking reasonable
efforts to mitigate the loss. In our above example, costs of advertising, shipping
and other expenditure incurred attempting to sell the steel would be claimable.
Thirdly, if the claimant avoids further potential losses, they cannot recover for the
loss they avoided. If we consider a breach of a contract of employment, if the
claimant then finds another job one week later, they cannot continue to claim for
loss of salary, because they have mitigated this further loss by finding another job.

Did the claimant contribute to the loss?

If the claimant contributed to the loss in question, the courts may reduce the
amount of damages the claimant is able to claim, proportionately in line with the
fault of the claimant. This rule has statutory footing in Section 1 of the Law
Reform (Contributory Negligence) Act 1945.

There are three types of contributory negligence in relation to breaches of

contract:

1. Where the defendant’s liability arises from a contractual provision which

does not rely on the negligence of the defendant
2. Where the defendant’s liability arises from a contractual obligation which is
expressed in terms of ‘taking care’
3. Where the defendant’s liability in contract is the same as his liability in the
tort of negligence independently of the existence of any contract.

The case of Barclays Bank plc v Fairclough Building Ltd [1994] EWCA Civ 3
confirms that contributory negligence will only be available in situation ‘3’.
Therefore, there must be a concurrent liability in tort in order to claim
contributory negligence as to a claim for damages.

Once the claim falls into situation ‘3’, the defendant must show the claimant was
at fault, and the fault was a factual cause of the loss the claimant sustained (the
‘but for’ test). The courts will then reduce the damages ‘to such extent as the
court thinks just and equitable having regard to the claimant’s share in the
responsibility for the damage’ as per Section 1(1) of the Law Reform (Contributory
Negligence) Act 1945.

Agreed damages clauses

So far, this chapter has dealt with the situation in which the courts will assess the
amount of damages to be awarded. The contractual freedom of parties allows
them to pre-agree an appropriate amount of damages in the event of certain
things. These are common in commercial contracts, and are advantageous for a
number of reasons:

 They provide certainty

 The claimant does not have to prove the amount of loss, as the amount will
be pre-agreed under the contract
 The defendant cannot claim the loss was unforeseeable, as they are
contracted into it
 They are efficient, and prevent the relationship between two parties being
disruption through large amounts of litigation

There are two types of damages clauses; a liquidated damages clause and a

penalty clause.

Liquidated damages clause

A liquidated damages clause is one which can be considered a genuine attempt to
pre-estimate the loss which will be suffered by the breach (Dunlop Pneumatic
Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79).

If a damages clause is identified as a liquidated damages clause, the sum in the

clause will be payable, irrespective of whether the actual loss is greater or smaller
than the sum in the clause. In Cellulose Acetate Silk Co Ltd v Widnes Foundry
Ltd [1933] AC 20 the contract provided for a liquidated damages clause of £20 per
week late. The delay was thirty weeks long, and actual loss for delay was £5,850,
but as the £20 clause was a genuine pre-estimate of loss, the non-breaching party
could only claim for £600 (£20 per week for 30 weeks).

Penalty Clauses
A clause will be classified as a penalty clause where the sum in the clause is not a
genuine pre-estimate of the loss suffered in event of a breach, but instead is a
threat to compel the other party to perform.

Case in focus: Jobson v Johnson [1989] 1 WLR 1926

In this case, the contract was for the purchase of shares in a football club. One of
the terms was that if there was a failure to pay one of the instalments of the
purchase price, the shares would need to be retransferred for £40,000. The
defendant failed to pay one of the instalments when he had already paid
£140,000.

It was held that the retransfer for £40,000 was a penalty clause, as it was not a
genuine pre-estimate of the loss, instead it was akin to a penalty.

The general rule is that penalty clauses will be unenforceable. The case of Dunlop
Pneumatic Tyre gives guidance on how far a clause must go in order to be
considered a penalty clause; it must be ‘extravagant and unconscionable’ in
comparison to the greatest loss that might be caused by the breach.

The case of Makdessi v Cavendish Square Holdings BV [2013] EWCA Civ 1539 has
provided some well-needed clarity in this area. Lord Neuberger explained that the
test to apply is:

“whether the impugned provision is a secondary obligation which imposes a

detriment on the contract-breaker out of all proportion to any legitimate interest
of the innocent party in the enforcement of the primary obligation”

Case in focus: ParkingEye Limited v Beavis  [2015] UKSC 67

In this case, Parkingeye managed a carpark who imposed an £85 penalty on those
who did not comply with the two hour only free parking stay. Beavis breached
this term of the car park, and was issued an £85 penalty. Beavis refused to pay
the penalty, arguing that it was a penalty clause.

The court held that this was not a penalty clause. Despite the £85 perhaps not
being representative of any loss suffered by the car park, it was a deterrent which
had a legitimate interest; it protects overstaying in the car park which was
important for the efficiency and management of the car park. The £85 was also
not any more exorbitant than penalties imposed for other parking violations.

You should use the test from Makdessi v Cavendish Square Holdings when

assessing whether a clause is a penalty. The test for penalty clauses is yet another
one which can be difficult to apply in practice. A sensible approach would be to
consider:
 1. Is there a legitimate interest protected by the penalty?
2. Is the amount exorbitant in comparison to other similar contracts/breaches
of this type?
3. Is the protection of the interest proportionate?

That brings us to the end of this chapter on damages. The next and final chapter
will cover all of the other remedies available for a breach of contract.

Other Contractual Remedies

Introduction
Congratulations on reaching the final chapter of this module guide on contract
law! Our final chapter covers alternative contractual remedies.

In the previous chapter we examined the remedy of damages. Damages place an

obligation on the defendant to pay damages instead of performing their
obligations under the contract, which is all very helpful, but sometimes damages
might not be an appropriate remedy. Take the following situation:

 Party A sees an advertisement in the paper for the sale of a gold ring for
£50;
 Party A realises that this gold ring is actually her Mother’s, and therefore
holds great sentimental value;
 Party B agrees to sell the ring to Party A for £50;
 Party B then breaches the contract and refuses to sell the ring to Party A.

In this situation, the £50 damages would compensate Party A financially, but Party
A was more interested in the ring for sentimental reasons. In this case, another
remedy such as an order for specific performance would more helpful, where the
court could force Party B to give the ring to Party A.

Alternative remedies under contract law are usually split into two categories -
positive and negative specific remedies. Positive specific remedies place a duty on
the defendant to act or do something, whereas negative specific remedies place a
duty on the defendant not to do something. Below are the different types of
remedies available;

Positive specific remedies

  Action for an agreed sum
 Specific performance
 Mandatory injunction

Negative specific remedies

 Prohibitory injunction

Despite there only being one negative specific remedy, this is the most common
form of specific remedy, as the courts are more willing to impose a negative duty
on an individual, rather than a positive one. The courts are often reluctant to
impose any kind of specific remedy at all; therefore the scope of specific remedies
can be limited and needs to be examined in relation to each of the remedies. This
chapter will begin by examining the positive specific remedies in turn, before
examining the negative specific remedy.

Positive specific remedies

Award of an agreed price
The award of an agreed price is a straightforward remedy to understand. It allows
the innocent party to claim a specific amount of money from the party in breach.
This is similar to the remedy of damages, but in damages the claim is calculated
by reference to the loss, whereas an award of an agree price is the recovery of the
money that is due under the contract. In other words, the award of an agreed
price is a claim for the payment of a debt. There are two key elements of this
remedy which often makes it more favourable than claiming damages or any
other remedy:

1. The claimant does not need to prove they have suffered any loss. The fact
that there is a sum owed under the contract which has not been paid is
sufficient.
2. The claimant does not need to prove they have mitigated or attempted to
mitigate the loss under the contract.

As we know from our previous chapter, proving a loss for damages can often be
difficult with the requirements for actionable losses, causation and forseeability.
This makes the award of an agreed price a popular choice in debt claims.
Furthermore, the case of Overstone Ltd v Shipway  [1962] 1 WLR 117 has
confirmed that once the claimant has used this remedy to claim the amount due
under the contract, they may then make a claim for damages in respect of any
further loss suffered.

The requirements for a claim for the award of an agreed price

1. There must be a specific sum due under the contract.

2. The specific sum must be owed to the claimant.

The first requirement is fairly straightforward, and will require an examination of

the contract. The second requirement is the one which is slightly more
controversial.

Whether or not the specific sum is ‘owed’ is a question of when the monies are
due under the contract. The two alternatives are:

1. When the claimant has completed all of their contractual obligations.

2. At some time before the claimant has completed all of their contractual
obligations.

Therefore, in order to establish whether a specific sum is owed the contract will
need to be examined. As you can imagine, this rule can operate very harshly for
both the claimant and the defendant. Consider these two examples:

Situation 1:

 Party A is contracting with Party B for the construction of a house for

£100,000.
 Party A has completed 80% of the work, when Party B breaches the
contract.
 Under the contract, the £100,000 is due only when the construction of the
house is completed.

Therefore, until the construction of the house is fully completed, the £100,00 is
not actually ‘owed’ and a claim for the agreed price would fail.

Situation 2:

 Party A is contracting with Party B for the construction of a house for

£100,000.
  Party A has completed 1% of the work, when Party B breaches the contract.
 Under the contract, the £100,000 is due upon beginning of the
construction.

In this situation, the £100,000 is ‘owed’, and therefore Party A would be able to
claim the full £100,000 from Party B, despite only 1% of the work being
completed.

Exam consideration: In situation 1, what would you advise Party A to do? Is there
another remedy they could pursue which would be favourable?

Obviously, there are preferable alternative remedies which would be applied in

situation 1, and it is very unlikely that a contract would be drafted with the terms
present in situation 2. However, the issues with a claim for an agreed price are
evident.

The courts have attempted to alleviate the issues with the remedy is the event of
circumstances such as in situation 1 in three ways:

Firstly, the courts will rarely construe contractual obligations as ‘entire’. Even
where the contract requires full performance, usually a substantial performance
will be sufficient to ensure the sum is ‘owed’, as seen in Hoenig v Isaacs [1952] 2
All ER 176.

Exam consideration: The ‘entire’ obligations principle was covered under the

‘terms’ chapter of this module guide. It may be helpful to refer back to that
chapter to refresh your understanding.

Secondly, an issue may also arise where the defendant prevents the work being
completed. For example, in our construction examples, if the defendant
prevented the claimant from accessing the land to continue the building. This
would then prevent the money being ‘owed’ because the claimant could not
complete their obligations. In this circumstance, the claimant will be able to claim
an amount for the expenditure they have incurred.
Thirdly, if the sum under the contract is not yet ‘owed’ but there has been a
partial performance, the defendant must pay for this partial performance if they
have had a chance to accept or reject the work and have previously accepted it.

Recovery limitation

Another important part of the claim for an agreed price is the limitation on
recovery. Where the defendant has breached the contract, and the claimant
starts or continues to perform after this breach, the claimant will not be limited
on the amount they may recover.

Case in focus: White & Carter (Councils) Ltd v McGregor [1962] UKHL 5

In this case, the claimant was an advertising contractor who contracted with the
owner of a garage, the defendant, to display advertisements at the garage for
three years. On the day the contract was formed, the defendant changed their
mind and informed the claimant they would be terminating the contract. Despite
this termination, the claimant went ahead and advertised at the garage, and sued
the defendants for the full price of the contract.

Surprisingly, the courts decided that the claimants were allowed to recover the
full price of the contract. The courts justification was that although the defendant
terminated the contract, the claimant was entitled to choose whether or not to
terminate the contract. In this case, the claimant opted to continue to contract.
Due to the fact the claimant is not required to mitigate the loss, this meant the
claimant could continue to perform their obligations despite being aware that the
performance was unwanted by the defendant. It is important to note that the
decision was three against two, and the dissenting judges submitted that the
claimant acted unreasonably by ignoring the defendant’s wishes, and that the
claim should have been limited.

In White & Carter v McGregor,  Lord Reid, who decided with the majority,
explained two qualifications. These qualifications limit the ability of the claimant
to claim the remedy of the agreed sum. If one of these qualifications can be
identified, the claimant will not be able to claim the agreed sum, and must
instead prove that he has suffered loss as a result of the breach.

The cooperation qualification

The claimant is only entitled to a particular sum when the performance has been
completed. If the defendant restricts the claimant from performing their
obligations, the claim will be restricted to a claim for damages. If we take the
example from White & Carter v McGregor, if the defendant had prevented the
claimant from placing the adverts, this would have prevented performance and
restricted the claim to one of damages. The case of Ministry of Sound (Ireland) Ltd
v World Online Ltd [2003] EWHC 2178 illustrates this qualification.

The legitimate interest qualification

This qualification is the more debated of the two. In White & Carter v McGregor, it
was stated:

‘If it can be shown that a person has no legitimate interest, financial or otherwise,
in performing the contract rather than claimant damages, he ought not be
allowed to saddle the other party with an additional burden with no benefit to
himself…just as a party is not allowed to enforce a penalty, so he ought not be
allowed to penalise the other party by taking one course when another is equally
advantageous to him’
The meaning of this is unclear. The phrase ‘legitimate interest, financial or
otherwise’ would suggest a claimant would always have a legitimate interest, as
the claimant’s interest will always have a financial interest in making a claim for
an agreed sum. Therefore, the courts have been unwilling to take a literal
interpretation of ‘financial’ interest.

Case in focus:  The Alaskan Trader [1983] 2 Lloyds Rep 645

In this case, the contract was for a chapter of the ship for a term of 24 months.
After one year the ship had a serious engine failure. The defendant informed the
claimant that they no longer wanted the ship, but the claimant went ahead with
expensive repairs on the ship, which cost $800,000 and took 5 months. Following,
the defendant again maintained that they did not want the ship. The claimant did
not treat this refusal as repudiation, and kept the ship ready for the defendant to
sail. At the end of the 24 month term, the claimant claimed the price of the seven
months’ hire that the defendant had not yet paid. The defendant argued that the
contract had been repudiated and the repudiated should have been accepted by
the claimant.

It was held that the claimant had no legitimate interest in performing the
contract, as they were fully aware that the defendant did not want the ship; it
was ‘wholly unreasonable’ for them to not repudiate the contract. However, it
was accepted that it would have been difficult to re-let the ship elsewhere. But in
conclusion, the decision was that the claimant could not claim for those seven
months.

The decision in The Alaskan Trader  shows the strict interpretation the courts take
of ‘financial interest’. If the courts themselves admitted that it would have been
difficult to re-let the ship, surely this would have amounted to a legitimate
financial interest under the contract.

In conclusion, it seems the courts will look how unreasonable it was for the
innocent party to refuse to repudiate the contract.

Exam consideration: It is difficult to reconcile the cases of The Alaskan

Trader  and White & Carter v McGregor.  It is recommended you discuss both and
contrast them if faced with a question where one party attempts to repudiate the
contract and the other refuses to do so.

Award of other agreed sums

The award of other agreed sums refers to where there is a contractual provision
within the contract which specifies an amount of money the will be paid in the
event there is a breach of the contract.

This remedy was covered in the previous chapter as part of ‘damages’. So you
should refer to that chapter to refresh your memory in relation to the award of
other agreed sums.
Specific performance
The second of the positive specific remedies we will cover is specific performance.
Again, this remedy is straightforward; it simply forces the party in breach to
perform the contract. Specific performance is usually the primary remedy in
contracts where the claimant is attempting to enforce an obligation from the
other party which is something other than to pay money. It is most commonly
used in contracts for services where the party providing the service has refused to
fulfil their obligations.

Test for specific performance

The case of Ryan v Mutual Tontine Westminster Chambers [1893] 1 Ch 116 set out
the test for specific performance. Originally, the claimant would have to prove
that damages as a remedy would have been inadequate.  However, subsequent
cases such as Beswick v Beswick  [1968] AC 58 showed that the threshold for the
test has been lowered; so long as specific remedy was the most appropriate
remedy, this would be sufficient. The courts position on the remedy was
eventually clarified in Co-operative Insurance Society Ltd v Argyll Stores (Holdings)
Ltd.

Case in focus: Co-operative Insurance Society Ltd v Argyll Stores (Holdings)

Ltd [1997] UKHL 17

In this case, the defendant owned a number of supermarkets. Unfortunately, they

were in financial trouble and were forced to close some of the supermarkets. One
of the supermarkets was located in a shopping centre. The contract for this
particular lease required the defendant to keep the supermarket for the duration
of the lease. Therefore, the closure of the supermarket broke this clause. The
claimant attempted to get a specific performance remedy to force the defendant
to keep the supermarket open.

The House of Lord refused to grant the remedy of specific performance due to a
number of reasons:

1. Forcing the defendant to keep the supermarket open would have an

adverse financial impact on them, causing massive financial losses.
2. The obligation was not precise enough; there would be question as to
exactly what was meant by keeping the supermarket open, the defendant
 could have chosen to re-open the supermarket with no stock and one staff
member which would result in further litigation.
3. The lease had a period of 19 years remaining. This meant that the court
would have to supervise the order for a long period of time.
4. The order would result in gain for the claimant at the expense of the
defendant.
5. It is not in the public interest to force the defendant to continue business at
a loss where there is an alternative remedy available

My main focus of the judgment can be seen to be the harm the specific
performance would cause to the defendant.

Exam consideration: Some of the justifications for the decision of Co-operative

Insurance Society Ltd v Argyll Stores (Holdings) Ltd  are related to the bars of
specific performance. These will be explained later in this chapter. The key point
to take from the case is the harm the specific performance causes.

The case of Co-operative Insurance Society Ltd v Argyll Stores (Holdings)

Ltd  clearly shows the court favouring a stricter approach to providing for the
remedy of specific performance. There must be a holistic assessment of the
circumstances, particular as to the harm specific performance may cause the
defendant and whether or not another remedy may be more appropriate.

One particular circumstance in which the remedy of specific performance seems

favourable is in a contract where the claimant would be unable to obtain a
substitute for the promised performance. We touched on one example at the
start of the chapter; the ring with sentimental value. Usually, where the goods
under a contract are either unique or cannot be obtained from anyone else but
the defendant, specific performance would be appropriate. Here are a few
examples:

 The sale of a particular property - unless the property was one of twenty
identical properties.
 The sale of a particular sculpture made by a famous artist.
 A football boot worn in a specific match signed by a famous footballer.

The case of Sky Petroleum Ltd v VIP Petroleum Ltd [1974] 1 All ER 954 is also
worth considering. In this case, the remedy of specific performance was granted
in relation to the sale of some petrol. The defendant was forced to supply the
claimant with petrol. Despite the petroleum not being a ‘unique’ item, the fact
that there was an oil crisis and petrol was in short supply meant this contract was
the only way the claimant could have obtained the petrol, making specific
performance an adequate remedy.

Bars to specific performance

There are a number of bars to the remedy of specific performance. The courts
have discretion whether or not to award the remedy and the following factors will
usually create an assumption that an order for specific performance should not be
granted.

Where the obligation is not precise

The obligation which is being imposed upon the party in breach must be precise
enough. If there is a lack of precision, the courts will be unable to grant a remedy
of specific performance because they will not know exactly what they should be
forcing the breaching party to do. The result of granting the specific performance
for an imprecise term would be further litigation to determine the actual
obligations, therefore the courts like to avoid this.

Where the obligation would require constant supervision from the court

We touched on this bar to specific performance earlier in the case of Co-operative

Insurance Society Ltd v Argyll Stores (Holdings) Ltd. Due to the performance being
required for 19 years, this was too onerous of a duty to impose on the courts. The
question the courts will ask is whether the specific performance requires a result,
or it is an order to carry on activities. Where the order requires a result,
supervision is not required. However, to carry on an activity would require
supervision; the claimant may have to make numerous applications to the court
to compel the defendant to carry on the activity.

Where the contractual obligation involves a personal service

If the contractual obligation involves a personal service, the courts are unlikely to
grant an order for specific performance. The main justification for this is that it is
difficult to force unwilling parties into a personal relationship. Take for example a
contract for employment. If the courts granted an order to keep the individual
employed, you can imagine the types of issues that might arise in the course of
employment.

However, in the case of contracts for employment, the courts have shown a
willingness to allow specific performance remedies dependant on the
circumstances. Some companies are so large that the personal relationship
between the individuals would not cause an issue. The case of Hill v CA Parsons
Ltd [1972] Ch 305 is authority for this point.

Where the claimant has acted unconscionably

The specific performance remedy requires that the claimant ‘comes with clean
hands’. If the claimant has acted unreasonably this may have an impact on their
ability to claim for a remedy of specific performance. This was seen in Shell UK Ltd
v Lostock Garages Ltd [1976] 1 WLR 1187.

The order for specific performance has a disproportionate adverse effect of the
defendant

Where forcing an order of specific performance would be extremely unfair and

cause hardship to the defendant, the courts are unwilling to grant the remedy.

Case in focus:  Patel v Ali [1984] 1 All ER 978

In this case, the defendants, Mr and Mrs Patel, contracted to sell their house. The
sale was not completed due to the defendant becoming bankrupt. Mrs Patel was
healthy at the time the sale of the house was agreed; however, prior to
completion, Mrs Patel had her leg amputated due to bone cancer.  With three
children, Mrs Ali became heavily reliant on her friends and neighbours to help her
with the house whilst her husband was working. The claimant sought a specific
performance remedy to force the defendants to sell the house.

The courts ruled that forcing Mrs Patel to move from her house would result in
disproportionate hardship. Despite this being no fault of the claimant, the fact
there was such hardship for the defendant meant the remedy was denied.

Where the claimant has delayed too long in seeking specific performance
If the delay between the breach and the claimant seeking specific performance is
long enough, and to grant specific performance would be unjust, the court will
not grant an order for specific performance.

Mandatory injunctions
The last of the positive specific remedies to examine is the mandatory injunction.
A mandatory injunction can be used where a party to a contract breaches a
negative covenant.

A negative covenant is a term in a contract which imposes an obligation on one of

the parties to not do something in the context of land. For example, Party A pays
Party B £1,000 to promise not to build a garage on their land. If the Party B then
went ahead and build a garage on the land, this would be a breach of the negative
covenant. The courts may then grant the remedy of a mandatory injunction to
make Party B remove the garage.

Therefore, there are two requirements for a mandatory injunction to be an

appropriate remedy:

1. The breach of a negative covenant in a contract

2. To remedy the breach some positive action will need to be taken (in our
example, removing the garage)

However, this remedy is rarely granted. The primary reasoning for this is that it
will be far easier for the party in breach to pay damages for the cost of the cure,
rather than the defendant themselves having to remedy the breach, as per Sharp
v Harrison [1922] 1 Ch 502.

Negative specific remedies

Prohibitory injunctions
The only negative specific remedy is the prohibitory injunction. This remedy
forces the defendant to stop breaching a negative obligation. A negative
obligation is similar to a negative covenant, but whilst a negative covenant applies
to land, a negative obligation can apply to anything. For example, one party may
contract with another to not play loud music at their property.

There are two requirements in order for a prohibitory injunction to be granted:

 1. The breach of a negative obligation in a contract.
2. Damages would not be an adequate remedy.

The threshold for proving damages would not be an adequate remedy is low. If
we take our example of a party contracting to not play loud music at their
property, it is easy to see how damages would not be an adequate remedy. What
value would you put on the promise to not play loud music?

There are two main reasons that the courts will refuse to grant a prohibitory
injunction. Firstly, where the injunction would be oppressive. In the case
of Jaggard v Sawyer [1995] 1 WLR 269, the defendant’s house was only accessible
by breaching a negative obligation. The claimant sought a prohibitory injunction
to prevent the defendant breaching the negative obligation. The courts refused to
grant the injunction, as it would mean the defendant could not access their
house, which was seen as disproportionately oppressive.

Secondly, where the remedy of specific performance would have been refused,
and the prohibitory injunction essentially forces the defendant to perform the
contract, the courts are unlikely to grant a prohibitory injunction. This causes an
issue in relation to contracts for personal services. As we know, the remedy of
specific performance is not usually applicable to those types of contracts.
Therefore, this means prohibitory injunctions cannot be applied to these types of
contracts.

Case in focus: Warner Brothers Pictures Inc v Nelson [1937] 1 KB 209

In this case, the defendant was a famous actor who contracted with an American
film company, the claimant, to perform exclusively for them. The defendant then
moved to England and wanted to work for another film company. The claimant
sought a prohibitory injunction.

The court identified that an injunction in this situation may have the effect of
forcing the defendant to perform; she must either act for the American company,
or have no job. However, in this case, the court held that she was only prohibited
from working in film, she could still get another job if she wished. Therefore, an
injunction was granted for a limited period of three years.

This concludes the final chapter of the contract law module guide. You should
now have a full understanding of the law of contract. To reconcile you should
refresh your knowledge by reference to the hands-on examples for each chapter.
Good luck!